UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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☒ | | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended SeptemberJune 30, 20192020.
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☐ | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______ to ______
Commission file number 001-15373
ENTERPRISE FINANCIAL SERVICES CORP
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | EFSC | | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | EFSC | | Nasdaq Global Select Market |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☒
As of October 23, 2019,July 22, 2020, the Registrant had 26,518,92426,206,044 shares of outstanding common stock, $0.01 par value per share.
This document is also available through our website at http://www.enterprisebank.com.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION | |
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Item 1. Financial Statements | |
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Condensed Consolidated Balance Sheets (Unaudited) | |
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Condensed Consolidated Statements of Operations (Unaudited) | |
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Condensed Consolidated Statements of Comprehensive Income (Unaudited) | |
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Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) | |
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Condensed Consolidated Statements of Cash Flows (Unaudited) | |
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Notes to Condensed Consolidated Financial Statements (Unaudited) | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
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Item 4. Controls and Procedures | |
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PART II - OTHER INFORMATION | |
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Item 1. Legal Proceedings | |
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Item 1A. Risk Factors | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3. Defaults Upon Senior Securities | |
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Item 4. Mine Safety Disclosures | |
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Item 5. Other Information | |
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Item 6. Exhibits | |
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Signatures | |
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Glossary of Acronyms, Abbreviations and Entities
The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 2 and the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
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ACL | Allowance for Credit Losses | | FDIC | Federal Deposit Insurance Corporation |
ACLL | Allowance for Credit Losses on Loans (excludes allowance for securities and allowance for unfunded commitments) | | FHLB | Federal Home Loan Bank |
ASC | Accounting Standards Codification | | GAAP | Generally Accepted Accounting Principles (United States) |
ASU | Accounting Standards Update | | LIBOR | London Interbank Offered Rate |
Bank | Enterprise Bank & Trust | | MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
C&I | Commercial and Industrial | | PCD | Purchased Credit Deteriorated |
CECL | Current Expected Credit Loss | | PCI | Purchased Credit Impaired |
Company | Enterprise Financial Services Corp and Subsidiaries | | PPP | Paycheck Protection Program |
CRE | Commercial Real Estate | | SBA | Small Business Administration |
DCF | Discounted Cash Flow | | SEC | Securities and Exchange Commission |
EFSC | Enterprise Financial Services Corp | | SOFR | Secured Overnight Financing Rate |
Enterprise | Enterprise Financial Services Corp and Subsidiaries | | Trinity | Trinity Capital Corporation |
FASB | Financial Accounting Standards Board | | | |
PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| | (in thousands, except share and per share data) | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
Assets | | | | | | |
Cash and due from banks | $ | 153,730 |
| | $ | 91,511 |
| $ | 100,804 |
| | $ | 74,769 |
|
Federal funds sold | 2,829 |
| | 1,714 |
| 2,381 |
| | 3,060 |
|
Interest-earning deposits (including $17,785 and $1,305 pledged as collateral, respectively) | 99,943 |
| | 103,327 |
| |
Interest-earning deposits (including $47,085 and $15,285 pledged as collateral, respectively) | | 245,542 |
| | 89,427 |
|
Total cash and cash equivalents | 256,502 |
| | 196,552 |
| 348,727 |
| | 167,256 |
|
Interest-earning deposits greater than 90 days | 3,975 |
| | 3,185 |
| 6,907 |
| | 3,730 |
|
Securities available for sale | 1,247,333 |
| | 721,369 |
| |
Securities held to maturity, at cost | 60,786 |
| | 65,679 |
| |
Loans held for sale | 6,281 |
| | 392 |
| |
Securities available-for-sale | | 998,104 |
| | 1,135,317 |
|
Securities held-to-maturity, net | | 345,791 |
| | 181,166 |
|
Loans held-for-sale | | 16,029 |
| | 5,570 |
|
Loans | 5,228,014 |
| | 4,350,001 |
| 6,140,051 |
| | 5,314,337 |
|
Less: Allowance for loan losses | 44,555 |
| | 43,476 |
| |
Loans, net | 5,183,459 |
| | 4,306,525 |
| |
Other investments, at cost | 46,867 |
| | 26,654 |
| |
Less: Allowance for credit losses on loans | | 110,270 |
| | 43,288 |
|
Total loans, net | | 6,029,781 |
| | 5,271,049 |
|
Other investments | | 43,106 |
| | 38,044 |
|
Fixed assets, net | 59,216 |
| | 32,109 |
| 58,231 |
| | 60,013 |
|
Goodwill | 211,251 |
| | 117,345 |
| 210,344 |
| | 210,344 |
|
Intangible assets, net | 27,626 |
| | 8,553 |
| 23,196 |
| | 26,076 |
|
Other assets | 243,495 |
| | 167,299 |
| 277,285 |
| | 235,226 |
|
Total assets | $ | 7,346,791 |
| | $ | 5,645,662 |
| $ | 8,357,501 |
| | $ | 7,333,791 |
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| | | | | | |
Liabilities and Shareholders' Equity | | | | | | |
Demand deposits | $ | 1,295,450 |
| | $ | 1,100,718 |
| |
Noninterest-bearing deposit accounts | | $ | 1,965,868 |
| | $ | 1,327,348 |
|
Interest-bearing transaction accounts | 1,307,855 |
| | 1,037,684 |
| 1,508,535 |
| | 1,367,444 |
|
Money market accounts | 1,652,394 |
| | 1,565,729 |
| 1,962,916 |
| | 1,713,615 |
|
Savings | 548,658 |
| | 199,425 |
| |
Savings accounts | | 603,095 |
| | 536,169 |
|
Certificates of deposit: | | | | | | |
Brokered | 209,754 |
| | 198,981 |
| 85,414 |
| | 215,758 |
|
Other | 610,269 |
| | 485,448 |
| 573,752 |
| | 610,689 |
|
Total deposits | 5,624,380 |
| | 4,587,985 |
| 6,699,580 |
| | 5,771,023 |
|
Subordinated debentures and notes (net of debt issuance cost of $907 and $1,005, respectively) | 141,179 |
| | 118,156 |
| |
Federal Home Loan Bank advances | 461,426 |
| | 70,000 |
| |
Subordinated debentures and notes | | 203,384 |
| | 141,258 |
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FHLB advances | | 250,000 |
| | 222,406 |
|
Other borrowings | 162,920 |
| | 221,450 |
| 196,532 |
| | 230,886 |
|
Notes payable | 36,714 |
| | 2,000 |
| 31,429 |
| | 34,286 |
|
Other liabilities | 74,077 |
| | 42,267 |
| 108,613 |
| | 66,747 |
|
Total liabilities | $ | 6,500,696 |
| | $ | 5,041,858 |
| $ | 7,489,538 |
| | $ | 6,466,606 |
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| | | | | | |
Commitments and contingent liabilities (Note 7) | | | | |
Commitments and contingent liabilities (Note 5) | | | | |
| | | | | | |
Shareholders' equity: | | | | | | |
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding | — |
| | — |
| — |
| | — |
|
Common stock, $0.01 par value; 45,000,000 shares authorized; 28,042,628 and 23,938,994 shares issued, respectively | 280 |
| | 239 |
| |
Treasury stock, at cost; 1,429,861 and 1,127,105 shares, respectively | (54,472 | ) | | (42,655 | ) | |
Common stock, $0.01 par value; 45,000,000 shares authorized; 28,176,087 and 28,067,087 shares issued, respectively | | 281 |
| | 281 |
|
Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively | | (73,528 | ) | | (58,181 | ) |
Additional paid in capital | 524,916 |
| | 350,936 |
| 527,734 |
| | 526,599 |
|
Retained earnings | 356,160 |
| | 304,566 |
| 380,667 |
| | 380,737 |
|
Accumulated other comprehensive income (loss) | 19,211 |
| | (9,282 | ) | |
Accumulated other comprehensive income | | 32,809 |
| | 17,749 |
|
Total shareholders' equity | 846,095 |
| | 603,804 |
| 867,963 |
| | 867,185 |
|
Total liabilities and shareholders' equity | $ | 7,346,791 |
| | $ | 5,645,662 |
| $ | 8,357,501 |
| | $ | 7,333,791 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(in thousands, except per share data) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Interest income: | | | | | | | | | | | | | | |
Interest and fees on loans | $ | 71,214 |
| | $ | 55,383 |
| | $ | 201,867 |
| | $ | 158,781 |
| $ | 64,478 |
| | $ | 69,628 |
| | $ | 131,647 |
| | $ | 130,653 |
|
Interest on debt securities: | | | | | | | | | | | | | | |
Taxable | 8,004 |
| | 4,482 |
| | 21,236 |
| | 12,697 |
| 6,587 |
| | 7,757 |
| | 14,144 |
| | 13,232 |
|
Nontaxable | 969 |
| | 263 |
| | 2,277 |
| | 816 |
| 1,812 |
| | 861 |
| | 3,301 |
| | 1,308 |
|
Interest on interest-bearing deposits | 572 |
| | 306 |
| | 1,722 |
| | 777 |
| |
Interest on interest-earning deposits | | 87 |
| | 703 |
| | 387 |
| | 1,150 |
|
Dividends on equity securities | 319 |
| | 323 |
| | 794 |
| | 729 |
| 227 |
| | 252 |
| | 400 |
| | 475 |
|
Total interest income | 81,078 |
| | 60,757 |
|
| 227,896 |
|
| 173,800 |
| 73,191 |
| | 79,201 |
|
| 149,879 |
|
| 146,818 |
|
Interest expense: | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | 2,048 |
| | 799 |
| | 5,972 |
| | 2,422 |
| |
Money market accounts | 6,959 |
| | 5,423 |
| | 20,470 |
| | 13,221 |
| |
Savings accounts | 232 |
| | 157 |
| | 646 |
| | 429 |
| |
Certificates of deposit | 3,970 |
| | 2,878 |
| | 11,060 |
| | 7,115 |
| |
Deposits | | 4,383 |
| | 13,119 |
| | 14,271 |
| | 24,939 |
|
Subordinated debentures and notes | 1,956 |
| | 1,483 |
| | 5,562 |
| | 4,305 |
| 2,316 |
| | 1,958 |
| | 4,235 |
| | 3,606 |
|
Federal Home Loan Bank advances | 2,203 |
| | 1,729 |
| | 5,297 |
| | 4,435 |
| |
FHLB advances | | 455 |
| | 1,696 |
| | 1,350 |
| | 3,094 |
|
Notes payable and other borrowings | 664 |
| | 195 |
| | 1,785 |
| | 561 |
| 204 |
| | 713 |
| | 822 |
| | 1,121 |
|
Total interest expense | 18,032 |
| | 12,664 |
|
| 50,792 |
|
| 32,488 |
| 7,358 |
| | 17,486 |
|
| 20,678 |
|
| 32,760 |
|
Net interest income | 63,046 |
| | 48,093 |
| | 177,104 |
| | 141,312 |
| 65,833 |
| | 61,715 |
| | 129,201 |
| | 114,058 |
|
Provision for loan losses | 1,833 |
| | 2,263 |
| | 5,031 |
| | 4,524 |
| |
Net interest income after provision for loan losses | 61,213 |
| | 45,830 |
|
| 172,073 |
|
| 136,788 |
| |
Provision for credit losses | | 19,591 |
| | 1,722 |
| | 41,855 |
| | 3,198 |
|
Net interest income after provision for credit losses | | 46,242 |
| | 59,993 |
|
| 87,346 |
|
| 110,860 |
|
Noninterest income: | | | | | | | | | | | | | | |
Service charges on deposit accounts | 3,246 |
| | 2,997 |
| | 9,547 |
| | 8,855 |
| 2,616 |
| | 3,366 |
| | 5,759 |
| | 6,301 |
|
Wealth management revenue | 2,661 |
| | 2,012 |
| | 7,314 |
| | 6,267 |
| 2,326 |
| | 2,661 |
| | 4,827 |
| | 4,653 |
|
Card services revenue | 2,494 |
| | 1,760 |
| | 6,745 |
| | 4,926 |
| 2,225 |
| | 2,461 |
| | 4,472 |
| | 4,251 |
|
Tax credit income | 1,238 |
| | 192 |
| | 1,968 |
| | 508 |
| (221 | ) | | 572 |
| | 1,815 |
| | 730 |
|
Gain on sale of investment securities | 337 |
| | — |
| | 337 |
| | 9 |
| |
Miscellaneous income | 3,588 |
| | 1,449 |
| | 8,847 |
| | 7,080 |
| 3,014 |
| | 2,904 |
| | 6,495 |
| | 5,259 |
|
Total noninterest income | 13,564 |
| | 8,410 |
|
| 34,758 |
|
| 27,645 |
| 9,960 |
| | 11,964 |
|
| 23,368 |
|
| 21,194 |
|
Noninterest expense: | | | | | | | | | | | | | | |
Employee compensation and benefits | 20,845 |
| | 16,297 |
| | 60,884 |
| | 49,370 |
| 22,389 |
| | 20,687 |
| | 44,074 |
| | 40,039 |
|
Occupancy | 3,179 |
| | 2,394 |
| | 9,004 |
| | 7,142 |
| 3,185 |
| | 3,188 |
| | 6,532 |
| | 5,825 |
|
Data processing | 2,051 |
| | 1,634 |
| | 6,415 |
| | 4,634 |
| 2,144 |
| | 2,458 |
| | 4,226 |
| | 4,364 |
|
Professional fees | 1,064 |
| | 1,023 |
| | 2,847 |
| | 2,619 |
| 1,287 |
| | 1,037 |
| | 2,149 |
| | 1,783 |
|
Merger related expenses | 393 |
| | — |
| | 17,969 |
| | — |
| |
Merger-related expenses | | — |
| | 10,306 |
| | — |
| | 17,576 |
|
Other | 10,707 |
| | 8,574 |
| | 30,012 |
| | 24,519 |
| 8,907 |
| | 11,378 |
| | 19,604 |
| | 19,305 |
|
Total noninterest expense | 38,239 |
| | 29,922 |
|
| 127,131 |
|
| 88,284 |
| 37,912 |
| | 49,054 |
|
| 76,585 |
|
| 88,892 |
|
| | | | | | | | | | | | | | |
Income before income tax expense | 36,538 |
| | 24,318 |
|
| 79,700 |
|
| 76,149 |
| 18,290 |
| | 22,903 |
|
| 34,129 |
|
| 43,162 |
|
Income tax expense | 7,469 |
| | 1,802 |
| | 16,051 |
| | 10,461 |
| 3,656 |
| | 4,479 |
| | 6,627 |
| | 8,582 |
|
Net income | $ | 29,069 |
| | $ | 22,516 |
|
| $ | 63,649 |
|
| $ | 65,688 |
| $ | 14,634 |
| | $ | 18,424 |
|
| $ | 27,502 |
|
| $ | 34,580 |
|
| | | | | | | | | | | | | | |
Earnings per common share | | | | | | | | | | | | | | |
Basic | $ | 1.09 |
| | $ | 0.97 |
| | $ | 2.46 |
| | $ | 2.84 |
| $ | 0.56 |
| | $ | 0.69 |
| | $ | 1.04 |
| | $ | 1.36 |
|
Diluted | 1.08 |
| | 0.97 |
| | 2.45 |
| | 2.81 |
| 0.56 |
| | 0.68 |
| | 1.04 |
| | 1.36 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 29,069 |
| | $ | 22,516 |
| | $ | 63,649 |
| | $ | 65,688 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense (benefit) for three months of $2,306 and $(1,328), and for nine months of $10,293 and $(3,926), respectively | 7,028 |
| | (4,047 | ) | | 31,377 |
| | (11,968 | ) |
Reclassification adjustment for realized gains on sale of securities available for sale included in net income, net of income tax expense for three months of $83 and $0, and for nine months of $11 and $2, respectively | (254 | ) | | — |
| | (34 | ) | | (7 | ) |
Unrealized loss on cash flow hedges arising during the 2019 periods, net of income tax benefit for three months of $219 and for nine months of $947 | (669 | ) | | — |
| | (2,886 | ) | | — |
|
Reclassification of loss on cash flow hedge arising during the 2019 periods, net of income tax benefit for three months of $10 and for nine months of $12 | 32 |
| | — |
| | 36 |
| | — |
|
Total other comprehensive income (loss) | 6,137 |
| | (4,047 | ) | | 28,493 |
| | (11,975 | ) |
Total comprehensive income | $ | 35,206 |
| | $ | 18,469 |
| | $ | 92,142 |
| | $ | 53,713 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 14,634 |
| | $ | 18,424 |
| | $ | 27,502 |
| | $ | 34,580 |
|
Other comprehensive income (loss), after-tax: | | | | | | | |
Change in unrealized gain on available-for-sale debt securities | 10,984 |
| | 12,842 |
| | 21,548 |
| | 24,344 |
|
Reclassification adjustment for realized (gain) loss on sale of available-for-sale debt securities | — |
| | — |
| | (3 | ) | | 220 |
|
Reclassification of (gain) loss on held-to-maturity securities | (329 | ) | | 3 |
| | (485 | ) | | 5 |
|
Change in unrealized loss on cash flow hedges arising during the period | (1,177 | ) | | (1,265 | ) | | (6,357 | ) | | (2,217 | ) |
Reclassification of loss on cash flow hedges | 234 |
| | 4 |
| | 357 |
| | 4 |
|
Total other comprehensive income, after-tax | 9,712 |
| | 11,584 |
| | 15,060 |
| | 22,356 |
|
Comprehensive income | $ | 24,346 |
| | $ | 30,008 |
| | $ | 42,562 |
| | $ | 56,936 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
| | Three and six months ended June 30, 2020 | | | | | | | | | | | | |
(in thousands, except per share data) | Common Stock | | Treasury Stock | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total shareholders’ equity | Common Stock | | Treasury Stock | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total shareholders’ equity |
Balance at June 30, 2019 | $ | 280 |
| | $ | (42,655 | ) | | $ | 523,454 |
| | $ | 331,348 |
| | $ | 13,074 |
| | $ | 825,501 |
| |
Balance at March 31, 2020 | | $ | 281 |
| | $ | (73,528 | ) | | $ | 525,838 |
| | $ | 370,748 |
| | $ | 23,097 |
| | $ | 846,436 |
|
Net income | | — |
| | — |
| | — |
| | 14,634 |
| | — |
| | 14,634 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 9,712 |
| | 9,712 |
|
Comprehensive income | | — |
| | — |
| | — |
| | 14,634 |
| | 9,712 |
| | 24,346 |
|
Cash dividends paid on common shares, $0.18 per share | | — |
| | — |
| | — |
| | (4,715 | ) | | — |
| | (4,715 | ) |
Issuance under equity compensation plans, 35,485 shares, net | | — |
| | — |
| | 827 |
| | — |
| | — |
| | 827 |
|
Share-based compensation | | — |
| | — |
| | 1,069 |
| | — |
| | — |
| | 1,069 |
|
Balance at June 30, 2020 | | $ | 281 |
| | $ | (73,528 | ) | | $ | 527,734 |
| | $ | 380,667 |
| | $ | 32,809 |
| | $ | 867,963 |
|
| | | | | | | | | | | | |
Balance at December 31, 2019 | | $ | 281 |
| | $ | (58,181 | ) | | $ | 526,599 |
| | $ | 380,737 |
| | $ | 17,749 |
| | $ | 867,185 |
|
Net income | — |
| | — |
| | — |
| | 29,069 |
| | — |
| | 29,069 |
| — |
| | — |
| | — |
| | 27,502 |
| | — |
| | 27,502 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 6,137 |
| | 6,137 |
| — |
| | — |
| | — |
| | — |
| | 15,060 |
| | 15,060 |
|
Total comprehensive income | — |
| | — |
| | — |
| | 29,069 |
| | 6,137 |
| | 35,206 |
| — |
| | — |
| | — |
| | 27,502 |
| | 15,060 |
| | 42,562 |
|
Cash dividends paid on common shares, $0.16 per share | — |
| | — |
| | — |
| | (4,257 | ) | | — |
| | (4,257 | ) | |
Cash dividends paid on common shares, $0.36 per share | | — |
| | — |
| | — |
| | (9,458 | ) | | — |
| | (9,458 | ) |
Repurchase of common shares | — |
| | (11,817 | ) | | — |
| | — |
| | — |
| | (11,817 | ) | — |
| | (15,347 | ) | | — |
| | — |
| | — |
| | (15,347 | ) |
Issuance under equity compensation plans, 9,382 shares, net | — |
| | — |
| | 353 |
| | — |
| | — |
| | 353 |
| |
Issuance under equity compensation plans, 109,000 shares, net | | — |
| | — |
| | (894 | ) | | — |
| | — |
| | (894 | ) |
Share-based compensation | — |
| | — |
| | 1,109 |
| | — |
| | — |
| | 1,109 |
| — |
| | — |
| | 2,029 |
| | — |
| | — |
| | 2,029 |
|
Balance at September 30, 2019 | $ | 280 |
| | $ | (54,472 | ) | | $ | 524,916 |
| | $ | 356,160 |
| | $ | 19,211 |
| | $ | 846,095 |
| |
Reclassification for the adoption of ASU 2016-13 (CECL) | | — |
| | — |
| | — |
| | (18,114 | ) | | — |
| | (18,114 | ) |
Balance at June 30, 2020 | | $ | 281 |
| | $ | (73,528 | ) | | $ | 527,734 |
| | $ | 380,667 |
| | $ | 32,809 |
| | $ | 867,963 |
|
| | | | | | | | | | | | |
Three and six months ended June 30, 2019 | | | | | | | | | | | | |
(in thousands, except per share data) | | Common Stock | | Treasury Stock | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total shareholders’ equity |
Balance at March 31, 2019 | | $ | 280 |
| | $ | (42,655 | ) | | $ | 521,761 |
| | $ | 316,959 |
| | $ | 1,490 |
| | $ | 797,835 |
|
Net income | | — |
| | — |
| | — |
| | 18,424 |
| | — |
| | 18,424 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 11,584 |
| | 11,584 |
|
Comprehensive income | | — |
| | — |
| | — |
| | 18,424 |
| | 11,584 |
| | 30,008 |
|
Cash dividends paid on common shares, $0.15 per share | | — |
| | — |
| | — |
| | (4,035 | ) | | — |
| | (4,035 | ) |
Issuance under equity compensation plans, 28,341 shares, net | | — |
| | — |
| | 707 |
| | — |
| | — |
| | 707 |
|
Share-based compensation | | — |
| | — |
| | 986 |
| | — |
| | — |
| | 986 |
|
Balance at June 30, 2019 | | $ | 280 |
| | $ | (42,655 | ) | | $ | 523,454 |
| | $ | 331,348 |
| | $ | 13,074 |
| | $ | 825,501 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | $ | 239 |
| | $ | (42,655 | ) | | $ | 350,936 |
| | $ | 304,566 |
| | $ | (9,282 | ) | | $ | 603,804 |
| $ | 239 |
| | $ | (42,655 | ) | | $ | 350,936 |
| | $ | 304,566 |
| | $ | (9,282 | ) | | $ | 603,804 |
|
Net income | — |
| | — |
| | — |
| | 63,649 |
| | — |
| | 63,649 |
| — |
| | — |
| | — |
| | 34,580 |
| | — |
| | 34,580 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 28,493 |
| | 28,493 |
| — |
| | — |
| | — |
| | — |
| | 22,356 |
| | 22,356 |
|
Total comprehensive income | — |
| | — |
| | — |
| | 63,649 |
| | 28,493 |
| | 92,142 |
| — |
| | — |
| | — |
| | 34,580 |
| | 22,356 |
| | 56,936 |
|
Cash dividends paid on common shares, $0.45 per share | — |
| | — |
| | — |
| | (12,055 | ) | | — |
| | (12,055 | ) | |
Repurchase of common shares | — |
| | (11,817 | ) | | — |
| | — |
| | — |
| | (11,817 | ) | |
Issuance under equity compensation plans, 112,812 shares, net | 1 |
| | — |
| | (881 | ) | | — |
| | — |
| | (880 | ) | |
Cash dividends paid on common shares, $0.29 per share | | — |
| | — |
| | — |
| | (7,798 | ) | | — |
| | (7,798 | ) |
Issuance under equity compensation plans, 103,430 shares, net | | 1 |
| | — |
| | (1,234 | ) | | — |
| | — |
| | (1,233 | ) |
Share-based compensation | — |
| | — |
| | 3,016 |
| | — |
| | — |
| | 3,016 |
| — |
| | — |
| | 1,907 |
| | — |
| | — |
| | 1,907 |
|
Shares issued in connection with acquisition of Trinity Capital Corporation, 3,990,822 shares | 40 |
| | — |
| | 171,845 |
| | — |
| | — |
| | 171,885 |
| 40 |
| | — |
| | 171,845 |
| | — |
| | — |
| | 171,885 |
|
Balance at September 30, 2019 | $ | 280 |
| | $ | (54,472 | ) | | $ | 524,916 |
| | $ | 356,160 |
| | $ | 19,211 |
| | $ | 846,095 |
| |
| | | | | | | | | | | | |
(in thousands, except per share data) | Common Stock | | Treasury Stock | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total shareholders’ equity | |
Balance at June 30, 2018 | $ | 239 |
| | $ | (26,326 | ) | | $ | 348,471 |
| | $ | 264,280 |
| | $ | (12,580 | ) | | $ | 574,084 |
| |
Net income | — |
| | — |
| | — |
| | 22,516 |
| | — |
| | 22,516 |
| |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (4,047 | ) | | (4,047 | ) | |
Total comprehensive income (loss) | — |
| | — |
| | — |
| | 22,516 |
| | (4,047 | ) | | 18,469 |
| |
Cash dividends paid on common shares, $0.12 per share | — |
| | — |
| | — |
| | (2,780 | ) | | — |
| | (2,780 | ) | |
Repurchase of common shares | — |
| | (3,782 | ) | | — |
| | — |
| | — |
| | (3,782 | ) | |
Issuance under equity compensation plans, 18,592 shares, net | — |
| | — |
| | (77 | ) | | — |
| | — |
| | (77 | ) | |
Share-based compensation | — |
| | — |
| | 923 |
| | — |
| | — |
| | 923 |
| |
Reclassification adjustment for change in accounting policies | — |
| | — |
| | — |
| | 834 |
| | (834 | ) | | — |
| |
Balance at September 30, 2018 | $ | 239 |
| | $ | (30,108 | ) | | $ | 349,317 |
| | $ | 284,016 |
| | $ | (16,627 | ) | | $ | 586,837 |
| |
| | | | | | | | | | | | |
Balance at December 31, 2017 | $ | 238 |
| | $ | (23,268 | ) | | $ | 350,061 |
| | $ | 225,360 |
| | $ | (3,818 | ) | | $ | 548,573 |
| |
Net income | — |
| | — |
| | — |
| | 65,688 |
| | — |
| | 65,688 |
| |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (11,975 | ) | | (11,975 | ) | |
Total comprehensive income (loss) | — |
| | — |
| | — |
| | 65,688 |
| | (11,975 | ) | | 53,713 |
| |
Cash dividends paid on common shares, $0.34 per share | — |
| | — |
| | — |
| | (7,866 | ) | | — |
| | (7,866 | ) | |
Repurchase of common shares | — |
| | (6,840 | ) | | — |
| | — |
| | — |
| | (6,840 | ) | |
Issuance under equity compensation plans, 138,149 shares, net | 1 |
| | — |
| | (3,298 | ) | | — |
| | — |
| | (3,297 | ) | |
Share-based compensation | — |
| | — |
| | 2,554 |
| | — |
| | — |
| | 2,554 |
| |
Reclassification adjustment for change in accounting policies | — |
| | — |
| | — |
| | 834 |
| | (834 | ) | | — |
| |
Balance at September 30, 2018 | $ | 239 |
| | $ | (30,108 | ) | | $ | 349,317 |
| | $ | 284,016 |
| | $ | (16,627 | ) | | $ | 586,837 |
| |
Balance at June 30, 2019 | | $ | 280 |
| | $ | (42,655 | ) | | $ | 523,454 |
| | $ | 331,348 |
| | $ | 13,074 |
| | $ | 825,501 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | Nine months ended September 30, | Six months ended June 30, |
(in thousands, except share data) | 2019 | | 2018 | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 63,649 |
| | $ | 65,688 |
| $ | 27,502 |
| | $ | 34,580 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | |
Depreciation | 4,187 |
| | 2,622 |
| 3,048 |
| | 2,743 |
|
Provision for loan losses | 5,031 |
| | 4,524 |
| |
Provision for credit losses | | 41,855 |
| | 3,198 |
|
Deferred income taxes | 4,777 |
| | 2,822 |
| (4,937 | ) | | 3,813 |
|
Net amortization of debt securities | 2,009 |
| | 1,338 |
| 2,756 |
| | 1,189 |
|
Amortization of intangible assets | 3,993 |
| | 1,908 |
| 2,880 |
| | 2,418 |
|
Gain on sale of investment securities | (45 | ) | | (9 | ) | |
Mortgage loans originated for sale | (39,260 | ) | | (30,136 | ) | |
Mortgage loans originated-for-sale | | (94,536 | ) | | (11,645 | ) |
Proceeds from mortgage loans sold | 33,503 |
| | 32,839 |
| 84,799 |
| | 10,629 |
|
Gain on sale of other real estate | (59 | ) | | (13 | ) | |
Gain on state tax credits, net | (469 | ) | | (508 | ) | |
Loss (gain) on: | | | | |
Sale of investment securities | | (4 | ) | | 292 |
|
Sale of other real estate | | 5 |
| | (48 | ) |
Sale of state tax credits | | (211 | ) | | (107 | ) |
Share-based compensation | 3,016 |
| | 2,554 |
| 2,029 |
| | 1,907 |
|
Accretion of loan discount | (8,101 | ) | | (1,253 | ) | |
Changes in: | | | | |
Accrued interest receivable | (1,031 | ) | | (5,811 | ) | |
Accrued interest payable | 560 |
| | 703 |
| |
Other assets | 1,270 |
| | (16,309 | ) | |
Other liabilities | (6,460 | ) | | (1,093 | ) | |
Net accretion of loan discount | | (4,049 | ) | | (4,702 | ) |
Changes in other assets and liabilities, net | | (2,277 | ) | | (23,700 | ) |
Net cash provided by operating activities | 66,570 |
| | 59,866 |
| 58,860 |
| | 20,567 |
|
Cash flows from investing activities: | | | | | | |
Acquisition cash purchase price, net of cash and cash equivalents acquired | (23,377 | ) | | — |
| — |
| | (23,377 | ) |
Increase in loans | (197,514 | ) | | (172,449 | ) | |
Net increase in loans | | (815,437 | ) | | (121,115 | ) |
Proceeds received from: | | | | | | |
Sale of debt securities, available for sale | 314,189 |
| | 1,451 |
| |
Paydown or maturity of debt securities, available for sale | 95,386 |
| | 61,881 |
| |
Paydown or maturity of debt securities, held to maturity | 4,760 |
| | 4,988 |
| |
Sale of debt securities, available-for-sale | | 207 |
| | 263,298 |
|
Paydown or maturity of debt securities, available-for-sale | | 140,218 |
| | 58,229 |
|
Paydown or maturity of debt securities, held-to-maturity | | 8,711 |
| | 2,864 |
|
Redemption of other investments | 43,034 |
| | 30,593 |
| 25,978 |
| | 31,138 |
|
Sale of state tax credits held for sale | 3,978 |
| | 3,056 |
| 1,924 |
| | 2,252 |
|
Sale of other real estate | 4,380 |
| | 467 |
| 609 |
| | 2,281 |
|
Settlement of bank-owned life insurance policies | | 974 |
| | — |
|
Payments for the purchase of: | | | | | | |
Available for sale debt securities | (467,695 | ) | | (108,121 | ) | |
Available-for-sale debt securities | | (152,082 | ) | | (363,900 | ) |
Other investments | (61,226 | ) | | (44,597 | ) | (38,527 | ) | | (43,589 | ) |
State tax credits held for sale | (9,666 | ) | | (4,704 | ) | (3,730 | ) | | (1,852 | ) |
Fixed assets, net | (4,008 | ) | | (2,369 | ) | (1,532 | ) | | (2,236 | ) |
Net cash used in investing activities | (297,759 | ) | | (229,804 | ) | (832,687 | ) | | (196,007 | ) |
Cash flows from financing activities: | | | | | | |
Net increase (decrease) in noninterest-bearing deposit accounts | 25,653 |
| | (61,781 | ) | 638,520 |
| | (88,219 | ) |
Net increase (decrease) in interest-bearing deposit accounts | (70,446 | ) | | 115,843 |
| 290,036 |
| | (21,615 | ) |
Proceeds from Federal Home Loan Bank advances | 1,352,000 |
| | 1,142,500 |
| |
Repayments of Federal Home Loan Bank advances | (967,500 | ) | | (914,000 | ) | |
Proceeds from FHLB advances, net | | 27,700 |
| | 312,500 |
|
Proceeds from notes payable | 41,000 |
| | — |
| — |
| | 40,000 |
|
Repayments of notes payable | (6,286 | ) | | — |
| (2,857 | ) | | (4,857 | ) |
Proceeds from issuance of subordinated debentures, net | | 61,953 |
| | — |
|
Net decrease in other borrowings | (58,530 | ) | | (91,879 | ) | (34,355 | ) | | (60,490 | ) |
Cash dividends paid on common stock | (12,055 | ) | | (7,866 | ) | (9,458 | ) | | (7,798 | ) |
Payments for the repurchase of common stock | (11,817 | ) | | (6,840 | ) | (15,347 | ) | | — |
|
Payments for the issuance of equity instruments, net | (880 | ) | | (3,297 | ) | (894 | ) | | (1,233 | ) |
Net cash provided by financing activities | 291,139 |
| | 172,680 |
| 955,298 |
| | 168,288 |
|
Net increase in cash and cash equivalents | 59,950 |
| | 2,742 |
| |
Net increase (decrease) in cash and cash equivalents | | 181,471 |
| | (7,152 | ) |
Cash and cash equivalents, beginning of period | 196,552 |
| | 153,323 |
| 167,256 |
| | 196,552 |
|
Cash and cash equivalents, end of period | $ | 256,502 |
| | $ | 156,065 |
| $ | 348,727 |
| | $ | 189,400 |
|
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid during the period for: | | | | | | |
Interest | $ | 49,862 |
| | $ | 31,785 |
| $ | 20,574 |
| | $ | 32,036 |
|
Income taxes | 12,955 |
| | 8,492 |
| 30 |
| | 11,915 |
|
Noncash transactions: | | | | | | |
Transfer to other real estate owned in settlement of loans | $ | 7,964 |
| | $ | — |
| $ | — |
| | $ | 7,783 |
|
Sales of other real estate financed | | 48 |
| | — |
|
Right-of-use assets obtained in exchange for lease obligations | | 200 |
| | — |
|
Common shares issued in connection with acquisition | 171,885 |
| | — |
| — |
| | 171,885 |
|
Transfer of securities from available for sale to held to maturity | | 163,592 |
| | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used by Enterprise Financial Services Corp (the “Company,” “EFSC,” or “Enterprise”) in the preparation of the condensed consolidated financial statements are summarized below:
Business and Consolidation
Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers located in the Arizona, Kansas, Missouri, and New Mexico markets through its banking subsidiary, Enterprise Bank & Trust (the “Bank”).Trust.
Operating results for the three and ninesix months ended SeptemberJune 30, 20192020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2019.2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the Securities and Exchange Commission.SEC.
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”)GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the statements of financial position, results of operations, and cash flow for the interim periods.
Recently Adopted Accounting Pronouncements
During the first quarter of 2019,On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2017-08,ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology commonly referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities.
The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded an after-tax decrease to retained earnings of $18.1 million as of January 1, 2020 for the cumulative effect of adopting this standard.
The Company adopted this standard using the prospective transition approach for PCD assets that were previously classified as PCI assets. Management did not reassess whether PCI assets met the criteria of PCD assets as of the date of the adoption.
The Company elected not to maintain PCI pools for certain loans which are now accounted for individually. Thus they are now included in nonperforming and classified loans. Management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.
The following table illustrates the impact of adoption:
|
| | | | | | | | | | | |
| | | | | |
($ in thousands) | December 31, 2019 | | Impact of Adoption | | January 1, 2020 |
|
Assets: | | | | | |
Loans | $ | 5,314,337 |
| | $ | 7,091 |
| | $ | 5,321,428 |
|
Allowance for credit losses on loans | 43,288 |
| | 28,387 |
| | 71,675 |
|
Allowance for credit losses on held-to-maturity debt securities | — |
| | 303 |
| | 303 |
|
Deferred tax asset | 14,851 |
| | 5,898 |
| | 20,749 |
|
| | | | | |
Liabilities: | | | | | |
Reserve for unfunded commitments | 430 |
| | 2,413 |
| | 2,843 |
|
| | | | | |
Shareholders’ Equity | | | | | |
Retained Earnings | 380,737 |
| | (18,114 | ) | | 362,623 |
|
The Company also adopted ASU 2018-13, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period of certain callable debt securities held at a premiumFair Value Measurement (Topic 820): Disclosure Framework—Changes to the earliest callDisclosure Requirements for Fair Value Measurement” on January 1, 2020. The Company previously selected the option to adopt the removal or modification of disclosures during the second quarter of 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are applied prospectively for only the most recent interim or annual period presented. All other amendments are applied retrospectively to all periods presented upon their effective date. The adoption of this update did not have a material effect on the Company's consolidated financial statements.
Accounting Standards Issued but not yet Adopted
FASB ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In March 2020, the FASB issued “Reference Rate Reform (Topic 848)” whichprovides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for contract modifications as of March 12, 2020 through December 31, 2022. The Company adopted ASU 2016-02 “Leases (Topic 842)” usingis currently evaluating the optional transition method effective on January 1, 2019. ASU 2016-02 requires organizations that lease assets to recognize the assetsexpedients and liabilities for the rightsexceptions and obligations created by leases. The Company recorded $15.5 million for right-to-use assets and $16.2 million for lease liabilities related to operating leases. The Company elected the practical expedients package which eliminates (1) the need to reassess whether any expired or existing contracts are or contain a lease, (2) the need to reassess the lease classification, and (3) the need to reassess initial direct costs for any existing leases. The Company also elected an accounting policy tohas not recognize assets and liabilities on leases 12 months or less, and an accounting policy for equipment and real estate leases to not separate nonlease components becauseyet determined the impact was immaterial.this standard may have on its consolidated financial statements.
AcquisitionsLoans
The Company has elected to present the accrued interest receivable balance separate from amortized cost basis, to exclude accrued interest receivable balances from the tabular disclosures, and not to estimate an ACL on accrued interest receivable as these amounts are timely written off as a credit loss expense.
AcquisitionsAccrued interest receivable totaled $19.7 million at June 30, 2020 and business combinationswas reported in Other Assets on the consolidated balance sheets.
PCD Loans
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are accounted forrecorded at the amount paid. An ACL is determined using the acquisition methodsame methodology as other loans held for investment. The initial ACL determined on a collective basis is allocated to individual loans. The sum of accounting.the loan’s purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through provision expense.
Allowance for Credit Losses on Loans
The ACLL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The ACLL is measured on a collective basis when similar risk characteristics exist. The Company has identified the following portfolio segments:
C&I – C&I loans consist of loans to small and medium-sized businesses in a wide variety of industries. These loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and liabilitiesmay be supported by other credit enhancements such as personal guarantees. Risk arises primarily due to a difference between expected and actual cash flows of the acquired entities have been recorded at their estimatedborrower. However, the recoverability of these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair values at the date of acquisition. Goodwill represents the excessvalue of the purchase price overcollateral securing these loans may fluctuate as market conditions change. Included within C&I are revolving loans supported by borrowing bases that fluctuate depending on the amount of underlying collateral. A portion of C&I loans consists of enterprise value lending, which are loans with senior debt exposure to private equity backed companies.
CRE – CRE loans include various types of loans for which the Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship. The primary risks of CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
Construction and Land Development – The Company originates loans to finance construction projects including one- to four-family residences, multifamily residences, commercial office, and industrial projects. Construction loans are generally collateralized by first liens on the real estate and have floating interest rates. Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans. Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and sell the project. Additionally, the fair value of net assets acquired, including the amount assignedunderlying collateral may fluctuate as market conditions change.
Residential Real Estate – The Company originates loans to identifiable intangible assets. finance one- to four-family residences, secured by both first and second liens. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Residential loans with a second lien are inherently riskier due to the junior lien position.
Agricultural – Agricultural loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying real property. Agricultural loans are primarily included as a component of CRE and C&I loans.
Consumer – The Company provides a broad range of consumer loans to customers, including personal lines of credit, credit cards and automobile loans. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Consumer loans are included as a component of Other loans.
The purchase price allocation process requires an estimationCompany utilizes a DCF method to measure the ACL on loans collectively evaluated that are sub-segmented by credit risk levels. The DCF method incorporates assumptions for probability of default, loss given default, prepayments and curtailments over the contractual term of the fair valuesloans. In determining the probability of default, the Company utilized a regression analysis to determine certain economic factors that are relevant loss drivers in the portfolio segments based on historical or peer evaluations. National unemployment is a loss driver used in nearly all portfolios, except Consumer. The annual percentage change in gross domestic product is also used in C&I, Construction, Agricultural and Consumer portfolios. The annual percentage change in a commercial real estate index, national house price index and the consumer price index are used in the CRE, Residential Real Estate and Consumer portfolios, respectively. The contractual term excludes expected extensions, renewals, and modifications unless either of the assets acquired andfollowing applies: management has a reasonable expectation at the liabilities assumed. Whenreporting date that a business combination agreement provides fortroubled debt restructuring will be executed with an adjustment toindividual borrower or the cost of the combination contingent on future events, the Company includes an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company utilizes third party valuations, such as appraisals,extension or internal valuations based on discounted cash flow analyses or other valuation techniques. The results of operations of the acquired businessrenewal options are included in the Company’s consolidated financial statements fromoriginal or modified contract at the reporting date of acquisition. Merger-related costsand are costsnot unconditionally cancellable by the Company incurs to effect a business combination. The Company presents merger-related expenses as a separate component of noninterest expenses on the Condensed Consolidated Statements of Operations. Merger-related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, gain or loss on sale of investment securities incurred through repositioning the acquired investment portfolio, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related costs as expenses in the periods in which the costs are incurred and the services are received.
RevenueCompany.
The Company’s revenues are primarily composed of interest income on financial instruments, including investment securities. Other noninterest income is primarily comprised of service charges on deposit accounts, wealth management revenue, card services revenueCompany uses a one-year reasonable and gains on sale of other real estate. Descriptions of our revenue-generating activities, which are presented in our income statement as components of noninterest income, are as follows:
Service charges on deposit accounts - represents fees generated from a variety of deposit productssupportable forecast that considers baseline, upside and services provideddownside economic scenarios. For periods beyond the forecast period, the Company reverts to customers under a day-to-day contract. These fees are recognized on a daily or monthly basis.
Wealth management revenue - represents monthly fees earned from directing, holding, and managing customers’ assets. Revenue is recognized over regular intervals, either monthly or quarterly.
Card services revenue - represents revenue earned from merchant, debit and credit cards as incurred and includes a contra revenue account for rebates.
Gain on sale of other real estate - represents income recognized at delivery of control of a property at the time of a real estate closing.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made prior to commencement and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognizedhistorical loss rates on a straight-line basis over the lease term. We account for the lease and non-lease components as a single lease component.six-month period.
Assumptions and judgmentsLoans that do not share risk characteristics are used in applying ASC 842 and may include (1) the decision framework for identifying a lease, (2) the accounting policy election for equipment and real estate leases toevaluated on an individual basis. Loans evaluated individually are not separate nonlease components, and (3) the discount rate for determining the initial present value of the lease payments which is based on information available at the commencement date for determining the lease term and assessing if optional periods are reasonably likely to be exercised. For the calculation at January 1, 2019, the discount rate was based on the remaining lease terms.
Derivative Instruments and Hedging Activities
FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how
and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
The Company records all derivatives on the balance sheet at fair value. The accounting for changesalso included in the fair value of derivatives dependscollective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable tocollateral at the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.
The Company does not offset derivative asset and liability positions. However, the Company's exposure to the credit risk of its derivative financial instruments is generally mitigated by master netting agreements with its counterparties.
The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Funding Rate (“SOFR”) replace LIBOR. ARRC has proposed the transition to SOFR from LIBOR until the end of 2021. The Company has material contracts indexed to LIBOR. Industry organizations are currently working on the transition plan. The Company is monitoring this activity and evaluating the risks involved.reporting date, adjusted for selling costs as appropriate.
NOTE 2 - ACQUISITION
Acquisition of Trinity Capital Corporation.
On March 8, 2019, the Company closed its acquisition of 100% of Trinity Capital Corporation (“Trinity”) and its wholly-owned subsidiary, Los Alamos National Bank (“LANB”). Trinity operated 6 full-service retail and commercial banking offices in Los Alamos, Santa Fe, and Albuquerque, New Mexico.
Trinity shareholders received cash consideration of $1.84 per share of Trinity common stock and 0.1972 shares of EFSC common stock per share of Trinity common stock with cash in lieu of fractional shares. Aggregate consideration at closing was 4.0 million shares of EFSC common stock and $37.3 million cash paid to Trinity shareholders. Based on EFSC’s closing stock price of $43.07 on March 7, 2019, the overall transaction had a value of $209.2 million. The Company recognized $18.0 million and $1.3 million of merger-related costs recorded in noninterest expense in the statement of operations for the nine months ended September 30, 2019, and the year ended December 31, 2018, respectively.
The acquisition of Trinity has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Goodwill of $93.9 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Trinity into Enterprise. The goodwill is assigned as part of the Company’s Banking reporting unit. None of the goodwill recognized is expected to be deductible for income tax purposes.
The following table presents the assets acquired and liabilities assumed of Trinity as of March 8, 2019. Additional adjustments may be recorded during the allocation period specified by ASC 805 as additional information becomes known.
|
| | | | | | | | | | | |
(in thousands) | As Recorded by Trinity | | Adjustments | | As Recorded by EFSC |
Assets acquired: | | | | | |
Cash and cash equivalents | $ | 13,899 |
| | $ | — |
| | $ | 13,899 |
|
Interest-earning deposits greater than 90 days | 100 |
| | — |
| | 100 |
|
Securities | 428,715 |
| | (619 | ) | (a) | 428,096 |
|
Loans | 705,057 |
| | (20,743 | ) | (b) | 684,314 |
|
Other real estate | 5,284 |
| | (772 | ) | (c) | 4,512 |
|
Other investments | 6,673 |
| | — |
| | 6,673 |
|
Fixed assets | 27,586 |
| | (300 | ) | (d) | 27,286 |
|
Accrued interest receivable | 3,997 |
| | — |
| | 3,997 |
|
Intangible assets | — |
| | 23,066 |
| (e) | 23,066 |
|
Deferred tax assets | 10,708 |
| | (1,057 | ) | (f) | 9,651 |
|
Other assets | 35,045 |
| | (5,008 | ) | (g) | 30,037 |
|
Total assets acquired | $ | 1,237,064 |
| | $ | (5,433 | ) | | $ | 1,231,631 |
|
| | | | | |
Liabilities assumed: | | | | | |
Deposits | $ | 1,081,151 |
| | $ | 36 |
| (h) | $ | 1,081,187 |
|
Subordinated debentures | 26,806 |
| | (3,972 | ) | (i) | 22,834 |
|
Federal Home Loan Bank advances | 6,800 |
| | 171 |
| (j) | 6,971 |
|
Accrued interest payable | 370 |
| | — |
| | 370 |
|
Other liabilities | 5,842 |
| | (827 | ) | (k) | 5,015 |
|
Total liabilities assumed | $ | 1,120,969 |
| | $ | (4,592 | ) | | $ | 1,116,377 |
|
| | | | | |
Net assets acquired | $ | 116,095 |
| | $ | (841 | ) | | $ | 115,254 |
|
| | | | | |
Consideration paid: | | | | | |
Cash | | | | | $ | 37,275 |
|
Common stock | | | | | 171,885 |
|
Total consideration paid | | | | | $ | 209,160 |
|
| | | | | |
Goodwill | | | | | $ | 93,906 |
|
(a)Fair value adjustments of the securities portfolio as of the acquisition date.
| |
(b) | Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs and elimination of the allowance for loan losses recorded by Trinity. |
| |
(c) | Fair value adjustment based on the Company’s evaluation of the acquired OREO portfolio. |
| |
(d) | Fair value adjustments based on the Company’s evaluation of the acquired premises and equipment. |
| |
(e) | Record the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum of years digits method over a useful life of 10 years. |
| |
(f) | Adjustment for deferred taxes at the acquisition date. |
| |
(g) | Fair value adjustment of other assets at the acquisition date. |
| |
(h) | Fair value adjustment to time deposits. |
| |
(i) | Fair value adjustment to the trust preferred securities at the acquisition date. |
| |
(j) | Fair value adjustment to the Federal Home Loan Bank borrowings. |
| |
(k) | Fair value adjustment of other liabilities recorded during the second quarter of 2019 upon continued refinement of the fair values. |
The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2019 and 2018, as if the acquisition had occurred on January 1, 2018. The pro forma results combine the historical results of Trinity with the Company’s Consolidated Statements of Income, adjusted for the
impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2018. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition-related expenses that have been incurred as of September 30, 2019 are included in net income in the table below.
|
| | | | | | | |
| Pro Forma |
| Nine months ended September 30, |
(in thousands, except per share data) | 2019 | | 2018 |
Total revenues (net interest income plus noninterest income) | $ | 221,055 |
| | $ | 211,004 |
|
Net income | 78,055 |
| | 59,473 |
|
Diluted earnings per common share | 3.00 |
| | 2.18 |
|
NOTE 32 - EARNINGS PER SHARE
Basic earnings per common share data is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.
The following table presents a summary of per common share data and amounts for the periods indicated.
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(in thousands, except per share data) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Net income as reported | $ | 29,069 |
| | $ | 22,516 |
| | $ | 63,649 |
| | $ | 65,688 |
| $ | 14,634 |
| | $ | 18,424 |
| | $ | 27,502 |
| | $ | 34,580 |
|
| | | | | | | | | | | | | | |
Weighted average common shares outstanding | 26,778 |
| | 23,148 |
| | 25,878 |
| | 23,129 |
| 26,180 |
| | 26,887 |
| | 26,325 |
| | 25,415 |
|
Additional dilutive common stock equivalents | 90 |
| | 181 |
| | 98 |
| | 211 |
| 15 |
| | 53 |
| | 29 |
| | 73 |
|
Weighted average diluted common shares outstanding | 26,868 |
| | 23,329 |
| | 25,976 |
| | 23,340 |
| 26,195 |
| | 26,940 |
| | 26,354 |
| | 25,488 |
|
| | | | | | | | | | | | | | |
Basic earnings per common share: | $ | 1.09 |
| | $ | 0.97 |
| | $ | 2.46 |
| | $ | 2.84 |
| $ | 0.56 |
| | $ | 0.69 |
| | $ | 1.04 |
| | $ | 1.36 |
|
Diluted earnings per common share: | 1.08 |
| | 0.97 |
| | $ | 2.45 |
| | $ | 2.81 |
| 0.56 |
| | 0.68 |
| | $ | 1.04 |
| | $ | 1.36 |
|
For the three and ninesix months ended SeptemberJune 30, 20192020 common stock equivalents of approximately 21,000157,000 and 26,000,147,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. ForComparatively, there were 130,000 and 99,000 common stock equivalents excluded in the comparableprior year periods, in 2018, the amounts were immaterial.
respectively.
NOTE 43 - INVESTMENTS
The following table presents the amortized cost, gross unrealized gains and losses, allowance of credit losses and fair value of securities available for sale and held to maturity:
| | | September 30, 2019 | June 30, 2020 |
(in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Available for sale securities: | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | |
Obligations of U.S. Government-sponsored enterprises | $ | 9,949 |
| | $ | 84 |
| | $ | — |
| | $ | 10,033 |
| $ | 9,966 |
| | $ | 275 |
| | $ | — |
| | $ | — |
| | $ | 10,241 |
|
Obligations of states and political subdivisions | 164,263 |
| | 6,298 |
| | (248 | ) | | 170,313 |
| 245,961 |
| | 8,450 |
| | (133 | ) | | — |
| | 254,278 |
|
Agency mortgage-backed securities | 917,102 |
| | 18,021 |
| | (1,012 | ) | | 934,111 |
| 693,082 |
| | 27,915 |
| | (6 | ) | | — |
| | 720,991 |
|
U.S. Treasury bills | 9,969 |
| | 278 |
| | — |
| | 10,247 |
| 9,975 |
| | 591 |
| | — |
| | — |
| | 10,566 |
|
Corporate debt securities | 116,355 |
| | 6,274 |
| | — |
| | 122,629 |
| 2,000 |
| | 28 |
| | — |
| | — |
| | 2,028 |
|
Total securities available for sale | $ | 1,217,638 |
| | $ | 30,955 |
| | $ | (1,260 | ) | | $ | 1,247,333 |
| $ | 960,984 |
| | $ | 37,259 |
| | $ | (139 | ) | | $ | — |
| | $ | 998,104 |
|
Held to maturity securities: | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 12,468 |
| | $ | 167 |
| | $ | — |
| | $ | 12,635 |
| $ | 96,547 |
| | $ | 336 |
| | $ | (122 | ) | | $ | (16 | ) | | $ | 96,745 |
|
Agency mortgage-backed securities | 48,318 |
| | 670 |
| | — |
| | 48,988 |
| 127,353 |
| | 2,469 |
| | (28 | ) | | — |
| | 129,794 |
|
Total securities held to maturity | $ | 60,786 |
| | $ | 837 |
|
| $ | — |
|
| $ | 61,623 |
| |
Corporate debt securities | | 122,536 |
| | 7,693 |
| | — |
| | (629 | ) | | 129,600 |
|
Total securities held-to-maturity | | $ | 346,436 |
| | $ | 10,498 |
|
| $ | (150 | ) |
| $ | (645 | ) | | $ | 356,139 |
|
Less: Allowance for credit losses | | 645 |
| | | | | | | | |
Total securities held-to-maturity, net | | $ | 345,791 |
| | | | | | | | |
| | | December 31, 2018 | December 31, 2019 |
(in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale securities: | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
Obligations of U.S. Government-sponsored enterprises | $ | 99,926 |
| | $ | — |
| | $ | (1,428 | ) | | $ | 98,498 |
| $ | 9,954 |
| | $ | 92 |
| | $ | — |
| | $ | 10,046 |
|
Obligations of states and political subdivisions | 26,566 |
| | 327 |
| | (83 | ) | | 26,810 |
| 207,269 |
| | 6,118 |
| | (363 | ) | | 213,024 |
|
Agency mortgage-backed securities | 596,825 |
| | 1,160 |
| | (11,849 | ) | | 586,136 |
| 888,129 |
| | 15,083 |
| | (1,191 | ) | | 902,021 |
|
U.S. Treasury Bills | $ | 9,962 |
| | $ | — |
| | $ | (37 | ) | | $ | 9,925 |
| 9,971 |
| | 255 |
| | — |
| | 10,226 |
|
Total securities available for sale | $ | 733,279 |
| | $ | 1,487 |
| | $ | (13,397 | ) | | $ | 721,369 |
| $ | 1,115,323 |
| | $ | 21,548 |
| | $ | (1,554 | ) | | $ | 1,135,317 |
|
Held to maturity securities: | | | | | | | | |
Held-to-maturity securities: | | | | | | | | |
Obligations of states and political subdivisions | $ | 12,506 |
| | $ | 16 |
| | $ | (114 | ) | | $ | 12,408 |
| $ | 11,704 |
| | $ | 170 |
| | $ | — |
| | $ | 11,874 |
|
Agency mortgage-backed securities | 53,173 |
| | — |
| | (1,647 | ) | | 51,526 |
| 46,346 |
| | 675 |
| | — |
| | 47,021 |
|
Corporate debt securities | | 123,116 |
| | 128 |
| | (200 | ) | | 123,044 |
|
Total securities held to maturity | $ | 65,679 |
| | $ | 16 |
| | $ | (1,761 | ) | | $ | 63,934 |
| $ | 181,166 |
| | $ | 973 |
| | $ | (200 | ) |
| $ | 181,939 |
|
During the second quarter of 2020, the Company transferred municipal securities and agency mortgage-backed securities with a book value of $163.6 million and fair value of $175.1 million from available-for-sale to held-to-maturity. The Company believes the held- to-maturity category is more consistent with the Company’s intent for these securities. The transfer of securities was made at fair value at the time of transfer. The unamortized portion of the $11.5 million unrealized holding gain at the time of transfer is retained in accumulated other comprehensive income and in the carrying value of held-to-maturity securities. Such amounts are amortized over the remaining life of the securities.
At SeptemberJune 30, 20192020 and December 31, 2018,2019, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of $416.0$449.9 million and $433.7$484.8 million at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.
The amortized cost and estimated fair value of debt securities at SeptemberJune 30, 2019,2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 43 years.
| | | Available for sale | | Held to maturity | Available for sale | | Held to maturity |
(in thousands) | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
Due in one year or less | $ | 1,079 |
| | $ | 1,086 |
| | $ | — |
| | $ | — |
| $ | 2,313 |
| | $ | 2,345 |
| | $ | — |
| | $ | — |
|
Due after one year through five years | 27,564 |
| | 28,081 |
| | 3,879 |
| | 3,929 |
| 25,981 |
| | 27,058 |
| | 10,207 |
| | 10,597 |
|
Due after five years through ten years | 127,062 |
| | 133,705 |
| | 8,589 |
| | 8,706 |
| 9,455 |
| | 9,915 |
| | 126,285 |
| | 133,206 |
|
Due after ten years | 144,831 |
| | 150,350 |
| | — |
| | — |
| 230,153 |
| | 237,795 |
| | 82,591 |
| | 82,542 |
|
Agency mortgage-backed securities | 917,102 |
| | 934,111 |
| | 48,318 |
| | 48,988 |
| 693,082 |
| | 720,991 |
| | 127,353 |
| | 129,794 |
|
| $ | 1,217,638 |
| | $ | 1,247,333 |
|
| $ | 60,786 |
|
| $ | 61,623 |
| $ | 960,984 |
| | $ | 998,104 |
|
| $ | 346,436 |
|
| $ | 356,139 |
|
The following table represents a summary of available-for-sale investment securities that had an unrealized loss:
| | | September 30, 2019 | June 30, 2020 |
Less than 12 months | | 12 months or more | | Total | Less than 12 months | | 12 months or more | | Total |
(in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Obligations of states and political subdivisions | $ | 36,066 |
| | $ | 248 |
| | $ | — |
| | $ | — |
| | $ | 36,066 |
| | $ | 248 |
| $ | 33,821 |
| | $ | 133 |
| | $ | — |
| | $ | — |
| | $ | 33,821 |
| | $ | 133 |
|
Agency mortgage-backed securities | 124,823 |
| | 352 |
| | 55,333 |
| | 660 |
| | 180,156 |
| | 1,012 |
| 8,366 |
| | 5 |
| | 66 |
| | 1 |
| | 8,432 |
| | 6 |
|
| $ | 160,889 |
| | $ | 600 |
|
| $ | 55,333 |
|
| $ | 660 |
|
| $ | 216,222 |
|
| $ | 1,260 |
| $ | 42,187 |
| | $ | 138 |
|
| $ | 66 |
|
| $ | 1 |
|
| $ | 42,253 |
|
| $ | 139 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | |
| The following table represents a summary of investment securities that had an unrealized loss: |
| | | | | | | | | | | | |
| | December 31, 2019 |
Less than 12 months | | 12 months or more | | Total | Less than 12 months | | 12 months or more | | Total |
(in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Obligations of U.S. Government-sponsored enterprises | $ | 19,622 |
| | $ | 322 |
| | $ | 78,876 |
| | $ | 1,106 |
| | $ | 98,498 |
| | $ | 1,428 |
| |
Obligations of states and political subdivisions | 3,102 |
| | 15 |
| | 14,156 |
| | 182 |
| | 17,258 |
| | 197 |
| 56,327 |
| | 363 |
| | — |
| | — |
| | 56,327 |
| | 363 |
|
Agency mortgage-backed securities | 87,357 |
| | 2,211 |
| | 389,770 |
| | 11,285 |
| | 477,127 |
| | 13,496 |
| 131,693 |
| | 756 |
| | 41,491 |
| | 435 |
| | 173,184 |
| | 1,191 |
|
U.S. Treasury bills | — |
| | — |
| | 9,925 |
| | 37 |
| | 9,925 |
| | 37 |
| |
Corporate debt securities | | 67,964 |
| | 200 |
| | — |
| | — |
| | 67,964 |
| | 200 |
|
| $ | 110,081 |
| | $ | 2,548 |
|
| $ | 492,727 |
|
| $ | 12,610 |
|
| $ | 602,808 |
|
| $ | 15,158 |
| $ | 255,984 |
| | $ | 1,319 |
|
| $ | 41,491 |
|
| $ | 435 |
|
| $ | 297,475 |
|
| $ | 1,754 |
|
The unrealized losses at both SeptemberJune 30, 2019,2020 and December 31, 2018,2019, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At SeptemberJune 30, 2019,2020, management performed its quarterly analysis of all securities with an unrealized loss and concluded
no individual securities were other-than-temporarily impaired. Accrued interest receivable on available-for-sale debt securities totaled $3.6 million at June 30, 2020 and is excluded from the estimate of credit losses.
Accrued interest receivable on held-to-maturity debt securities totaled $2.3 million at June 30, 2020 and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. At June 30, 2020, the ACL on held-to-maturity securities was $0.6 million.
NOTE 54 - LOANS
The loan portfolio is comprised of loans originated by the Company and loans acquired in connection with the Company’s acquisitions. These loans are accounted for using the guidance in the Accounting Standards Codification (ASC) sections 310-30 and 310-20. Loans accounted for using ASC 310-30 are sometimes referred to as purchased credit impaired (“PCI”) loans.
The table below shows the loan portfolio composition including carrying value categorized by loans accounted for at amortized cost, which includes our originated loans, and by loans accounted for as PCI.
|
| | | | | | | |
(in thousands)
| September 30, 2019 | | December 31, 2018 |
Loans accounted for at amortized cost | $ | 5,132,391 |
| | $ | 4,303,600 |
|
Loans accounted for as PCI | 95,623 |
| | 46,401 |
|
Total loans | $ | 5,228,014 |
| | $ | 4,350,001 |
|
At September 30, 2019, loans acquired in the Trinity acquisition included $562.4 million accounted for at amortized cost and $62.2 million accounted for as PCI. These loans were recorded at fair value with no allowance for loan losses.
The table below shows the composition of the allowance for loan losses:
|
| | | | | | | |
(in thousands)
| September 30, 2019 | | December 31, 2018 |
Allowance for loans accounted for at amortized cost | $ | 43,698 |
| | $ | 42,295 |
|
Allowance for loans accounted for as PCI | 857 |
| | 1,181 |
|
Total allowance for loan losses | $ | 44,555 |
| | $ | 43,476 |
|
Below is a summary of loans by category at SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | (in thousands) | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
Commercial and industrial | $ | 2,287,722 |
| | $ | 2,121,008 |
| $ | 3,165,611 |
| | $ | 2,361,157 |
|
Real estate: | | | | | | |
Commercial - investor owned | 1,247,691 |
| | 843,728 |
| 1,309,895 |
| | 1,299,884 |
|
Commercial - owner occupied | 660,433 |
| | 604,498 |
| 738,549 |
| | 697,437 |
|
Construction and land development | 425,639 |
| | 330,097 |
| 481,221 |
| | 457,273 |
|
Residential | 374,162 |
| | 298,944 |
| 326,992 |
| | 366,261 |
|
Total real estate loans | 2,707,925 |
| | 2,077,267 |
| 2,856,657 |
| | 2,820,855 |
|
Consumer and other | 139,090 |
| | 107,351 |
| |
Other | | 142,224 |
| | 134,941 |
|
Loans, before unearned loan fees | 5,134,737 |
| | 4,305,626 |
| 6,164,492 |
| | 5,316,953 |
|
Unearned loan fees, net | (2,346 | ) | | (2,026 | ) | (24,441 | ) | | (2,616 | ) |
Loans, including unearned loan fees | $ | 5,132,391 |
| | $ | 4,303,600 |
| $ | 6,140,051 |
| | $ | 5,314,337 |
|
PPP loans totaled $830.2 million at June 30, 2020, or $807.8 million net of unearned fees of $22.4 million. The loan balance at June 30, 2020 also includes a discount on acquired loans of $22.2 million. At June 30, 2020 loans of $2.4 billion were pledged to FHLB and the Federal Reserve Bank.
A summary of the activity in the allowanceACLL by category for loan lossesthe three and the recorded investment in loans by class and category based on impairment methodology through Septembersix months ended June 30, 2019 and at December 31, 2018,2020 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Commercial and industrial | | CRE - investor owned | | CRE - owner occupied | | Construction and land development | | Residential real estate | | Consumer and other | | Total |
Allowance for loan losses: | | | | | | | | | | | | | |
Balance at December 31, 2018 | $ | 29,039 |
| | $ | 4,683 |
| | $ | 4,239 |
| | $ | 1,987 |
| | $ | 1,616 |
| | $ | 731 |
| | $ | 42,295 |
|
Provision (provision reversal) for loan losses | 1,445 |
| | 769 |
| | (431 | ) | | (252 | ) | | (288 | ) | | 233 |
| | 1,476 |
|
Losses charged off | (1,853 | ) | | (120 | ) | | (36 | ) | | (45 | ) | | (67 | ) | | (129 | ) | | (2,250 | ) |
Recoveries | 29 |
| | 7 |
| | 2 |
| | 9 |
| | 364 |
| | 13 |
| | 424 |
|
Balance at March 31, 2019 | $ | 28,660 |
| | $ | 5,339 |
|
| $ | 3,774 |
|
| $ | 1,699 |
|
| $ | 1,625 |
|
| $ | 848 |
|
| $ | 41,945 |
|
Provision (provision reversal) for loan losses | 1,781 |
| | 364 |
| | 591 |
| | (216 | ) | | (345 | ) | | (215 | ) | | 1,960 |
|
Losses charged off | (1,380 | ) | | (431 | ) | | — |
| | — |
| | (26 | ) | | (53 | ) | | (1,890 | ) |
Recoveries | 32 |
| | 52 |
| | 6 |
| | 489 |
| | 124 |
| | 217 |
| | 920 |
|
Balance at June 30, 2019 | $ | 29,093 |
| | $ | 5,324 |
|
| $ | 4,371 |
|
| $ | 1,972 |
|
| $ | 1,378 |
|
| $ | 797 |
|
| $ | 42,935 |
|
Provision (provision reversal) for loan losses | 867 |
| | 333 |
| | 419 |
| | (88 | ) | | 193 |
| | 109 |
| | 1,833 |
|
Losses charged off | (1,295 | ) | | — |
| | (22 | ) | | — |
| | (255 | ) | | (86 | ) | | (1,658 | ) |
Recoveries | 209 |
| | 11 |
| | 3 |
| | 260 |
| | 65 |
| | 40 |
| | 588 |
|
Balance at September 30, 2019 | $ | 28,874 |
| | $ | 5,668 |
|
| $ | 4,771 |
|
| $ | 2,144 |
|
| $ | 1,381 |
|
| $ | 860 |
|
| $ | 43,698 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Commercial and industrial | | CRE - investor owned | | CRE - owner occupied | | Construction and land development | | Residential real estate | | Consumer and other | | Total |
Balance September 30, 2019 | | | | | | | | | | | | | |
Allowance for loan losses - Ending balance: | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 2,023 |
| | $ | 258 |
| | $ | — |
| | $ | — |
| | $ | 116 |
| | $ | 11 |
| | $ | 2,408 |
|
Collectively evaluated for impairment | 26,851 |
| | 5,410 |
| | 4,771 |
| | 2,144 |
| | 1,265 |
| | 849 |
| | 41,290 |
|
Total | $ | 28,874 |
| | $ | 5,668 |
|
| $ | 4,771 |
|
| $ | 2,144 |
|
| $ | 1,381 |
|
| $ | 860 |
|
| $ | 43,698 |
|
Loans - Ending balance: | | | | | | | |
| | | | | | |
Individually evaluated for impairment | $ | 11,433 |
| | $ | 2,637 |
| | $ | 1,423 |
| | $ | — |
| | $ | 1,267 |
| | $ | 11 |
| | $ | 16,771 |
|
Collectively evaluated for impairment | 2,276,289 |
| | 1,245,054 |
| | 659,010 |
| | 425,639 |
| | 372,895 |
| | 136,733 |
| | 5,115,620 |
|
Total | $ | 2,287,722 |
| | $ | 1,247,691 |
|
| $ | 660,433 |
|
| $ | 425,639 |
|
| $ | 374,162 |
|
| $ | 136,744 |
|
| $ | 5,132,391 |
|
| | | | | | | | | | | | | |
Balance December 31, 2018 | | | | | | | | | | | | | |
Allowance for loan losses - Ending balance: | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 4,266 |
| | $ | — |
| | $ | 109 |
| | $ | — |
| | $ | 52 |
| | $ | 26 |
| | $ | 4,453 |
|
Collectively evaluated for impairment | 24,773 |
| | 4,683 |
| | 4,130 |
| | 1,987 |
| | 1,564 |
| | 705 |
| | 37,842 |
|
Total | $ | 29,039 |
| | $ | 4,683 |
|
| $ | 4,239 |
|
| $ | 1,987 |
|
| $ | 1,616 |
|
| $ | 731 |
|
| $ | 42,295 |
|
Loans - Ending balance: | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 12,950 |
| | $ | 398 |
| | $ | 2,135 |
| | $ | — |
| | $ | 2,277 |
| | $ | 311 |
| | $ | 18,071 |
|
Collectively evaluated for impairment | 2,108,058 |
| | 843,330 |
| | 602,363 |
| | 330,097 |
| | 296,667 |
| | 105,014 |
| | 4,285,529 |
|
Total | $ | 2,121,008 |
| | $ | 843,728 |
|
| $ | 604,498 |
|
| $ | 330,097 |
|
| $ | 298,944 |
|
| $ | 105,325 |
|
| $ | 4,303,600 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Commercial and industrial | | CRE - investor owned | | CRE - owner occupied | | Construction and land development | | Residential real estate | | Other | | Total |
Allowance for credit losses on loans: | | | | | | | | | | | | | |
Balance at March 31, 2020 | $ | 45,981 |
| | $ | 19,892 |
|
| $ | 9,477 |
|
| $ | 9,895 |
|
| $ | 5,395 |
|
| $ | 1,547 |
|
| $ | 92,187 |
|
Provision for credit losses | 7,168 |
| | 2,599 |
| | 1,600 |
| | 6,038 |
| | 744 |
| | 242 |
| | 18,391 |
|
Charge-offs | (3,303 | ) | | (224 | ) | | — |
| | — |
| | (32 | ) | | (105 | ) | | (3,664 | ) |
Recoveries | 293 |
| | 2,752 |
| | 11 |
| | 29 |
| | 226 |
| | 45 |
| | 3,356 |
|
Balance at June 30, 2020 | $ | 50,139 |
| | $ | 25,019 |
|
| $ | 11,088 |
|
| $ | 15,962 |
|
| $ | 6,333 |
|
| $ | 1,729 |
|
| $ | 110,270 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Commercial and industrial | | CRE - investor owned | | CRE - owner occupied | | Construction and land development | | Residential real estate | | Other | | Total |
Allowance for credit losses on loans: | | | | | | | | | | | | | |
Balance at December 31, 2019 | $ | 27,455 |
| | $ | 5,935 |
| | $ | 4,873 |
| | $ | 2,611 |
| | $ | 1,280 |
| | $ | 1,134 |
| | $ | 43,288 |
|
CECL adoption | 6,494 |
| | 10,726 |
| | 2,598 |
| | 5,183 |
| | 3,470 |
| | (84 | ) | | 28,387 |
|
PCD loans immediately charged off | — |
| | (5 | ) | | (57 | ) | | (217 | ) | | (1,401 | ) | | — |
| | (1,680 | ) |
Balance at January 1, 2020 | $ | 33,949 |
| | $ | 16,656 |
| | $ | 7,414 |
| | $ | 7,577 |
| | $ | 3,349 |
| | $ | 1,050 |
| | $ | 69,995 |
|
Provision for credit losses | 18,759 |
| | 5,823 |
| | 3,594 |
| | 8,347 |
| | 2,755 |
| | 808 |
| | 40,086 |
|
Charge-offs | (3,366 | ) | | (226 | ) | | — |
| | (31 | ) | | (154 | ) | | (191 | ) | | (3,968 | ) |
Recoveries | 797 |
| | 2,766 |
| | 80 |
| | 69 |
| | 383 |
| | 62 |
| | 4,157 |
|
Balance at June 30, 2020 | $ | 50,139 |
| | $ | 25,019 |
| | $ | 11,088 |
| | $ | 15,962 |
| | $ | 6,333 |
| | $ | 1,729 |
| | $ | 110,270 |
|
Reserves on enterprise value lending and agricultural lending, which are included in the categories above, represented $15.8 million and $2.4 million, respectively.
On January 1, 2020, the Company adopted the CECL methodology which added $28.4 million to the ACLL. Upon adoption, $1.7 million of nonperformingnonaccrual PCD loans individually evaluatedthat were less than $100,000 were immediately charged-off. Under the CECL method, the Company recorded a $18.4 million and $40.1 million provision for impairment by categorycredit losses on loans in the three and six months ended June 30, 2020, respectively, compared to a $1.7 million and $3.2 million provision for loan losses in the prior year periods, respectively, under the incurred loss method. The increase in the provision for credit losses on loans is primarily due to the Company’s forecast of macroeconomic factors over the next 12 months, which significantly deteriorated in the first quarter 2020 due to the COVID-19 pandemic. The forecast continued to worsen in the second quarter of 2020.
The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model, a Moody’s baseline, a stronger near-term growth and a moderate recession forecast. The Company weights these scenarios at September 30, 201980%, 10%, and December 31, 2018,10%, respectively. These forecasts incorporate an accommodative monetary policy and the income recognized on impaired loans iscurrent and anticipated impact of government stimulus. Accordingly, the CECL model has not been adjusted for negative qualitative factors, such as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
(in thousands) | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance | | Average Recorded Investment |
Commercial and industrial | $ | 24,233 |
| | $ | 1,096 |
| | $ | 10,337 |
| | $ | 11,433 |
| | $ | 2,023 |
| | $ | 12,429 |
|
Real estate: | | | | | | | | | | | |
Commercial - investor owned | 3,312 |
| | 1,135 |
| | 1,502 |
| | 2,637 |
| | 258 |
| | 2,525 |
|
Commercial - owner occupied | 245 |
| | 221 |
| | — |
| | 221 |
| | — |
| | 27 |
|
Construction and land development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential | 1,388 |
| | 1,021 |
| | 246 |
| | 1,267 |
| | 116 |
| | 1,782 |
|
Consumer and other | 1 |
| | — |
| | 11 |
| | 11 |
| | 11 |
| | 11 |
|
Total | $ | 29,179 |
| | $ | 3,473 |
|
| $ | 12,096 |
|
| $ | 15,569 |
|
| $ | 2,408 |
|
| $ | 16,774 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
(in thousands) | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance | | Recorded Investment With Allowance | | Total Recorded Investment | | Related Allowance | | Average Recorded Investment |
Commercial and industrial | $ | 21,893 |
| | $ | 3,294 |
| | $ | 9,656 |
| | $ | 12,950 |
| | $ | 4,266 |
| | $ | 13,827 |
|
Real estate: | | | | | | | | | | | |
Commercial - investor owned | 553 |
| | 398 |
| | — |
| | 398 |
| | — |
| | 277 |
|
Commercial - owner occupied | 847 |
| | 472 |
| | 336 |
| | 808 |
| | 109 |
| | 691 |
|
Construction and land development | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential | 2,425 |
| | 1,659 |
| | 618 |
| | 2,277 |
| | 52 |
| | 778 |
|
Consumer and other | 329 |
| | — |
| | 312 |
| | 312 |
| | 26 |
| | — |
|
Total | $ | 26,047 |
| | $ | 5,823 |
|
| $ | 10,922 |
|
| $ | 16,745 |
|
| $ | 4,453 |
|
| $ | 15,573 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Total interest income that would have been recognized under original terms | $ | 247 |
| | $ | 614 |
| | $ | 893 |
| | $ | 1,615 |
|
Total cash received and recognized as interest income on non-accrual loans | 77 |
| | 68 |
| | 262 |
| | 157 |
|
Total interest income recognized on accruing impaired loans | 3 |
| | 110 |
| | 115 |
| | 133 |
|
the potential loss mitigation of loan deferrals and the PPP. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines if a second wave of COVID hits, small-business bankruptcies occur at higher levels or unemployment increases. The 80/10/10 weighting adds approximately $1.0 million to the ACL.
The recorded investment in nonperforming loans by category at SeptemberJune 30, 20192020 and December 31, 2018,2019, is as follows:
| | | September 30, 2019 | June 30, 2020 |
(in thousands) | Non-accrual | | Restructured, accruing | | Loans over 90 days past due and still accruing interest | | Total | Nonaccrual | | Restructured, accruing | | Loans over 90 days past due and still accruing interest | | Total nonperforming loans | | Nonaccrual loans with no allowance |
Commercial and industrial | $ | 11,409 |
| | $ | — |
| | $ | 24 |
| | $ | 11,433 |
| $ | 27,431 |
| | $ | 3,642 |
| | $ | 865 |
| | $ | 31,938 |
| | $ | 20,553 |
|
Real estate: | | | | | | | | | | | | | | | | |
Commercial - investor owned | 2,637 |
| | — |
| | — |
| | 2,637 |
| 2,389 |
| | — |
| | — |
| | 2,389 |
| | 1,677 |
|
Commercial - owner occupied | 221 |
| | — |
| | — |
| | 221 |
| 2,400 |
| | — |
| | — |
| | 2,400 |
| | 1,403 |
|
Construction and land development | — |
| | — |
| | — |
| | — |
| 207 |
| | — |
| | — |
| | 207 |
| | 207 |
|
Residential | 1,162 |
| | 79 |
| | 26 |
| | 1,267 |
| 4,421 |
| | 78 |
| | — |
| | 4,499 |
| | 3,444 |
|
Consumer and other | 1 |
| | — |
| | 10 |
| | 11 |
| |
Other | | 19 |
| | — |
| | 21 |
| | 40 |
| | — |
|
Total | $ | 15,430 |
| | $ | 79 |
|
| $ | 60 |
|
| $ | 15,569 |
| $ | 36,867 |
| | $ | 3,720 |
|
| $ | 886 |
|
| $ | 41,473 |
| | $ | 27,284 |
|
There was no interest income recognized on nonaccrual loans during the six months ended June 30, 2020.
| | | December 31, 2018 | December 31, 2019 |
(in thousands) | Non-accrual | | Restructured, accruing | | Total | Nonaccrual | | Restructured, accruing | | Loans over 90 days past due and still accruing interest | | Total nonperforming loans |
Commercial and industrial | $ | 12,805 |
| | $ | 145 |
| | $ | 12,950 |
| $ | 22,328 |
| | $ | — |
| | $ | 250 |
| | $ | 22,578 |
|
Real estate: | | | | | | | | | | | | |
Commercial - investor owned | 398 |
| | — |
| | 398 |
| 2,303 |
| | — |
| | — |
| | 2,303 |
|
Commercial - owner occupied | 808 |
| | — |
| | 808 |
| 213 |
| | — |
| | — |
| | 213 |
|
Construction and land development | — |
| | — |
| | — |
| |
Residential | 2,197 |
| | 80 |
| | 2,277 |
| 1,251 |
| | 79 |
| | — |
| | 1,330 |
|
Consumer and other | 312 |
| | — |
| | 312 |
| |
Other | | 1 |
| | — |
| | — |
| | 1 |
|
Total | $ | 16,520 |
| | $ | 225 |
| | $ | 16,745 |
| $ | 26,096 |
| | $ | 79 |
| | $ | 250 |
| | $ | 26,425 |
|
There were noThe following table presents the amortized cost basis of collateral-dependent nonperforming loans over 90 days past due and still accruingby class of loan at December 31, 2018.June 30, 2020:
|
| | | | | | | | | | | |
| Type of Collateral |
(in thousands) | Commercial Real Estate | | Residential Real Estate | | Blanket Lien |
Commercial and industrial | $ | 13,124 |
| | $ | — |
| | $ | 4,872 |
|
Real estate: | | | | | |
Commercial - investor owned | 2,389 |
| | — |
| | — |
|
Commercial - owner occupied | 1,811 |
| | — |
| | — |
|
Construction and land development | — |
| | 207 |
| | — |
|
Residential | — |
| | 4,271 |
| | — |
|
Total | $ | 17,324 |
| | $ | 4,478 |
| | $ | 4,872 |
|
There were no loans restructuredtroubled debt restructurings that occurred during the three months ended SeptemberJune 30, 2019.2020. The recorded investment by category for the portfolio loans restructuredtroubled debt restructurings that occurred during the threesix months ended SeptemberJune 30, 2018, is2020 and the three and six months ended June 30, 2019 are as follows:
|
| | | | | | | | | | |
| September 30, 2018 |
(in thousands, except for number of loans) | Number of loans | | Pre-Modification Outstanding Recorded Balance | | Post-Modification Outstanding Recorded Balance |
Commercial and industrial | 1 |
| | $ | 187 |
| | $ | 187 |
|
Total | 1 |
| | $ | 187 |
| | $ | 187 |
|
The recorded investment by category for the portfolio loans restructured during the nine months ended September 30, 2019 and 2018, is as follows:
| | | September 30, 2019 | | September 30, 2018 | June 30, 2020 | | June 30, 2019 |
(in thousands, except for number of loans) | Number of loans | | Pre-Modification Outstanding Recorded Balance | | Post-Modification Outstanding Recorded Balance | | Number of loans | | Pre-Modification Outstanding Recorded Balance | | Post-Modification Outstanding Recorded Balance | Number of loans | | Pre-Modification Outstanding Recorded Balance | | Post-Modification Outstanding Recorded Balance | | Number of loans | | Pre-Modification Outstanding Recorded Balance | | Post-Modification Outstanding Recorded Balance |
Commercial and industrial | — |
| | $ | — |
| | $ | — |
| | 1 |
| | $ | 187 |
| | $ | 187 |
| 1 |
| | $ | 3,731 |
| | $ | 3,731 |
| | — |
| | $ | — |
| | $ | — |
|
Real estate: | | | | | | | | | | | | | | | | | | | | | | |
Commercial - owner occupied | 1 |
| | 188 |
| | 188 |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | 1 |
| | 188 |
| | 188 |
|
Residential | 2 |
| | 332 |
| | 332 |
| | — |
| | — |
| | — |
| 2 |
| | 155 |
| | 155 |
| | 2 |
| | 332 |
| | 332 |
|
Total | 3 |
| | $ | 520 |
| | $ | 520 |
| | 1 |
| | $ | 187 |
| | $ | 187 |
| 3 |
| | $ | 3,886 |
| | $ | 3,886 |
| | 3 |
| | $ | 520 |
| | $ | 520 |
|
As of September 30, 2019, the Company had $0.6 million in specific reserves allocated to restructured loans totaling $3.3 million.
Restructured loans that subsequently defaulted during the three months ended September 30, 2019 included 1 commercial and industrial loan with a recorded balance of $0.1 million. Restructured loans that subsequently defaulted for the nine months ended September 30, 2019 included 2 commercial and industrial loans with an aggregate recorded balance of $0.4 million. There were no troubled debt restructured loans that subsequently defaulted during the three and nineor six months ended SeptemberJune 30, 2018.2020 or 2019.
In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt restructurings. As of June 30, 2020, $685.7 million in loans have participated in the programs, including $361.4 million in loans deferring full principal and interest payments and $324.3 million in
loans deferring principal only. Interest of $4.0 million has been deferred and will be collected upon final maturity. The Company has moved all loans that have requested deferrals to a level six risk rating for additional monitoring.
The aging of the recorded investment in past due loans by portfolio class and category at SeptemberJune 30, 2019 and December 31, 2018,2020 is shown below.
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
(in thousands) | 30-89 Days Past Due | | 90 or More Days Past Due | | Total Past Due | | Current | | Total |
Commercial and industrial | $ | 6,913 |
| | $ | 7,314 |
| | $ | 14,227 |
| | $ | 2,273,495 |
| | $ | 2,287,722 |
|
Real estate: | | | | | | | | | |
Commercial - investor owned | 2,408 |
| | 2,000 |
| | 4,408 |
| | 1,243,283 |
| | 1,247,691 |
|
Commercial - owner occupied | 1,166 |
| | — |
| | 1,166 |
| | 659,267 |
| | 660,433 |
|
Construction and land development | 62 |
| | — |
| | 62 |
| | 425,577 |
| | 425,639 |
|
Residential | 2,098 |
| | 1,183 |
| | 3,281 |
| | 370,881 |
| | 374,162 |
|
Consumer and other | 107 |
| | — |
| | 107 |
| | 136,637 |
| | 136,744 |
|
Total | $ | 12,754 |
| | $ | 10,497 |
|
| $ | 23,251 |
|
| $ | 5,109,140 |
|
| $ | 5,132,391 |
|
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2020 |
(in thousands) | 30-89 Days Past Due | | 90 or More Days Past Due | | Total Past Due | | Current | | Total |
Commercial and industrial | $ | 6,684 |
| | $ | 22,623 |
| | $ | 29,307 |
| | $ | 3,113,890 |
| | $ | 3,143,197 |
|
Real estate: | | | | | | | | | |
Commercial - investor owned | 116 |
| | 2,095 |
| | 2,211 |
| | 1,307,684 |
| | 1,309,895 |
|
Commercial - owner occupied | 2,723 |
| | 1,208 |
| | 3,931 |
| | 734,618 |
| | 738,549 |
|
Construction and land development | 58 |
| | — |
| | 58 |
| | 481,163 |
| | 481,221 |
|
Residential | 951 |
| | 1,738 |
| | 2,689 |
| | 324,303 |
| | 326,992 |
|
Other | 100 |
| | 21 |
| | 121 |
| | 140,076 |
| | 140,197 |
|
Total | $ | 10,632 |
| | $ | 27,685 |
|
| $ | 38,317 |
|
| $ | 6,101,734 |
|
| $ | 6,140,051 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
(in thousands) | 30-89 Days Past Due | | 90 or More Days Past Due | | Total Past Due | | Current | | Total |
Commercial and industrial | $ | 66 |
| | $ | 10,257 |
| | $ | 10,323 |
| | $ | 2,110,685 |
| | $ | 2,121,008 |
|
Real estate: | | | | | | | | | |
Commercial - investor owned | 529 |
| | 127 |
| | 656 |
| | 843,072 |
| | 843,728 |
|
Commercial - owner occupied | 292 |
| | 565 |
| | 857 |
| | 603,641 |
| | 604,498 |
|
Construction and land development | 6 |
| | — |
| | 6 |
| | 330,091 |
| | 330,097 |
|
Residential | 709 |
| | 897 |
| | 1,606 |
| | 297,338 |
| | 298,944 |
|
Consumer and other | — |
| | 312 |
| | 312 |
| | 105,013 |
| | 105,325 |
|
Total | $ | 1,602 |
| | $ | 12,158 |
|
| $ | 13,760 |
|
| $ | 4,289,840 |
|
| $ | 4,303,600 |
|
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
| |
• | Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry. |
| |
• | Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow. |
| |
• | Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow. |
| |
• | Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating. |
| |
• | Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated at this time, due to strong collateral and/or guarantor support. |
| |
• | Grade 8 – Substandard credits include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted. |
| |
• | Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual.nonaccrual. |
The recorded investment by risk category of the loans by portfolio class and category at SeptemberJune 30, 2019,2020, which is based upon the most recent analysis performed and December 31, 2018, is as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2019 |
(in thousands) | Pass (1-6) | | Watch (7) | | Classified (8 & 9) | | Total |
Commercial and industrial | $ | 2,091,433 |
| | $ | 120,930 |
| | $ | 75,359 |
| | $ | 2,287,722 |
|
Real estate: | | | | | | | |
Commercial - investor owned | 1,226,499 |
| | 17,552 |
| | 3,640 |
| | 1,247,691 |
|
Commercial - owner occupied | 625,365 |
| | 28,763 |
| | 6,305 |
| | 660,433 |
|
Construction and land development | 418,357 |
| | 7,179 |
| | 103 |
| | 425,639 |
|
Residential | 368,241 |
| | 3,333 |
| | 2,588 |
| | 374,162 |
|
Consumer and other | 136,738 |
| | — |
| | 6 |
| | 136,744 |
|
Total | $ | 4,866,633 |
| | $ | 177,757 |
| | $ | 88,001 |
| | $ | 5,132,391 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
(in thousands) | Pass (1-6) | | Watch (7) | | Classified (8 & 9) | | Total |
Commercial and industrial | $ | 1,927,782 |
| | $ | 146,033 |
| | $ | 47,193 |
| | $ | 2,121,008 |
|
Real estate: | | | | | | | |
Commercial - investor owned | 823,128 |
| | 15,083 |
| | 5,517 |
| | 843,728 |
|
Commercial - owner occupied | 563,003 |
| | 31,834 |
| | 9,661 |
| | 604,498 |
|
Construction and land development | 318,451 |
| | 11,580 |
| | 66 |
| | 330,097 |
|
Residential | 287,802 |
| | 4,232 |
| | 6,910 |
| | 298,944 |
|
Consumer and other | 105,007 |
| | 6 |
| | 312 |
| | 105,325 |
|
Total | $ | 4,025,173 |
| | $ | 208,768 |
|
| $ | 69,659 |
| | $ | 4,303,600 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans by Origination Year | | | | | | |
(in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Converted to Term Loans | | Revolving Loans | | Total |
Commercial and industrial | | | | | | | | | | | | | | | | | | |
Pass (1-6) | | $ | 1,239,062 |
| | $ | 535,477 |
| | $ | 318,046 |
| | $ | 180,269 |
| | $ | 47,210 |
| | $ | 85,529 |
| | $ | 14,954 |
| | $ | 510,168 |
| | $ | 2,930,715 |
|
Watch (7) | | 26,347 |
| | 13,354 |
| | 4,850 |
| | 6,468 |
| | 24,044 |
| | 175 |
| | — |
| | 62,293 |
| | 137,531 |
|
Classified (8-9) | | 3,775 |
| | 15,068 |
| | 8,155 |
| | 3,950 |
| | 5,093 |
| | 3,673 |
| | 295 |
| | 23,222 |
| | 63,231 |
|
Total Commercial and industrial | | $ | 1,269,184 |
| | $ | 563,899 |
| | $ | 331,051 |
| | $ | 190,687 |
| | $ | 76,347 |
| | $ | 89,377 |
| | $ | 15,249 |
| | $ | 595,683 |
| | $ | 3,131,477 |
|
| | | | | | | | | | | | | | | | | | |
Commercial real estate-investor owned | | | | | | | | | | | | | | | | | |
|
Pass (1-6) | | $ | 246,319 |
| | $ | 321,849 |
| | $ | 204,242 |
| | $ | 126,567 |
| | $ | 153,904 |
| | $ | 181,761 |
| | $ | 3,284 |
| | $ | 35,460 |
| | $ | 1,273,386 |
|
Watch (7) | | 5,136 |
| | 4,220 |
| | 1,192 |
| | 369 |
| | 12,681 |
| | 1,275 |
| | — |
| | — |
| | 24,873 |
|
Classified (8-9) | | — |
| | 966 |
| | 8,286 |
| | 455 |
| | 249 |
| | 1,680 |
| | — |
| | — |
| | 11,636 |
|
Total Commercial real estate-investor owned | | $ | 251,455 |
| | $ | 327,035 |
| | $ | 213,720 |
| | $ | 127,391 |
| | $ | 166,834 |
| | $ | 184,716 |
| | $ | 3,284 |
| | $ | 35,460 |
| | $ | 1,309,895 |
|
| | | | | | | | | | | | | | | | | | |
Commercial real estate-owner occupied | | | | | | | | | | | | | | | | | |
|
Pass (1-6) | | $ | 147,313 |
| | $ | 200,519 |
| | $ | 92,624 |
| | $ | 79,058 |
| | $ | 44,990 |
| | $ | 80,172 |
| | $ | 2,756 |
| | $ | 42,883 |
| | $ | 690,315 |
|
Watch (7) | | 9,473 |
| | 1,963 |
| | 261 |
| | 9,729 |
| | 8,533 |
| | 5,074 |
| | — |
| | 2,500 |
| | 37,533 |
|
Classified (8-9) | | 601 |
| | 1,156 |
| | 4,267 |
| | 458 |
| | — |
| | 4,219 |
| | — |
| | — |
| | 10,701 |
|
Total Commercial real estate-owner occupied | | $ | 157,387 |
| | $ | 203,638 |
| | $ | 97,152 |
| | $ | 89,245 |
| | $ | 53,523 |
| | $ | 89,465 |
| | $ | 2,756 |
| | $ | 45,383 |
| | $ | 738,549 |
|
| | | | | | | | | | | | | | | | | | |
Construction real estate | | | | | | | | | | | | | | | | | | |
Pass (1-6) | | $ | 75,983 |
| | $ | 167,936 |
| | $ | 121,909 |
| | $ | 37,555 |
| | $ | 28,060 |
| | $ | 12,906 |
| | $ | — |
| | $ | 20,631 |
| | $ | 464,980 |
|
Watch (7) | | 2,408 |
| | 722 |
| | 1,254 |
| | 11,047 |
| | — |
| | 546 |
| | — |
| | — |
| | 15,977 |
|
Classified (8-9) | | — |
| | 227 |
| | — |
| | — |
| | — |
| | 37 |
| | — |
| | — |
| | 264 |
|
Total Construction real estate | | $ | 78,391 |
| | $ | 168,885 |
| | $ | 123,163 |
| | $ | 48,602 |
| | $ | 28,060 |
| | $ | 13,489 |
| | $ | — |
| | $ | 20,631 |
| | $ | 481,221 |
|
| | | | | | | | | | | | | | | | | | |
Residential real estate | | | | | | | | | | | | | | | | | | |
Pass (1-6) | | $ | 26,448 |
| | $ | 33,085 |
| | $ | 22,074 |
| | $ | 19,931 |
| | $ | 34,427 |
| | $ | 115,036 |
| | $ | 591 |
| | $ | 63,505 |
| | $ | 315,097 |
|
Watch (7) | | 181 |
| | 895 |
| | 842 |
| | — |
| | — |
| | 2,027 |
| | 279 |
| | 802 |
| | 5,026 |
|
Classified (8-9) | | 184 |
| | 1,265 |
| | 758 |
| | 13 |
| | 213 |
| | 3,445 |
| | — |
| | 50 |
| | 5,928 |
|
Total residential real estate | | $ | 26,813 |
| | $ | 35,245 |
| | $ | 23,674 |
| | $ | 19,944 |
| | $ | 34,640 |
| | $ | 120,508 |
| | $ | 870 |
| | $ | 64,357 |
| | $ | 326,051 |
|
| | | | | | | | | | | | | | | | | | |
Other | | | | | | | | | | | | | | | | | | |
Pass (1-6) | | $ | 8,758 |
| | $ | 25,567 |
| | $ | 20,615 |
| | $ | 682 |
| | $ | 3,705 |
| | $ | 34,455 |
| | $ | — |
| | $ | 43,971 |
| | $ | 137,753 |
|
Watch (7) | | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 3 |
|
Classified (8-9) | | — |
| | 1 |
| | 3 |
| | 4 |
| | — |
| | 19 |
| | 10 |
| | 7 |
| | 44 |
|
Total Other | | $ | 8,758 |
| | $ | 25,570 |
| | $ | 20,618 |
| | $ | 686 |
| | $ | 3,705 |
| | $ | 34,474 |
| | $ | 10 |
| | $ | 43,979 |
| | $ | 137,800 |
|
Below isIn the table above, loan originations in 2020 and 2019 with a summaryclassification of PCI loans by category at September 30, 2019watch or classified primarily represent renewals or modifications initially underwritten and December 31, 2018:
|
| | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
(in thousands) | Weighted- Average Risk Rating1 | Recorded Investment PCI Loans | | Weighted- Average Risk Rating1 | Recorded Investment PCI Loans |
Commercial and industrial | 5.77 | $ | 15,773 |
| | 6.09 | $ | 2,159 |
|
Real estate: | | | | | |
Commercial - investor owned | 7.04 | 39,329 |
| | 7.19 | 23,939 |
|
Commercial - owner occupied | 6.58 | 20,435 |
| | 7.39 | 9,669 |
|
Construction and land development | 5.75 | 7,847 |
| | 6.03 | 4,548 |
|
Residential | 6.31 | 12,011 |
| | 6.40 | 6,082 |
|
Total real estate loans | | 79,622 |
| | | 44,238 |
|
Consumer and other | 5.54 | 228 |
| | 2.18 | 4 |
|
Total | | $ | 95,623 |
| | | $ | 46,401 |
|
1Risk ratings are based on the borrower’s contractual obligation, which is not reflective of the purchase discount. |
originated in prior years.
TheFor certain loans, primarily credit cards, the Company evaluates credit quality based on the aging of the recorded investment in past due PCI loans by portfolio class and category at September 30, 2019 and December 31, 2018, is shown below:
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
(in thousands) | 30-89 Days Past Due | | 90 or More Days Past Due | | Total Past Due | | Current | | Total |
Commercial and industrial | $ | 922 |
| | $ | 532 |
| | $ | 1,454 |
| | $ | 14,319 |
| | $ | 15,773 |
|
Real estate: | | | | | | | | | |
Commercial - investor owned | — |
| | 2,115 |
| | 2,115 |
| | 37,214 |
| | 39,329 |
|
Commercial - owner occupied | — |
| | 1,023 |
| | 1,023 |
| | 19,412 |
| | 20,435 |
|
Construction and land development | 14 |
| | 217 |
| | 231 |
| | 7,616 |
| | 7,847 |
|
Residential | 703 |
| | 833 |
| | 1,536 |
| | 10,475 |
| | 12,011 |
|
Consumer and other | — |
| | 35 |
| | 35 |
| | 193 |
| | 228 |
|
Total | $ | 1,639 |
| | $ | 4,755 |
|
| $ | 6,394 |
|
| $ | 89,229 |
|
| $ | 95,623 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
(in thousands) | 30-89 Days Past Due | | 90 or More Days Past Due | | Total Past Due | | Current | | Total |
Commercial and industrial | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,159 |
| | $ | 2,159 |
|
Real estate: | | | | | | | | | |
Commercial - investor owned | 416 |
| | 88 |
| | 504 |
| | 23,435 |
| | 23,939 |
|
Commercial - owner occupied | 591 |
| | 6,279 |
| | 6,870 |
| | 2,799 |
| | 9,669 |
|
Construction and land development | — |
| | — |
| | — |
| | 4,548 |
| | 4,548 |
|
Residential | 146 |
| | 37 |
| | 183 |
| | 5,899 |
| | 6,082 |
|
Consumer and other | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Total | $ | 1,153 |
| | $ | 6,404 |
|
| $ | 7,557 |
|
| $ | 38,844 |
|
| $ | 46,401 |
|
status.
The following table is a roll forward of PCIpresents the recorded investment on loans net of the allowance for loan losses, for the nine months ended September 30, 2019 and 2018.based on payment activity:
|
| | | | | | | | | | | | | | | |
(in thousands) | Contractual Cashflows | | Non-accretable Difference | | Accretable Yield | | Carrying Amount |
Balance December 31, 2018 | $ | 73,157 |
| | $ | 15,299 |
| | $ | 12,638 |
| | $ | 45,220 |
|
Acquisitions | 111,963 |
| | 13,542 |
| | 30,238 |
| | 68,183 |
|
Principal reductions and interest payments | (33,548 | ) | | — |
| | — |
| | (33,548 | ) |
Accretion of loan discount | — |
| | — |
| | (8,014 | ) | | 8,014 |
|
Changes in contractual and expected cash flows due to remeasurement | 10,490 |
| | (2,057 | ) | | (86 | ) | | 12,633 |
|
Reductions due to disposals | (9,121 | ) | | (3,345 | ) | | (40 | ) | | (5,736 | ) |
Balance September 30, 2019 | $ | 152,941 |
| | $ | 23,439 |
|
| $ | 34,736 |
|
| $ | 94,766 |
|
| | | | | | | |
Balance December 31, 2017 | $ | 112,710 |
| | $ | 29,005 |
| | $ | 13,964 |
| | $ | 69,741 |
|
Principal reductions and interest payments | (38,165 | ) | | — |
| | — |
| | (38,165 | ) |
Accretion of loan discount | — |
| | — |
| | (5,118 | ) | | 5,118 |
|
Changes in contractual and expected cash flows due to remeasurement | 4,341 |
| | (8,939 | ) | | 3,179 |
| | 10,101 |
|
Balance September 30, 2018 | $ | 78,886 |
| | $ | 20,066 |
|
| $ | 12,025 |
|
| $ | 46,795 |
|
|
| | | | | | | | | | | | |
| | June 30, 2020 |
(in thousands) | | Performing | | Non Performing | | Total |
Commercial and industrial | | $ | 11,682 |
| | $ | 38 |
| | $ | 11,720 |
|
Real estate: | | | | | | |
Residential | | 941 |
| | — |
| | 941 |
|
Other | | 2,376 |
| | 21 |
| | 2,397 |
|
Total | | $ | 14,999 |
| | $ | 59 |
| | $ | 15,058 |
|
The accretable yield is recognized in interest income over the estimated life of the acquired loans using the effective yield method. Outstanding customer balances on PCI loans were $121.5 million and $64.7 million as of September 30, 2019, and December 31, 2018, respectively.
NOTE 6 - LEASES
The Company has banking and limited-service facilities, datacenters, and certain equipment leased under agreements. Most of the leases expire between 2019 and 2024 and include one or more renewal options of up to five years. One lease expires in 2030. All leases are classified as operating leases.
|
| | | | | | |
| For the three months ended | For the nine months ended |
(in thousands) | September 30, 2019 | September 30, 2019 |
Operating lease cost | $ | 821 |
| $ | 2,434 |
|
Short-term lease cost | 81 |
| 215 |
|
Total lease cost | $ | 902 |
| $ | 2,649 |
|
Payments on operating leases included in the measurementThe recorded investment by risk category of lease liabilities during the nine months ended September 30,loans by class at December 31, 2019, totaled $2.4 million. Right-of-use assets obtained in exchange for lease obligations totaled $0.4 million during the nine months ended September 30, 2019.
Supplemental balance sheet information related to leases was as follows:
|
| | | |
| As of |
(in thousands) | September 30, 2019 |
Operating lease right-of-use assets, included in other assets | $ | 13,849 |
|
Operating lease liabilities, included in other liabilities | 14,440 |
|
| |
Operating leases | |
Weighted average remaining lease term | 5 years |
|
Weighted average discount rate | 3.0 | % |
|
| | | | | | | | | | | | | | | |
| December 31, 2019 |
(in thousands) | Pass (1-6) | | Watch (7) | | Classified (8 & 9) | | Total* |
Commercial and industrial | $ | 2,151,084 |
| | $ | 124,718 |
| | $ | 70,021 |
| | $ | 2,345,823 |
|
Real estate: | | | | | | | |
Commercial - investor owned | 1,242,569 |
| | 17,572 |
| | 2,840 |
| | 1,262,981 |
|
Commercial - owner occupied | 643,276 |
| | 28,773 |
| | 6,473 |
| | 678,522 |
|
Construction and land development | 437,134 |
| | 12,140 |
| | 106 |
| | 449,380 |
|
Residential | 348,246 |
| | 4,450 |
| | 2,496 |
| | 355,192 |
|
Other | 132,096 |
| | 3 |
| | 51 |
| | 132,150 |
|
Total | $ | 4,954,405 |
| | $ | 187,656 |
|
| $ | 81,987 |
| | $ | 5,224,048 |
|
Maturities*Excludes $90.3 million of operating lease liabilities wereloans accounted for as follows:
|
| | | |
(in thousands) | |
Year | Amount |
2019 | $ | 818 |
|
2020 | 3,329 |
|
2021 | 3,355 |
|
2022 | 2,795 |
|
2023 | 2,191 |
|
Thereafter | 3,143 |
|
Total operating lease liabilities, payments | 15,631 |
|
Less: present value adjustment | 1,191 |
|
Operating lease liabilities | $ | 14,440 |
|
As of September 30, 2019, the Company has an operating lease amendment for the expansion of an existing facility that has not yet commenced. This amendment is expected to commence in 2019 with a lease term of 8 years.
Lessor income was immaterial during the three and nine months ended September 30, 2019. During the second quarter of 2019, the Company executed an agreement, as landlord, to lease a portion of an owned building. The agreement commenced in the third quarter of 2019 with current payments prorated for partial occupancy. The initial term is for 7 years, with an annual rental income of $1.3 million.PCI
NOTE 75 - COMMITMENTS AND CONTINGENCIES
The Company issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At September 30, 2019, the amount of unadvanced commitments on impaired loans was insignificant.
The contractual amounts of off-balance-sheet financial instruments as of SeptemberJune 30, 2019,2020, and December 31, 2018,2019, are as follows:
| | (in thousands) | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
Commitments to extend credit | $ | 1,426,131 |
| | $ | 1,344,687 |
| $ | 1,659,225 |
| | $ | 1,469,413 |
|
Letters of credit | 51,375 |
| | 44,665 |
| 51,798 |
| | 47,969 |
|
Off-Balance Sheet Credit Risk
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at SeptemberJune 30, 2019,2020, and December 31, 2018,2019, approximately $128.4$161.3 million and $68.5$144.8 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes $4.9 million and $0.4 million for estimated losses attributable to the unadvanced commitments at SeptemberJune 30, 2019,2020, and December 31, 2018.2019, respectively.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. As of SeptemberJune 30, 2019,2020, the approximate remaining terms of standby letters of credit range from 1 month to 54 years.
Contingencies
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
NOTE 86 - DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not enter into derivative financial instruments for trading purposes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2019, suchThese derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. These cash flow hedges include: (1) swaps of variable three-month LIBOR on $62.0 million of junior subordinated debentures to a weighted-average-fixed rate of 2.62% over approximately six years, (2) a swap variable 90 day LIBORof the federal funds effective rate on $100.0 million of rolling FHLB overnight
advances to a fixed rate of 2.62%1.12% for three years, and (3) a swap of three-month LIBOR on average$100.0 million of rolling three-month FHLB advances for an average term of sixfive years.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $0.5$2.8 million will be reclassified as an increase to interest expense.
Non-designated Hedges
Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of SeptemberJune 30, 20192020 and December 31, 2018.2019.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| September 30, 2019 | December 31, 2018 | | September 30, 2019 | December 31, 2018 |
(in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Notional Amount | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value |
Derivatives Designated as Hedging Instruments |
Interest rate swap | $ | 185,886 |
| Other Assets | $ | — |
| $ | — |
| Other Assets | $ | — |
| | Other Liabilities | $ | 3,785 |
| Other Liabilities | $ | — |
|
Total | | | $ | — |
| | | $ | — |
| | | $ | 3,785 |
| | $ | — |
|
| | | | | | | | | | | |
Derivatives not Designated as Hedging Instruments |
Interest rate swap | $ | 628,864 |
| Other Assets | $ | 13,561 |
| $ | 494,567 |
| Other Assets | $ | 2,217 |
| | Other Liabilities | $ | 14,666 |
| Other Liabilities | $ | 2,217 |
|
Foreign exchange forward contracts | — |
| Other Assets | — |
| 806 |
| Other Assets | 806 |
| | Other Liabilities | — |
| Other Liabilities | 806 |
|
Total | | | $ | 13,561 |
| | | $ | 3,023 |
| | | $ | 14,666 |
| | $ | 3,023 |
|
The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income for the three and nine months ended September 30, 2019. The Company did not have cash flow hedging instruments in 2018. The loss reclassified from accumulated OCI is recorded as an adjustment to interest expense.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| June 30, 2020 | December 31, 2019 | | June 30, 2020 | December 31, 2019 |
(in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Notional Amount | Balance Sheet Location | Fair Value | | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value |
Derivatives Designated as Hedging Instruments |
Interest rate swap | $ | 261,962 |
| Other Assets | $ | — |
| $ | 61,962 |
| Other Assets | $ | — |
| | Other Liabilities | $ | 10,840 |
| Other Liabilities | $ | 2,872 |
|
Total | | | $ | — |
| | | $ | — |
| | | $ | 10,840 |
| | $ | 2,872 |
|
| | | | | | | | | | | |
Derivatives not Designated as Hedging Instruments |
Interest rate swap | $ | 1,021,528 |
| Other Assets | $ | 35,728 |
| $ | 749,819 |
| Other Assets | $ | 11,055 |
| | Other Liabilities | $ | 35,988 |
| Other Liabilities | $ | 11,875 |
|
Total | | | $ | 35,728 |
| | | $ | 11,055 |
| | | $ | 35,988 |
| | $ | 11,875 |
|
|
| | | | | | | | | | | | | | | | |
| | Amount of Loss Recognized in OCI | | Amount of Loss Reclassified from Accumulated OCI into Income |
(in thousands) | | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 |
Derivatives in Cash Flow Hedging Relationships | | | | | | | | |
Interest rate swap | | $ | (846 | ) | | $ | (3,785 | ) | | $ | (42 | ) | | $ | (48 | ) |
Total | | $ | (846 | ) | | $ | (3,785 | ) | | $ | (42 | ) | | $ | (48 | ) |
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to offsetting as of SeptemberJune 30, 20192020 and December 31, 2018.2019. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that financial assets and liabilities are presented on the Balance Sheet.
| | As of September 30, 2019 | |
As of June 30, 2020 | | As of June 30, 2020 |
| | | Gross Amounts Not Offset in the Statement of Financial Position | | | | | Gross Amounts Not Offset in the Statement of Financial Position | | |
(in thousands) | Gross Amounts Recognized | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets presented in the Statement of Financial Position | | Financial Instruments | | Fair Value Collateral Posted | | Net Amount | Gross Amounts Recognized | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets presented in the Statement of Financial Position | | Financial Instruments | | Fair Value Collateral Posted | | Net Amount |
Assets: | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap | $ | 13,561 |
| | $ | — |
| | $ | 13,561 |
| | $ | 22 |
| | $ | — |
| | $ | 13,539 |
| $ | 35,728 |
| | $ | — |
| | $ | 35,728 |
| | $ | 14 |
| | $ | — |
| | $ | 35,714 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap | $ | 18,451 |
| | $ | — |
| | $ | 18,451 |
| | $ | 22 |
| | $ | 17,785 |
| | $ | 644 |
| $ | 46,828 |
| | $ | — |
| | $ | 46,828 |
| | $ | 14 |
| | $ | 46,222 |
| | $ | 592 |
|
Securities sold under agreements to repurchase | 162,920 |
| | — |
| | 162,920 |
| | — |
| | 162,920 |
| | — |
| 196,532 |
| | — |
| | 196,532 |
| | — |
| | 196,532 |
| | — |
|
| As of December 31, 2018 | |
As of December 31, 2019 | | As of December 31, 2019 |
| | | Gross Amounts Not Offset in the Statement of Financial Position | | | | | Gross Amounts Not Offset in the Statement of Financial Position | | |
(in thousands) | Gross Amounts Recognized | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets presented in the Statement of Financial Position | | Financial Instruments | | Fair Value Collateral Posted | | Net Amount | Gross Amounts Recognized | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets presented in the Statement of Financial Position | | Financial Instruments | | Fair Value Collateral Posted | | Net Amount |
Assets: | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap | $ | 2,217 |
| | $ | — |
| | $ | 2,217 |
| | $ | — |
| | $ | — |
| | $ | 2,217 |
| $ | 11,055 |
| | $ | — |
| | $ | 11,055 |
| | $ | 56 |
| | $ | — |
| | $ | 10,999 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swap | $ | 2,217 |
| | $ | — |
| | $ | 2,217 |
| | $ | — |
| | $ | — |
| | $ | 2,217 |
| $ | 14,747 |
| | $ | — |
| | $ | 14,747 |
| | $ | 56 |
| | $ | 14,573 |
| | $ | 118 |
|
Securities sold under agreements to repurchase | 221,450 |
| | — |
| | 221,450 |
| | — |
| | 221,450 |
| | — |
| 230,886 |
| | — |
| | 230,886 |
| | — |
| | 230,886 |
| | — |
|
As of SeptemberJune 30, 2019,2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $18.5$46.8 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $17.8$47.1 million.
NOTE 97 - FAIR VALUE MEASUREMENTS
The following table summarizes financial instruments measured at fair value on a recurring basis as of SeptemberJune 30, 20192020 and December 31, 2018,2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | September 30, 2019 | June 30, 2020 |
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Assets | | | | | | | | | | | | | | |
Securities available for sale | | | | | | | | | | | | | | |
Obligations of U.S. Government-sponsored enterprises | $ | — |
| | $ | 10,033 |
| | $ | — |
| | $ | 10,033 |
| $ | — |
| | $ | 10,241 |
| | $ | — |
| | $ | 10,241 |
|
Obligations of states and political subdivisions | — |
| | 170,313 |
| | — |
| | 170,313 |
| — |
| | 254,278 |
| | — |
| | 254,278 |
|
Agency mortgage-backed securities | — |
| | 934,111 |
| | — |
| | 934,111 |
| — |
| | 720,991 |
| | — |
| | 720,991 |
|
U.S. Treasury bills | — |
| | 10,247 |
| | — |
| | 10,247 |
| — |
| | 10,566 |
| | — |
| | 10,566 |
|
Corporate debt securities | — |
| | 122,629 |
| | | | 122,629 |
| — |
| | 2,028 |
| | — |
| | 2,028 |
|
Total securities available for sale | — |
| | 1,247,333 |
|
| — |
|
| 1,247,333 |
| — |
| | 998,104 |
|
| — |
|
| 998,104 |
|
Other investments | 164 |
| | — |
| | — |
| | 164 |
| |
Derivatives | — |
| | 13,561 |
| | — |
| | 13,561 |
| — |
| | 35,728 |
| | — |
| | 35,728 |
|
Total assets | $ | 164 |
| | $ | 1,260,894 |
|
| $ | — |
|
| $ | 1,261,058 |
| $ | — |
| | $ | 1,033,832 |
|
| $ | — |
|
| $ | 1,033,832 |
|
| | | | | | | | | | | | | | |
Liabilities | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
Derivatives | $ | — |
| | $ | 18,451 |
| | $ | — |
| | $ | 18,451 |
| $ | — |
| | $ | 46,828 |
| | $ | — |
| | $ | 46,828 |
|
Total liabilities | $ | — |
| | $ | 18,451 |
|
| $ | — |
|
| $ | 18,451 |
| $ | — |
| | $ | 46,828 |
|
| $ | — |
|
| $ | 46,828 |
|
| | | December 31, 2018 | December 31, 2019 |
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Assets | | | | | | | | | | | | | | |
Securities available for sale | | | | | | | | | | | | | | |
Obligations of U.S. Government-sponsored enterprises | $ | — |
| | $ | 98,498 |
| | $ | — |
| | $ | 98,498 |
| $ | — |
| | $ | 10,046 |
| | $ | — |
| | $ | 10,046 |
|
Obligations of states and political subdivisions | — |
| | 26,810 |
| | — |
| | 26,810 |
| — |
| | 213,024 |
| | — |
| | 213,024 |
|
Agency mortgage-backed securities | — |
| | 586,136 |
| | — |
| | 586,136 |
| |
Residential mortgage-backed securities | | — |
| | 902,021 |
| | — |
| | 902,021 |
|
U.S. Treasury bills | — |
| | 9,925 |
| | — |
| | 9,925 |
| — |
| | 10,226 |
| | — |
| | 10,226 |
|
Total securities available for sale | — |
| | 721,369 |
|
| — |
|
| 721,369 |
| |
Other investments | 121 |
| | — |
| | — |
| | 121 |
| |
Derivatives | — |
| | 3,023 |
| | — |
| | 3,023 |
| |
Total securities available-for-sale | | — |
| | 1,135,317 |
|
| — |
|
| 1,135,317 |
|
Derivative financial instruments | | — |
| | 11,055 |
| | — |
| | 11,055 |
|
Total assets | $ | 121 |
| | $ | 724,392 |
|
| $ | — |
|
| $ | 724,513 |
| $ | — |
| | $ | 1,146,372 |
|
| $ | — |
|
| $ | 1,146,372 |
|
| | | | | | | | | | | | | | |
Liabilities | |
| | | | |
| | | |
| | | | |
| | |
Derivatives | $ | — |
| | $ | 3,023 |
| | $ | — |
| | $ | 3,023 |
| $ | — |
| | $ | 14,747 |
| | $ | — |
| | $ | 14,747 |
|
Total liabilities | $ | — |
| | $ | 3,023 |
|
| $ | — |
|
| $ | 3,023 |
| $ | — |
| | $ | 14,747 |
|
| $ | — |
|
| $ | 14,747 |
|
Level 3 financial instruments
The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis as of September 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| State tax credits held for sale |
Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Beginning balance | $ | — |
| | $ | 299 |
| | $ | — |
| | $ | 400 |
|
Total gains: | | | | | | | |
Included in earnings | — |
| | 7 |
| | — |
| | 13 |
|
Purchases, sales, issuances and settlements: | | | | | | | |
Sales | — |
| | (135 | ) | | — |
| | (242 | ) |
Ending balance | $ | — |
| | $ | 171 |
| | $ | — |
| | $ | 171 |
|
| | | | | | | |
Change in unrealized losses relating to assets still held at the reporting date | $ | — |
| | $ | (34 | ) | | $ | — |
| | $ | (60 | ) |
From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (1) | | (1) | | (1) | | (1) | | | | |
(in thousands) | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total losses for the three months ended June 30, 2020 | | Total losses for the six months ended June 30, 2020 |
Impaired loans | $ | 3,627 |
| | $ | — |
| | $ | — |
| | $ | 3,627 |
| | $ | 3,219 |
| | $ | 3,230 |
|
Other real estate | 3,899 |
| | — |
| | — |
| | 3,899 |
| | 79 |
| | 777 |
|
Total | $ | 7,526 |
| | $ | — |
|
| $ | — |
|
| $ | 7,526 |
|
| $ | 3,298 |
| | $ | 4,007 |
|
| | | | | | | | | | | |
(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| (1) | | (1) | | (1) | | (1) | | | | |
(in thousands) | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total losses for the three months ended September 30, 2019 | | Total losses for the nine months ended September 30, 2019 |
Impaired loans | $ | 1,589 |
| | $ | — |
| | $ | — |
| | $ | 1,589 |
| | $ | 118 |
| | $ | 1,532 |
|
Total | $ | 1,589 |
| | $ | — |
|
| $ | — |
|
| $ | 1,589 |
|
| $ | 118 |
| | $ | 1,532 |
|
| | | | | | | | | | | |
(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date. |
Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at SeptemberJune 30, 20192020 and December 31, 2018.
2019.
|
| | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
(in thousands) | Carrying Amount | | Estimated fair value | | Carrying Amount | | Estimated fair value |
Balance sheet assets | | | | | | | |
Cash and due from banks | $ | 153,730 |
| | $ | 153,730 |
| | $ | 91,511 |
| | $ | 91,511 |
|
Federal funds sold | 2,829 |
| | 2,829 |
| | 1,714 |
| | 1,714 |
|
Interest-bearing deposits | 103,918 |
| | 103,918 |
| | 106,512 |
| | 106,512 |
|
Securities available for sale | 1,247,333 |
| | 1,247,333 |
| | 721,369 |
| | 721,369 |
|
Securities held to maturity | 60,786 |
| | 61,623 |
| | 65,679 |
| | 63,934 |
|
Other investments, at cost | 46,867 |
| | 46,867 |
| | 26,654 |
| | 26,654 |
|
Loans held for sale | 6,281 |
| | 6,281 |
| | 392 |
| | 392 |
|
Derivative financial instruments | 13,561 |
| | 13,561 |
| | 3,023 |
| | 3,023 |
|
Portfolio loans, net | 5,183,459 |
| | 5,123,351 |
| | 4,306,525 |
| | 4,253,239 |
|
State tax credits, held for sale | 43,808 |
| | 46,981 |
| | 37,587 |
| | 39,169 |
|
Accrued interest receivable | 21,097 |
| | 21,097 |
| | 16,069 |
| | 16,069 |
|
| | | | | | | |
Balance sheet liabilities | | | | | | | |
Deposits | 5,624,380 |
| | 5,604,045 |
| | 4,587,985 |
| | 4,583,047 |
|
Subordinated debentures and notes | 141,179 |
| | 131,603 |
| | 118,156 |
| | 106,316 |
|
Federal Home Loan Bank advances | 461,426 |
| | 464,033 |
| | 70,000 |
| | 70,000 |
|
Other borrowings and notes payable | 199,634 |
| | 199,539 |
| | 223,450 |
| | 223,260 |
|
Derivative financial instruments | 18,451 |
| | 18,451 |
| | 3,023 |
| | 3,023 |
|
Accrued interest payable | 2,907 |
| | 2,907 |
| | 1,977 |
| | 1,977 |
|
|
| | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
(in thousands) | Carrying Amount | | Estimated fair value | | Level | | Carrying Amount | | Estimated fair value | | Level |
Balance sheet assets | | | | | | | | | | | |
Securities held-to-maturity, net | 345,791 |
| | 356,139 |
| | Level 2 | | 181,166 |
| | 181,939 |
| | Level 2 |
Other investments | 43,106 |
| | 43,106 |
| | Level 2 | | 38,044 |
| | 38,044 |
| | Level 2 |
Loans held for sale | 16,029 |
| | 16,029 |
| | Level 2 | | 5,570 |
| | 5,570 |
| | Level 2 |
Loans, net | 6,029,781 |
| | 5,876,000 |
| | Level 3 | | 5,271,049 |
| | 5,205,651 |
| | Level 3 |
State tax credits, held for sale | 38,820 |
| | 44,164 |
| | Level 3 | | 36,802 |
| | 39,046 |
| | Level 3 |
| | | | | | | | | | | |
Balance sheet liabilities | | | | | | | | | | | |
Certificates of deposit | 659,166 |
| | 665,374 |
| | Level 3 | | 826,447 |
| | 825,203 |
| | Level 3 |
Subordinated debentures and notes | 203,384 |
| | 192,852 |
| | Level 2 | | 141,258 |
| | 130,985 |
| | Level 2 |
FHLB advances | 250,000 |
| | 251,978 |
| | Level 2 | | 222,406 |
| | 221,402 |
| | Level 2 |
Other borrowings and notes payable | 227,961 |
| | 227,961 |
| | Level 2 | | 265,172 |
| | 265,172 |
| | Level 2 |
For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments refer to Note 1819 – Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the Securities and Exchange Commission.SEC.
The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s financial instruments that are not already presented on the condensed consolidated balance sheets at fair value at September 30, 2019, and December 31, 2018.
|
| | | | | | | | | | | | | | | |
| Estimated Fair Value Measurement at Reporting Date Using | | Balance at September 30, 2019 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | |
Financial Assets: | | | | | | | |
Securities held to maturity | $ | — |
| | $ | 61,623 |
| | $ | — |
| | $ | 61,623 |
|
Portfolio loans, net | — |
| | — |
| | 5,123,351 |
| | 5,123,351 |
|
State tax credits, held for sale | — |
| | — |
| | 46,981 |
| | 46,981 |
|
Financial Liabilities: | | | | | | | |
Deposits | 4,804,357 |
| | — |
| | 799,688 |
| | 5,604,045 |
|
Subordinated debentures and notes | — |
| | 131,603 |
| | — |
| | 131,603 |
|
Federal Home Loan Bank advances | — |
| | 464,033 |
| | — |
| | 464,033 |
|
Other borrowings and notes payable | — |
| | 199,539 |
| | — |
| | 199,539 |
|
|
| Estimated Fair Value Measurement at Reporting Date Using | | Balance at December 31, 2018 |
(in thousands) | Level 1 | | Level 2 | | Level 3 | |
Financial Assets: | | | | | | | |
Securities held to maturity | $ | — |
| | $ | 63,934 |
| | $ | — |
| | $ | 63,934 |
|
Portfolio loans, net | — |
| | — |
| | 4,253,239 |
| | 4,253,239 |
|
State tax credits, held for sale | — |
| | — |
| | 39,169 |
| | 39,169 |
|
Financial Liabilities: | | | | | | | |
Deposits | 3,903,556 |
| | — |
| | 679,491 |
| | 4,583,047 |
|
Subordinated debentures and notes | — |
| | 106,316 |
| | — |
| | 106,316 |
|
Federal Home Loan Bank advances | — |
| | 70,000 |
| | — |
| | 70,000 |
|
Other borrowings and notes payable | — |
| | 223,260 |
| | — |
| | 223,260 |
|
NOTE 10 - GOODWILL AND INTANGIBLE ASSETS
Goodwill increased $93.9 million to $211.3 million at September 30, 2019 from $117.3 million at December 31, 2018 due to the acquisition of Trinity.
The table below presents a summary of intangible assets:
|
| | | |
| Nine months ended |
(in thousands) | September 30, 2019 |
Gross core deposit intangible, beginning of period | $ | 20,574 |
|
Additions from acquisition | 23,066 |
|
Gross core deposit intangible, end of period | 43,640 |
|
Accumulated amortization | (16,014 | ) |
Core deposit intangible, net, end of period | $ | 27,626 |
|
Amortization expense on the core deposit intangible was $1.6 million and $0.6 million for the quarters ended September 30, 2019 and 2018, and $4.0 million and $1.9 million for the nine months ended September 30, 2019 and 2018, respectively. The core deposit intangibles are being amortized over a 10year period.
The following table reflects the expected amortization schedule for the core deposit intangible at September 30, 2019.
|
| | | |
Year | Core Deposit Intangible (in thousands) |
2019 | $ | 1,550 |
|
2020 | 5,608 |
|
2021 | 4,814 |
|
2022 | 4,085 |
|
2023 | 3,456 |
|
After 2023 | 8,113 |
|
| $ | 27,626 |
|
NOTE 118 - SUBORDINATED DEBENTURES
The amounts and terms of each issuance of the Company’s subordinated debentures at SeptemberJune 30, 20192020 and December 31, 20182019 were as follows:
| | | Amount | | Maturity Date | | Call Date | | Interest Rate | Amount | | Maturity Date | | Initial Call Date(1) | | Interest Rate |
(in thousands) | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
EFSC Clayco Statutory Trust I | $ | 3,196 |
| | $ | 3,196 |
| | December 17, 2033 | | December 17, 2008 | | Floats @ 3MO LIBOR + 2.85% | $ | 3,196 |
| | $ | 3,196 |
| | December 17, 2033 | | December 17, 2008 | | Floats @ 3MO LIBOR + 2.85% |
EFSC Capital Trust II | 5,155 |
| | 5,155 |
| | June 17, 2034 | | June 17, 2009 | | Floats @ 3MO LIBOR + 2.65% | 5,155 |
| | 5,155 |
| | June 17, 2034 | | June 17, 2009 | | Floats @ 3MO LIBOR + 2.65% |
EFSC Statutory Trust III | 11,341 |
| | 11,341 |
| | December 15, 2034 | | December 15, 2009 | | Floats @ 3MO LIBOR + 1.97% | 11,341 |
| | 11,341 |
| | December 15, 2034 | | December 15, 2009 | | Floats @ 3MO LIBOR + 1.97% |
EFSC Clayco Statutory Trust II | 4,124 |
| | 4,124 |
| | September 15, 2035 | | September 15, 2010 | | Floats @ 3MO LIBOR + 1.83% | 4,124 |
| | 4,124 |
| | September 15, 2035 | | September 15, 2010 | | Floats @ 3MO LIBOR + 1.83% |
EFSC Statutory Trust IV | 10,310 |
| | 10,310 |
| | December 15, 2035 | | December 15, 2010 | | Floats @ 3MO LIBOR + 1.44% | 10,310 |
| | 10,310 |
| | December 15, 2035 | | December 15, 2010 | | Floats @ 3MO LIBOR + 1.44% |
EFSC Statutory Trust V | 4,124 |
| | 4,124 |
| | September 15, 2036 | | September 15, 2011 | | Floats @ 3MO LIBOR + 1.60% | 4,124 |
| | 4,124 |
| | September 15, 2036 | | September 15, 2011 | | Floats @ 3MO LIBOR + 1.60% |
EFSC Capital Trust VI | 14,433 |
| | 14,433 |
| | March 30, 2037 | | March 30, 2012 | | Floats @ 3MO LIBOR + 1.60% | 14,433 |
| | 14,433 |
| | March 30, 2037 | | March 30, 2012 | | Floats @ 3MO LIBOR + 1.60% |
EFSC Capital Trust VII | 4,124 |
| | 4,124 |
| | December 15, 2037 | | December 15, 2012 | | Floats @ 3MO LIBOR + 2.25% | 4,124 |
| | 4,124 |
| | December 15, 2037 | | December 15, 2012 | | Floats @ 3MO LIBOR + 2.25% |
JEFFCO Stat Trust I (1)(2) | 7,920 |
| | 8,019 |
| | February 22, 2031 | | February 22, 2011 | | Fixed @ 10.20% | 7,819 |
| | 7,886 |
| | February 22, 2031 | | February 22, 2011 | | Fixed @ 10.20% |
JEFFCO Stat Trust II (1)(2) | 4,375 |
| | 4,335 |
| | March 17, 2034 | | March 17, 2009 | | Floats @ 3MO LIBOR + 2.75% | 4,415 |
| | 4,388 |
| | March 17, 2034 | | March 17, 2009 | | Floats @ 3MO LIBOR + 2.75% |
Trinity Capital Trust III (1)(2) | 5,189 |
| | — |
| | September 8, 2034 | | September 8, 2009 | | Floats @ 3MO LIBOR + 2.70% | 5,239 |
| | 5,206 |
| | September 8, 2034 | | September 8, 2009 | | Floats @ 3MO LIBOR + 2.70% |
Trinity Capital Trust IV (1)(2) | 10,293 |
| | — |
| | November 23, 2035 | | August 23, 2010 | | Fixed @ 6.88% | 10,310 |
| | 10,302 |
| | November 23, 2035 | | August 23, 2010 | | Fixed @ 6.88% |
Trinity Capital Trust V (1)(2) | 7,502 |
| | — |
| | December 15, 2036 | | September 15, 2011 | | Floats @ 3MO LIBOR + 1.65% | 7,625 |
| | 7,543 |
| | December 15, 2036 | | September 15, 2011 | | Floats @ 3MO LIBOR + 1.65% |
Total junior subordinated debentures | 92,086 |
| | 69,161 |
| | 92,215 |
| | 92,132 |
| |
| | | | | | | | |
Fixed-to-floating rate subordinated notes | 50,000 |
| | 50,000 |
| | November 1, 2026 | | November 1, 2021 | | Fixed @ 4.75% until November 1, 2021, then floats @ 3MO LIBOR + 3.387% | |
5.75% Fixed-to-floating rate subordinated notes | | 63,250 |
| | — |
| | June 1, 2030 | | June 1, 2025 | | Fixed @ 5.75% until June 1, 2025, then floats @ Benchmark rate (3 month term SOFR) + 5.66% |
4.75% Fixed-to-floating rate subordinated notes | | 50,000 |
| | 50,000 |
| | November 1, 2026 | | November 1, 2021 | | Fixed @ 4.75% until November 1, 2021, then floats @ 3MO LIBOR + 3.387% |
Debt issuance costs | (907 | ) | | (1,005 | ) | | (2,081 | ) | | (874 | ) | |
Total fixed-to-floating rate subordinated notes | 49,093 |
| | 48,995 |
| | 111,169 |
| | 49,126 |
| |
| | | | | | | | |
Total subordinated debentures and notes | $ | 141,179 |
| | $ | 118,156 |
| | $ | 203,384 |
| | $ | 141,258 |
| |
| | | | | | | | |
(1) Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate. | |
(1) Callable each quarter after initial call date. | | (1) Callable each quarter after initial call date. |
(2) Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate. | | (2) Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate. |
| | | | | |
As part of the acquisition of Trinity,On May 21, 2020, the Company acquired additional juniorissued $63.3 million of 5.75% fixed-to-floating rate subordinated debentures issued by unconsolidated statutory trusts withnotes due in 2030 in a par valuepublic offering (the “2030 Notes”). From and including the date of $26.8 million. Theissuance to, but excluding June 1, 2025, the 2030 Notes will bear interest at a rate equal to 5.75% per annum, payable semiannually in arrears on each June 1 and December 1. From and including June 1, 2025 to, but excluding the maturity date or the date of earlier redemption, the 2030 Notes will bear interest at a floating rate per annum equal to a benchmark rate (which is expected to be three-month term SOFR (as defined in the Indenture, dated May 21, 2020, between the Company has assigned a fair valueand U.S. Bank National Association, as trustee, and subsequent First Supplemental Indenture)), plus 566.0 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of $22.8 millioneach year, commencing on September 1, 2025.
Notwithstanding the foregoing, in the event that the benchmark rate is less than zero, then the benchmark rate shall be deemed to these junior subordinated debentures.be zero.
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME
NOTE 12 - NEW AUTHORITATIVE ACCOUNTING GUIDANCEThe following table presents the changes in accumulated other comprehensive income after-tax by component:
|
| | | | | | | | | | | | | | | |
(in thousands) | Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities | | Unamortized Gain (Loss) on Held-to-Maturity Securities | | Net Unrealized Loss on Cash Flow Hedges | | Total |
Balance, March 31, 2020 | $ | 25,538 |
| | $ | 4,778 |
| | $ | (7,219 | ) | | $ | 23,097 |
|
Net change | 10,984 |
| | (329 | ) | | (943 | ) | | 9,712 |
|
Transfer from available-for-sale to held-to-maturity | $ | (8,650 | ) | | $ | 8,650 |
| | $ | — |
| | $ | — |
|
Balance, June 30, 2020 | $ | 27,872 |
| | $ | 13,099 |
| | $ | (8,162 | ) | | $ | 32,809 |
|
| | | | | | | |
Balance, December 31, 2019 | $ | 14,977 |
| | $ | 4,934 |
| | $ | (2,162 | ) | | $ | 17,749 |
|
Net change | 21,545 |
| | (485 | ) | | (6,000 | ) | | 15,060 |
|
Transfer from available-for-sale to held-to-maturity | $ | (8,650 | ) | | $ | 8,650 |
| | $ | — |
| | $ | — |
|
Balance, June 30, 2020 | $ | 27,872 |
| | $ | 13,099 |
| | $ | (8,162 | ) | | $ | 32,809 |
|
| | | | | | | |
(in thousands) | Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities | | Unamortized Gain (Loss) on Held-to-Maturity Securities | | Net Unrealized Loss on Cash Flow Hedges | | Total |
Balance, March 31, 2019 | $ | 2,675 |
| | $ | (233 | ) | | $ | (952 | ) | | $ | 1,490 |
|
Net change | 12,842 |
| | 3 |
| | (1,261 | ) | | 11,584 |
|
Balance, June 30, 2019 | $ | 15,517 |
| | $ | (230 | ) | | $ | (2,213 | ) | | $ | 13,074 |
|
| | | | | | | |
Balance, December 31, 2018 | $ | (9,047 | ) | | $ | (235 | ) | | $ | — |
| | $ | (9,282 | ) |
Net change | 24,564 |
| | 5 |
| | (2,213 | ) | | 22,356 |
|
Balance, June 30, 2019 | $ | 15,517 |
| | $ | (230 | ) | | $ | (2,213 | ) | | $ | 13,074 |
|
FASB ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
The following table presents the Disclosure Requirements for Fair Value Measurement” In August 2018, the FASB issued ASU 2018-13, whichpre-tax and after-tax changes the fair value measurement disclosure requirements of ASC 820. The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The Board used the guidance in the Concepts Statement, including considerationcomponents of costs and benefits, to improve the effectiveness of ASC 820’s disclosure requirements. other comprehensive income:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, |
(in thousands) | 2020 | | 2019 |
| Pre-tax | | Tax effect | | After-tax | | Pre-tax | | Tax effect | | After-tax |
Change in unrealized gain on available-for-sale debt securities | $ | 14,587 |
| | $ | 3,603 |
| | $ | 10,984 |
| | $ | 17,054 |
| | $ | 4,212 |
| | $ | 12,842 |
|
Reclassification of (gain) loss on held-to-maturity securities(b) | (437 | ) | | (108 | ) | | (329 | ) | | 4 |
| | 1 |
| | 3 |
|
Change in unrealized loss on cash flow hedges arising during the period | (1,563 | ) | | (386 | ) | | (1,177 | ) | | (1,679 | ) | | (414 | ) | | (1,265 | ) |
Reclassification of loss on cash flow hedges(b) | 311 |
| | 77 |
| | 234 |
| | 5 |
| | 1 |
| | 4 |
|
Total other comprehensive income | $ | 12,898 |
| | $ | 3,186 |
| | $ | 9,712 |
| | $ | 15,384 |
| | $ | 3,800 |
| | $ | 11,584 |
|
| | | | | | | | | | | |
| Six months ended June 30, |
| 2020 | | 2019 |
| Pre-tax | | Tax effect | | After-tax | | Pre-tax | | Tax effect | | After-tax |
Change in unrealized gain on available-for-sale debt securities | $ | 28,616 |
| | $ | 7,068 |
| | $ | 21,548 |
| | $ | 32,329 |
| | $ | 7,985 |
| | $ | 24,344 |
|
Reclassification adjustment for realized (gain) loss on sale of available-for-sale debt securities(a) | (4 | ) | | (1 | ) | | (3 | ) | | 292 |
| | 72 |
| | 220 |
|
Reclassification of (gain) loss on held-to-maturity securities(b) | (644 | ) | | (159 | ) | | (485 | ) | | 7 |
| | 2 |
| | 5 |
|
Change in unrealized loss on cash flow hedges arising during the period | (8,442 | ) | | (2,085 | ) | | (6,357 | ) | | (2,944 | ) | | (727 | ) | | (2,217 | ) |
Reclassification of loss on cash flow hedges(b) | 474 |
| | 117 |
| | 357 |
| | 5 |
| | 1 |
| | 4 |
|
Total other comprehensive income | $ | 20,000 |
| | $ | 4,940 |
| | $ | 15,060 |
| | $ | 29,689 |
| | $ | 7,333 |
| | $ | 22,356 |
|
(a)The amendmentspre-tax amount is reported in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presentednoninterest income/expense in the initial fiscal yearConsolidated Statements of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoptionOperations
(b)The pre-tax amount is permitted upon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. The Company has selected the option to adopt the removal or modification of disclosures during the second quarter of 2019. The Company is currently evaluating the additional disclosures and has not yet determined the impact this standard may have on its consolidated financial statements.
FASB ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” In June 2016, the FASB issued ASU 2016-13, “Financial Instruments (Topic 326)” which changes the methodology for evaluating impairment of most financial instruments. The ASU replaces the currently used incurred loss model with a forward-looking expected loss model, which will generally result in a more timely recognition of losses. Existing PCI assets will be grandfathered and classified as purchased credit deteriorated (PCD) assets at the date of adoption. The PCD assets will be grossed up for the allowance for expected credit losses at the date of adoption and the noncredit discount will continue to be recognizedreported in interest income based onincome/expense in the yieldConsolidated Statements of such assets as of the adoption date. Subsequent changes in expected credit losses on PCD assets will be recorded through the allowance. The guidance becomes effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has formed an implementation team that includes members of accounting, credit, and loan operations to review the requirements of ASU 2016-13, and has contracted with a software provider to aid in implementation. The Company has assessed its data and system needs, implemented a model validation process, selected portfolio segmentations and loss methodologies, and is continuing to refine forecast inputs and documentation of the end-to-end process. While the impact of adopting this standard has not been fully determined, the Company will recognize a cumulative effect adjustment to the allowance and retained earnings upon adoption. The Company expects to finalize quantifying the anticipated impact of the adoption of this standard on the Company’s financial statements during the fourth quarter of 2019.Operations
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
Some of the information in this
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements typicallyinclude, but are not limited to, statements about the Company’s plans, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries. Forward-looking statements are typically
identified with the use of terms such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue”“continue,” “intend,” and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements also include, but are not limitedinherently subject to statements regarding plans, objectives, expectations or consequences of statements about the future performance, operations productsrisks and services of the Companyuncertainties and its subsidiaries. Ourour ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements duestatements. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a numbertightening of credit, and further increase stock price
volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors including,that could cause or contribute to such differences include, but are not limited to: our ability to efficiently integrate acquisitions into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting policies and practices or accounting standards, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the Current Expected Credit Loss (“CECL”)CECL model, which will changehas changed how we estimate credit losses and may increase the required level of our allowance for credit losses after adoption on January 1, 2020;losses; uncertainty regarding the future of LIBOR; natural disasters, war or terrorist activities, or pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which we operate; increased unemployment rates and defaults as a result of the economic disruptions caused by COVID-19; the impact of governmental orders issued in response to COVID-19; and other risks discussed under the caption “Risk Factors” under Part 1, Item 1A of our 20182019 Annual Report on Form 10-K and Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and other reports filed with the Securities and Exchange Commission,SEC, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.
Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the Securities and Exchange CommissionSEC which are available on our website at www.enterprisebank.com under “Investor Relations.”
Introduction
The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first ninesix months of 20192020 compared to the financial condition as of December 31, 2018.2019. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and ninesix months ended SeptemberJune 30, 2019,2020, compared to the same periods in 2018.2019. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2018. Certain financial condition comparisons2019.
COVID-19 Pandemic
On January 31, 2020, the Secretary of Health and Human Services declared a public health emergency due to the prior yearglobal outbreak of a new strain of coronavirus (COVID-19). On March 13, 2020, the President of the United States proclaimed the COVID-19 as a national emergency, following the World Health Organization’s categorization of the outbreak as a pandemic. COVID-19 continues to aggressively spread globally, including throughout the United States. The pandemic and resulting travel bans, closure of non-essential businesses, social distancing measures and government responses across the country have had a profound impact on the global economy, financial markets and how business has been conducted across all industries and have affected many of the Company’s customers and clients. To the extent the economic impacts of the pandemic continue for a prolonged period and conditions stagnate or worsen, our provision for credit losses, noninterest income, and profitability may be adversely affected.
The Company has taken proactive and disciplined steps to promote the safety and overall wellbeing of its employees, customers and stakeholders, as well as to manage its financial performance. Steps taken include activation of the Company’s business continuity plan, formation of a communication and action task force, cost containment measures,
restrictions on business travel, conversion of in-person meetings to virtual and a work-from-home mandate. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act contains provisions to assist individuals and businesses, including the SBA’s Paycheck Protection Program (“PPP”). The PPP provided $349 billion in guaranteed loans that are forgivable if certain requirements are met. On April 24, 2020, an additional $310 billion was added to the PPP program. The CARES Act included a provision that allowed depository institutions the option to defer adoption of the CECL standard to the earlier of (1) the end of the COVID-19 national emergency or (2) December 31, 2020. The Company did not elect the deferral option.
On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the CARES Act. The statement also encourages institutions to work constructively with borrowers affected by COVID-19 and states the agencies will not criticize supervised institutions for prudent loan modifications. Both the CARES Act and the interagency statement provide relief from the accounting and reporting implications of troubled debt restructurings. The Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. As of June 30, 2020, $685.7 million in loans have participated in the programs.
Critical Accounting Policies
The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations comparisonscould reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the linkedyear ended December 31, 2019.
The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The three and six months ended June 30, 2020 were characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.
Allowance for Credit Losses
On January 1, 2020, the Company adopted Accounting Standard Update 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard, referred to as CECL, requires an estimate of lifetime expected credit losses on certain financial assets measured at amortized cost.
The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company’s credit costs.
Goodwill and Other Intangible Assets
The Company completes a goodwill impairment test in the fourth quarter each year or whenever events or changes in circumstances indicate the Company may not be able to recover the goodwill, or intangible assets, respective carrying amount. The impairment test involves the use of various estimates and assumptions. Management believes the estimates and assumptions utilized are includedreasonable.
Goodwill is evaluated for additional trend analysis.impairment at the reporting unit level. Reporting units are defined as the same level as, or one level below, an operating segment. An operating segment is a component of a business for which separate financial information is available that management regularly evaluates in deciding how to allocate resources and assess performance. The Company has one reporting unit and one operating segment.
Potential impairments to goodwill must first be identified by performing a qualitative assessment that evaluates relevant events or circumstances to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. If this test indicates it is more likely than not that goodwill has been impaired, then a quantitative impairment test is completed. The quantitative impairment test calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value.
Intangible assets other than goodwill, such as core deposit intangibles, determined to have finite lives are amortized over their estimated remaining useful lives. These assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
As of June 30, 2020, an assessment of goodwill and intangibles was performed due to a decrease in the Company’s market capitalization below book value. The impairment evaluation of goodwill and intangible balances did not identify any impairment in the second quarter 2020, though there can be no assurance that prolonged market volatility resulting from the COVID-19 pandemic will not result in impairments to goodwill or other intangibles in future periods.
Executive Summary
The Company closed its acquisition of Trinity Capital Corporation (“Trinity”) on March 8, 2019. The results of operations of Trinity are included in our consolidated results from this date forward, and are excluded from preceding periods. See “Item 1, Note 2 – Acquisitions” for more information.which may affect certain comparisons to the six months ended June 30, 2019.
The following table presents the fair values of assets acquired and liabilities assumed of Trinity as of March 8, 2019:
|
| | | |
(in thousands) | |
Assets acquired: | |
Cash and cash equivalents | $ | 13,899 |
|
Interest-earning deposits greater than 90 days | 100 |
|
Securities | 428,096 |
|
Loans | 684,314 |
|
Other real estate | 4,512 |
|
Other investments | 6,673 |
|
Fixed assets | 27,286 |
|
Accrued interest receivable | 3,997 |
|
Intangible assets | 23,066 |
|
Deferred tax assets | 9,651 |
|
Other assets | 30,037 |
|
Total assets acquired | $ | 1,231,631 |
|
| |
Liabilities assumed: | |
Deposits | $ | 1,081,187 |
|
Subordinated debentures | 22,834 |
|
FHLB advances | 6,971 |
|
Accrued interest payable | 370 |
|
Other liabilities | 5,015 |
|
Total liabilities assumed | $ | 1,116,377 |
|
| |
Net assets acquired | $ | 115,254 |
|
| |
Consideration paid: | |
Cash | $ | 37,275 |
|
Common stock | 171,885 |
|
Total consideration paid | $ | 209,160 |
|
| |
Goodwill | $ | 93,906 |
|
Below are highlights of our financial performance for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.
| | (in thousands, except per share data) | At or for the three months ended | | For the nine months ended | At or for the three months ended | | At or for the six months ended |
September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
EARNINGS | | | | | | | | | | | | | | |
Total interest income | $ | 81,078 |
| | $ | 60,757 |
| | $ | 227,896 |
| | $ | 173,800 |
| $ | 73,191 |
| | $ | 79,201 |
| | $ | 149,879 |
| | $ | 146,818 |
|
Total interest expense | 18,032 |
| | 12,664 |
| | 50,792 |
| | 32,488 |
| 7,358 |
| | 17,486 |
| | 20,678 |
| | 32,760 |
|
Net interest income | 63,046 |
| | 48,093 |
| | 177,104 |
| | 141,312 |
| 65,833 |
| | 61,715 |
| | 129,201 |
| | 114,058 |
|
Provision for portfolio loans | 1,833 |
| | 2,263 |
| | 5,031 |
| | 4,524 |
| |
Net interest income after provision for loan losses | 61,213 |
| | 45,830 |
| | 172,073 |
| | 136,788 |
| |
Provision for credit losses | | 19,591 |
| | 1,722 |
| | 41,855 |
| | 3,198 |
|
Net interest income after provision for credit losses | | 46,242 |
| | 59,993 |
| | 87,346 |
| | 110,860 |
|
Total noninterest income | 13,564 |
| | 8,410 |
| | 34,758 |
| | 27,645 |
| 9,960 |
| | 11,964 |
| | 23,368 |
| | 21,194 |
|
Total noninterest expense | 38,239 |
| | 29,922 |
| | 127,131 |
| | 88,284 |
| 37,912 |
| | 49,054 |
| | 76,585 |
| | 88,892 |
|
Income before income tax expense | 36,538 |
| | 24,318 |
| | 79,700 |
| | 76,149 |
| 18,290 |
| | 22,903 |
| | 34,129 |
| | 43,162 |
|
Income tax expense | 7,469 |
| | 1,802 |
| | 16,051 |
| | 10,461 |
| 3,656 |
| | 4,479 |
| | 6,627 |
| | 8,582 |
|
Net income | $ | 29,069 |
| | $ | 22,516 |
| | $ | 63,649 |
| | $ | 65,688 |
| $ | 14,634 |
| | $ | 18,424 |
| | $ | 27,502 |
| | $ | 34,580 |
|
| | | | | | | | | | | | | | |
Basic earnings per share | $ | 1.09 |
| | $ | 0.97 |
| | $ | 2.46 |
| | $ | 2.84 |
| $ | 0.56 |
| | $ | 0.69 |
| | $ | 1.04 |
| | $ | 1.36 |
|
Diluted earnings per share | 1.08 |
| | 0.97 |
| | 2.45 |
| | 2.81 |
| $ | 0.56 |
| | $ | 0.68 |
| | $ | 1.04 |
| | $ | 1.36 |
|
| | | | | | | | | | | | | | |
Return on average assets | 1.60 | % | | 1.63 | % | | 1.26 | % | | 1.62 | % | 0.72 | % | | 1.05 | % | | 0.71 | % | | 1.07 | % |
Return on average common equity | 13.66 |
| | 15.22 |
| | 11.00 |
| | 15.41 |
| 6.78 | % | | 9.09 | % | | 6.38 | % | | 9.45 | % |
Return on average tangible common equity1 | 19.08 |
| | 19.42 |
| | 15.16 |
| | 19.85 |
| 9.28 | % | | 12.92 | % | | 8.76 | % | | 12.93 | % |
Net interest margin (tax equivalent) | 3.81 |
| | 3.78 |
| | 3.85 |
| | 3.78 |
| 3.53 | % | | 3.86 | % | | 3.65 | % | | 3.87 | % |
Core net interest margin1 | 3.69 |
| | 3.74 |
| | 3.76 |
| | 3.74 |
| 3.50 | % | | 3.80 | % | | 3.60 | % | | 3.80 | % |
Efficiency ratio | 49.91 |
| | 52.96 |
| | 60.01 |
| | 52.25 |
| 50.02 | % | | 66.58 | % | | 50.20 | % | | 65.72 | % |
Core efficiency ratio1 | 51.73 |
| | 52.23 |
| | 52.96 |
| | 52.86 |
| 50.66 | % | | 53.30 | % | | 50.94 | % | | 53.65 | % |
Book value per common share | $ | 31.79 |
| | $ | 25.41 |
| | | | | $ | 33.13 |
| | $ | 30.68 |
| | | | |
Tangible book value per common share1 | 22.82 |
| | 19.94 |
| | | | | $ | 24.22 |
| | $ | 21.74 |
| | | | |
| | | | | | | | | | | | | | |
ASSET QUALITY | | | | | | | | | | | | | | |
Net charge-offs | $ | 1,070 |
| | $ | 2,447 |
| | $ | 3,866 |
| | $ | 2,862 |
| $ | 309 |
| | $ | 970 |
| | $ | 1,491 |
| | $ | 2,796 |
|
Nonperforming loans | 15,569 |
| | 17,044 |
| | | | | 41,473 |
| | 19,842 |
| | | | |
Classified assets | 93,984 |
| | 73,704 |
| | | | | 96,678 |
| | 91,715 |
| | | | |
Nonperforming loans to total loans | 0.30 | % | | 0.40 | % | | | | | 0.68 | % | | 0.39 | % | | | | |
Nonperforming assets to total assets | 0.33 |
| | 0.32 |
| | | | | 0.55 | % | | 0.42 | % | | | | |
Allowance for loan losses to total loans | 0.85 |
| | 1.04 |
| | | | | |
ACLL to total loans | | 1.80 | % | | 0.85 | % | | | | |
Net charge-offs to average loans (annualized) | 0.08 |
| | 0.23 |
| | 0.11 | % | | 0.09 | % | 0.02 | % | | 0.08 | % | | 0.05 | % | | 0.12 | % |
| | | | | | | | | | | | | | |
(1) A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.” |
For the three and ninesix months ended SeptemberJune 30, 20192020 compared to the three and ninesix months ended SeptemberJune 30, 2018,2019, the Company notes the following trends:
The Company was active in supporting its customers in the PPP. Details of the PPP loans are noted in the following table:
|
| | | |
| Quarter ended |
(in thousands) | June 30, 2020 |
PPP loans outstanding, net of unearned fees | $ | 807,814 |
|
Average PPP loans outstanding, net | 634,632 |
|
PPP average loan size | 224 |
|
PPP interest and fee income | 4,083 |
|
PPP unearned fees | 22,414 |
|
PPP average yield | 2.59 | % |
Participation in the PPP has impacted the Company’s financial metrics in the second quarter 2020. Loan and deposit growth, earnings per share, and return on assets all increased due to the PPP. Conversely, net interest margin, the allowance coverage ratio, the leverage ratio and the ratio of tangible common equity to tangible assets all decreased. Since the PPP loans are guaranteed by the SBA, CET1, Tier 1 and total risk-based capital are not impacted by the PPP loan balances.
For the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company had net income of $29.1$14.6 million and $63.6$27.5 million, respectively, compared to $22.5$18.4 million and $65.7$34.6 million, inrespectively, for the prior year periods. Earnings per diluted share for the three and ninesix months ended SeptemberJune 30, 2019, were $1.082020, was $0.56 and $2.45$1.04 per diluted share, respectively, and $0.97$0.68 and $2.81$1.36 per diluted share, for the same periods in 2018.2019. Net income and
earnings per share for the first ninethree and six months ended June 30, 2020 were impacted from $19.6 million and $41.9 million, respectively, on a pretax basis ($14.8 million and $31.5 million, respectively, after tax), of provision for credit losses. The increase in the provision for credit losses for the three and six months ending June 30, 2020 was primarily due to deterioration in the economic forecast. Net income and earnings per share for the three and six months ended June 30, 2019 were impacted from $18.0$10.3 million and $17.6 million, respectively, on a pretax basis ($14.08.0 million and $13.7 million, respectively, after tax), of merger-related expenses compared to the prior year period.expenses.
| |
• | Excluding the impact of merger-related expenses, the adjusted return on average assets1, adjusted return on average common equity1, and adjusted return on average tangible common equity1 were 1.54%, 13.42%, and 18.50%, respectively, for the nine months ended September 30, 2019.
|
Net interest income for the three and ninesix months ended SeptemberJune 30, 20192020 increased $15.0 million7% and $35.8 million13%, respectively, over the prior year periods.periods primarily from higher loan and investment volumes, both of which benefited from the Trinity acquisition and growth in the loan portfolio. The acquisitionthree-month period also benefited from higher loan volume due to PPP loans. The benefit to net interest income from higher earning-asset volumes and a decrease in funding costs was partially offset by the decrease in LIBOR in both the three and six months ended June 30, 2020.
The tax-equivalent net interest margin was 3.53% and 3.65% for the three and six months ended June 30, 2020, respectively, compared to 3.86% and 3.87% in the prior year periods, respectively. The net interest margin was impacted by the decline in short-term rates as approximately 60% of Trinity alongthe Company’s loan portfolio (excluding PPP) has variable rates, with organic loan growth and an expandedmost indexed to one-month LIBOR that has declined significantly over the past year. An increase in the investment portfolio supportedand in PPP loans in the increasesecond quarter 2020 contributed to growth in net interest income; however, the lower yields on these products compared to the loan portfolio yield excluding PPP reduced the net interest margin. The Company responded to interest rate trends by reducing the cost of certain managed money market and interest-bearing transaction accounts. Net interest income overand margin both benefited from an 84-basis point decrease in the prior year periods.rate paid on interest-bearing deposits in the second quarter 2020 compared to the second quarter 2019. The rate on interest-bearing deposits for the six months ended June 30, 2020 declined 64 basis points compared to the prior-year period.
| |
• | The net interest margin for both the three and nine months ended September 30, 2019 expanded over the prior year periods, primarily due to the impact of interest rate increases on portfolio loans out-pacing the increase in deposit and borrowing costs and the addition of Trinity’s lower-cost deposit portfolio. Core net interest margin,1 which excludes incremental accretion on non-core acquired loans, increased two basis points to 3.76% for the first nine months of 2019 from the prior year period, and decreased five basis points to 3.69% for the three months ended September 30, 2019 from the prior year period. The decline in core net interest margin during the third quarter of 2019 over the prior year period was primarily caused by the reduction in short-term rates during the three months ended September 30, 2019. Additionally, the overall mix of interest-earning assets negatively impacted net interest margin due to a larger investment portfolio.
|
Noninterest income for the three and ninesix months ended SeptemberJune 30, 2019 increased $5.22020 decreased $2.0 million and $7.1increased $2.2 million, respectively, compared to the prior year periodsperiods. For the second quarter 2020, the increase in deposit balances provided more earnings credits to business customers on analysis, resulting in lower service charge income compared to the prior year quarter. Lower transaction volumes on credit and debit cards impacted card services revenue for the three months ended June 30, 2020. For the six months ended June 30, noninterest income increased due to contributionsa full period of income from the Trinity of approximately $2.4 million and $5.3 million, respectively, primarily related toacquisition in wealth management and card services revenue. Tax credit income, swap fees and a claim on bank-owned life insurance also contributed to the increase in both periods.year-over-year increase.
Noninterest expense for the three and ninesix months ended SeptemberJune 30, 2019 increased $8.32020 decreased $11.1 million and $38.8$12.3 million, respectively, compared to the prior year periods. The increase for the three months ended September 30, 2019 reflects the ongoing operating expenses from the Trinity acquisition, including planned cost savings from the transaction. The increase in the first nine months of 2019 wasdecrease is primarily due to a reduction in merger-related expenses of $18.0 million and increased operating expenses following the closing of the Trinity acquisition, most notably in employee compensation and benefits.expenses.
Balance sheet highlights:
| |
• | Loans – Total loans increased to $5.2 billion at September 30, 2019, increasing $878.0 million when compared to December 31, 2018. The increase is primarily attributable to the acquisition of Trinity along with growth in the commercial and industrial (“C&I”), commercial real estate (“CRE”), and life insurance premium finance categories, partially offset by paydowns outpacing growth in the other categories.Loans – Total loans grew $825.7 million from December 31, 2019, or 15.1%, to $6.1 billion as of June 30, 2020. Growth in the loan portfolio was primarily driven by PPP loans. |
| |
• | Deposits – Total deposits at Septembergrew $928.6 million, or 15.5%, to $6.7 billion as of June 30, 2019 were $5.6 billion, an increase2020 primarily due to PPP related deposits, government stimulus checks and organic growth. Noninterest deposit accounts represented 29.3% of $1.0 billion, from December 31, 2018. The increase is primarily attributable to the acquisition of Trinity. Core deposits, defined as total deposits excluding time deposits, were $4.8 billion at SeptemberJune 30, 2019, an increase of $900.8 million, or 23% when compared2020, and the loan to December 31, 2018. Thedeposit ratio of noninterest-bearing deposits to total deposits was relatively stable at 23% at September 30, 2019, compared to 24% at December 31, 2018.91.6%. |
| |
• | Asset quality – NonperformingThe allowance for credit losses on loans were $15.6 millionto total loans increased to 1.80% at SeptemberJune 30, 2019, compared to $16.7 million2020 from 0.81% at December 31, 2018.2019. Nonperforming loans represented 0.30% and 0.38% ofassets to total loansassets was 0.55% at SeptemberJune 30, 2019 and2020 compared to 0.45% at December 31, 2018, respectively.2019. The adoption of CECL on January 1, 2020, increased nonperforming loans by $6.8 million due to the reclassification of loans previously accounted for in performing pools of loans. |
The provision for loan losses was $1.8 million and $5.0 million for the three and nine months ended September 30, 2019, respectively, compared to $2.3 million and $4.5 million for the prior year periods, respectively. See “Item 1, Note 5 – Portfolio Loans, and Provision and Allowance for Loan Losses” of this Quarterly Report on Form 10-Q for more information.
| |
• | Subordinated notes - In the second quarter 2020, the Company issued $63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030. The notes are callable beginning in 2025 and are included in tier 2 capital. |
| |
• | Shareholders’ equity – The Company repurchased 302,756 sharesTotal shareholders’ equity was $868.0 million and the tangible common equity to tangible assets ratio1 was 7.81% at an average priceJune 30, 2020 compared to 8.89% at December 31, 2019. Balance sheet growth from the PPP was the primary cause of $39.03 per sharethe decline in the third quartertangible common equity to tangible assets ratio. Bank regulatory capital ratios remain “well-capitalized,” with a common equity tier 1 ratio of 2019.11.75% and a total risk-based capital ratio of 13.00%. |
1A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”
RESULTS OF OPERATIONS
Net Interest Income
Average Balance Sheet
The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis. Non-core acquired loans noted in the table below were acquired from the FDIC and were previously covered by shared-loss agreements.
| | | Three months ended September 30, | Three months ended June 30, |
| 2019 | | 2018 | 2020 | | 2019 |
(in thousands) | Average Balance | | Interest Income/Expense | | Average Yield/ Rate | | Average Balance | | Interest Income/Expense | | Average Yield/ Rate | Average Balance | | Interest Income/Expense | | Average Yield/ Rate | | Average Balance | | Interest Income/Expense | | Average Yield/ Rate |
Assets | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | |
Taxable portfolio loans (1) | $ | 5,140,946 |
| | $ | 68,309 |
| | 5.27 | % | | $ | 4,196,242 |
| | $ | 54,086 |
| | 5.11 | % | $ | 5,982,117 |
| | $ | 63,250 |
| | 4.25 | % | | $ | 5,056,172 |
| | $ | 68,093 |
| | 5.40 | % |
Tax-exempt portfolio loans (2) | 26,364 |
| | 482 |
| | 7.25 |
| | 34,392 |
| | 483 |
| | 5.57 |
| 36,864 |
| | 447 |
| | 4.88 |
| | 26,821 |
| | 453 |
| | 6.77 |
|
Non-core acquired loans - contractual | 10,699 |
| | 402 |
| | 14.91 |
| | 21,891 |
| | 399 |
| | 7.23 |
| 13,095 |
| | 172 |
| | 5.28 |
| | 12,188 |
| | 284 |
| | 9.35 |
|
Non-core acquired loans - incremental accretion | | | 2,140 |
| | 79.36 |
| | | | 535 |
| | 9.70 |
| | | 719 |
| | 22.08 |
| | | | 910 |
| | 29.95 |
|
Total loans | 5,178,009 |
| | 71,333 |
| | 5.47 |
| | 4,252,525 |
|
| 55,503 |
| | 5.18 |
| 6,032,076 |
| | 64,588 |
| | 4.31 |
| | 5,095,181 |
|
| 69,740 |
| | 5.49 |
|
Taxable debt and equity investments | 1,169,753 |
| | 8,323 |
| | 2.82 |
| | 715,846 |
| | 4,805 |
| | 2.66 |
| 1,076,158 |
| | 6,814 |
| | 2.55 |
| | 1,120,526 |
| | 8,009 |
| | 2.87 |
|
Non-taxable debt and equity investments (2) | 143,107 |
| | 1,287 |
| | 3.57 |
| | 39,283 |
| | 349 |
| | 3.52 |
| 285,695 |
| | 2,406 |
| | 3.39 |
| | 126,003 |
| | 1,143 |
| | 3.64 |
|
Short-term investments | 113,214 |
| | 572 |
| | 2.00 |
| | 64,919 |
| | 306 |
| | 1.87 |
| 177,267 |
| | 87 |
| | 0.20 |
| | 111,291 |
| | 703 |
| | 2.53 |
|
Total securities and short-term investments | 1,426,074 |
| | 10,182 |
| | 2.83 |
| | 820,048 |
|
| 5,460 |
| | 2.64 |
| 1,539,120 |
| | 9,307 |
| | 2.43 |
| | 1,357,820 |
|
| 9,855 |
| | 2.91 |
|
Total interest-earning assets | 6,604,083 |
| | 81,515 |
| | 4.90 |
| | 5,072,573 |
| | 60,963 |
| | 4.77 |
| 7,571,196 |
| | 73,895 |
| | 3.93 |
| | 6,453,001 |
| | 79,595 |
| | 4.95 |
|
Noninterest-earning assets | 618,274 |
| | | | | | 398,931 |
| | | | | 587,008 |
| | | | | | 604,604 |
| | | | |
Total assets | $ | 7,222,357 |
| | | | | | $ | 5,471,504 |
| | | | | $ | 8,158,204 |
| | | | | | $ | 7,057,605 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | $ | 1,356,328 |
| | $ | 2,048 |
| | 0.60 | % | | $ | 758,621 |
| | $ | 799 |
| | 0.42 | % | $ | 1,487,467 |
| | $ | 244 |
| | 0.07 | % | | $ | 1,384,090 |
| | $ | 2,134 |
| | 0.62 | % |
Money market accounts | 1,639,603 |
| | 6,959 |
| | 1.68 |
| | 1,523,822 |
| | 5,423 |
| | 1.41 |
| 1,941,874 |
| | 995 |
| | 0.21 |
| | 1,576,333 |
| | 6,996 |
| | 1.78 |
|
Savings | 548,109 |
| | 232 |
| | 0.17 |
| | 208,057 |
| | 157 |
| | 0.30 |
| 590,104 |
| | 45 |
| | 0.03 |
| | 562,503 |
| | 231 |
| | 0.16 |
|
Certificates of deposit | 820,943 |
| | 3,970 |
| | 1.92 |
| | 678,214 |
| | 2,878 |
| | 1.68 |
| 718,529 |
| | 3,099 |
| | 1.73 |
| | 815,138 |
| | 3,758 |
| | 1.85 |
|
Total interest-bearing deposits | 4,364,983 |
| | 13,209 |
| | 1.20 |
| | 3,168,714 |
|
| 9,257 |
| | 1.16 |
| 4,737,974 |
| | 4,383 |
| | 0.37 |
| | 4,338,064 |
|
| 13,119 |
| | 1.21 |
|
Subordinated debentures | 141,136 |
| | 1,956 |
| | 5.50 |
| | 118,134 |
| | 1,483 |
| | 4.98 |
| 169,311 |
| | 2,316 |
| | 5.50 |
| | 141,059 |
| | 1,958 |
| | 5.57 |
|
FHLB advances | 378,207 |
| | 2,203 |
| | 2.31 |
| | 311,522 |
| | 1,729 |
| | 2.20 |
| 251,231 |
| | 455 |
| | 0.73 |
| | 263,384 |
| | 1,696 |
| | 2.58 |
|
Securities sold under agreements to repurchase | | 192,117 |
| | 57 |
| | 0.12 |
| | 164,037 |
| | 338 |
| | 0.83 |
|
Other borrowed funds | 193,055 |
| | 664 |
| | 1.36 |
| | 160,151 |
| | 195 |
| | 0.48 |
| 32,842 |
| | 147 |
| | 1.80 |
| | 40,338 |
| | 375 |
| | 3.73 |
|
Total interest-bearing liabilities | 5,077,381 |
| | 18,032 |
| | 1.41 |
| | 3,758,521 |
|
| 12,664 |
| | 1.34 |
| 5,383,475 |
| | 7,358 |
| | 0.55 |
| | 4,946,882 |
|
| 17,486 |
| | 1.42 |
|
Noninterest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | 1,232,360 |
| | | | | | 1,086,809 |
| | | | | 1,813,760 |
| | | | | | 1,244,008 |
| | | | |
Other liabilities | 68,642 |
| | | | | | 39,409 |
| | | | | 92,806 |
| | | | | | 53,609 |
| | | | |
Total liabilities | 6,378,383 |
| | | | | | 4,884,739 |
| | | | | 7,290,041 |
| | | | | | 6,244,499 |
| | | | |
Shareholders' equity | 843,974 |
| | | | | | 586,765 |
| | | | | 868,163 |
| | | | | | 813,106 |
| | | | |
Total liabilities & shareholders' equity | $ | 7,222,357 |
| | | | | | $ | 5,471,504 |
| | | | | $ | 8,158,204 |
| | | | | | $ | 7,057,605 |
| | | | |
Net interest income | | | $ | 63,483 |
| | | | | | $ | 48,299 |
| | | | | $ | 66,537 |
| | | | | | $ | 62,109 |
| | |
Net interest spread | | | | | 3.49 | % | | | | | | 3.43 | % | | | | | 3.38 | % | | | | | | 3.53 | % |
Net interest margin | | | | | 3.81 | % | | | | | | 3.78 | % | | | | | 3.53 | % | | | | | | 3.86 | % |
Core net interest margin (3) | | | | | 3.69 | % | | | | | | 3.74 | % | | | | | 3.50 | % | | | | | | 3.80 | % |
| |
(1) | Average balances include nonaccrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $3.6 million and $0.9 million for the three months ended June 30, 2020 and 2019 respectively. |
| |
(2) | Non-taxable income is presented on a tax-equivalent basis using a 24.7% tax rate in 2020 and 2019. The tax-equivalent adjustments were $0.7 million and $0.4 million for the three months ended June 30, 2020 and 2019, respectively. |
| |
(3) | A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial measures.” |
|
| | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| 2020 | | 2019 |
(in thousands) | Average Balance | | Interest Income/Expense | | Average Yield/ Rate | | Average Balance | | Interest Income/Expense | | Average Yield/ Rate |
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Taxable portfolio loans (1) | $ | 5,640,977 |
| | $ | 128,569 |
| | 4.58 | % | | $ | 4,763,916 |
| | $ | 127,320 |
| | 5.39 | % |
Tax-exempt portfolio loans (2) | 37,019 |
| | 938 |
| | 5.10 |
| | 27,418 |
| | 878 |
| | 6.46 |
|
Non-core acquired loans - contractual | 14,163 |
| | 379 |
| | 5.38 |
| | 13,564 |
| | 605 |
| | 8.99 |
|
Non-core acquired loans - incremental accretion | | | 1,992 |
| | 28.29 |
| | | | 2,067 |
| | 30.74 |
|
Total loans | 5,692,159 |
| | 131,878 |
| | 4.66 |
| | 4,804,898 |
| | 130,870 |
| | 5.49 |
|
Taxable debt and equity investments | 1,096,703 |
| | 14,544 |
| | 2.67 |
| | 976,875 |
| | 13,707 |
| | 2.83 |
|
Non-taxable debt and equity investments (2) | 257,707 |
| | 4,384 |
| | 3.42 |
| | 95,823 |
| | 1,737 |
| | 3.66 |
|
Short-term investments | 134,758 |
| | 387 |
| | 0.58 |
| | 106,752 |
| | 1,150 |
| | 2.17 |
|
Total securities and short-term investments | 1,489,168 |
| | 19,315 |
| | 2.61 |
| | 1,179,450 |
| | 16,594 |
| | 2.84 |
|
Total interest-earning assets | 7,181,327 |
| | 151,193 |
| | 4.23 |
| | 5,984,348 |
| | 147,464 |
| | 4.97 |
|
Noninterest-earning assets | 579,577 |
| | | | | | 525,540 |
| | | | |
Total assets | $ | 7,760,904 |
| | | | | | $ | 6,509,888 |
| | | | |
| | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction accounts | $ | 1,431,311 |
| | $ | 1,581 |
| | 0.22 | % | | $ | 1,231,537 |
| | $ | 3,924 |
| | 0.64 | % |
Money market accounts | 1,876,482 |
| | 5,735 |
| | 0.61 |
| | 1,549,255 |
| | 13,511 |
| | 1.76 |
|
Savings | 566,549 |
| | 188 |
| | 0.07 |
| | 431,843 |
| | 414 |
| | 0.19 |
|
Certificates of deposit | 755,871 |
| | 6,767 |
| | 1.80 |
| | 763,988 |
| | 7,090 |
| | 1.87 |
|
Total interest-bearing deposits | 4,630,213 |
| | 14,271 |
| | 0.62 |
| | 3,976,623 |
| | 24,939 |
| | 1.26 |
|
Subordinated debentures | 155,303 |
| | 4,235 |
| | 5.48 |
| | 132,653 |
| | 3,606 |
| | 5.48 |
|
FHLB advances | 235,842 |
| | 1,350 |
| | 1.15 |
| | 239,535 |
| | 3,094 |
| | 2.60 |
|
Securities sold under agreements to repurchase | 197,002 |
| | 419 |
| | 0.43 |
| | 175,603 |
| | 611 |
| | 0.70 |
|
Other borrowed funds | 33,556 |
| | 403 |
| | 2.42 |
| | 27,689 |
| | 510 |
| | 3.71 |
|
Total interest-bearing liabilities | 5,251,916 |
| | 20,678 |
| | 0.79 |
| | 4,552,103 |
| | 32,760 |
| | 1.45 |
|
Noninterest bearing liabilities: | | | | | | | | | | | |
Demand deposits | 1,564,513 |
| | | | | | 1,166,595 |
| | | | |
Other liabilities | 77,876 |
| | | | | | 52,994 |
| | | | |
Total liabilities | 6,894,305 |
| | | | | | 5,771,692 |
| | | | |
Shareholders' equity | 866,599 |
| | | | | | 738,196 |
| | | | |
Total liabilities & shareholders' equity | $ | 7,760,904 |
| | | | | | $ | 6,509,888 |
| | | | |
Net interest income | | | $ | 130,515 |
| | | | | | $ | 114,704 |
| | |
Net interest spread | | | | | 3.44 | % | | | | | | 3.52 | % |
Net interest margin | | | | | 3.65 | % | | | | | | 3.87 | % |
Core net interest margin (3) | | | | | 3.60 | % | | | | | | 3.80 | % |
| | | | | | | | | | | |
| |
(1) | Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $1.3$4.9 million and $1.0$2.1 million for the threesix months ended SeptemberJune 30, 20192020 and 2018 respectively. |
| |
(2) | Non-taxable income is presented on a tax-equivalent basis using a 24.7% tax rate in 2019 and 2018. The tax-equivalent adjustments were $0.4 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively.
|
| |
(3) | A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial measures.” |
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2019 |
| 2019 | | 2018 |
(in thousands) | Average Balance | | Interest Income/Expense | | Average Yield/ Rate | | Average Balance | | Interest Income/Expense | | Average Yield/ Rate |
Assets | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Taxable portfolio loans (1) | $ | 4,890,974 |
| | $ | 195,628 |
| | 5.35 | % | | $ | 4,144,319 |
| | $ | 154,760 |
| | 4.99 | % |
Tax-exempt portfolio loans (2) | 27,063 |
| | 1,359 |
| | 6.71 |
| | 35,561 |
| | 1,446 |
| | 5.44 |
|
Non-core acquired loans - contractual | 12,598 |
| | 1,009 |
| | 10.71 |
| | 25,705 |
| | 1,342 |
| | 6.98 |
|
Non-core acquired loans - incremental accretion | | | 4,207 |
| | 44.66 |
| | | | 1,592 |
| | 8.28 |
|
Total loans | 4,930,635 |
| | 202,203 |
| | 5.48 |
| | 4,205,585 |
| | 159,140 |
| | 5.06 |
|
Taxable debt and equity investments | 1,041,874 |
| | 22,030 |
| | 2.83 |
| | 705,894 |
| | 13,426 |
| | 2.54 |
|
Non-taxable debt and equity investments (2) | 111,758 |
| | 3,025 |
| | 3.62 |
| | 40,576 |
| | 1,084 |
| | 3.57 |
|
Short-term investments | 108,930 |
| | 1,722 |
| | 2.11 |
| | 63,416 |
| | 777 |
| | 1.64 |
|
Total securities and short-term investments | 1,262,562 |
| | 26,777 |
| | 2.84 |
| | 809,886 |
| | 15,287 |
| | 2.52 |
|
Total interest-earning assets | 6,193,197 |
| | 228,980 |
| | 4.94 |
| | 5,015,471 |
| | 174,427 |
| | 4.65 |
|
Noninterest-earning assets | 556,791 |
| | | | | | 393,933 |
| | | | |
Total assets | $ | 6,749,988 |
| | | | | | $ | 5,409,404 |
| | | | |
| | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing transaction accounts | $ | 1,273,591 |
| | $ | 5,972 |
| | 0.63 | % | | $ | 814,679 |
| | $ | 2,422 |
| | 0.40 | % |
Money market accounts | 1,579,702 |
| | 20,470 |
| | 1.73 |
| | 1,470,177 |
| | 13,221 |
| | 1.20 |
|
Savings | 471,024 |
| | 646 |
| | 0.18 |
| | 206,213 |
| | 429 |
| | 0.28 |
|
Certificates of deposit | 783,182 |
| | 11,060 |
| | 1.89 |
| | 638,889 |
| | 7,115 |
| | 1.49 |
|
Total interest-bearing deposits | 4,107,499 |
| | 38,148 |
| | 1.24 |
| | 3,129,958 |
| | 23,187 |
| | 0.99 |
|
Subordinated debentures | 135,512 |
| | 5,562 |
| | 5.49 |
| | 118,123 |
| | 4,305 |
| | 4.87 |
|
FHLB advances | 286,267 |
| | 5,297 |
| | 2.47 |
| | 302,937 |
| | 4,435 |
| | 1.96 |
|
Other borrowed funds | 199,842 |
| | 1,785 |
| | 1.19 |
| | 178,245 |
| | 561 |
| | 0.42 |
|
Total interest-bearing liabilities | 4,729,120 |
| | 50,792 |
| | 1.44 |
| | 3,729,263 |
| | 32,488 |
| | 1.16 |
|
Noninterest bearing liabilities: | | | | | | | | | | | |
Demand deposits | 1,188,758 |
| | | | | | 1,073,903 |
| | | | |
Other liabilities | 58,267 |
| | | | | | 36,323 |
| | | | |
Total liabilities | 5,976,145 |
| | | | | | 4,839,489 |
| | | | |
Shareholders' equity | 773,843 |
| | | | | | 569,915 |
| | | | |
Total liabilities & shareholders' equity | $ | 6,749,988 |
| | | | | | $ | 5,409,404 |
| | | | |
Net interest income | | | $ | 178,188 |
| | | | | | $ | 141,939 |
| | |
Net interest spread | | | | | 3.50 | % | | | | | | 3.49 | % |
Net interest margin | | | | | 3.85 | % | | | | | | 3.78 | % |
Core net interest margin (3) | | | | | 3.76 | % | | | | | | 3.74 | % |
| |
(1) | Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $3.4 million and $2.9 million for the nine months ended September 30, 2019 and 2018 respectively. |
| |
(2) | Non-taxable income is presented on a fully tax-equivalent basis using a 24.7% tax rate in 20192020 and 2018.2019. The tax-equivalent adjustments were $1.1$1.3 million and $0.6 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. |
| |
(3) | A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial measures." |
Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
| | | 2019 compared to 2018 | 2020 compared to 2019 |
| Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
| Increase (decrease) due to | | Increase (decrease) due to | Increase (decrease) due to | | Increase (decrease) due to |
(in thousands) | Volume(1) | | Rate(2) | | Net | | Volume(1) | | Rate(2) | | Net | Volume(1) | | Rate(2) | | Net | | Volume(1) | | Rate(2) | | Net |
Interest earned on: | | | | | | | | | | | | | | | | | | | | | | |
Taxable loans | $ | 12,487 |
| | $ | 1,736 |
| | $ | 14,223 |
| | $ | 29,304 |
| | $ | 11,564 |
| | $ | 40,868 |
| $ | 11,129 |
| | $ | (15,972 | ) | | $ | (4,843 | ) | | $ | 21,761 |
| | $ | (20,512 | ) | | $ | 1,249 |
|
Tax-exempt loans (3) | (128 | ) | | 127 |
| | (1 | ) | | (387 | ) | | 300 |
| | (87 | ) | 141 |
| | (147 | ) | | (6 | ) | | 269 |
| | (209 | ) | | 60 |
|
Non-core acquired loans | (698 | ) | | 2,306 |
| | 1,608 |
| | (2,135 | ) | | 4,417 |
| | 2,282 |
| 83 |
| | (386 | ) | | (303 | ) | | 116 |
| | (417 | ) | | (301 | ) |
Taxable debt and equity investments | 3,213 |
| | 305 |
| | 3,518 |
| | 6,968 |
| | 1,636 |
| | 8,604 |
| (313 | ) | | (882 | ) | | (1,195 | ) | | 1,646 |
| | (809 | ) | | 837 |
|
Non-taxable debt and equity investments (3) | 933 |
| | 5 |
| | 938 |
| | 1,927 |
| | 14 |
| | 1,941 |
| 1,346 |
| | (83 | ) | | 1,263 |
| | 2,766 |
| | (119 | ) | | 2,647 |
|
Short-term investments | 244 |
| | 22 |
| | 266 |
| | 673 |
| | 272 |
| | 945 |
| 264 |
| | (880 | ) | | (616 | ) | | 245 |
| | (1,008 | ) | | (763 | ) |
Total interest-earning assets | $ | 16,051 |
| | $ | 4,501 |
| | $ | 20,552 |
| | $ | 36,350 |
| | $ | 18,203 |
| | $ | 54,553 |
| $ | 12,650 |
| | $ | (18,350 | ) | | $ | (5,700 | ) | | $ | 26,803 |
| | $ | (23,074 | ) | | $ | 3,729 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Interest paid on: | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | $ | 809 |
| | $ | 440 |
| | $ | 1,249 |
| | $ | 1,753 |
| | $ | 1,797 |
| | $ | 3,550 |
| $ | 147 |
| | $ | (2,037 | ) | | $ | (1,890 | ) | | $ | 557 |
| | $ | (2,900 | ) | | $ | (2,343 | ) |
Money market accounts | 436 |
| | 1,100 |
| | 1,536 |
| | 1,048 |
| | 6,201 |
| | 7,249 |
| 1,313 |
| | (7,314 | ) | | (6,001 | ) | | 2,415 |
| | (10,191 | ) | | (7,776 | ) |
Savings | 167 |
| | (92 | ) | | 75 |
| | 402 |
| | (185 | ) | | 217 |
| 10 |
| | (196 | ) | | (186 | ) | | 102 |
| | (328 | ) | | (226 | ) |
Certificates of deposit | 650 |
| | 442 |
| | 1,092 |
| | 1,804 |
| | 2,141 |
| | 3,945 |
| (426 | ) | | (233 | ) | | (659 | ) | | (71 | ) | | (252 | ) | | (323 | ) |
Subordinated debentures | 308 |
| | 165 |
| | 473 |
| | 677 |
| | 580 |
| | 1,257 |
| 383 |
| | (25 | ) | | 358 |
| | 628 |
| | 1 |
| | 629 |
|
FHLB advances | 385 |
| | 89 |
| | 474 |
| | (255 | ) | | 1,117 |
| | 862 |
| (75 | ) | | (1,166 | ) | | (1,241 | ) | | (47 | ) | | (1,697 | ) | | (1,744 | ) |
Borrowed funds | 47 |
| | 422 |
| | 469 |
| | 76 |
| | 1,148 |
| | 1,224 |
| |
Securities sold under agreements to repurchase | | 50 |
| | (331 | ) | | (281 | ) | | 68 |
| | (260 | ) | | (192 | ) |
Other borrowings | | (60 | ) | | (168 | ) | | (228 | ) | | 94 |
| | (201 | ) | | (107 | ) |
Total interest-bearing liabilities | 2,802 |
| | 2,566 |
| | 5,368 |
| | 5,505 |
| | 12,799 |
| | 18,304 |
| 1,342 |
| | (11,470 | ) | | (10,128 | ) | | 3,746 |
| | (15,828 | ) | | (12,082 | ) |
Net interest income | $ | 13,249 |
| | $ | 1,935 |
| | $ | 15,184 |
| | $ | 30,845 |
| | $ | 5,404 |
| | $ | 36,249 |
| $ | 11,308 |
| | $ | (6,880 | ) | | $ | 4,428 |
| | $ | 23,057 |
| | $ | (7,246 | ) | | $ | 15,811 |
|
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a tax equivalent basis using the combined statutory federal and state income tax rate in effect for each tax year.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Net interest income (on a tax equivalent basis) for the three and ninesix months ended SeptemberJune 30, 20192020 increased 31%7% and 26%13%, respectively, over the prior year periods primarily from higher loan and investment volumes. Loan and investment volumes, both of which benefited from the Trinity acquisition and organic growth in the loan portfolio. In additionThe three-month period also benefited from a higher loan volume due to an increase in interest rates in the current-year periods that positively impactedPPP loans. The benefit to net interest income incremental accretion on non-core acquired loans also contributed to the increase. The increasefrom higher earning-asset volumes and a decrease in incremental accretionfunding costs was due to successful loan workouts on several non-core acquired loans.partially offset by a decrease in earning-asset yields.
The tax-equivalent net interest margin was 3.81%3.53% and 3.85%3.65% for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to 3.78%3.86% and 3.87% in both the prior year periods.periods, respectively. The net interest margin benefited fromwas impacted by the impactdecline in short-term rates as approximately 60% of interest rate increases on the Company's asset sensitive balance sheet and the incremental accretion on non-core acquired loans. While the overall yield on interest-earning assets increased in 2019Company’s loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR that has declined significantly over the past year. Average one-month LIBOR was 0.35% and 0.89% in the three and six months ended June 30, 2020, respectively, compared to 2.44% and 2.47% in the comparable prior year periods, short-term interest rates at September 30, 2019 have declined from September 30, 2018.respectively. An increase in the investment portfolio and in 2019 over 2018 hasPPP loans in
the second quarter 2020 contributed to growth in net interest income, butincome; however, the shift in earning assets between loans and investments has alsolower yields on these products compared to the loan portfolio yield excluding PPP reduced the net interest margin. Total investments were 22% of average
The Company responded to interest earning assets for the three months ended September 30, 2019, compared to 16% in the prior year period. Partially offsetting the increase from earning assets wasrate trends by reducing the cost of total interest-bearing liabilities that increased seven basis points and 28 basis points for the three and nine months ended September 30, 2019, respectively, compared to the prior year periods. The increase
in the interest rate paid on deposits reflects market interest rate trends, as the Company continues to defend existing and attract new core deposit relationships. Deposit pricing adjustments typically lag market movements in interest rates. While short-term interest rates have declined in 2019, the impact of these declines has not yet been reflected in the cost of deposits. The Company has $3.5 billion incertain managed money market and interest-bearing deposit accounts which experiencedtransaction accounts. Net interest income and margin both benefited from an increase84-basis point decrease in yield over the past several quarters as interest rates have risen. Within those categories, we have approximately $600 million directly indexedrate paid on interest-bearing deposits in the second quarter 2020 compared to federal funds.the second quarter 2019. The rate on interest-bearing deposits for the six months ended June 30, 2020 declined 64 basis points compared to the prior-year period. In addition, there are other wholesale and brokered funds that have and will continue to adjust with the federal funds rate and other indices.new subordinated debt issuance in the quarter reduced net interest margin by two basis points.
The Company manages its balance sheet to defend against pressures on core net interest margin, which could be negatively impacted byfrom continued competition for deposits, current interest rate conditions, and downward movementmovements in short-term rates.
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income for the periods indicated.
| | | 2019 compared to 2018 | 2020 compared to 2019 |
| Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2019 | | 2018 | | Increase (decrease) | | 2019 | | 2018 | | Increase (decrease) | 2020 | | 2019 | | Increase (decrease) | | 2020 | | 2019 | | Increase (decrease) |
Service charges on deposit accounts | $ | 3,246 |
| | $ | 2,997 |
| | $ | 249 |
| | 8 | % | | $ | 9,547 |
| | $ | 8,855 |
| | $ | 692 |
| | 8 | % | $ | 2,616 |
| | $ | 3,366 |
| | $ | (750 | ) | | (22 | )% | | $ | 5,759 |
| | $ | 6,301 |
| | $ | (542 | ) | | (9 | )% |
Wealth management revenue | 2,661 |
| | 2,012 |
| | 649 |
| | 32 | % | | 7,314 |
| | 6,267 |
| | 1,047 |
| | 17 | % | 2,326 |
| | 2,661 |
| | (335 | ) | | (13 | )% | | 4,827 |
| | 4,653 |
| | 174 |
| | 4 | % |
Card services revenue | 2,494 |
| | 1,760 |
| | 734 |
| | 42 | % | | 6,745 |
| | 4,926 |
| | 1,819 |
| | 37 | % | 2,225 |
| | 2,461 |
| | (236 | ) | | (10 | )% | | 4,472 |
| | 4,251 |
| | 221 |
| | 5 | % |
Tax credit income | 1,238 |
| | 192 |
| | 1,046 |
| | 545 | % | | 1,968 |
| | 508 |
| | 1,460 |
| | 287 | % | (221 | ) | | 572 |
| | (793 | ) | | (139 | )% | | 1,815 |
| | 730 |
| | 1,085 |
| | 149 | % |
Gain on sale of investment securities | 337 |
| | — |
| | 337 |
| | NM |
| | 337 |
| | 9 |
| | 328 |
| | 3,644 | % | |
Miscellaneous income | 3,588 |
| | 1,449 |
| | 2,139 |
| | 148 | % | | 8,847 |
| | 7,080 |
| | 1,767 |
| | 25 | % | 3,014 |
| | 2,904 |
| | 110 |
| | 4 | % | | 6,495 |
| | 5,259 |
| | 1,236 |
| | 24 | % |
Total noninterest income | $ | 13,564 |
| | $ | 8,410 |
| | $ | 5,154 |
| | 61 | % | | $ | 34,758 |
| | $ | 27,645 |
| | $ | 7,113 |
| | 26 | % | $ | 9,960 |
| | $ | 11,964 |
| | $ | (2,004 | ) | | (17 | )% | | $ | 23,368 |
| | $ | 21,194 |
| | $ | 2,174 |
| | 10 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NM - Not meaningful | |
Noninterest income decreased $2.0 million, or 17%, for the three months ended June 30, 2020, compared to the same period in 2019. The increase in deposit account balances provided more earnings credits to business customers, resulting in lower service charge income compared to the prior year quarter. Lower transaction volumes on credit and debit cards impacted card services revenue for the three months ended June 30, 2020. The Company’s tax credit income decreased in the current quarter over the prior year period primarily due to timing delays on projects.
Noninterest income increased $5.2$2.2 million, or 61%, and $7.1 million, or 26%10%, for the three and ninesix months ended SeptemberJune 30, 2019, respectively,2020, compared to the same periodsperiod in 2018. Both periods2019. Wealth management and card services benefited from a full period of income in 2019 benefited2020 from the Trinity acquisition that comprised mostcompared to the prior year. Tax credit income increased partially due to fair value adjustments on tax credits. The fair value of these projects increased due to a decline in the LIBOR component of the increasesdiscount rate. Miscellaneous income increased $1.2 million in 2020 over the prior year periods. Trinity’s noninterest income sources will2019 due primarily increase the Company’s wealth management and card services revenue, and other income to a lesser extent. The acquisition of Trinity initially added $406$0.9 million of additional assets under management. The Company’s tax credit income has increasedincrease in 2019 over 2018 due to stronger activityswap fees and a $0.7 million claim on a life insurance policy, partially offset by a $0.4 million decrease in the current year.
The Company expects growth in noninterest income of a high single digit percentage for 2019 and 2020 over the previous year’s level, exclusive of the impact of the Trinity acquisition.non-core acquired fee income.
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.
| | | 2019 compared to 2018 | 2020 compared to 2019 |
| Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2019 | | 2018 | | Increase (decrease) | | 2019 | | 2018 | | Increase (decrease) | 2020 | | 2019 | | Increase (decrease) | | 2020 | | 2019 | | Increase (decrease) |
Employee compensation and benefits | $ | 20,845 |
| | $ | 16,297 |
| | $ | 4,548 |
| | 28 | % | | $ | 60,884 |
| | $ | 49,370 |
| | $ | 11,514 |
| | 23 | % | $ | 22,389 |
| | $ | 20,687 |
| | $ | 1,702 |
| | 8 | % | | $ | 44,074 |
| | $ | 40,039 |
| | $ | 4,035 |
| | 10 | % |
Occupancy | 3,179 |
| | 2,394 |
| | 785 |
| | 33 | % | | 9,004 |
| | 7,142 |
| | 1,862 |
| | 26 | % | 3,185 |
| | 3,188 |
| | (3 | ) | | — | % | | 6,532 |
| | 5,825 |
| | 707 |
| | 12 | % |
Data processing | 2,051 |
| | 1,634 |
| | 417 |
| | 26 | % | | 6,415 |
| | 4,634 |
| | 1,781 |
| | 38 | % | 2,144 |
| | 2,458 |
| | (314 | ) | | (13 | )% | | 4,226 |
| | 4,364 |
| | (138 | ) | | (3 | )% |
Professional fees | 1,064 |
| | 1,023 |
| | 41 |
| | 4 | % | | 2,847 |
| | 2,619 |
| | 228 |
| | 9 | % | 1,287 |
| | 1,037 |
| | 250 |
| | 24 | % | | 2,149 |
| | 1,783 |
| | 366 |
| | 21 | % |
Merger related expenses | 393 |
| | — |
| | 393 |
| | — | % | | 17,969 |
| | — |
| | 17,969 |
| | — | % | |
Merger-related expenses | | — |
| | 10,306 |
| | (10,306 | ) | | (100 | )% | | — |
| | 17,576 |
| | (17,576 | ) | | (100 | )% |
Other | 10,707 |
| | 8,574 |
| | 2,133 |
| | 25 | % | | 30,012 |
| | 24,519 |
| | 5,493 |
| | 22 | % | 8,907 |
| | 11,378 |
| | (2,471 | ) | | (22 | )% | | 19,604 |
| | 19,305 |
| | 299 |
| | 2 | % |
Total noninterest expense | $ | 38,239 |
| | $ | 29,922 |
| | $ | 8,317 |
| | 28 | % | | $ | 127,131 |
| | $ | 88,284 |
| | $ | 38,847 |
| | 44 | % | $ | 37,912 |
| | $ | 49,054 |
| | $ | (11,142 | ) | | (23 | )% | | $ | 76,585 |
| | $ | 88,892 |
| | $ | (12,307 | ) | | (14 | )% |
| | | | | | | | | | | | | | | | | | |
Efficiency ratio | 49.91 | % | | 52.96 | % | | (3.05 | )% | |
|
| | 60.01 | % | | 52.25 | % | | 7.76 | % | |
|
| 50.02 | % | | 66.58 | % | | (16.56 | )% | |
|
| | 50.20 | % | | 65.72 | % | | (15.52 | )% | |
|
|
Core efficiency ratio1 | 51.73 | % | | 52.23 | % | | (0.5 | )% | |
|
| | 52.96 | % | | 52.86 | % | | 0.1 | % | |
|
| 50.66 | % | | 53.30 | % | | (2.64 | )% | |
|
| | 50.94 | % | | 53.65 | % | | (2.71 | )% | |
|
|
1A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.” | 1A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.” | 1A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.” |
Noninterest expense increased $8.3decreased $11.1 million, or 28%, and $38.8 million, or 44%23%, for the three and nine months ended September 30, 2019, respectively,second quarter 2020, compared to the same periodsperiod in 2018.2019. The increasedecrease from the prior year periods wereperiod was primarily impacted by merger-related expenses of $0.4$10.3 million and $18.0 million for the three and nine months ended September 30, 2019, respectively. In addition, increased operating expenses from the Trinity acquisition, most notablytransaction incurred in the second quarter 2019. For the six months ended June 30, 2020, noninterest expense decreased $12.3 million, or 14%, from the prior year period primarily due to merger-related expenses of $17.6 million, partially offset by an increase in employee compensation and benefits, will be included in the Company’s ongoing expense run-rate. The three-month period ended September 30, 2019 incorporates a majority of the cost-saving measures from the acquisition. The Company expects its noninterest expense to range between $37 million and $39 million in the fourth quarter of 2019.merit increases.
Efficiency improvements that have resultedgains primarily from growth in net interest income and noninterest income growth exceeding the growthcombined with reductions in noninterest expense excluding merger expenses, have resulted in continued improvements to the Company’s core efficiency ratio.1 The core efficiency ratio was 50.66% in the second quarter 2020 compared to 53.30% in the second quarter 2019.
Income Taxes
The Company’s effective tax rate was 20.4% and 20.1%20.0% for the three and nine months ended September 30, 2019, respectively,second quarter 2020, compared to 7.4% and 13.7%19.6% for the same periodsperiod in 2018. Reduced excess tax benefits from2019. For the vesting of stock-based compensation and nondeductible merger-related expenses in 2019 contributed to the increase insix months ended June 30, 2020, the effective tax rate in 2019. Additionally, tax credit investments and a tax benefit recognized in the third quarter of 2018 upon the finalization of the 2017 tax return benefited the prior year periods.
The Company expects its effective tax ratewas 19.4% compared to 19.9% for the full year of 2019 to be approximately 20%, excluding potential tax planning strategies.same period in 2019.
Summary Balance Sheet
The Trinity acquisition added $1.2 billion of assets and $1.1 billion of liabilities to the balance sheet in 2019.
| | (in thousands) | September 30, 2019 | | December 31, 2018 | | Increase (decrease) | June 30, 2020 | | December 31, 2019 | | Increase (decrease) |
Total cash and cash equivalents | $ | 256,502 |
| | $ | 196,552 |
| | $ | 59,950 |
| | 31 | % | $ | 348,727 |
| | $ | 167,256 |
| | $ | 181,471 |
| | 108 | % |
Securities | 1,308,119 |
| | 787,048 |
| | 521,071 |
| | 66 |
| 1,343,895 |
| | 1,316,483 |
| | 27,412 |
| | 2 | % |
Loans held for investment | 5,228,014 |
| | 4,350,001 |
| | 878,013 |
| | 20 |
| 6,140,051 |
| | 5,457,517 |
| | 682,534 |
| | 13 | % |
Total assets | 7,346,791 |
| | 5,645,662 |
| | 1,701,129 |
| | 30 |
| 8,357,501 |
| | 7,333,791 |
| | 1,023,710 |
| | 14 | % |
Deposits | 5,624,380 |
| | 4,587,985 |
| | 1,036,395 |
| | 23 |
| 6,699,580 |
| | 5,771,023 |
| | 928,557 |
| | 16 | % |
Total liabilities | 6,500,696 |
| | 5,041,858 |
| | 1,458,838 |
| | 29 |
| 7,489,538 |
| | 6,466,606 |
| | 1,022,932 |
| | 16 | % |
Total shareholders’ equity | 846,095 |
| | 603,804 |
| | 242,291 |
| | 40 |
| 867,963 |
| | 867,185 |
| | 778 |
| | — | % |
Assets
Loans by Type
The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio, including the C&I category, is secured by real estate. The ability of the Company’s borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market.
The following table summarizes the composition of the Company’s loan portfolio:
| | (in thousands) | September 30, 2019 | | December 31, 2018 | | Increase (decrease) | June 30, 2020 | | December 31, 2019 | | Increase (decrease) |
Commercial and industrial | $ | 2,303,495 |
| | $ | 2,123,167 |
| | $ | 180,328 |
| | 8 | % | $ | 3,143,197 |
| | $ | 2,361,157 |
| | $ | 782,040 |
| | 33 | % |
Commercial real estate - investor owned | 1,287,020 |
| | 867,667 |
| | 419,353 |
| | 48 |
| 1,309,895 |
| | 1,299,884 |
| | 10,011 |
| | 1 | % |
Commercial real estate - owner occupied | 680,868 |
| | 614,167 |
| | 66,701 |
| | 11 |
| 738,549 |
| | 697,437 |
| | 41,112 |
| | 6 | % |
Construction and land development | 433,486 |
| | 334,645 |
| | 98,841 |
| | 30 |
| 481,221 |
| | 457,273 |
| | 23,948 |
| | 5 | % |
Residential real estate | 386,173 |
| | 305,026 |
| | 81,147 |
| | 27 |
| 326,992 |
| | 366,261 |
| | (39,269 | ) | | (11 | )% |
Consumer and other | 136,972 |
| | 105,329 |
| | 31,643 |
| | 30 |
| |
Other | | 140,197 |
| | 132,325 |
| | 7,872 |
| | 6 | % |
Loans held for investment | $ | 5,228,014 |
| | $ | 4,350,001 |
| | $ | 878,013 |
| | 20 | % | $ | 6,140,051 |
| | $ | 5,314,337 |
| | $ | 825,714 |
| | 16 | % |
LoansLoans grew $878$825.7 million to$5.2 $6.1 billion at SeptemberJune 30, 2019, when compared to2020, from December 31, 2018. The increase is2019. Loan growth was primarily attributabledue to the acquisition of Trinity along with growth$807.8 million PPP loans outstanding at June 30, 2020. Revolving line utilization for C&I customers decreased in the C&I, CRE,second quarter 2020, partially due to the influx of PPP funds to our customers. Low interest rates and life insurance premium finance categories, partially offset by paydowns outpacing growth inhigher refinance activity has reduced the other categories. We expect continued loan growth in 2019residential real estate portfolio, while construction and 2020 to be 6-8% excluding Trinity acquired loans.
commercial real estate loans have increased.
The following table illustrates portfolio loan growth with selected specialized lending detail:
| | (in thousands) | September 30, 2019 | | December 31, 2018 | | Increase (decrease) | June 30, 2020 | | December 31, 2019 | | Increase (decrease) |
C&I - general | $ | 1,174,569 |
| | $ | 995,491 |
| | $ | 179,078 |
| | 18 | % | $ | 1,057,899 |
| | $ | 1,186,667 |
| | $ | (128,768 | ) | | (11 | )% |
CRE investor owned - general | 1,281,332 |
| | 862,423 |
| | 418,909 |
| | 49 |
| 1,302,235 |
| | 1,290,258 |
| | 11,977 |
| | 1 | % |
CRE owner occupied - general | 566,219 |
| | 496,835 |
| | 69,384 |
| | 14 |
| 599,800 |
| | 582,579 |
| | 17,221 |
| | 3 | % |
PPP | | 807,814 |
| | — |
| | 807,814 |
| | NM |
|
Enterprise value lending1 | 417,521 |
| | 465,992 |
| | (48,471 | ) | | (10 | ) | 382,828 |
| | 428,896 |
| | (46,068 | ) | | (11 | )% |
Life insurance premium financing1 | 468,051 |
| | 417,950 |
| | 50,101 |
| | 12 |
| 520,705 |
| | 472,822 |
| | 47,883 |
| | 10 | % |
Residential real estate - general | 386,174 |
| | 304,671 |
| | 81,503 |
| | 27 |
| 326,697 |
| | 366,261 |
| | (39,564 | ) | | (11 | )% |
Construction and land development - general | 403,590 |
| | 310,832 |
| | 92,758 |
| | 30 |
| 455,686 |
| | 428,681 |
| | 27,005 |
| | 6 | % |
Tax credits1 | 265,626 |
| | 262,735 |
| | 2,891 |
| | 1 |
| 363,222 |
| | 294,210 |
| | 69,012 |
| | 23 | % |
Agriculture1 | 136,249 |
| | 136,188 |
| | 61 |
| | — |
| 191,093 |
| | 139,873 |
| | 51,220 |
| | 37 | % |
Consumer and other - general | 128,683 |
| | 96,884 |
| | 31,799 |
| | 33 |
| |
Other | | 132,072 |
| | 124,090 |
| | 7,982 |
| | 6 | % |
Total loans | $ | 5,228,014 |
| | $ | 4,350,001 |
| | $ | 878,013 |
| | 20 | % | $ | 6,140,051 |
| | $ | 5,314,337 |
| | $ | 825,714 |
| | 16 | % |
| | | | | | | | | | | | | | |
Note: Certain prior period amounts have been reclassified among the categories to conform to the current period presentation. | 1Specialized categories may include a mix of C&I, CRE, construction and land development, or consumer and other loans. | |
1Specialized categories may include a mix of C&I, CRE, construction and land development, or other loans. | | 1Specialized categories may include a mix of C&I, CRE, construction and land development, or other loans. |
Specialized lending products, especially enterprise value lending, life insurance premium financing, and tax credits, consist of primarily C&I loans. These loans are sourced through relationships developed with estate planning firms and private equity funds and are not bound geographically by our four markets. These specialized loan products offer opportunities to expand and diversify geographically by entering into new markets. The Company continues to focus on originating high-quality C&I relationships, as they typically have variable interest rates and allow for cross selling
opportunities involving other banking products. C&I loan growth, coupled with typically fixed-rate CRE lending, supports management’s efforts to maintain a flexible asset sensitive interest rate risk position. The specialized lending products declined in 2020, primarily due to a decrease in enterprise value loans, offset by an increase in life insurance premium financing and tax credits. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans. Agriculture loans increased primarily due to one relationship for hog and pig farming, and other loans increased primarily due to loans to financial institutions as part of the Company’s correspondent business unit.
In response to the COVID-19 pandemic, the Company has processed short-term deferrals allowing customers to defer payments. Approximately 99% of the deferrals are for 90 days or less. As of June 30, 2020, $685.7 million in loans have received deferrals, of which 53% are deferring all principal and interest and 47% are paying interest only.
The following table summarizes the loans modified by category:
|
| | | |
(in thousands) | June 30, 2020 |
Commercial and industrial | $ | 171,108 |
|
Commercial real estate | 404,295 |
|
Construction and land development | 88,368 |
|
Residential real estate | 21,762 |
|
Other | 134 |
|
Loans held for investment | $ | 685,667 |
|
Provision and Allowance for LoanCredit Losses
The adoption of CECL on January 1, 2020 increased the ACLL by $28.4 million, or 65%, and the allowance for unfunded commitments by $2.4 million. These increases were primarily offset in retained earnings and did not impact the consolidated statement of operations. The following table summarizes changes in the allowance for loan lossesACLL arising from loans charged offCECL adoption; loan charge-offs and recoveries on loans previously charged off, by loan category, and additions to the allowance charged to expense.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Allowance at beginning of period, for portfolio loans | $ | 42,935 |
| | $ | 42,007 |
| | $ | 42,295 |
| | $ | 38,166 |
|
Loans charged off: | | | | | | | |
Commercial and industrial | (1,295 | ) | | (2,405 | ) | | (4,528 | ) | | (4,093 | ) |
Real estate: | | | | | | | |
Commercial | (22 | ) | | (22 | ) | | (609 | ) | | (22 | ) |
Construction and land development | — |
| | — |
| | (45 | ) | | — |
|
Residential | (255 | ) | | (122 | ) | | (348 | ) | | (414 | ) |
Consumer and other | (86 | ) | | (46 | ) | | (268 | ) | | (128 | ) |
Total loans charged off | (1,658 | ) | | (2,595 | ) |
| (5,798 | ) |
| (4,657 | ) |
Recoveries of loans previously charged off: | | | | | | | |
Commercial and industrial | 209 |
| | 2 |
| | 270 |
| | 1,076 |
|
Real estate: | | | | | | | |
Commercial | 14 |
| | 12 |
| | 81 |
| | 37 |
|
Construction and land development | 260 |
| | 21 |
| | 758 |
| | 395 |
|
Residential | 65 |
| | 88 |
| | 553 |
| | 220 |
|
Consumer and other | 40 |
| | 25 |
| | 270 |
| | 67 |
|
Total recoveries of loans | 588 |
| | 148 |
|
| 1,932 |
|
| 1,795 |
|
Net loan charge-offs | (1,070 | ) | | (2,447 | ) |
| (3,866 | ) |
| (2,862 | ) |
Provision for loan losses | 1,833 |
| | 2,332 |
| | 5,269 |
| | 6,588 |
|
Allowance at end of period, for portfolio loans | $ | 43,698 |
| | $ | 41,892 |
|
| $ | 43,698 |
|
| $ | 41,892 |
|
| | | | | | | |
Allowance at beginning of period, for purchased credit impaired loans | $ | 886 |
| | $ | 2,363 |
| | $ | 1,181 |
| | $ | 4,411 |
|
Loans charged off | — |
| | — |
| | — |
| | — |
|
Recoveries of loans | — |
| | — |
| | — |
| | — |
|
Net loan charge-offs | — |
| | — |
| | — |
| | — |
|
Provision reversal for purchased credit impaired loan losses | — |
| | (69 | ) | | (238 | ) | | (2,064 | ) |
Other | (29 | ) | | — |
| | (86 | ) | | (53 | ) |
Allowance at end of period, for purchased credit impaired loans | $ | 857 |
| | $ | 2,294 |
|
| $ | 857 |
|
| $ | 2,294 |
|
| | | | | | | |
Total allowance at end of period | $ | 44,555 |
| | $ | 44,186 |
| | $ | 44,555 |
| | $ | 44,186 |
|
| | | | | | | |
Portfolio loans, average | $ | 5,164,409 |
| | $ | 4,230,090 |
| | $ | 4,916,631 |
| | $ | 4,178,900 |
|
Total loans, average | 5,178,009 |
| | 4,252,525 |
| | 4,930,635 |
| | 4,205,585 |
|
Total loans, ending | 5,228,014 |
| | 4,267,430 |
| | | | |
Net charge-offs to average loans | 0.08 | % | | 0.23 | % | | 0.11 | % | | 0.09 | % |
Allowance for loan losses to total loans | 0.85 | % | | 1.04 | % | | 0.85 | % | | 1.04 | % |
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Allowance, at beginning of period | $ | 92,187 |
| | $ | 43,095 |
| | $ | 43,288 |
| | $ | 43,476 |
|
CECL adoption | — |
| | — |
| | 28,387 |
| | — |
|
PCD loans immediately charged-off | — |
| | — |
| | (1,680 | ) | | — |
|
Allowance at beginning of period, adjusted for adoption of CECL | 92,187 |
| | 43,095 |
| | 69,995 |
| | 43,476 |
|
Charge-offs: | | | | | | | |
Commercial and industrial | (3,303 | ) | | (1,380 | ) | | (3,366 | ) | | (3,233 | ) |
Real estate: | | | | | | | |
Commercial | (224 | ) | | (431 | ) | | (226 | ) | | (587 | ) |
Construction and land development | — |
| | — |
| | (31 | ) | | (45 | ) |
Residential | (32 | ) | | (26 | ) | | (154 | ) | | (93 | ) |
Other | (105 | ) | | (53 | ) | | (191 | ) | | (182 | ) |
Total charge-offs | (3,664 | ) | | (1,890 | ) |
| (3,968 | ) |
| (4,140 | ) |
Recoveries: | | | | | | | |
Commercial and industrial | 293 |
| | 32 |
| | 797 |
| | 61 |
|
Real estate: | | | | | | | |
Commercial | 2,763 |
| | 58 |
| | 2,846 |
| | 67 |
|
Construction and land development | 29 |
| | 489 |
| | 69 |
| | 498 |
|
Residential | 226 |
| | 124 |
| | 383 |
| | 488 |
|
Other | 45 |
| | 217 |
| | 62 |
| | 230 |
|
Total recoveries | 3,356 |
| | 920 |
|
| 4,157 |
|
| 1,344 |
|
Net (charge-offs) recoveries | (308 | ) | | (970 | ) |
| 189 |
|
| (2,796 | ) |
Provision for credit losses | 18,391 |
| | 1,722 |
| | 40,086 |
| | 3,198 |
|
Other | — |
| | (25 | ) | | — |
| | (56 | ) |
Allowance, at end of period | $ | 110,270 |
| | $ | 43,822 |
|
| $ | 110,270 |
|
| $ | 43,822 |
|
The following table presents the components of the provision for credit losses:
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Provision for loan losses | $ | 18,391 |
| | $ | 1,722 |
| | $ | 40,086 |
| | $ | 3,198 |
|
Provision for off-balance sheet commitments | 1,206 |
| | — |
| | 2,055 |
| | — |
|
Provision for held-to-maturity securities | 342 |
| | — |
| | 342 |
| | — |
|
Recovery for accrued interest | (348 | ) | | — |
| | (628 | ) | | — |
|
Provision for credit losses | $ | 19,591 |
| | $ | 1,722 |
| | $ | 41,855 |
| | $ | 3,198 |
|
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly
through the provision of credit losses. Due to current economic conditions, the provision for credit losses was $19.6 million and $41.9 million for the three and ninesix months ended SeptemberJune 30, 2019was $1.8 million and $5.0 million, respectively, compared2020, respectively. CECL requires economic forecasts to $2.3 million and $4.5 million for same periods in 2018, respectively.be factored into determining estimated losses. As a result, CECL will typically require a higher level of provision at the start of an economic downturn. The provision is reflective of loan growth and charge-offsincrease in the period.
The allowanceprovision for loancredit losses was 0.85% of loans at September 30, 2019, compared to 1.04% at September 30, 2018. The decrease in the ratio of allowance for loan losses to total loans2020 was primarily due to a change in economic forecasts from the acquisitionend of Trinity loans that were recorded at fair value2019, which worsened significantly starting in March 2020 due to the COVID-19 pandemic and didthe resulting slow-down of business activity. Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and unemployment. The Company’s forecast of the percentage change in GDP included a range of (10.0)% to 8.0%. The Company’s forecast of unemployment included a range of 7.9% to 11.8%. The Company utilizes a one-year reasonable and supportable forecast.
To the extent the Company does not haverecognize charge-offs and economic forecasts improve in future periods, the Company could recognize a corresponding allowancereversal of provision for loancredit losses. Conversely, if economic conditions and the Company’s forecast worsens, the Company could recognize elevated levels of provision for credit losses. The Company recorded a credit mark onprovision is also reflective of charge-offs in the Trinity loan portfolio of $24.4 million at acquisition.period.
Management believes the allowance for loan losses is adequate to absorb inherent lossesThe Company had net charge-offs of $1.5 million in the loan portfolio.first six months of 2020, primarily due to the administrative charge-off of nonaccrual loans less than $100,000 under the Company’s credit policy. Most of these charge-offs were loans added to nonaccual as part of the CECL adoption. The ACLL was 1.80% of loans at June 30, 2020, compared to 0.81% at December 31, 2019.
Nonperforming assets
Prior to the adoption of CECL, PCI loans were accounted for in performing pools of loans and were not individually identified as nonaccrual or classified. Under the CECL accounting model, the Company elected not to maintain PCI pools for certain loans which are now accounted for individually and are now included in nonperforming and classified loans. PCI loans are referred to as PCD under CECL.
The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.
| | (in thousands) | September 30, 2019 | | December 31, 2018 | | September 30, 2018 | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Non-accrual loans | $ | 15,430 |
| | $ | 16,520 |
| | $ | 14,935 |
| |
Nonaccrual loans | | $ | 36,867 |
| | $ | 26,096 |
| | $ | 15,659 |
|
Loans past due 90 days or more and still accruing interest | 60 |
| | — |
| | 1,289 |
| 886 |
| | 250 |
| | 3,999 |
|
Restructured loans | 79 |
| | 225 |
| | 820 |
| |
Troubled debt restructurings | | 3,720 |
| | 79 |
| | 184 |
|
Total nonperforming loans | 15,569 |
| | 16,745 |
| | 17,044 |
| 41,473 |
| | 26,425 |
| | 19,842 |
|
Other real estate | 8,498 |
| | 469 |
| | 408 |
| 4,874 |
| | 6,344 |
| | 10,531 |
|
Total nonperforming assets | $ | 24,067 |
| | $ | 17,214 |
| | $ | 17,452 |
| $ | 46,347 |
| | $ | 32,769 |
| | $ | 30,373 |
|
| | | | | | | | | | |
Total assets | $ | 7,346,791 |
| | $ | 5,645,662 |
| | $ | 5,517,539 |
| $ | 8,357,501 |
| | $ | 7,333,791 |
| | $ | 7,181,855 |
|
Total loans | 5,132,391 |
| | 4,350,001 |
| | 4,267,430 |
| 6,140,051 |
| | 5,314,337 |
| | 5,149,497 |
|
Total loans plus other real estate | 5,236,512 |
| | 4,350,470 |
| | 4,267,430 |
| |
Nonperforming loans to total loans | 0.30 | % | | 0.38 | % | | 0.40 | % | 0.68 | % | | 0.50 | % | | 0.39 | % |
Nonperforming assets to total assets | 0.33 |
| | 0.30 |
| | 0.32 |
| 0.55 | % | | 0.45 | % | | 0.42 | % |
Allowance for loan losses to nonperforming loans | 286 | % | | 260 | % | | 259 | % | |
ACLL to nonperforming loans | | 266 | % | | 164 | % | | 221 | % |
Nonperforming loans decreased $1.2increased $15.1 million to $15.6$41.5 million at SeptemberJune 30, 20192020 from $16.7$26.4 million at December 31, 2018. Net charge-offs2019 partially due to the adoption of CECL that added $6.8 million in 2019,PCD loans that were previously accounted for in an accruing pool of loans. The addition of a $5.0 million nonaccrual enterprise value loan in 2020 also contributed to the decline in nonperforming loans, are comprised primarily of two loan relationships identified as nonperforming loans at the end of 2018. The charge-off of these loans did not significantly impact the provision for loan losses, as the credits were specifically reserved at the end of 2018.
increase. Other real estate increased in 2019 primarilydecreased during 2020 due to the foreclosurewrite-downs of a $5.4$0.9 million commercial property that was a purchased credit impaired loan from our acquisition of Jefferson County Bancshares Inc., along with the addition of 15 properties with the acquisition of Trinity totaling $4.5 million. The foreclosure of the commercial property did not result in a write-down of the asset. These additions were partially offset by other real estateand sales of $4.3$0.6 million.
Nonperforming loans
Nonperforming loans exclude PCI loans that are accounted for on a pool basis. See Item 1, Note 5 – Loans for more information on these loans.
Nonperforming loans based on loan type were as follows:
| | (in thousands) | September 30, 2019 | | December 31, 2018 | | September 30, 2018 | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Commercial and industrial | $ | 11,433 |
| | $ | 12,950 |
| | $ | 12,197 |
| $ | 31,938 |
| | $ | 22,578 |
| | $ | 15,112 |
|
Commercial real estate | 2,858 |
| | 1,206 |
| | 2,058 |
| 4,789 |
| | 2,516 |
| | 1,670 |
|
Construction and land development | — |
| | — |
| | — |
| 207 |
| | — |
| | — |
|
Residential real estate | 1,267 |
| | 2,277 |
| | 2,477 |
| 4,499 |
| | 1,330 |
| | 3,060 |
|
Consumer and other | 11 |
| | 312 |
| | 312 |
| |
Other | | 40 |
| | 1 |
| | — |
|
Total | $ | 15,569 |
| | $ | 16,745 |
|
| $ | 17,044 |
| $ | 41,473 |
| | $ | 26,425 |
|
| $ | 19,842 |
|
The following table summarizes the changes in nonperforming loans:
| | | Nine months ended September 30, | Six months ended June 30, |
(in thousands) | 2019 | | 2018 | 2020 | | 2019 |
Nonperforming loans beginning of period | $ | 16,745 |
| | $ | 15,687 |
| |
Nonperforming loans, beginning of period | | $ | 26,425 |
| | $ | 16,745 |
|
CECL adoption | | 8,462 |
| | — |
|
PCD loans immediately charged off | | (1,680 | ) | | — |
|
Nonperforming loans, January 1 | | $ | 33,207 |
| | $ | 16,745 |
|
Additions to nonaccrual loans | 14,861 |
| | 6,966 |
| 12,154 |
| | 10,605 |
|
Additions to restructured loans | — |
| | 274 |
| 3,750 |
| | — |
|
Charge-offs | (5,470 | ) | | (4,546 | ) | (3,970 | ) | | (3,965 | ) |
Other principal reductions | (8,221 | ) | | (2,426 | ) | (4,250 | ) | | (5,136 | ) |
Moved to other real estate | (1,732 | ) | | (200 | ) | — |
| | (1,732 | ) |
Moved to performing | (674 | ) | | — |
| (6 | ) | | (674 | ) |
Loans past due 90 days or more and still accruing interest | 60 |
| | 1,289 |
| 588 |
| | 3,999 |
|
Nonperforming loans end of period | $ | 15,569 |
| | $ | 17,044 |
| |
Nonperforming loans, end of period | | $ | 41,473 |
| | $ | 19,842 |
|
Other real estate
Other real estate was $8.5$4.9 million at SeptemberJune 30, 20192020 compared to $0.4$10.5 million at SeptemberJune 30, 2018.2019.
The following table summarizes the changes in other real estate:
| | | Nine months ended September 30, | Six months ended June 30, |
(in thousands) | 2019 | | 2018 | 2020 | | 2019 |
Other real estate beginning of period | $ | 469 |
| | $ | 498 |
| $ | 6,344 |
| | $ | 469 |
|
Additions and expenses capitalized to prepare property for sale | 7,964 |
| | 408 |
| — |
| | 7,783 |
|
Additions from acquisition | 4,512 |
| | — |
| — |
| | 4,512 |
|
Writedowns in value | (126 | ) | | (44 | ) | (856 | ) | | — |
|
Sales | (4,321 | ) | | (454 | ) | (615 | ) | | (2,233 | ) |
Other real estate end of period | $ | 8,498 |
| | $ | 408 |
| $ | 4,873 |
| | $ | 10,531 |
|
Writedowns in fair value are recorded in other noninterest expense based on current market activity shown in the appraisals.
Liabilities
Liabilities totaled $6.5 billion at September 30, 2019, compared to $5.0 billion at December 31, 2018. The increase in liabilities was due to $1.0 billion of growth in total deposits primarily attributable to the acquisition of Trinity and a $391.4 million increase in Federal Home Loan Bank (“FHLB”) advances, partially offset by a decrease of $23.8 million in other borrowings and notes payable. The increase in Federal Home Loan Bank advances supported the increase in the investment portfolio, the reduction in higher-cost other borrowings and the Company’s share repurchase plan.
Deposits
| | (in thousands) | September 30, 2019 | | December 31, 2018 | | Increase (decrease) | June 30, 2020 | | December 31, 2019 | | Increase (decrease) |
Demand deposits | $ | 1,295,450 |
| | $ | 1,100,718 |
| | $ | 194,732 |
| | 18 | % | |
Noninterest-bearing deposit accounts | | $ | 1,965,868 |
| | $ | 1,327,348 |
| | $ | 638,520 |
| | 48 | % |
Interest-bearing transaction accounts | 1,307,855 |
| | 1,037,684 |
| | 270,171 |
| | 26 | % | 1,508,535 |
| | 1,367,444 |
| | 141,091 |
| | 10 | % |
Money market accounts | 1,652,394 |
| | 1,565,729 |
| | 86,665 |
| | 6 | % | 1,962,916 |
| | 1,713,615 |
| | 249,301 |
| | 15 | % |
Savings | 548,658 |
| | 199,425 |
| | 349,233 |
| | 175 | % | |
Savings accounts | | 603,095 |
| | 536,169 |
| | 66,926 |
| | 12 | % |
Certificates of deposit: | | | | | | | | | | | | | | |
Brokered | 209,754 |
| | 198,981 |
| | 10,773 |
| | 5 | % | 85,414 |
| | 215,758 |
| | (130,344 | ) | | (60 | )% |
Other | 610,269 |
| | 485,448 |
| | 124,821 |
| | 26 | % | 573,752 |
| | 610,689 |
| | (36,937 | ) | | (6 | )% |
Total deposits | $ | 5,624,380 |
| | $ | 4,587,985 |
| | $ | 1,036,395 |
| | 23 | % | $ | 6,699,580 |
| | $ | 5,771,023 |
| | $ | 928,557 |
| | 16 | % |
| | | | | | | | | | | | | | |
Non-time deposits / total deposits | 85 | % | | 85 | % | | | | | 90 | % | | 86 | % | | | | |
Demand deposits / total deposits | 23 | % | | 24 | % | | | | | 29 | % | | 23 | % | | | | |
Total deposits at SeptemberJune 30, 20192020 were $5.6$6.7 billion, an increase of 23%16%, from December 31, 2018.2019. The increase is duein deposits has been influenced by the PPP, as many of the recipients have maintained increased deposit levels since receiving PPP funding. Government stimulus checks and organic growth have also impacted deposit balances. Due to increased liquidity, the acquisitionbrokered certificates of Trinity, partially offset by a declinedeposit have been reduced in interest-bearing deposits.2020. Noninterest bearing deposits as a percentage of total deposits was 23%29% at SeptemberJune 30, 20192020, compared to 24%23% at December 31, 2018. The deposit portfolio acquired with Trinity had a lower percentage of noninterest-bearing deposit accounts as part of the total deposit base. However, the cost of funds on the Trinity interest-bearing deposit portfolio was relatively lower than the Company’s deposits prior to the acquisition.2019, respectively.
Shareholders’ Equity
Shareholders’ equity totaled $846.1$868.0 million at SeptemberJune 30, 2019,2020, an increase of $242.3$0.8 million from December 31, 2018.2019. Significant activity during the ninefirst six months ended September 30, 2019of 2020 was as follows:
issuance of approximately 4.0 million shares of common stock for the Trinity acquisition reflecting approximately $171.9 million of consideration,
increase from net income of $63.6$27.5 million,
net increase in fair value of securities and cash flow hedges of $28.5$15.1 million,
decrease from CECL adoption of $18.1 million,
decrease from dividends paid on common shares of $12.1$9.5 million,
increase from the issuance under equity compensation plans of $1.2$1.1 million, and
decrease from share repurchases of $11.8$15.3 million.
Liquidity and Capital Resources
Liquidity
TheOur objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are run-off from demand deposits, maturing time deposits which are not renewed, and fundings under credit commitments
to customers. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities.
Additionally, liquidityLiquidity is provided from sales of the securities portfolio, fed fund lines with correspondent banks, borrowings from the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits, and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.
The Bank’s Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank’s Board of Directors. Our liquidity position is monitored monthly by measuring the amount of liquid versus non-liquid assets and liabilities. Our liquidity management framework includes measurement of several
key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.
The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at June 30, 2020, the Bank had borrowing capacity of $562 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $879 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $90 million, and $367 million of unsecured credit through the American Financial Exchange.
Investment securities are another important tool in managing the Bank’s liquidity objectives. Securities totaled $1.4 billion at June 30, 2020, and included $450 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $904 million could be pledged or sold to enhance liquidity, if necessary.
In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Bank has $1.7 billion in unused commitments as of June 30, 2020. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.
Parent Company liquidity
The parent company’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company’s primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments.
The Company has an effective automatic shelf registration statement on Form S-3 registering up to $100 millionallowing for the issuance of common stock, preferred stock,various forms of equity and debt securities, and various other securities, including combinations of such securities. The Company’s ability to offer securities pursuant to the registration statement depends on market conditions and the Company’s continuing eligibility to use the Form S-3 under rules of the SEC.
On November 1, 2016, the Company issued $50 million aggregate principal amount of 4.75% fixed-to-floating rate subordinated notes with a maturity date of November 1, 2026, which initially bear an annual interest rate of 4.75%, with interest payable semiannually. Beginning November 1, 2021, the interest rate resets quarterly to the three-month LIBOR rate plus a spread of 338.7 basis points, payable quarterly.
On May 21, 2020, the Company issued $63.3 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes with a maturity date of June 1, 2030, which initially bear an annual interest rate of 5.75%, with interest payable semiannually. Beginning June 1, 2025, the interest rate resets quarterly to the three-month SOFR rate plus a spread of 566.0 basis points, payable quarterly.
The Company has a senior unsecured revolving credit agreement (the “Revolving Agreement”) with another bank allowing for borrowings up to $25 million that matures in February 2020.2021. The proceeds can be used for general corporate purposes. The Revolving Agreement is subject to ongoing compliance with a number of customary affirmative and negative covenants as well as specified financial covenants. As of SeptemberJune 30, 2019, there2020, no amount was $1 million outstanding under the Revolving Agreement.
TheIn March 2019, the Company hasentered into a five-year term note for $40 million that matures in March 2024. The Company principally used the proceeds from the issuance of the note to fund the cash consideration at the closing of the acquisition of Trinity. The remaining balance at June 30, 2020 was $31 million.
As of SeptemberJune 30, 2019,2020, the Company had $92 million of outstanding junior subordinated debentures as part of 13 statutory trusts which includes $23 million acquired in the Trinity acquisition.trusts. These debentures are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them an attractive source of funding.
Management believes our current level of cash at the holding company of $6$68 million, along with the Company’s other available funding sources, will be sufficient to meet all projected cash needs for the remainder of 2019.
Bank liquidity
The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at September 30, 2019, the Bank had borrowing capacity of $532 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $1 billion available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $90 million, and $296 million of unsecured credit through the American Financial Exchange.
Investment securities are another important tool in managing the Bank’s liquidity objectives. Securities totaled $1.3 billion at September 30, 2019, and included $416 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $893 million could be pledged or sold to enhance liquidity, if necessary.
In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Bank has $1.5 billion in unused commitments as of September 30, 2019. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.2020.
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of SeptemberJune 30, 2019,2020, and December 31, 2018,2019, the Company and the Bank met all capital adequacy requirements to which they are subject.
The Bank continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at SeptemberJune 30, 2019.2020.
The following table summarizes the Company’s various capital ratios at the dates indicated:
|
| | | | | | | | | | | | |
(in thousands) | June 30, 2020 | | December 31, 2019 | | Well Capitalized Minimum % | | Minimum Capital Requirement Including Capital Conservation Buffer |
Total capital to risk-weighted assets | 14.40 | % | | 12.90 | % | | N/A | | 10.50 | % |
Tier 1 capital to risk-weighted assets | 11.37 |
| | 11.40 |
| | N/A | | 8.50 |
|
Common equity tier 1 capital to risk-weighted assets | 9.91 |
| | 9.90 |
| | N/A | | 7.00 |
|
Leverage ratio (Tier 1 capital to average assets) | 9.16 |
| | 10.05 |
| | N/A | | 4.00 |
|
Tangible common equity to tangible assets1 | 7.81 |
| | 8.89 |
| | N/A | | |
Total risk-based capital | $ | 919,693 |
| | $ | 804,273 |
| | | | |
Tier 1 capital | 726,574 |
| | 710,480 |
| | | | |
Common equity tier 1 capital | 632,919 |
| | 616,825 |
| | | | |
| | | | | | | |
1 Not a required regulatory capital ratio | | | | |
The following table summarizes the Bank’s various capital ratios at the dates indicated:
| | (in thousands) | September 30, 2019 | | December 31, 2018 | | Well Capitalized Minimum % | | Minimum Capital Requirement Including Capital Conservation Buffer | June 30, 2020 | | December 31, 2019 | | Well Capitalized Minimum % | | Minimum Capital Requirement Including Capital Conservation Buffer |
Total capital to risk-weighted assets | 12.53 | % | | 12.26 | % | | 10.00 | % | | 10.50 | % | 13.00 | % | | 12.40 | % | | 10.00 | % | | 10.50 | % |
Tier 1 capital to risk-weighted assets | 11.79 |
| | 11.38 |
| | 8.00 |
| | 8.50 |
| 11.75 |
| | 11.70 |
| | 8.00 |
| | 8.50 |
|
Common equity tier 1 capital to risk-weighted assets | 11.79 |
| | 11.37 |
| | 6.50 |
| | 7.00 |
| 11.75 |
| | 11.69 |
| | 6.50 |
| | 7.00 |
|
Leverage ratio (Tier 1 capital to average assets) | 10.38 |
| | 10.52 |
| | 5.00 |
| | 4.00 |
| 9.48 |
| | 10.31 |
| | 5.00 |
| | 4.00 |
|
Total risk-based capital | $ | 765,025 |
| | $ | 611,197 |
| | | | | $ | 829,134 |
| | $ | 769,254 |
| | | | |
Tier 1 capital | 719,965 |
| | 567,296 |
| | | | | 749,402 |
| | 725,461 |
| | | | |
Common equity tier 1 capital | 719,908 |
| | 567,239 |
| | | | | 749,347 |
| | 725,406 |
| | | | |
In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital followed by a three-year transition period. The following table summarizesCompany adopted CECL on January 1, 2020. For additional information regarding the adoption of CECL, see “Item 1. Note 1 – Summary of Significant Accounting Policies.” The Company has elected the transition provisions provided by the U.S. banking agencies’ rule. Accordingly, the regulatory capital effects resulting from adoption of the CECL methodology will not be fully reflected in the Company’s variousregulatory capital until January 1, 2025. Based on the Company’s regulatory capital position as of June 30, 2020, the estimated impact of adopting CECL methodology would reduce the Common Equity Tier 1 Capital ratio by approximately 44 basis points. The actual impact of adopting CECL on the regulatory capital ratios atmay change as the dates indicated:final impact is not determined until the end of the second year of the transition period.
|
| | | | | | | | | | | | |
(in thousands) | September 30, 2019 | | December 31, 2018 | | Well Capitalized Minimum % | | Minimum Capital Requirement Including Capital Conservation Buffer |
Total capital to risk-weighted assets | 12.72 | % | | 13.02 | % | | N/A | | 10.50 | % |
Tier 1 capital to risk-weighted assets | 11.17 |
| | 11.14 |
| | N/A | | 8.50 |
|
Common equity tier 1 capital to risk-weighted assets | 9.64 |
| | 9.79 |
| | N/A | | 7.00 |
|
Leverage ratio (Tier 1 capital to average assets) | 9.83 |
| | 10.29 |
| | N/A | | 4.00 |
|
Tangible common equity to tangible assets1 | 8.54 |
| | 8.66 |
| | N/A | | |
Total risk-based capital | $ | 779,655 |
| | $ | 650,859 |
| | | | |
Tier 1 capital | 684,595 |
| | 556,958 |
| | | | |
Common equity tier 1 capital | 590,938 |
| | 489,301 |
| | | | |
| | | | | | | |
1 Not a required regulatory capital ratio | | | | |
The Company believes the tangible common equity ratio is an important measure of capital strength, even though it is considered a non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”
Use of Non-GAAP Financial Measures:
The Company’s accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”)GAAP and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as core net interest income, core net interest margin, core efficiency ratios, tangible common equity, return on average assets, return on averagetangible common equity, and the tangible common equity ratio, in this report that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.
The Company considers its core net interest income, core net interest margin, core efficiency ratio, return on average assets, return on averagetangible common equity, and return on average tangible common equity, and the tangible common equity ratio, collectively “core performance measures,” presented in this report and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of non-core acquired loans, which were acquired from the FDIC and previously covered by loss share agreements, and the related income and expenses, the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures include contractual interest on non-core acquired loans, but exclude incremental accretion on these loans. Core performance measures also exclude expenses directly related to non-core acquired loans. Core performance measures also exclude certain other income and expense items, such as merger-related expenses, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered
to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.
The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company’s performance and capital strength. The Company’s management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company’s operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the following tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Core Performance Measures
|
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
(in thousands) | September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Net interest income | $ | 63,046 |
| | $ | 48,093 |
| | $ | 177,104 |
| | $ | 141,312 |
|
Less: Incremental accretion income | 2,140 |
| | 535 |
| | 4,207 |
| | 1,592 |
|
Core net interest income | 60,906 |
| | 47,558 |
| | 172,897 |
| | 139,720 |
|
| | | | | | | |
Total noninterest income | 13,564 |
| | 8,410 |
| | 34,758 |
| | 27,645 |
|
Less: Gain on sale of investment securities | 337 |
| | — |
| | 337 |
| | 9 |
|
Less: Other income from non-core acquired assets | 1,001 |
| | 7 |
| | 1,368 |
| | 1,038 |
|
Less: Other non-core income | — |
| | — |
| | 266 |
| | 649 |
|
Core noninterest income | 12,226 |
| | 8,403 |
| | 32,787 |
| | 25,949 |
|
| | | | | | | |
Total core revenue | 73,132 |
| | 55,961 |
| | 205,684 |
| | 165,669 |
|
| | | | | | | |
Total noninterest expense | 38,239 |
| | 29,922 |
| | 127,131 |
| | 88,284 |
|
Less: Other expenses related to non-core acquired loans | 18 |
| | 12 |
| | 224 |
| | (203 | ) |
Less: Merger related expenses | 393 |
| | — |
| | 17,969 |
| | — |
|
Less: Facilities disposal charge | — |
| | — |
| | — |
| | 239 |
|
Less: Non-recurring excise tax | — |
| | 682 |
| | — |
| | 682 |
|
Core noninterest expense | 37,828 |
| | 29,228 |
| | 108,938 |
| | 87,566 |
|
| | | | | | | |
Core efficiency ratio | 51.73 | % | | 52.23 | % | | 52.96 | % | | 52.86 | % |
|
| | | | | | | | | | | | | | | |
| For the three months ended | | At or for the six months ended |
(in thousands) | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
Net interest income | $ | 65,833 |
| | $ | 61,715 |
| | $ | 129,201 |
| | $ | 114,058 |
|
Less: Incremental accretion income | 719 |
| | 910 |
| | 1,992 |
| | 2,067 |
|
Core net interest income | 65,114 |
| | 60,805 |
| | 127,209 |
| | 111,991 |
|
| | | | | | | |
Total noninterest income | 9,960 |
| | 11,964 |
| | 23,368 |
| | 21,194 |
|
Less: Gain on sale of investment securities | — |
| | — |
| | 4 |
| | — |
|
Less: Other income from non-core acquired assets | — |
| | 2 |
| | — |
| | 367 |
|
Less: Other non-core income | 265 |
| | 266 |
| | 265 |
| | 266 |
|
Core noninterest income | 9,695 |
| | 11,696 |
| | 23,099 |
| | 20,561 |
|
| | | | | | | |
Total core revenue | 74,809 |
| | 72,501 |
| | 150,308 |
| | 132,552 |
|
| | | | | | | |
Total noninterest expense | 37,912 |
| | 49,054 |
| | 76,585 |
| | 88,892 |
|
Less: Other expenses related to non-core acquired loans | 12 |
| | 103 |
| | 24 |
| | 206 |
|
Less: Merger related expenses | — |
| | 10,306 |
| | — |
| | 17,576 |
|
Core noninterest expense | 37,900 |
| | 38,645 |
| | 76,561 |
| | 71,110 |
|
| | | | | | | |
Core efficiency ratio | 50.66 | % | | 53.30 | % | | 50.94 | % | | 53.65 | % |
Net Interest Margin to Core Net Interest Margin (tax equivalent)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Net interest income | $ | 63,483 |
| | $ | 48,299 |
| | $ | 178,187 |
| | $ | 141,939 |
| $ | 66,537 |
| | $ | 62,109 |
| | $ | 130,515 |
| | $ | 114,704 |
|
Less: Incremental accretion income | 2,140 |
| | 535 |
| | 4,207 |
| | 1,592 |
| 719 |
| | 910 |
| | 1,992 |
| | 2,067 |
|
Core net interest income, tax equivalent | $ | 61,343 |
| | $ | 47,764 |
| | $ | 173,980 |
| | $ | 140,347 |
| $ | 65,818 |
| | $ | 61,199 |
| | $ | 128,523 |
| | $ | 112,637 |
|
| | | | | | | | | | | | | | |
Average earning assets | $ | 6,604,083 |
| | $ | 5,072,573 |
| | $ | 6,193,197 |
| | $ | 5,015,471 |
| $ | 7,571,196 |
| | $ | 6,453,005 |
| | $ | 7,181,327 |
| | $ | 5,984,348 |
|
Reported net interest margin | 3.81 | % | | 3.78 | % | | 3.85 | % | | 3.78 | % | 3.53 | % | | 3.86 | % | | 3.65 | % | | 3.87 | % |
Core net interest margin | 3.69 | % | | 3.74 | % | | 3.76 | % | | 3.74 | % | 3.50 | % | | 3.80 | % | | 3.60 | % | | 3.80 | % |
Tangible Common Equity Ratio
| | (in thousands) | September 30, 2019 | | December 31, 2018 | June 30, 2020 | | December 31, 2019 |
Total shareholders' equity | $ | 846,095 |
| | $ | 603,804 |
| $ | 867,963 |
| | $ | 867,185 |
|
Less: Goodwill | 211,251 |
| | 117,345 |
| 210,344 |
| | 210,344 |
|
Less: Intangible assets | 27,626 |
| | 8,553 |
| 23,196 |
| | 26,076 |
|
Tangible common equity | $ | 607,218 |
| | $ | 477,906 |
| $ | 634,423 |
| | $ | 630,765 |
|
| | | | | | |
Total assets | $ | 7,346,791 |
| | $ | 5,645,662 |
| $ | 8,357,501 |
| | $ | 7,333,791 |
|
Less: Goodwill | 211,251 |
| | 117,345 |
| 210,344 |
| | 210,344 |
|
Less: Intangible assets, net | 27,626 |
| | 8,553 |
| 23,196 |
| | 26,076 |
|
Tangible assets | $ | 7,107,914 |
| | $ | 5,519,764 |
| $ | 8,123,961 |
| | $ | 7,097,371 |
|
| | | | | | |
Tangible common equity to tangible assets | 8.54 | % | | 8.66 | % | 7.81 | % | | 8.89 | % |
Average Shareholders’ Equity and Average Tangible Common Equity
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Average shareholder’s equity | $ | 843,974 |
| | $ | 586,765 |
| | $ | 773,843 |
| | $ | 569,915 |
|
Less: Average goodwill | 211,251 |
| | 117,345 |
| | 188,231 |
| | 117,345 |
|
Less: Average intangible assets, net | 28,392 |
| | 9,445 |
| | 24,327 |
| | 10,074 |
|
Average tangible common equity | $ | 604,331 |
| | $ | 459,975 |
| | $ | 561,285 |
| | $ | 442,496 |
|
Impact of Merger Related Expenses |
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Average shareholder’s equity | $ | 868,163 |
| | $ | 813,106 |
| | $ | 866,599 |
| | $ | 738,196 |
|
Less: Average goodwill | 210,344 |
| | 211,251 |
| | 210,344 |
| | 176,529 |
|
Less: Average intangible assets, net | 23,873 |
| | 29,965 |
| | 24,587 |
| | 22,261 |
|
Average tangible common equity | $ | 633,946 |
| | $ | 571,890 |
| | $ | 631,668 |
| | $ | 539,406 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net income - GAAP | $ | 29,069 |
| | $ | 22,516 |
| | $ | 63,649 |
| | $ | 65,688 |
|
Merger-related expenses | 393 |
| | — |
| | 17,969 |
| | — |
|
Related tax effect | (97 | ) | | — |
| | (3,963 | ) | | — |
|
Adjusted net income - Non-GAAP | $ | 29,365 |
| | $ | 22,516 |
| | $ | 77,655 |
| | $ | 65,688 |
|
| | | | | | | |
Average assets | $ | 7,222.357 |
| | $ | 5,471.504 |
| | $ | 6,749,988 |
| | $ | 5,409,404 |
|
ROAA - GAAP net income | 1.60 | % | | 1.63 | % | | 1.26 | % | | 1.62 | % |
ROAA - Adjusted net income | 1.61 |
| | 1.63 |
| | 1.54 |
| | 1.62 |
|
| | | | | | | |
Average shareholder’s equity | $ | 843,974 |
| | $ | 586,765 |
| | $ | 773,843 |
| | $ | 569,915 |
|
ROAE - GAAP net income | 13.66 | % | | 15.22 | % | | 11.00 | % | | 15.41 | % |
ROAE - Adjusted net income | 13.80 |
| | 15.22 |
| | 13.42 |
| | 15.41 |
|
| | | | | | | |
Average tangible common equity | $ | 604,331 |
| | $ | 459,975 |
| | $ | 561,285 |
| | $ | 442,496 |
|
ROATCE - GAAP net income | 19.08 | % | | 19.42 | % | | 15.16 | % | | 19.85 | % |
ROATCE - Adjusted net income | 19.28 |
| | 19.42 |
| | 18.50 |
| | 19.85 |
|
Critical Accounting Policies
The impact and any associated risks related to the Company’s critical accounting policies on business operations are described throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed description on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures set forth in this item are qualified by the section captioned “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” included in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Interest Rate Risk
Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against deterioration that could be caused by certain interest rate scenarios. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to minimize or eliminate any impact from market interest rate changes. In order to measure earnings sensitivity to changing rates, the Company uses an earnings simulation model.
The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling (due to the current level of interest rates, the 300 basis point downward shock scenario isscenarios are not shown in the table below.) The simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. This difference represents the Company’sThe Company uses an earning sensitivity model to track earnings sensitivity to a plus or minus 100 basis points parallel rate shock.
The following table summarizes the expected impact of interest rate shocks on net interest income:
|
| |
Rate Shock1 | Annual % change in net interest income |
+ 300 bp | 6.0%7.8% |
+ 200 bp | 4.1%4.9% |
+ 100 bp | 2.3%2.1% |
- 100 bp | (3.8)% |
- 200 bp | (7.6)%1 Due to the current levels of interest rates, the downward shock scenarios are not shown. |
In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic
interest rate scenarios. Generally, positive changes in rates result in higher levels of net interest income, while scenarios based on declining rates, particularly those involving decreases in long-term rates, result in reduced net interest income.
At SeptemberJune 30, 2019, models resulting in2020, model scenarios based on a steeperflatter yield curve through a reduction in short-termlonger term rates over a 12-month horizon, as well as those based on stable short-term and modestly lower long-term rates, all result in a marginal decrease toin net interest income over a one-year forecast.12 month horizon.
At SeptemberJune 30, 2019,2020, the Company had $2.5$3.1 billion in variable rate loans that areincluding $2.5 billion based on LIBOR and $0.4$332 million that are based on Prime. Approximately 80%86% of the LIBOR based loans are indexed to one-month LIBOR. Of the total variable rate loans, $1.2 billion, or 39%, had a rate floor of which approximately $1.0 billion, or 86%, were currently priced at the floor.
The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of SeptemberJune 30, 2019.2020. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 20192020 to provide reasonable assurance of the achievement of the objectives described above.
Changes to Internal Controls
There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In connection with its acquisition of Trinity/LANB, the Company, as successor-in-interest to Trinity, is a party to certain consolidated proceedings pending in the First Judicial Circuit Court for the State of New Mexico, styled Trinity Capital Corporation, et al v. Atlantic Specialty Ins. Co., et al. The lawsuit seeks declaratory relief, defense costs, and damages related to claims for bad faith breach of insurance contracts and violations of New Mexico insurance statutes. The insurance coverage at issue in the lawsuit relates to regulatory proceedings commenced by the OCC against LANB and the SEC against Trinity following an OCC bank examination in 2012. At the time, Trinity had in place a director and officer insurance policy that included coverage for the cost of defending against certain regulatory proceedings. Coverage was denied by the insurance company based on an alleged failure to give timely notice of a claim. Former Trinity/LANB officers, William Enloe, Jill Cook and Mark Pierce, also filed suits against the insurance company and Trinity/LANB which have been consolidated in the proceeding. The claims of William Enloe against Trinity/LANB relate to an alleged failure to provide timely notice to the insurance company. The claims of Jill Cook and Mark Pierce relate to indemnification and alleged wrongful termination. The officers’ claims against Trinity/LANB have been stayed pending resolution of the claims against the insurance company. To date, the Company has received notice that all three former Trinity/LANB officers have each individually settled their claims with the insurance company.
In December 2018, the Court granted summary judgment in favor of Trinity/LANB finding that they had delivered timely notice to the insurance company as a matter of law. The insurance company filed a motion to reconsider which was subsequently heard and denied. The Company will next seek to prove up its damages at trial which is anticipated to occur in the first quarter of 2020. The Company also plans to vigorously defend itself against the officers’ claims. Due to the complex nature of this lawsuit, the outcome and timing of ultimate resolution and recovery by the Company is uncertain.
In addition, the Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
ITEM 1A: RISK FACTORS
For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2018,2019, which is supplemented by the additional risk factorfactors set forth below. There
The recent global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.
In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the United States. In March 2020, the World Health Organization declared COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the COVID-19 pandemic will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.
Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has caused and could continue to cause severe disruptions in the U.S. economy at large, and has resulted and may continue to result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, recent actions by US federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, may have a significant adverse effect on our customers and the markets in which we conduct our business. The extent of impacts resulting from the COVID-19 pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and actions taken to contain the COVID-19 or its impact, among others.
Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans as well as declines in wealth management revenues. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability. If the global response to contain COVID-19 escalates or is unsuccessful, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.
The Company has implemented restrictions on employee business travel, conversion of in-person meetings to virtual, and a work-from home mandate. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances. These actions in response to the COVID-19 pandemic, and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. For instance, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic. Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.
The spread of the COVID-19 outbreak and the governmental responses may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.
The outbreak of COVID-19 and the US federal, state and local governmental responses may result in a disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services or experience interruptions in their ability to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the COVID-19 pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine or other effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. If we are unable to promptly recover from such business disruptions, our business and financial conditions and results of operations would be adversely affected. We also may incur additional costs to remedy damages caused by such disruptions, which could adversely affect our financial condition and results of operations.
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.
The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19
pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.
Because there have been no material changescomparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the risk factorspandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the COVID-19 outbreak continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in suchour Annual Report on Form 10-K.
Increased regulatory oversight, uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the results of our operations.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offering Rate (“LIBOR”), announced that it intends to stop persuading or compelling banks to submit rates10-K for the calculation of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot andyear ended December 31, 2019 will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Efforts in the United States to identify a set of alternative U.S. dollar reference interest rates include proposals by the ARRC of the Federal Reserve Board and the Federal Reserve Bank of New York. Uncertainty as to the nature of alternative reference rates and as to potential changes in other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures. The Company has material contracts that are indexed to LIBOR. If LIBOR rates are no longer available, any successor or replacement interest rates may perform differently and we may incur significant costs to transition both our borrowing arrangements and the loan agreements with our customers from LIBOR, which may have an adverse effect on our results of operations. The impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known.heightened.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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Period | Total number of shares purchased (a) | | Weighted-average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number of shares that may yet be purchased under the plans or programs |
July 1, 2019 through July 31, 2019 | 32,113 |
| | 39.51 |
| | 32,113 |
| | 916,782 |
|
August 1, 2019 through August 31, 2019 | 223,183 |
| | 38.96 |
| | 223,183 |
| | 693,599 |
|
September 1, 2019 through September 30, 2019 | 47,460 |
| | 39.05 |
| | 47,460 |
| | 646,139 |
|
Total | 302,756 |
| | $ | 39.03 |
| | 302,756 |
| | 646,139 |
|
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(a) In May 2015, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The repurchases may be made in open market or privately negotiated transactions and the stock repurchase program will remain in effect until fully utilized or until modified, superseded or terminated. The timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations. |
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
NoneNone.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
Douglas N. Bauche Amended and Restated Executive Employment AgreementNone.
On October 24, 2019, the Company entered into an Amended and Restated Executive Employment Agreement with Douglas N. Bauche. Mr. Bauche is employed as the Chief Credit Officer & St. Louis President of the Company. Under the Amended and Restated Employment Agreement, Mr. Bauche will receive an annual base salary of $293,733 to be reviewed at least annually by the Company, and annual targeted incentives of 35% of the applicable salary for the year under the Company’s long-term and short-term incentive plans. Mr. Bauche will also participate in standard benefits offered to employees generally and under terms of plans pursuant to which benefits are provided.
The foregoing description of the Executive Employment Agreement is qualified in its entirety by reference to the full and complete copy of the Executive Employment Agreement listed as Exhibit 10.1 of this quarterly report.
Nicole M. Iannacone Executive Employment Agreement
On October 24, 2019, the Company entered into an Executive Employment Agreement with Nicole M. Iannacone. Ms. Iannacone is employed as the EVP, Chief Risk Officer and General Counsel of the Company. Under the Employment Agreement, Ms. Iannacone will receive an annual base salary of $253,399 to be reviewed at least annually by the Company, and annual targeted incentives of 35% of the applicable salary for the year under the Company’s long-term and short-term incentive plans. Ms. Iannacone will also participate in standard benefits offered to employees generally and under terms of plans pursuant to which benefits are provided.
The foregoing description of the Executive Employment Agreement is qualified in its entirety by reference to the full and complete copy of the Executive Employment Agreement listed as Exhibit 10.2 of this quarterly report.
Mark G. Ponder Executive Employment Agreement
On October 24, 2019, the Company entered into an Executive Employment Agreement with Mark G. Ponder. Mr. Ponder is employed as the Chief Administrative Officer of the Company. Under the Employment Agreement, Mr. Ponder will receive an annual base salary of $252,840 to be reviewed at least annually by the Company, and annual targeted incentives of 35% of the applicable salary for the year under the Company’s long-term and short-term incentive plans. Mr. Ponder will also participate in standard benefits offered to employees generally and under terms of plans pursuant to which benefits are provided.
The foregoing description of the Executive Employment Agreement is qualified in its entirety by reference to the full and complete copy of the Executive Employment Agreement listed as Exhibit 10.3 of this quarterly report.
ITEM 6: EXHIBITS
Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of Registrant and its consolidated subsidiaries.
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*10.3 | Exchange Commission upon request. |
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101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL documentdocument. |
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101.SCH | XBRL Taxonomy Extension Schema DocumentDocument. |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.LAB XBRL Taxonomy Extension Label Linkbase Document
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definitions Linkbase Document
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101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document. |
* Filed herewith
** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with two (**) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri on the day of October 25, 2019.July 24, 2020.
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| ENTERPRISE FINANCIAL SERVICES CORP |
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| By: | /s/ James B. Lally | |
| | James B. Lally | |
| | Chief Executive Officer | |
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| By: | /s/ Keene S. Turner | |
| | Keene S. Turner | |
| | Chief Financial Officer | |