HOME BANCSHARES, INC. (CONWAY, AR) The following discussion should be read in conjunction with our Form 10-K, filed with theSecurities and Exchange Commission onFebruary 26, 2020 , which includes the audited financial statements for the year endedDecember 31, 2019 . Unless the context requires otherwise, the terms "Company," "us," "we," and "our" refer toHome BancShares, Inc. on a consolidated basis.
General
We are a bank holding company headquartered in
We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income.Deposits and Federal Home Loan Bank ("FHLB") and other borrowed funds are our primary source of funding. Our largest expenses are interest on our funding sources, salaries and related employee benefits and occupancy and equipment. We measure our performance by calculating our return on average common equity, return on average assets and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding adjustments such as merger expenses and/or certain gains, losses and other non-interest income and expenses. Table 1: Key Financial Measures As of or for the Three Months Ended As of or for the Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (Dollars in thousands, except per share data) Total assets$ 16,549,758 $
14,901,935
11,691,470 10,771,946 11,691,470 10,771,946
Allowance for credit losses 248,224 104,304 248,224 104,304
Total deposits 12,937,466 11,047,370 12,937,466 11,047,370
Total stockholders' equity 2,540,799 2,469,389 2,540,799 2,469,389
Net income 69,320 72,763 132,654 216,277
Basic earnings per share 0.42 0.44 0.80 1.29
Diluted earnings per share 0.42 0.44 0.80 1.29
Book value per share 15.38 14.80 15.38 14.80
Tangible book value per share (non-GAAP)(1) 9.30 8.83 9.30 8.83
Annualized net interest margin - FTE 3.92 % 4.32 % 4.08 % 4.30 %
Efficiency ratio 39.56 39.16 43.69 40.03
Efficiency ratio, as adjusted (non-GAAP)(2) 40.08 40.60 40.25 40.35
Annualized return on average assets 1.66 1.93 1.11 1.92
Annualized return on average common equity 10.97 11.84 7.13 12.12
(1) See Table 19 for the non-GAAP tabular reconciliation.
(2) See Table 23 for the non-GAAP tabular reconciliation.
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Overview
Recent Developments - COVID-19
The rapid spread of the novel coronavirus ("COVID-19") hit the United States
during the first quarter of 2020 and has continued through the third quarter of
2020. In March 2020 , the World Health Organization declared COVID-19 a global
pandemic and the United States declared a National Public Health Emergency. The
COVID-19 pandemic has severely restricted the economic activity in our markets.
In response to the COVID-19 pandemic, the state governments have taken
preventative or protective actions, such as imposing restrictions on travel and
business operations, advising or requiring individuals to limit or forego their
time outside of their homes, and ordering temporary closures of businesses that
have been deemed to be non-essential. These actions have had a significant
impact on markets driven by supply chain and production disruptions, workforce
restrictions, travel restrictions, retail closures, and reduced consumer
spending and sentiment, amongst other factors. The ultimate extent of the impact
of the COVID-19 pandemic on our business, financial condition and results of
operations is currently uncertain and will depend on various developments and
other factors, including, among others, the duration and scope of the pandemic,
as well as governmental, regulatory and private sector responses to the
pandemic, and the associated impacts on the economy, financial markets and our
customers, employees and vendors.
While our business has been designated an essential business, which allows us to
continue to serve our customers, we serve many customers that have been deemed,
or who are employed by businesses that have been deemed, to be non-essential.
Further, many of our customers that have been categorized to date as essential
businesses, or who are employed by businesses that have been categorized as
essential businesses, have been adversely affected by the COVID-19 pandemic.
Our business, financial condition and results of operations generally rely upon
the ability of our borrowers to repay their loans, the value of collateral
underlying our secured loans, and demand for loans and other products and
services we offer, which are highly dependent on the business environment in our
primary markets where we operate and in the United States as a whole. The
COVID-19 pandemic has had a significant impact on our business and operations.
We have reopened our banking lobbies in order to serve customers in person,
while still offering service through drive-thru tellers as well as electronic
and online means. To support the health and well-being of our employees, we
continue to support working remotely. To support our customers or to comply with
law, we have deferred loan payments for certain consumer and commercial
customers, and we have suspended residential property foreclosure sales,
evictions, and involuntary automobile repossessions, and are offering fee
waivers, payment deferrals, and other expanded assistance for automobile,
mortgage, small business and personal lending customers. Future governmental
actions may require these and other types of customer-related responses.
As of September 30, 2020 , our loan deferrals decreased to $933.8 million on 330
loans from the June 30, 2020 balance of $3.18 billion on 4,209 loans, with
approximately 70% of the initially deferred loan balances returning to full
payments of principal and interest following the initial deferral period. Of
the 272 customers currently on deferment, 79 of our customers totaling $347
million chose principal deferment only and now have returned to paying interest
monthly. The remaining customers with loans totaling $586.8 million , which
represents only 5.0% of our total loans, have continued full deferment. The
hospitality sector has been most negatively impacted by COVID-19 and represents
nearly half of the deferment balance as of September 30, 2020 . The geographic
distribution of these deferrals is similar through all of our markets. Our
review of second-round deferment requests required updated interim operating
statements, balance sheet and liquidity verifications, and validation of the
current risk rating.
In April 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES" Act) established a new federal economic relief program administered by
the Small Business Administration ("SBA") called the Paycheck Protection Program
("PPP"), which provides for 100% federally guaranteed loans to be issued by
participating private financial institutions to small businesses for payroll and
certain other permitted expenses. As of September 30, 2020 , as a participating
lender, we have generated 8,702 loans to both existing and new customers
totaling $848.7 million . The average loan size is $98,000 .
We also are monitoring the impact of COVID-19 on the valuation of goodwill. Our
stock price has historically traded above its per share book value and tangible
book value (non-GAAP). However, at certain times during the first nine months of
2020, our stock price fell below book value. This drop in stock was in reaction
to the COVID-19 pandemic, which has affected stock prices of companies in almost
all industries. During the first nine months of 2020, our common stock has
traded as low as $9.71 per share and closed on September 30, 2020 at $15.16 per
share, which was below book value of $15.38 per share but above tangible book
value (non-GAAP) of $9.30 per share. The Company updated its valuation of the
carrying value of goodwill as of September 30, 2020 based on the drop in the
Company's stock price in the first three quarters of 2020. However, taking into
account the effect that the COVID-19 pandemic has had and continues to have on
our local economy, we determined that no impairment charge to goodwill was
necessary at this time. While our common stock price has closed above book value
each day beginning October 1, 2020 through the date of this filing, we will
continue to monitor the impact of COVID-19 on the Company's business, operating
results, cash flows and financial condition and will reevaluate any impairment
of our goodwill should economic or market conditions further deteriorate as a
result of the pandemic.
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Results of Operations for the Three Months Ended
Our net income decreased$3.4 million , or 4.7%, to$69.3 million for the three-month period endedSeptember 30, 2020 , from$72.8 million for the same period in 2019. On a diluted earnings per share basis, our earnings were$0.42 per share for the three-month period endedSeptember 30, 2020 and$0.44 per share for the three-month period endedSeptember 30, 2019 . During the three-month period endedSeptember 30, 2020 , the Company recorded$14.0 million of total credit loss expense which was primarily due to the Company increasing reserves on deferred loans resulting from the ongoing uncertainties related to the COVID-19 pandemic. The Company also recorded a$1.4 million write-down for the fair value adjustment on marketable securities. These items were partially offset by$3.2 million of special dividend income from one of our equity investments. The summation of all these items resulted in net additional expense of$12.2 million , or$9.0 million after tax. Total interest income decreased$15.4 million or 8.5%, and non-interest expense increased$3.9 million or 5.8%. This was offset by a$18.6 million , or 47.6%, decrease in total interest expense and a$5.2 million , or 21.0%, increase in non-interest income. The primary drivers of the decrease in interest income were a$12.7 million decrease in loan interest income, a$1.9 million decrease in investment security income and a$816,000 decrease in interest income on deposits with other banks. The primary driver of the increase in non-interest expense was a$1.6 million increase in salaries and employee benefits, a$519,000 increase in occupancy and equipment expense, a$862,000 increase in data processing expense and an$975,000 increase in other operating expenses. The decrease in interest expense was primarily due to a$16.4 million decrease in interest on deposits and a$1.4 million decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to a$5.6 million increase in mortgage lending income, a$2.3 million increase in dividend income from FHLB, FRB, FNBB and other equity investments, and a$1.1 million increase in other income, partially offset by a$1.6 million decrease in service charges on deposit accounts and a$1.4 million decrease in the fair value adjustment on marketable securities. Income tax expense decreased by$6.1 million during the quarter due a reduction in net income as well as$3.7 million in tax expense incurred in the third quarter of 2019 due to the Company surrendering$47.5 million of underperforming separate account bank owned life insurance. Our net interest margin decreased from 4.32% for the three-month period endedSeptember 30, 2019 to 3.92% for the three-month period endedSeptember 30, 2020 . The yield on interest earning assets was 4.47% and 5.50% for the three months endedSeptember 30, 2020 and 2019, respectively, as average interest earning assets increased from$13.24 billion to$14.98 billion . The increase in average earning assets is primarily the result of an$813.5 million increase in average loans receivable, a$713.1 million increase in average interest-bearing balances due from banks and a$214.1 million increase in average investment securities. Average PPP loan balances were$822.0 million for the three months endedSeptember 30, 2020 . These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of$5.9 million on PPP loans for the three months endedSeptember 30, 2020 . The PPP loans were dilutive to the net interest margin by 6 basis points for the three months endedSeptember 30, 2020 . The COVID-19 pandemic and the resulting governmental response have created a significant amount of excess liquidity in the market. As a result, we had an increase of$713.1 million in average interest-bearing cash balances for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This excess liquidity was dilutive to the net interest margin by 20 basis points. For the three months endedSeptember 30, 2020 and 2019, we recognized$7.0 million and$8.5 million , respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 4 basis points. We recognized no event interest income for the three months endedSeptember 30, 2020 compared to$2.8 million for the three months endedSeptember 30, 2019 . This lowered the net interest margin by 8 basis points. The rate on interest bearing liabilities was 0.76% and 1.57% for the three months endedSeptember 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from$9.91 billion to$10.67 billion . The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 38 basis points for the quarter endedSeptember 30, 2020 . Our efficiency ratio was 39.56% for the three months endedSeptember 30, 2020 , compared to 39.16% for the same period in 2019. For the third quarter of 2020, our efficiency ratio, as adjusted (non-GAAP), was 40.08%, an improvement of 52 basis points from the 40.60% reported for the third quarter of 2019. (See Table 23 for the non-GAAP tabular reconciliation). Our annualized return on average assets was 1.66% for the three months endedSeptember 30, 2020 , compared to 1.93% for the same period in 2019. Our annualized return on average common equity was 10.97% for the three months endedSeptember 30, 2020 , compared to 11.84% for the same period in 2019. 49
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Results of Operations for the Nine Months Ended
Our net income decreased$83.6 million , or 38.7%, to$132.7 million for the nine-month period endedSeptember 30, 2020 , from$216.3 million for the same period in 2019. On a diluted earnings per share basis, our earnings were$0.80 per share for the nine-month period endedSeptember 30, 2020 and$1.29 per share for the nine-month period endedSeptember 30, 2019 . As a result of COVID-19, the unemployment rate projections significantly increased fromJanuary 1, 2020 throughSeptember 30, 2020 . Additionally, the ongoing uncertainties related to the COVID-19 pandemic have resulted in the Company increasing reserves on deferred loans. These impacts of COVID-19 have resulted in the Company recording a$102.1 million provision for credit losses on loans, an$842,000 provision for credit losses on investment securities, and a$6.2 million write-down for the fair value adjustment on marketable securities. The Company also recorded$17.0 million in unfunded commitments expense which was due to an increase in the expected funding percentages for the Company's unfunded commitments as well as an increase in the unemployment rate projections fromJanuary 1, 2020 toSeptember 30, 2020 , due to COVID-19. We incurred$10.0 million of expense as a result of our LH-Finance acquisition, which we completed onFebruary 29, 2020 , including$9.3 million for the provision for credit losses and$711,000 of acquisition expenses. The acquired loan portfolio is now housed in our Shore Premier Finance ("SPF") division. The Company also had$1.1 million of expense for outsourced special projects,$10.2 million of special dividend income from one of our equity investments and$981,000 of increased depreciation expense related to the second quarter write-off of the Company'sMarathon, Florida branch office, which the Company made the strategic decision to demolish and rebuild at its existing location. The summation of all these items resulted in net additional expense of$128.1 million , or$94.6 million after tax. Total interest income decreased$32.5 million , or 6.0% and non-interest expense increased$25.7 million , or 12.6%. This was partially offset by a$43.5 million , or 36.5%, decrease in total interest expense and a$6.4 million , or 9.0%, increase in non-interest income. The primary drivers of the decrease in interest income were a$25.2 million decrease in loan interest income, a$4.6 million decrease in investment security income and a$2.7 million decrease in interest income on deposits with other banks. The increase in non-interest expense was primarily due to a$5.2 million increase in salaries and employee benefits,$1.9 million increase in occupancy and equipment expense, a$2.0 million increase in data processing expense and a$16.6 million increase in other operating expenses resulting from a$17.0 million increase in our reserve for unfunded commitments during the nine months endedSeptember 30, 2020 . The decrease in interest expense was due to a$34.8 million decrease in interest on deposits and a$6.9 million decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to a$8.5 million increase in mortgage lending income, a$5.8 million increase in dividend income from FHLB, FRB, FNBB and other equity investments , and a$3.7 million increase in other income, which were partially offset by a$6.2 million write-down for the fair value adjustment on marketable securities, a$3.3 million decrease in service charges on deposit accounts and a$1.2 million decrease in other service charges and fees. Income tax expense decreased by$35.5 million due to a reduction in net income as well as$3.7 million in tax expense incurred in the third quarter of 2019 due to the Company surrendering$47.5 million of underperforming separate account bank owned life insurance. Our net interest margin decreased from 4.30% for the nine-month period endedSeptember 30, 2019 to 4.08% for the nine-month period endedSeptember 30, 2020 . The yield on interest earning assets was 4.79% and 5.50% for the nine months endedSeptember 30, 2020 and 2019, respectively, as average interest earning assets increased from$13.28 billion to$14.36 billion . The increase in average earning assets is primarily the result of a$526.0 million increase in average loans receivable, a$409.8 million in average interest-bearing balances due from banks, and a$141.3 million increase in average investment securities. Average PPP loan balances from the Company's participation in the Paycheck Protection Program beginning in the second quarter of 2020 were$470.6 million for the nine months endedSeptember 30, 2020 . We recognized total interest income of$10.4 million on PPP loans for the nine months endedSeptember 30, 2020 . The PPP loans were dilutive to the net interest margin by 4 basis points for the nine months endedSeptember 30, 2020 . As a result of the significant amount of excess liquidity in the market created by the COVID-19 pandemic and the resulting governmental response, we had an increase of$409.8 million in average interest-bearing cash balances for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This excess liquidity was dilutive to the net interest margin by 12 basis points. For the nine months endedSeptember 30, 2020 and 2019, we recognized$21.6 million and$26.8 million , respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 5 basis points. We recognized$2.1 million in event interest income for the nine months endedSeptember 30, 2020 compared to$2.8 million for the nine months endedSeptember 30, 2019 . This lowered the net interest margin by 1 basis point. The rate on interest bearing liabilities was 0.97% and 1.59% for the nine months endedSeptember 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from$10.05 billion to$10.49 billion . The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 22 basis points for the nine months endedSeptember 30, 2020 . 50
-------------------------------------------------------------------------------- Our efficiency ratio was 43.69% for the nine months endedSeptember 30, 2020 , compared to 40.03% for the same period in 2019. For the first nine months of 2020, our efficiency ratio, as adjusted (non-GAAP) was 40.25%, an decrease of 10 basis points from the 40.35% reported for the first nine months of 2019. (See Table 23 for the non-GAAP tabular reconciliation).
Our annualized return on average assets was 1.11% for the nine months ended
Financial Condition as of and for the Period Ended
Our total assets as ofSeptember 30, 2020 increased$1.52 billion to$16.55 billion from the$15.03 billion reported as ofDecember 31, 2019 . Cash and cash equivalents increased$552.7 million , or 112.7%, for the nine months endedSeptember 30, 2020 . The increase in cash and cash equivalents is primarily due to the Company's strategic decision to increase our liquidity position as a result of the COVID-19 pandemic . Our loan portfolio balance increased to$11.69 billion as ofSeptember 30, 2020 from$10.87 billion atDecember 31, 2019 . The increase in the loan portfolio is primarily due to the$848.7 million of PPP loans as well as the acquisition of$406.2 million of loans from LH-Finance during the first quarter of 2020. Total deposits increased$1.66 billion to$12.94 billion as ofSeptember 30, 2020 from$11.28 billion as ofDecember 31, 2019 , which was due customers holding higher deposit balances in response to the COVID-19 pandemic. Stockholders' equity increased$29.3 million to$2.54 billion as ofSeptember 30, 2020 , compared to$2.51 billion as ofDecember 31, 2019 . The$29.3 million increase in stockholders' equity is primarily associated with the$132.7 million in net income and$22.1 million in other comprehensive income for the nine months endedSeptember 30, 2020 which was partially offset by the$44.0 million impact of the adoption of ASC 326,$64.6 million of shareholder dividends paid and stock repurchases of$23.9 million in 2020. Our non-performing loans were$73.8 million , or 0.63% of total loans as ofSeptember 30, 2020 , compared to$54.8 million , or 0.50% of total loans as ofDecember 31, 2019 . The allowance for credit losses as a percent of non-performing loans increased to 336.4% as ofSeptember 30, 2020 , from 186.2% as ofDecember 31, 2019 . Non-performing loans from ourArkansas franchise were$23.3 million atSeptember 30, 2020 compared to$17.9 million as ofDecember 31, 2019 . Non-performing loans from ourFlorida franchise were$40.2 million atSeptember 30, 2020 compared to$34.7 million as ofDecember 31, 2019 . Non-performing loans from ourAlabama franchise were$489,000 atSeptember 30, 2020 compared to$429,000 as ofDecember 31, 2019 . Non-performing loans from our SPF franchise were$4.3 million atSeptember 30, 2020 compared to$1.8 million as ofDecember 31, 2019 . Non-performing loans from ourCentennial Commercial Finance Group ("CFG") franchise were$5.4 million atSeptember 30, 2020 compared to zero as ofDecember 31, 2019 . As ofSeptember 30, 2020 , our non-performing assets increased to$78.4 million , or 0.47% of total assets, from$64.4 million , or 0.43% of total assets, as ofDecember 31, 2019 . Non-performing assets from ourArkansas franchise were$24.8 million atSeptember 30, 2020 compared to$22.9 million as ofDecember 31, 2019 . Non-performing assets from ourFlorida franchise were$43.3 million atSeptember 30, 2020 compared to$39.2 million as ofDecember 31, 2019 . Non-performing assets from ourAlabama franchise were$523,000 atSeptember 30, 2020 compared to$463,000 as ofDecember 31, 2019 . Non-performing assets from our SPF franchise were$4.4 million atSeptember 30, 2020 compared to$1.8 million as ofDecember 31, 2019 . Non-performing assets from our CFG franchise were$5.4 million atSeptember 30, 2020 compared to zero as ofDecember 31, 2019 . The$5.4 million balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for Credit risk by theFederal Reserve under the Shared National Credit Program. The decision to place these loans on non-accrual status was made by theFederal Reserve and not the Company. The two loans that make up the total balance are still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because theFederal Reserve required us to place these loans on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by theFederal Reserve .
Critical Accounting Policies
Overview. We prepare our consolidated financial statements based on the
selection of certain accounting policies, generally accepted accounting
principles and customary practices in the banking industry. These policies, in
certain areas, require us to make significant estimates and assumptions. Our
accounting policies are described in detail in the notes to our consolidated
financial statements included as part of this document.
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We consider a policy critical if (i) the accounting estimate requires
assumptions about matters that are highly uncertain at the time of the
accounting estimate; and (ii) different estimates that could reasonably have
been used in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material impact
on our financial statements. Using these criteria, we believe that the
accounting policies most critical to us are those associated with our lending
practices, including revenue recognition and the accounting for the allowance
for credit losses, foreclosed assets, investments, intangible assets, income
taxes and stock options.
Revenue Recognition. Accounting Standards Codification ("ASC") Topic 606,
Revenue from Contracts with Customers ("ASC Topic 606"), establishes principles
for reporting information about the nature, amount, timing and uncertainty of
revenue and cash flows arising from the entity's contracts to provide goods or
services to customers. The core principle requires an entity to recognize
revenue to depict the transfer of goods or services to customers in an amount
that reflects the consideration that it expects to be entitled to receive in
exchange for those goods or services recognized as performance obligations are
satisfied. The majority of our revenue-generating transactions are not subject
to ASC Topic 606, including revenue generated from financial instruments, such
as our loans, letters of credit and investment securities, as these activities
are subject to other GAAP discussed elsewhere within our disclosures.
Descriptions of our revenue-generating activities that are within the scope of
ASC Topic 606, which are presented in our income statements as components of
non-interest income are as follows:
• Service charges on deposit accounts - These represent general service fees
for monthly account maintenance and activity or transaction-based fees and
consist of transaction-based revenue, time-based revenue (service period),
item-based revenue or some other individual attribute-based revenue.
Revenue is recognized when our performance obligation is completed which
is generally monthly for account maintenance services or when a
transaction has been completed (such as a wire transfer). Payment for such
performance obligations are generally received at the time the performance
obligations are satisfied.
• Other service charges and fees - These represent credit card interchange
fees and Centennial CFG loan fees. The interchange fees are recorded in
the period the performance obligation is satisfied which is generally the
cash basis based on agreed upon contracts. Centennial CFG loan fees are
based on loan or other negotiated agreements with customers and are
accounted for under ASC Topic 310. Interchange fees were
$11.0 million ,$3.6 million and$10.4 million for the three and nine months endedSeptember 30, 2020 and 2019, respectively. Centennial CFG
loan fees were
for the three and nine months ended
respectively.
Credit Losses. The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effectiveJanuary 1, 2020 . The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("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 not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company's portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not, they will be required to sell. The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet ("OBS") credit exposures. Results for reporting periods beginning afterJanuary 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of$44.0 million which was recognized through a$32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to$146.1 million as ofJanuary 1, 2020 . In addition, the Company recorded a$15.5 million reserve on unfunded commitments, as ofJanuary 1, 2020 , which was recognized through an$11.5 million adjustment to retained earnings, net of tax. 52
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The Company adopted ASC 326 using the prospective transition approach for
financial assets purchased with credit deterioration ("PCD") that were
previously classified as purchased credit impaired ("PCI") and accounted for
under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased
loans with deteriorated credit quality. These loans pools related specifically
to acquired loans from the Heritage, Liberty, Landmark, Bay Cities, Bank of
Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At
acquisition, a portion of these loans were recorded as purchased credit impaired
loans on a pool by pool basis. Through the reevaluation of these loan pools,
management determined that estimated losses for purchase credit impaired loans
should be processed against the credit mark of the applicable pools. The
remaining non-accretable mark was then moved to accretable mark to be recognized
over the remaining weighted average life of the loan pools. The projected
losses for these loans were less than the total credit mark. As such, the
remaining $107.6 million of loans in these pools along with the $29.3 million in
accretable yield was deemed to be immaterial and was reclassified out of the
purchased credit impaired loans category. As of December 31, 2019 , the Company
no longer held any purchased loans with deteriorated credit quality. Therefore,
the Company did not have any PCI loans upon adoption on of ASC 326 as of January
1, 2020 .
The Company adopted ASC 326 using the prospective transition approach for debt
securities for which other-than-temporary impairment had been recognized prior
to January 1, 2020 . As of December 31, 2019 , the Company did not have any
other-than-temporarily impaired investment securities. Therefore, upon adoption
of ASC 326, the Company determined than an allowance for credit losses on
available-for-sale securities was not deemed material. However, the Company
evaluated the investment portfolio during the first quarter of 2020 and
determined that an $842,000 provision for credit losses was necessary. No
additional provision was deemed necessary during the second and third quarters
of 2020. See Note 3 for further discussion.
Investments - Available-for-sale. Securities available-for-sale are reported at
fair value with unrealized holding gains and losses reported as a separate
component of stockholders' equity and other comprehensive income (loss), net of
taxes. Securities that are held as available-for-sale are used as a part of our
asset/liability management strategy. Securities that may be sold in response to
interest rate changes, changes in prepayment risk, the need to increase
regulatory capital, and other similar factors are classified as
available-for-sale. The Company evaluates all securities quarterly to determine
if any securities in a loss position require a provision for credit losses in
accordance with ASC 326, Measurement of Credit Losses on Financial Instruments.
The Company first assesses whether it intends to sell or is more likely than not
that the Company will be required to sell the security before recovery of its
amortized cost basis. If either of the criteria regarding intent or requirement
to sell is met, the security's amortized cost basis is written down to fair
value through income. For securities that do not meet this criteria, the Company
evaluates whether the decline in fair value has resulted from credit losses or
other factors. In making this assessment, the Company considers the extent to
which fair value is less than amortized cost, and changes to the rating of the
security by a rating agency, and adverse conditions specifically related to the
security, among other factors. If this assessment indicates that a credit loss
exists, the present value of cash flows expected to be collected from the
security are compared to the amortized cost basis of the security. If the
present value of cash flows expected to be collected is less than the amortized
cost basis, a credit loss exists and an allowance for credit losses is recorded
for the credit loss, limited by the amount that the fair value is less than the
amortized cost basis. Any impairment that has not been recorded through an
allowance for credit losses is recognized in other comprehensive income. Changes
in the allowance for credit losses are recorded as provision for (or reversal
of) credit loss expense. Losses are charged against the allowance when
management believes the uncollectability of a security is confirmed or when
either of the criteria regarding intent or requirement to sell is met.
Loans Receivable and Allowance for Credit Losses. Except for loans acquired
during our acquisitions, substantially all of our loans receivable are reported
at their outstanding principal balance adjusted for any charge-offs, as it is
management's intent to hold them for the foreseeable future or until maturity or
payoff, except for mortgage loans held for sale. Interest income on loans is
accrued over the term of the loans based on the principal balance outstanding.
The allowance for credit losses on loans receivable is a valuation account that
is deducted from the loans' amortized cost basis to present the net amount
expected to be collected on the loans. Loans are charged off against the
allowance when management believes the uncollectability of a loan balance is
confirmed. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. Historical 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 the national unemployment rate, commercial real
estate price index, housing price index and national retail sales index.
53
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The allowance for credit losses is measured based on call report segment as these types of loan exhibit similar risk characteristics. The identified loan segments are as follows:
• 1-4 family construction • All other construction
• 1-4 family revolving home equity lines of credit ("HELOC") & junior liens
• 1-4 family senior liens
• Multifamily
• Owner occupies commercial real estate
• Non-owner occupied commercial real estate
• Commercial & industrial, agricultural, non-depository financial
institutions, purchase/carry securities, other
• Consumer auto
• Other consumer
The allowance for credit losses for each segment is measured through the use of
the discounted cash flow method. Loans that do not share risk characteristics
are evaluated on an individual basis. Loans evaluated individually are not also
included in the collective evaluation. For those loans that are classified as
impaired, an allowance is established when the discounted cash flows, collateral
value or observable market price of the impaired loan is lower than the carrying
value of that loan.
Expected credit losses are estimated over the contractual term of the loans,
adjusted for expected prepayments when appropriate. The contractual term
excludes expected extensions, renewals, and modifications unless either of the
following applies:
• Management has a reasonable expectation at the reporting date that
troubled debt restructuring will be executed with an individual
borrower.
• The extension or renewal options are included in the original ormodified contract at the reporting date and are not unconditionally
cancellable by the Company.
Loans considered impaired, according to ASC 326, are loans for which, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
aggregate amount of impairment of loans is utilized in evaluating the adequacy
of the allowance for credit losses and amount of provisions thereto. Losses on
impaired loans are charged against the allowance for credit losses when in the
process of collection, it appears likely that such losses will be realized. The
accrual of interest on impaired loans is discontinued when, in management's
opinion the collection of interest is doubtful or generally when loans are 90
days or more past due. When accrual of interest is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received in excess of principal due. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Loans are placed on non-accrual status when management believes that the
borrower's financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of interest
is doubtful, or generally when loans are 90 days or more past due. Loans are
charged against the allowance for credit losses when management believes that
the collectability of the principal is unlikely. Accrued interest related to
non-accrual loans is generally charged against the allowance for credit losses
when accrued in prior years and reversed from interest income if accrued in the
current year. Interest income on non-accrual loans may be recognized to the
extent cash payments are received, although the majority of payments received
are usually applied to principal. Non-accrual loans are generally returned to
accrual status when principal and interest payments are less than 90 days past
due, the customer has made required payments for at least six months, and we
reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under
FASB ASC Topic 805, Business Combinations, which requires the use of the
acquisition method of accounting. All identifiable assets acquired, including
loans, are recorded at fair value. In accordance with ASC 326, the Company
records both a discount and an allowance for credit losses on acquired
loans. All purchased loans are recorded at fair value in accordance with the
fair value methodology prescribed in FASB ASC Topic 820, Fair Value
Measurements. The fair value estimates associated with the loans include
estimates related to expected prepayments and the amount and timing of
undiscounted expected principal, interest and other cash flows.
The Company has purchased loans, some of which have experienced more than
insignificant credit deterioration since origination. Purchase credit
deteriorated ("PCD") loans are recorded at the amount paid. An allowance for
credit losses is determined using the same methodology as other loans. The
initial allowance for credit losses determined on a collective basis is
allocated to individual loans. The sum of the loan's purchase price and
allowance for credit losses 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 allowance for credit losses
are recorded through the provision for credit loss.
54
-------------------------------------------------------------------------------- Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Foreclosed Assets Held for Sale. Real estate and personal properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Valuations are periodically performed by management, and the real estate and personal properties are carried at fair value less costs to sell. Gains and losses from the sale of other real estate and personal properties are recorded in non-interest income, and expenses used to maintain the properties are included in non-interest expenses. Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles.Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 48 to 121 months on a straight-line basis.Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by FASB ASC 350, Intangibles -Goodwill and Other, in the fourth quarter or more often if events and circumstances indicate there may be an impairment. Income Taxes. We account for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term "more likely than not" means a likelihood of more than 50 percent; the terms "examined" and "upon examination" also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management's judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Both we and our subsidiary file consolidated tax returns. Our subsidiary provides for income taxes on a separate return basis, and remits to us amounts determined to be currently payable.
Stock Compensation. In accordance with FASB ASC 718, Compensation - Stock Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the fair value of each option award is estimated on the date of grant. We recognize compensation expense for the grant-date fair value of the option award over the vesting period of the award. Acquisitions Acquisition of LH-Finance OnFebruary 29, 2020 , the Company completed the acquisition of LH-Finance, the marine lending division ofPeople's United Bank, N.A. The Company paid a purchase price of approximately$421.2 million in cash. LH-Finance provides direct consumer financing forUnited States Coast Guard ("USCG") registered high-end sail and power boats. Additionally, LH-Finance provides inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.
Including the purchase accounting adjustments, as of the acquisition date,
LH-Finance had approximately
The acquired portfolio of loans is now housed in our SPF division. The SPF
division is responsible for servicing the acquired loan portfolio and
originating new loan production. In connection with this acquisition, we opened
a new loan production office in
55
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See Note 2 "Business Combinations" in the Notes to Consolidated Financial Statements for additional information regarding the acquisition of LH-Finance.
Future Acquisitions
In our continuing evaluation of our growth plans, we believe properly priced bank acquisitions can complement our organic growth and de novo branching growth strategies. We anticipate that our principal acquisition focus will be to continue to expand our presence inArkansas ,Florida andAlabama and into other contiguous markets through pursuing both non-FDIC -assisted andFDIC -assisted bank acquisitions. However, as financial opportunities in other market areas arise, we may seek to expand into those areas.
We will continue evaluating all types of potential bank acquisitions to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.
Branches
As opportunities arise, we will continue to open new (commonly referred to as de novo) branches in our current markets and in other attractive market areas.
As ofSeptember 30, 2020 , we had 161 branch locations. There were 77 branches inArkansas , 78 branches inFlorida , five branches inAlabama and one branch inNew York City . Results of Operations
For the three and nine months ended
Our net income decreased$3.4 million , or 4.7%, to$69.3 million for the three-month period endedSeptember 30, 2020 , from$72.8 million for the same period in 2019. On a diluted earnings per share basis, our earnings were$0.42 per share for the three-month period endedSeptember 30, 2020 and$0.44 per share for the three-month period endedSeptember 30, 2019 . During the three-month period endedSeptember 30, 2020 , the Company recorded$14.0 million of total credit loss expense which was primarily due to the Company increasing reserves on deferred loans resulting from the ongoing uncertainties related to the COVID-19 pandemic. The Company also recorded a$1.4 million write-down for the fair value adjustment on marketable securities. These items were partially offset by$3.2 million of special dividend income from one of our equity investments. The summation of all these items resulted in net additional expense of$12.2 million , or$9.0 million after tax. Our net income decreased$83.6 million , or 38.7%, to$132.7 million for the nine-month period endedSeptember 30, 2020 , from$216.3 million for the same period in 2019. On a diluted earnings per share basis, our earnings were$0.80 per share for the nine-month period endedSeptember 30, 2020 and$1.29 per share for the nine-month period endedSeptember 30, 2019 . As a result of COVID-19, the unemployment rate projections significantly increased fromJanuary 1, 2020 throughSeptember 30, 2020 . Additionally, the ongoing uncertainties related to the COVID-19 pandemic have resulted in the Company increasing reserves on deferred loans. These impacts of COVID-19 have resulted in the Company recording a$102.1 million provision for credit losses on loans, an$842,000 provision for credit losses on investment securities, and a$6.2 million write-down for the fair value adjustment on marketable securities. The Company also recorded$17.0 million in unfunded commitments expense, which was due to an increase in the expected funding percentages for the Company's unfunded commitments as well as an increase in the unemployment rate projections fromJanuary 1, 2020 toSeptember 30, 2020 , due to COVID-19. We incurred$10.0 million of expense as a result of our LH-Finance acquisition, which we completed onFebruary 29, 2020 , including$9.3 million for the provision for credit losses and$711,000 of acquisition expenses. The acquired loan portfolio is now housed in our SPF division. The Company also had$1.1 million of expense for outsourced special projects,$10.2 million of special dividend income from one of our equity investments and$981,000 of increased depreciation expense related to the second quarter write-off of the Company'sMarathon, Florida branch office, which the Company made the strategic decision to demolish and rebuild at its existing location. The summation of all these items resulted in net additional expense of$128.1 million , or$94.6 million after tax. 56
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Net Interest Income
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (26.135% for the three and nine months endedSeptember 30, 2020 , respectively) TheFederal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. TheFederal Reserve lowered the target rate three times during 2019. First, the target rate was lowered to 2.00% to 2.25% onJuly 31, 2019 ; second, the rate was lowered onSeptember 18, 2019 to 1.75% to 2.00%; and third, the rate was lowered onOctober 30, 2019 to 1.50% to 1.75%. The Federal reserve lowered the target rate two times in 2020. First, the target rate was lowered to 1.00% to 1.25% onMarch 3, 2020 ; second, the rate was lowered to 0.00% to 0.25% onMarch 15, 2020 . The target rate is currently at 0.00% to 0.25% as ofSeptember 30, 2020 , which has decreased from the target rate of 1.75% to 2.00% as ofSeptember 30, 2019 . Our net interest margin decreased from 4.32% for the three-month period endedSeptember 30, 2019 to 3.92% for the three-month period endedSeptember 30, 2020 . The yield on interest earning assets was 4.47% and 5.50% for the three months endedSeptember 30, 2020 and 2019, respectively, as average interest earning assets increased from$13.24 billion to$14.98 billion . The increase in average earning assets is primarily the result of an$813.5 million increase in average loans receivable, a$713.1 million increase in average interest-bearing balances due from banks and a$214.1 million increase in average investment securities. Average PPP loan balances were$822.0 million for the three months endedSeptember 30, 2020 . These loans bear interest at 1.00% plus the accretion of the origination fee. We recognized total interest income of$5.9 million on PPP loans for the three months endedSeptember 30, 2020 . The PPP loans were dilutive to the net interest margin by 6 basis points for the three months endedSeptember 30, 2020 . The COVID-19 pandemic and the resulting governmental response has created a significant amount of excess liquidity in the market. As a result, we had an increase of$713.1 million in average interest-bearing cash balances for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . This excess liquidity was dilutive to the net interest margin by 20 basis points. For the three months endedSeptember 30, 2020 and 2019, we recognized$7.0 million and$8.5 million , respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive the net interest margin by 4 basis points. We recognized no event interest income for the three months endedSeptember 30, 2020 compared to$2.8 million for the three months endedSeptember 30, 2019 . This lowered the net interest margin by 8 basis points. The rate on interest bearing liabilities was 0.76% and 1.57% for the three months endedSeptember 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from$9.91 billion to$10.67 billion . The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 38 basis points for the quarter endedSeptember 30, 2020 . Our net interest margin decreased from 4.30% for the nine-month period endedSeptember 30, 2019 to 4.08% for the nine-month period endedSeptember 30, 2020 . The yield on interest earning assets was 4.79% and 5.50% for the nine months endedSeptember 30, 2020 and 2019, respectively, as average interest earning assets increased from$13.28 billion to$14.36 billion . The increase in average earning assets is primarily the result of a$526.0 million increase in average loans receivable, a$409.8 million in average interest-bearing balances due from banks, and a$141.3 million increase in average investment securities. Average PPP loan balances from the Company's participation in the Paycheck Protection Program beginning in the second quarter of 2020 were$470.6 million for the nine months endedSeptember 30, 2020 . We recognized total interest income of$10.4 million on PPP loans for the nine months endedSeptember 30, 2020 . The PPP loans were dilutive to the net interest margin by 4 basis points for the nine months endedSeptember 30, 2020 . As a result of the significant amount of excess liquidity in the market created by the COVID-19 pandemic and the resulting governmental response, we had an increase of$409.8 million in average interest-bearing cash balances for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . This excess liquidity was dilutive to the net interest margin by 12 basis points. For the nine months endedSeptember 30, 2020 and 2019, we recognized$21.6 million and$26.8 million , respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive the net interest margin by 5 basis points. We recognized$2.1 million in event interest income for the nine months endedSeptember 30, 2020 compared to$2.8 million for the nine months endedSeptember 30, 2019 . This lowered the net interest margin by 1 basis point. The rate on interest bearing liabilities was 0.97% and 1.59% for the nine months endedSeptember 30, 2020 and 2019, respectively, as average interest-bearing liabilities increased from$10.05 billion to$10.49 billion . The reduction in yield on loans due to the low interest rate on PPP loans, the impact of the excess liquidity, the reduction in accretion income, and the absence of loan payoff events, reduced the net interest margin by 22 basis points for the nine months endedSeptember 30, 2020 . 57
-------------------------------------------------------------------------------- Net interest income on a fully taxable equivalent basis increased$3.5 million , or 2.4%, to$147.7 million for the three-month period endedSeptember 30, 2020 , from$144.2 million for the same period in 2019. This increase in net interest income for the three-month period endedSeptember 30, 2020 was the result of a$18.6 million decrease in interest expense which was partially offset by a$15.1 million decrease in interest income, on a fully taxable equivalent basis. The$15.1 million decrease in interest income was primarily the result of lower yields on our earning assets, partially offset by a higher level of earning assets. The lower yield on earning assets resulted in a decrease in interest income of approximately$30.2 million , and the higher level of earning assets resulted in an increase in interest income of approximately$15.0 million . The lower yield was primarily driven by the decrease in income on loans of$12.8 million , a decrease in income on investment securities of$1.5 million and a$816,000 decrease in income on interest-bearing balances due from banks. The decrease in interest income also reflected a$1.5 million decrease in loan accretion income. The$18.6 million decrease in interest expense for the three-month period endedSeptember 30, 2020 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment which lowered interest expense by$19.4 million , partially offset by a$742,000 in increased interest expense resulting from an increase in average interest bearing liabilities. Net interest income on a fully taxable equivalent basis increased$11.4 million , or 2.7%, to$438.8 million for the nine-month period endedSeptember 30, 2020 , from$427.4 million for the same period in 2019. This increase in net interest income for the nine-month period endedSeptember 30, 2020 was the result of a$43.5 million decrease in interest expense which was partially offset by a$32.1 million decrease in interest income, on a fully taxable equivalent basis. The$32.1 million decrease in interest income was primarily the result of lower yields on our earning assets, partially offset by a higher level of earning assets. The lower yield on earning assets resulted in a decrease in interest income of approximately$62.3 million , and the higher level of earning assets resulted in an increase in interest income of approximately$30.1 million . The lower yield was primarily driven by the decrease in income on loans of$25.4 million , a decrease in income on investment securities of$4.0 million and a$2.7 million decrease in income on interest-bearing balances from banks. The decrease in interest income also reflected a$5.1 million decrease in loan accretion income. The$43.5 million decrease in interest expense for the nine-month period endedSeptember 30, 2020 is primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by$44.5 million . Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine months endedSeptember 30, 2020 and 2019, as well as changes in fully taxable equivalent net interest margin for the three and nine months endedSeptember 30, 2020 compared to the same period in 2019. Table 2: Analysis of Net Interest Income Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (Dollars in thousands) Interest income$ 166,633 $ 182,082 $ 510,406 $ 542,856 Fully taxable equivalent adjustment 1,576 1,247 4,237 3,933 Interest income - fully taxable equivalent 168,209 183,329 514,643 546,789 Interest expense 20,495 39,105 75,876 119,422 Net interest income - fully taxable equivalent 147,714 144,224 438,767 427,367 Yield on earning assets - fully taxable equivalent 4.47 % 5.50 % 4.79 % 5.50 % Cost of interest-bearing liabilities 0.76 1.57 0.97 1.59 Net interest spread - fully taxable equivalent 3.71 3.93 3.82 3.91 Net interest margin - fully taxable equivalent 3.92 4.32 4.08 4.30 58
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Table 3: Changes in Fully Taxable Equivalent Net Interest Margin
Three Months Ended Nine Months Ended
September 30, September 30,
2020 vs. 2019 2020 vs. 2019
(In thousands)
Increase (decrease) in interest income due to change
in earning assets $ 15,044 $ 30,142
Increase (decrease) in interest income due to change
in earning asset yields (30,164 ) (62,288 )
(Increase) decrease in interest expense due to change in
interest-bearing liabilities (742 ) (931 )
(Increase) decrease in interest expense due to change in
interest rates paid on interest-bearing liabilities 19,352 44,477
Increase (decrease) in net interest income $ 3,490 $ 11,400
59
-------------------------------------------------------------------------------- Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three and nine months endedSeptember 30, 2020 and 2019, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans. Table 4: Average Balance Sheets and Net Interest Income Analysis
Three Months Ended
2020 2019
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks $ 926,754 $ 252 0.11 %
124 - 0.00 1,442 8 2.20
Investment securities - taxable 1,618,058 7,227 1.78 1,705,647 10,343 2.41 Investment securities - non-taxable
672,067 5,731 3.39 370,376 4,139 4.43 Loans receivable
11,758,143 154,999 5.24 10,944,638 167,771 6.08 Total interest-earning assets
14,975,146 168,209 4.47 % 13,235,774 183,329 5.50 %
Non-earning assets 1,619,349 1,757,458
Total assets $ 16,594,495 $ 14,993,232
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction
accounts $ 7,937,412 $ 6,651 0.33 %
1,745,279 6,549 1.49 2,014,630 9,951 1.96 Total interest-bearing deposits
9,682,691 13,200 0.54 8,644,121 29,566 1.36 Federal funds purchased
- - 0.00 4,801 21 1.74
Securities sold under agreement to
repurchase 157,172 237 0.60 143,628 628 1.73
FHLB and other borrowed funds 464,799 2,235 1.91 748,577 3,683 1.95
Subordinated debentures 370,038 4,823 5.19 369,269 5,207 5.59 Total interest-bearing liabilities
10,674,700 20,495 0.76 % 9,910,396 39,105 1.57 %
Non-interest-bearing liabilities
Non-interest-bearing deposits 3,259,501 2,530,664
Other liabilities 146,502 114,352
Total liabilities 14,080,703 12,555,412
Stockholders' equity 2,513,792 2,437,820
Total liabilities and stockholders' equity $ 16,594,495 $ 14,993,232
Net interest spread 3.71 % 3.93 %
Net interest income and margin $ 147,714 3.92 % $ 144,224 4.32 %
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Table 4: Average Balance Sheets and Net Interest Income Analysis
Nine Months Ended
2020 2019
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks $ 671,231 $ 1,579 0.31 %
1,775 21 1.58 1,510 29 2.57
Investment securities - taxable 1,665,900 25,696 2.06 1,647,781 31,699 2.57 Investment securities - non-taxable
503,253 14,712 3.90 380,115 12,741 4.48 Loans receivable
11,519,706 472,635 5.48 10,993,686 498,081 6.06 Total interest-earning assets
14,361,865 514,643 4.79 % 13,284,511 546,789 5.50 %
Non-earning assets 1,655,973 1,772,341
Total assets $ 16,017,838 $ 15,056,852
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction
accounts $ 7,544,763 $ 30,272 0.54 %
1,847,833 22,242 1.61 1,954,182 27,493 1.88 Total interest-bearing deposits
9,392,596 52,514 0.75 8,588,991 87,281 1.36 Federal funds purchased
2,080 13 0.83 1,618 21 1.74
Securities sold under agreement to
repurchase 150,020 959 0.85 146,277 1,892 1.73
FHLB and other borrowed funds 579,805 7,589 1.75 945,351 14,523 2.05
Subordinated debentures 369,846 14,801 5.35 369,078 15,705 5.69 Total interest-bearing liabilities
10,494,347 75,876 0.97 % 10,051,315 119,422 1.59 %
Non-interest-bearing liabilities
Non-interest-bearing deposits 2,904,159 2,508,082
Other liabilities 134,281 110,715
Total liabilities 13,532,787 12,670,112
Stockholders' equity 2,485,051 2,386,740
Total liabilities and stockholders' equity $ 16,017,838 $ 15,056,852
Net interest spread 3.82 % 3.91 %
Net interest income and margin $ 438,767 4.08 % $ 427,367 4.30 %
61
-------------------------------------------------------------------------------- Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine months endedSeptember 30, 2020 compared to the same period in 2019, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume. Table 5: Volume/Rate Analysis Three Months Ended September 30, Nine Months Ended September 30, 2020 over 2019 2020 over 2019 Volume Yield/Rate Total Volume Yield/Rate Total (In thousands) Increase (decrease) in: Interest income: Interest-bearing balances due from banks$ 938 $ (1,754 ) $ (816 ) $ 2,969 $ (5,629 ) $ (2,660 ) Federal funds sold (4 ) (4 ) (8 ) 4 (12 ) (8 ) Investment securities - taxable (508 ) (2,608 ) (3,116 ) 345 (6,348 ) (6,003 ) Investment securities - non-taxable 2,753 (1,161 ) 1,592 3,749 (1,778 ) 1,971 Loans receivable 11,865 (24,637 ) (12,772 ) 23,075 (48,521 ) (25,446 ) Total interest income 15,044 (30,164 ) (15,120 ) 30,142 (62,288 ) (32,146 ) Interest expense: Interest-bearing transaction and savings deposits 3,271 (16,235 ) (12,964 ) 7,298 (36,814 ) (29,516 ) Time deposits (1,216 ) (2,186 ) (3,402 ) (1,437 ) (3,814 ) (5,251 ) Federal funds purchased (11 ) (10 ) (21 ) 5 (13 ) (8 ) Securities sold under agreement to repurchase 54 (445 ) (391 ) 47 (980 ) (933 ) FHLB borrowed funds (1,367 ) (81 ) (1,448 ) (5,015 ) (1,919 ) (6,934 ) Subordinated debentures 11 (395 ) (384 ) 33 (937 ) (904 ) Total interest expense 742 (19,352 ) (18,610 ) 931 (44,477 ) (43,546 ) Increase (decrease) in net interest income$ 14,302 $ (10,812 ) $ 3,490 $ 29,211 $ (17,811 ) $ 11,400 Provision for Credit Losses The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effectiveJanuary 1, 2020 . The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss 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 not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company's portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not, they will be required to sell. Loans. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical 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 the national unemployment rate, commercial real estate price index, housing price index and national retail sales index. Acquired loans. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. This is commonly referred to as "double accounting." 62
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The allowance for credit losses is measured based on call report segment as these types of loan exhibit similar risk characteristics. The identified loan segments are as follows:
• 1-4 family construction • All other construction
• 1-4 family revolving home equity lines of credit ("HELOC") & junior liens
• 1-4 family senior liens
• Multifamily
• Owner occupies commercial real estate
• Non-owner occupied commercial real estate
• Commercial & industrial, agricultural, non-depository financial
institutions, purchase/carry securities, other
• Consumer auto
• Other consumer
The allowance for credit losses for each segment is measured through the use of
the discounted cash flow method. Loans that do not share risk characteristics
are evaluated on an individual basis. Loans evaluated individually are not also
included in the collective evaluation. For those loans that are classified as
impaired, an allowance is established when the discounted cash flows, collateral
value or observable market price of the impaired loan is lower than the carrying
value of that loan.
Investments - Available-for-sale: The Company evaluates all securities quarterly
to determine if any securities in a loss position require a provision for credit
losses in accordance with ASC 326, Measurement of Credit Losses on Financial
Instruments. The Company first assesses whether it intends to sell or is more
likely than not that the Company will be required to sell the security before
recovery of its amortized cost basis. If either of the criteria regarding intent
or requirement to sell is met, the security's amortized cost basis is written
down to fair value through income. For securities that do not meet this
criteria, the Company evaluates whether the decline in fair value has resulted
from credit losses or other factors. In making this assessment, the Company
considers the extent to which fair value is less than amortized cost, and
changes to the rating of the security by a rating agency, and adverse conditions
specifically related to the security, among other factors. If this assessment
indicates that a credit loss exists, the present value of cash flows expected to
be collected from the security are compared to the amortized cost basis of the
security. If the present value of cash flows expected to be collected is less
than the amortized cost basis, a credit loss exists and an allowance for credit
losses is recorded for the credit loss, limited by the amount that the fair
value is less than the amortized cost basis. Any impairment that has not been
recorded through an allowance for credit losses is recognized in other
comprehensive income. Changes in the allowance for credit losses are recorded as
provision for (or reversal of) credit loss expense. Losses are charged against
the allowance when management believes the uncollectability of a security is
confirmed or when either of the criteria regarding intent or requirement to sell
is met.
During the three months ended September 30, 2020 , we recorded $14.0 million of
total credit loss expense compared to recording zero credit loss expense for the
three months ended September 30, 2019 . For the nine months ended September 30,
2020 , we recorded $112.3 million of total credit loss expense compared to $1.3
million for the nine months ended September 30 . 2019. This expense is comprised
of the following components - investment securities, CECL double accounting for
LH-Finance and CECL COVID-19 loan provision. During the nine months ended
September 30, 2020 , we recorded $842,000 for credit losses on the state and
political subdivision portfolio as a result of economic uncertainties related to
COVID-19, $9.3 million for CECL double accounting for LH-Finance and $102.1
million for the CECL COVID-19 loan provision. Our CECL provisioning model is
significantly tied to projected unemployment rates. As a result of COVID-19, the
unemployment rate projections significantly increased from January 1 to the end
of September 2020 . Additionally, the ongoing uncertainties related to the
COVID-19 pandemic have resulted in the Company increasing reserves on deferred
loans. These impacts of COVID-19 have resulted in the Company recording the
$102.1 million provision. In addition, net charge-offs to average total loans
increased to 0.14% for the three months ended September 30, 2020 from 0.06% for
the three months ended September 30, 2019 . Net charge-offs to average total
loans increased to 0.11% for the nine months ended September 30, 2020 from 0.07%
for the nine months ended September 30, 2019 .
Non-Interest Income
Total non-interest income was$30.0 million and$77.9 million for the three and nine months endedSeptember 30, 2020 , compared to$24.7 million and$71.5 million for the same periods in 2019. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending, insurance, increase in cash value of life insurance and dividends. 63
-------------------------------------------------------------------------------- Table 6 measures the various components of our non-interest income for the three and nine months endedSeptember 30, 2020 and 2019, respectively, as well as changes for three and nine months endedSeptember 30, 2020 compared to the same period in 2019. Table 6: Non-Interest Income Three Months Ended Nine Months Ended September 30, 2020 Change September 30, 2020 Change 2020 2019 from 2019 2020 2019 from 2019 (Dollars in thousands) Service charges on deposit accounts$ 4,910 $ 6,492 $ (1,582 ) (24.4 )%$ 15,837 $ 19,152 $ (3,315 ) (17.3 )% Other service charges and fees 8,539 8,710 (171 ) (2.0 ) 22,261 23,450 (1,189 ) (5.1 ) Trust fees 378 382 (4 ) (1.0 ) 1,213 1,176 37 3.1 Mortgage lending income 10,177 4,610 5,567 120.8 18,994 10,502 8,492 80.9 Insurance commissions 271 603 (332 )
(55.1 ) 1,482 1,727 (245 ) (14.2 ) Increase in cash value of life insurance
548 714 (166 ) (23.2 ) 1,666 2,190 (524 ) (23.9 ) Dividends from FHLB, FRB, FNBB &
other 3,433 1,101 2,332 211.8 11,505 5,755 5,750 99.9 Gain on sale of SBA loans - 291 (291 ) (100.0 ) 341 887 (546 ) (61.6 ) Gain (loss) on sale of branches, equipment and other assets, net (27 ) 12 (39 ) (325.0 ) 109 (38 ) 147 386.8 Gain (loss) on OREO, net 470 334 136 40.7 982 598 384 64.2 Fair value adjustment for marketable securities (1,350 ) - (1,350 )
(100.0 ) (6,249 ) - (6,249 ) (100.0 ) Other income
2,602 1,500 1,102
73.5 9,760 6,088 3,672 60.3
Total non-interest income
Non-interest income increased$5.2 million , or 21.0%, to$30.0 million for three months endedSeptember 30, 2020 from$24.7 million for the same period in 2019. The primary factor that resulted in this increase was the impact of mortgage lending income which increased non-interest income by$5.6 million . Other factors were changes related to service charges on deposit accounts, mortgage lending income, dividends from FHLB,Federal Reserve Bank ("FRB"),First National Bankers Bank ("FNBB") & other, fair value adjustment for marketable securities, and other income.
Additional details for the three months ended
• The
primarily related to a decrease in overdraft fees resulting from changes
in consumer spending habits leading consumers to hold higher deposit
balances in response to the COVID-19 pandemic.
• The
the increase in volume of secondary market loan sales driven by the
current low interest rate environment. In addition, reduced hedging
expense led to higher margins on secondary market loan sales.
• The
primarily the result of a
investment. This was partially offset by a decrease in dividend income
from the FRB and FHLB.
• The $1.4 million loss on the fair value adjustment for marketable
securities is related to the decrease in the fair market value of a
marketable security held by the Company.
• The
increase in additional income for items previously charged off, a
increase in investment brokerage fee income, and a
miscellaneous income.
64
-------------------------------------------------------------------------------- Non-interest income increased$6.4 million , or 9.0%, to$77.9 million for the nine months endedSeptember 30, 2020 from$71.5 million for the same period in 2019. The primary factor that resulted in this increase was the impact of the mortgage lending income which increased non-interest income by$8.5 million for the nine months endedSeptember 30, 2020 . Other factors were changes related to service charges on deposit accounts, other service charges and fees, increase in cash value of life insurance, dividends from FHLB, FRB, FNBB & other, gain on sale of SBA loans, fair value adjustment of marketable securities and other income.
Additional details for the nine months ended
• The
primarily related to a decrease in overdraft fees resulting from changes
in consumer spending habits leading consumers to hold higher deposit
balances in response to the COVID-19 pandemic.
• The
related to a decrease in Centennial CFG property finance loan fees.
• The
Company surrendering
bank owned life insurance during 2019.
• The
the increase in volume of secondary market loan sales driven by the
current low interest rate environment. In addition, reduced hedging
expense led to higher margins on secondary market loan sales.
• The
primarily the result of $10.2 million in special dividends from an equity
investment received during the nine months ended September 30, 2020 ,
compared to
30, 2019. This was partially offset by a decrease in dividend income from
the FRB and FHLB.
• The
the second and third quarters of 2020.
• The $6.2 million loss in the fair value adjustment for marketable
securities is related to the decline in the fair market value of a
marketable security held by the Company.
• The
million increase in additional income for items previously charged off, a
$452,000 increase in gain on life insurance and a$522,000 increase in investment brokerage fee income.
Non-Interest Expense
Non-interest expense primarily consists of salaries and employee benefits,
occupancy and equipment, data processing, and other expenses such as
advertising, merger and acquisition expenses, amortization of intangibles,
electronic banking expense,
65
-------------------------------------------------------------------------------- Table 7 below sets forth a summary of non-interest expense for the three and nine months endedSeptember 30, 2020 and 2019, as well as changes for the three and nine months endedSeptember 30, 2020 compared to the same period in 2019. Table 7: Non-Interest Expense Three Months Ended Nine Months Ended September 30, 2020 Change September 30, 2020 Change 2020 2019 from 2019 2020 2019 from 2019 (Dollars in thousands) Salaries and employee benefits$ 41,511 $ 39,919 $ 1,592
4.0 %
9,566 9,047 519 5.7 28,611 26,723 1,888 7.1 Data processing expense
4,921 4,059 862 21.2 13,861 11,867 1,994 16.8 Other operating expenses: Advertising
902 1,201 (299 ) (24.9 ) 2,923 3,347 (424 ) (12.7 ) Merger and acquisition expense
- - - - 711 - 711 100.0
Amortization of intangibles 1,420 1,587 (167 ) (10.5 ) 4,423 4,760 (337 ) (7.1 ) Electronic banking expense
2,426 1,901 525 27.6 6,195 5,655 540 9.5 Directors' fees
429 380 49 12.9 1,265 1,206 59 4.9
Due from bank service charges 259 272 (13 ) (4.8 ) 721 792 (71 ) (9.0 )
FDIC and state assessment 1,607 (532 ) 2,139 402.1 5,001 2,833 2,168 76.5
Hurricane expense - - - - - 897 (897 ) (100.0 )
Insurance 766 698 68 9.7 2,223 2,056 167 8.1
Legal and accounting 1,235 1,414 (179 ) (12.7 ) 3,432 3,384 48 1.4
Other professional fees 1,661 1,906 (245 ) (12.9 ) 6,622 7,024 (402 ) (5.7 )
Operating supplies 460 511 (51 ) (10.0 ) 1,548 1,552 (4 ) (0.3 )
Postage 328 320 8 2.5 968 939 29 3.1
Telephone 321 289 32 11.1 955 898 57 6.3
Unfunded commitments - - - - 16,989 - 16,989 100.0
Other expense 3,900 4,792 (892 )
(18.6 ) 12,757 14,781 (2,024 ) (13.7 )
Total non-interest expense
5.8 %$ 230,133 $ 204,445 $ 25,688 12.6 % Non-interest expense increased$3.9 million , or 5.8%, to$71.7 million for the three months endedSeptember 30, 2020 from$67.8 million for the same period in 2019. The primary factor that resulted in this increase was the changes related toFDIC and state assessment fees. Other factors were changes related to salaries and employee benefits expense, occupancy and equipment expenses, data processing expenses, and other expenses.
Additional details for the three months ended
• The
primarily due to increased salary expense related to the normal increased
cost of doing business, additional employees hired as a result of the
increased regulatory environment, and the acquisition of LH-Finance on
February 29, 2020 .
• The
an increase in janitorial services and supplies expenses as a result of
the ongoing COVID-19 pandemic.
• The
an increase in software, licensing, and software maintenance fees.
• The
related to a
the third quarter of 2019.
• The
in other professional fees, legal expenses, and general travel expenses.
•
66
-------------------------------------------------------------------------------- Non-interest expense increased$25.7 million , or 12.6%, to$230.1 million for the nine months endedSeptember 30, 2020 from$204.4 million for the same period in 2019. The primary factor that resulted in this increase was the unfunded commitments expense incurred as a result of the Company adopting ASC 326. Other factors were changes related to salaries and employee benefits expense, occupancy and equipment expenses, data processing expenses, merger and acquisition expenses,FDIC and state assessment fees, unfunded commitments expense and other expenses.
Additional details for the nine months ended
• The
primarily due to increased salary expense related to the normal increased
cost of doing business, additional employees hired as a result of the
increased regulatory environment and the acquisition of LH-Finance on
February 29, 2020 .
• The
to an increase in janitorial services and supplies expense resulting from
the ongoing COVID-19 pandemic and the increased depreciation expense due
to the write-off of the Company's
the second quarter of 2020. The Company made the strategic decision to
demolish and rebuild the branch at its existing location.
• The
to an increase in software, licensing, software maintenance and internet
banking/cash management expenses.
• The $711,000 in merger and acquisition expense is related to the
acquisition of LH-Finance during the first quarter of 2020.
• The
related to a
the third quarter of 2019.
• The
2019 was related to damages from Hurricane Michael which made landfall in
• The
increase in the expected funding percentages for the Company's unfunded
commitments as well as an increase in the unemployment rate projections
from January 1, 2020 to September 30, 2020 , due to COVID-19, as the
Company's provisioning model is significantly tied to projected
unemployment rates.
• The
decreases in other professional fees and electronic interchange network
expense.
Income Taxes
Income tax expense decreased $6.1 million , or 22.6%, to $21.1 million for the
three-month period ended September 30, 2020 , from $27.2 million for the same
period in 2019. Income tax expense decreased $35.5 million , or 48.7%, to $37.4
million for the nine-month period ended September 30, 2020 , from $72.9 million
for the same period in 2019. The effective income tax rate was 23.30% and 21.98%
for the three and nine-month period ended September 30, 2020 , compared to 27.21%
and 25.20% for the same periods in 2019. The reduction in income tax expense and
the effective tax rate for the three and nine-month periods ended September 30,
2020 compared to the same periods in 2019 was due to the decrease in pre-tax net
income for the three and nine-month periods ended September 31, 2020 compared to
the same periods in 2019 as well as $3.7 million in tax expense incurred in the
third quarter of 2019 due to the Company surrendering $47.5 million of
underperforming separate account bank owned life insurance.
Financial Condition as of and for the Period Ended
Our total assets as ofSeptember 30, 2020 increased$1.52 billion to$16.55 billion from the$15.03 billion reported as ofDecember 31, 2019 . Cash and cash equivalents increased$552.7 million , or 112.7%, for the nine months endedSeptember 30, 2020 . The increase in cash and cash equivalents is primarily due to the Company's strategic decision to increase our liquidity position as a result of the COVID-19 pandemic. Our loan portfolio balance increased to$11.69 billion as ofSeptember 30, 2020 from$10.87 billion atDecember 31, 2019 . The increase in the loan portfolio is primarily due to the$848.7 million of PPP loans as well as the acquisition of$406.2 million of loans from LH-Finance during the first quarter of 2020. Total deposits increased$1.66 billion to$12.94 billion as ofSeptember 30, 2020 from$11.28 billion as ofDecember 31, 2019 , which was due customers holding higher deposit balances in response to the COVID-19 pandemic. Stockholders' equity increased$29.3 million to$2.54 billion as ofSeptember 30, 2020 , compared to$2.51 billion as ofDecember 31, 2019 . The$29.3 million increase in stockholders' equity is primarily associated with the$132.7 million in net income and$22.1 million in other comprehensive income for the nine months endedSeptember 30, 2020 , which was partially offset by the$44.0 million impact of the adoption of ASC 326,$64.6 million of shareholder dividends paid and stock repurchases of$23.9 million in 2020. 67
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Loan Portfolio Loans Receivable Our loan portfolio averaged$11.76 billion and$10.94 billion during the three months endedSeptember 30, 2020 and 2019, respectively. Our loan portfolio averaged$11.52 billion and$10.99 billion during the nine months endedSeptember 30, 2020 and 2019, respectively. Loans receivable were$11.69 billion and$10.87 billion as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. The CARES Act was passed byCongress and signed into law onMarch 27, 2020 . The CARES Act includes an allocation for loans to be issued by financial institutions through theSmall Business Administration ("SBA"). This program is known as the Paycheck Protection Program. PPP loans are forgivable, in whole or in part, so long as employee and compensation levels of the borrower are maintained, and the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1.00% to 5.00%, based on the size of the loan. The Paycheck Protection Program and Health Care Enhancement Act ("PPP/HCEA Act") was passed byCongress onApril 23, 2020 and signed into law onApril 24, 2020 . The PPP/HCEA Act authorizes additional funds under the CARES Act for PPP loans to be issued by financial institutions through the SBA. As ofSeptember 30, 2020 , the Company had$848.7 million of PPP loans. This balance consists of$776.5 million in commercial & industrial loans and$72.2 million in other loans. FromDecember 31, 2019 toSeptember 30, 2020 , the Company experienced an increase of approximately$821.8 million in loans. The increase in the loan portfolio is primarily due to the$848.7 million of PPP loans held as ofSeptember 30, 2020 as well as the acquisition of$406.2 million of loans from LH-Finance during the first quarter of 2020. Including the effects of PPP loan originations, Centennial CFG experienced$89.1 million of organic loan growth during the first nine months of 2020, while the remaining footprint, excluding the acquisition of LH-Finance, experienced$326.5 million of organic loan growth during the first nine months of 2020. The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises inArkansas ,Florida ,South Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas ofArkansas ,Florida ,Alabama andNew York . Loans receivable were approximately$3.80 billion ,$5.06 billion ,$242.9 million ,$912.9 million and$1.68 billion as ofSeptember 30, 2020 inArkansas ,Florida ,Alabama , SPF and Centennial CFG, respectively. As ofSeptember 30, 2020 , we had approximately$431.1 million of construction land development loans which were collateralized by land. This consisted of approximately$119.1 million for raw land and approximately$312.0 million for land with commercial and or residential lots.
Table 8 presents our loans receivable balances by category as of
Table 8: Loans Receivable
As of As of
September 30, 2020 December 31, 2019
(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential $ 4,342,141 $ 4,412,769
Construction/land development 1,748,928 1,776,689
Agricultural 89,476
88,400
Residential real estate loans: Residential 1-4 family 1,665,628 1,819,221 Multifamily residential 491,380 488,278 Total real estate 8,337,553 8,585,357 Consumer 883,568 511,909 Commercial and industrial 2,161,818 1,528,003 Agricultural 85,365 63,644 Other 223,166 180,797 Total loans receivable $ 11,691,470$ 10,869,710 68
-------------------------------------------------------------------------------- Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized (where defined) over a 15 to 30-year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower's liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis. As ofSeptember 30, 2020 , commercial real estate loans totaled$6.18 billion , or 52.9% of loans receivable, as compared to$6.28 billion , or 57.8% of loans receivable, as ofDecember 31, 2019 . Commercial real estate loans originated in ourArkansas ,Florida ,Alabama , SPF and Centennial CFG markets were$2.15 billion ,$2.82 billion ,$117.9 million , zero and$1.10 billion atSeptember 30, 2020 , respectively. Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 34.9% and 53.8% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as ofSeptember 30, 2020 , with the remaining 11.3% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower's ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio. As ofSeptember 30, 2020 , residential real estate loans totaled$2.16 billion , or 18.4% of loans receivable, compared to$2.31 billion , or 21.2% of loans receivable, as ofDecember 31, 2019 . Residential real estate loans originated in ourArkansas ,Florida ,Alabama , SPF and Centennial CFG markets were$752.9 million ,$1.15 billion ,$68.1 million , zero and$183.5 million atSeptember 30, 2020 , respectively. Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats as a result of our acquisition of SPF onJune 30, 2018 as well as our acquisition of LH-Finance onFebruary 29, 2020 . The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics. As ofSeptember 30, 2020 , consumer loans totaled$883.6 million , or 7.6% of loans receivable, compared to$511.9 million , or 4.7% of loans receivable, as ofDecember 31, 2019 . Consumer loans originated in ourArkansas ,Florida ,Alabama , SPF and Centennial CFG markets were$40.2 million ,$10.5 million ,$1.1 million ,$831.8 million ($331.4 million of which was acquired from LH-Finance during the first quarter of 2020) and zero atSeptember 30, 2020 , respectively. Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to seven years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower's liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally, accounts receivable are financed at between 50% and 80% of accounts receivable less than 60 days past due. Inventory financing will range between 50% and 80% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans. As ofSeptember 30, 2020 , commercial and industrial loans totaled$2.16 billion , or 18.5% of loans receivable, compared to$1.53 billion , or 14.1% of loans receivable, as ofDecember 31, 2019 . Commercial and industrial loans originated in ourArkansas ,Florida ,Alabama , SPF and Centennial CFG markets were$683.9 million ,$938.4 million ,$53.4 million ,$81.1 million ($74.8 million of which was acquired from LH-Finance during the first quarter of 2020) and$405.1 million atSeptember 30, 2020 , respectively.
Non-Performing Assets
We classify our problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing).
69
-------------------------------------------------------------------------------- When management determines that a loan is no longer performing, and that collection of interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past due are placed on non-accrual status unless they are adequately secured and there is reasonable assurance of full collection of both principal and interest. Our management closely monitors all loans that are contractually 90 days past due, treated as "special mention" or otherwise classified or on non-accrual status. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310-30. In 2019, the Company reevaluated its loan pools of purchased loans with deteriorated credit quality. These loans pools related specifically to acquired loans from the Heritage, Liberty, Landmark,Bay Cities, Bank of Commerce, Premier Bank, Stonegate and Shore Premier Finance acquisitions. At acquisition, a portion of these loans were recorded as purchased credit impaired loans on a pool by pool basis. Through the reevaluation of these loan pools, management determined that estimated losses for purchase credit impaired loans should be processed against the credit mark of the applicable pools. The remaining non-accretable mark was then moved to accretable mark to be recognized over the remaining weighted average life of the loan pools. The projected losses for these loans were less than the total credit mark. As such, the remaining$107.6 million of loans in these pools along with the$29.3 million in accretable yield was deemed to be immaterial and was reclassified out of the purchased credit impaired loans category. As ofDecember 31, 2019 , the Company no longer held any purchased loans with deteriorated credit quality. Therefore, the Company did not have any PCI loans upon adoption on of ASC 326 as ofJanuary 1, 2020 . The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense. Table 9 sets forth information with respect to our non-performing assets as ofSeptember 30, 2020 andDecember 31, 2019 . As of these dates, all non-performing restructured loans are included in non-accrual loans. Table 9: Non-performing Assets As of As of September 30, December 31, 2020 2019 (Dollars in thousands) Non-accrual loans$ 65,148 $ 47,607 Loans past due 90 days or more (principal or interest payments) 8,635 7,238 Total non-performing loans 73,783 54,845 Other non-performing assets Foreclosed assets held for sale, net 4,322
9,143
Other non-performing assets 247 447 Total other non-performing assets 4,569
9,590
Total non-performing assets$ 78,352 $ 64,435 Allowance for credit losses to non-performing loans 336.42 % 186.20 % Non-performing loans to total loans 0.63
0.50
Non-performing assets to total assets 0.47 0.43 Our non-performing loans are comprised of non-accrual loans and accruing loans that are contractually past due 90 days. Our bank subsidiary recognizes income principally on the accrual basis of accounting. When loans are classified as non-accrual, the accrued interest is charged off and no further interest is accrued, unless the credit characteristics of the loan improve. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses. Total non-performing loans were$73.8 million and$54.8 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. Non-performing loans atSeptember 30, 2020 were$23.3 million ,$40.2 million ,$489,000 ,$4.3 million and$5.4 million in theArkansas ,Florida ,Alabama , SPF and Centennial CFG markets, respectively. 70
-------------------------------------------------------------------------------- The$5.4 million balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for Credit risk by theFederal Reserve under the Shared National Credit Program. The decision to place these loans on non-accrual status was made by theFederal Reserve and not the Company. The two loans that make up the total balance are still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because theFederal Reserve required us to place these loans on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by theFederal Reserve . During the first nine months of 2020, the COVID-19 pandemic has had a significant impact on global markets driven by supply chain and production disruptions, workforce restrictions, travel restrictions, retail closures, and reduced consumer spending and sentiment, amongst other factors. The global and economic impacts of the coronavirus continue to evolve, and the Company is continuing to closely monitor the situation. While the Company believes our allowance for credit losses is adequate atSeptember 30, 2020 , as additional facts become known about relevant internal and external factors that affect loan collectability and our assumptions, it may result in us making additions to the provision for credit losses during 2020. Our CECL provisioning model is significantly tied to projected unemployment rates. As a result of COVID-19, the unemployment rate projections significantly increased fromJanuary 1 to the end ofSeptember 2020 . Additionally, the ongoing uncertainties related to the COVID-19 pandemic have resulted in the Company increasing reserves on deferred loans. These impacts of COVID-19 have resulted in a$102.1 million provision for the nine months endedSeptember 30, 2020 . Troubled debt restructurings ("TDRs") generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. Only non-performing restructured loans are included in our non-performing loans. As ofSeptember 30, 2020 , we had$10.7 million of restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 9. OurFlorida market contains$8.6 million and ourArkansas market contains$2.1 million of these restructured loans. A loan modification that might not otherwise be considered may be granted resulting in classification as a TDR. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of nine months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can pay under the new terms and may result in the loan being returned to an accrual status after a shorter performance period. If the borrower's ability to meet the revised payment schedule is not reasonably assured, the loan will remain in a non-accrual status. Section 4013 of the CARES Act enacted inMarch 2020 provides financial institutions optional temporary relief from the TDR classification requirements for certain COVID-19 related loan modifications. Specifically, financial institutions may elect to suspend TDR classification for certain loan modifications related to COVID-19 made betweenMarch 1, 2020 and the earlier ofDecember 31, 2020 or 60 days after termination of the President's national emergency declaration for COVID-19. Further, financial institutions do not need to determine impairment associated with certain loan concessions that would otherwise have been required for TDRs (e.g., interest rate concessions, payment deferrals, or loan extensions). OnApril 7, 2020 , theFederal Reserve Board and the other federal bank regulatory agencies issued an interagency statement clarifying the relationship between the Section 4013 of the CARES Act and previous guidance issued by the agencies onMarch 22, 2020 . This interagency statement encourages financial institutions to work prudently with borrowerswho are or may be unable to meet their payment obligations because of COVID-19 and states that the agencies view loan modification programs as positive actions that can mitigate adverse effects on borrowers due to COVID-19. The Company has not relied on Section 4013 of the CARES Act in accounting for loan modifications as ofSeptember 30, 2020 ; however, it is likely that the Company will use this optional accounting treatment. The majority of the Bank's loan modifications relates to commercial lending and involves reducing the interest rate, changing from a principal and interest payment to interest-only, lengthening the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. AtSeptember 30, 2020 andDecember 31, 2019 , the amount of TDRs was$12.4 million and$16.3 million , respectively. As ofSeptember 30, 2020 andDecember 31, 2019 , 86.0% and 74.6%, respectively, of all restructured loans were performing to the terms of the restructure. 71
-------------------------------------------------------------------------------- Total foreclosed assets held for sale were$4.3 million as ofSeptember 30, 2020 , compared to$9.1 million as ofDecember 31, 2019 for a decrease of$4.8 million . The foreclosed assets held for sale as ofSeptember 30, 2020 are comprised of$1.4 million of assets located inArkansas ,$2.9 million of assets located inFlorida ,$34,000 located inAlabama and zero from SPF and Centennial CFG. During the first nine months of 2020, we had one foreclosed property with a carrying value greater than$1.0 million . The property was a development property inFlorida acquired fromThe Bank of Commerce with a carrying value of$2.1 million atSeptember 30, 2020 . The Company does not currently anticipate any additional losses on this property. As ofSeptember 30, 2020 , no other foreclosed assets held for sale have a carrying value greater than$1.0 million .
Table 10 shows the summary of foreclosed assets held for sale as of
Table 10: Foreclosed Assets Held For Sale
As of As of
September 30, 2020 December 31, 2019
(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential $ 819 $ 3,528
Construction/land development 3,341 3,218
Residential real estate loans
Residential 1-4 family 162 2,397
Total foreclosed assets held for sale $ 4,322 $ 9,143
A loan is considered impaired when it is probable that we will not receive all
amounts due according to the contracted terms of the loans. Impaired loans
include non-performing loans (loans past due 90 days or more and non-accrual
loans), criticized and/or classified loans with a specific allocation, loans
categorized as TDRs and certain other loans identified by management that are
still performing (loans included in multiple categories are only included once).
As of September 30, 2020 and December 31, 2019 , impaired loans were $114.4
million and $78.9 million , respectively. The amortized cost balance for loans
with a specific allocation increased from $11.9 million to $41.6 million , and
the specific allocation for impaired loans increased by approximately $7.6
million for the period ended September 30, 2020 compared to the period ended
December 31, 2019 . As of September 30, 2020 , our Arkansas , Florida , Alabama , SPF
and Centennial CFG markets accounted for approximately $49.3 million , $54.9
million , $489,000 , $4.3 million and $5.4 million of the impaired loans,
respectively.
As of September 30, 2020 and December 31, 2019 , there was not a material amount
of purchased loans with deteriorated credit quality on non-accrual status as a
result of most of the loans being accounted for on the pool basis and the pools
are considered to be performing for the accruing of interest income. Also,
acquired loans contractually past due 90 days or more are accruing interest
because the pools are considered to be performing for the purpose of accruing
interest income.
72
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Past Due and Non-Accrual Loans
Table 11 shows the summary of non-accrual loans as ofSeptember 30, 2020 andDecember 31, 2019 : Table 11: Total Non-Accrual Loans As of As of September 30, 2020 December 31, 2019 (In thousands) Real estate: Commercial real estate loans Non-farm/non-residential $ 14,790 $
10,966
Construction/land development 1,479
1,359
Agricultural 898
1,094
Residential real estate loans Residential 1-4 family 20,498 20,314 Multifamily residential 176 331 Total real estate 37,841 34,064 Consumer 3,624 1,632 Commercial and industrial 22,588 10,692 Agricultural 1,095 1,218 Other - 1 Total non-accrual loans $ 65,148 $ 47,607 If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately$944,000 and$604,000 , respectively, would have been recorded for the three-month periods endedSeptember 30, 2020 and 2019. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately$2.8 million and$1.9 million , respectively, would have been recorded for the nine-month periods endedSeptember 30, 2020 and 2019. The interest income recognized on non-accrual loans for the three and nine months endedSeptember 30, 2020 and 2019 was considered immaterial.
Table 12 shows the summary of accruing past due loans 90 days or more as of
Table 12: Loans Accruing Past Due 90 Days or More
As of As of
September 30, 2020 December 31, 2019
(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential $ 3,706 $ 3,194
Construction/land development 1,351 1,821
Residential real estate loans
Residential 1-4 family 2,766 1,614
Total real estate 7,823 6,629
Consumer 812 317
Commercial and industrial - 292
Total loans accruing past due 90 days or more $ 8,635 $ 7,238
Our ratio of total loans accruing past due 90 days or more and non-accrual loans
to total loans was 0.63% and 0.50% at September 30, 2020 and December 31, 2019 ,
respectively.
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Allowance for Credit Losses
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effectiveJanuary 1, 2020 . The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credits, financial guarantees, and other similar instruments. The Company adopted ASC 326 using the modified retrospective method for loans and off-balance-sheet credit exposures. Results for reporting periods beginning afterJanuary 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses of$44.0 million , which was recognized through a$32.5 million adjustment to retained earnings, net of tax. This adjustment brought the beginning balance of the allowance for credit losses to$146.1 million as ofJanuary 1, 2020 . In addition, the Company recorded a$15.5 million reserve on unfunded commitments, as ofJanuary 1, 2020 , which was recognized through an$11.5 million adjustment to retained earnings, net of tax. Overview. The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company uses the discounted cash flow ("DCF") method to estimate expected losses for all of Company's loan pools. These pools are as follows: construction & land development; other commercial real estate; residential real estate; commercial & industrial; and consumer & other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with theFederal Financial Institutions Examination Council . For each of these loan pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical 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 the national unemployment rate, commercial real estate price index, housing price index and national retail sales index.
The allowance for credit losses is measured based on call report segment as these types of loan exhibit similar risk characteristics. The identified loan segments are as follows:
• 1-4 family construction • All other construction
• 1-4 family revolving home equity lines of credit ("HELOC") & junior liens
• 1-4 family senior liens
• Multifamily
• Owner occupies commercial real estate
• Non-owner occupied commercial real estate
• Commercial & industrial, agricultural, non-depository financial
institutions, purchase/carry securities, other
• Consumer auto
• Other consumer
74
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The combination of adjustments for credit expectations (default and loss) and
time expectations prepayment, curtailment, and time to recovery) produces an
expected cash flow stream at the instrument level. Instrument effective yield is
calculated, net of the impacts of prepayment assumptions, and the instrument
expected cash flows are then discounted at that effective yield to produce an
instrument-level net present value of expected cash flows ("NPV"). An allowance
for credit loss is established for the difference between the instrument's NPV
and amortized cost basis.
The allowance for credit losses for each segment is measured through the use of
the discounted cash flow method. Loans that do not share risk characteristics
are evaluated on an individual basis. Loans evaluated individually are not also
included in the collective evaluation. For those loans that are classified as
impaired, an allowance is established when the discounted cash flows, collateral
value or observable market price of the impaired loan is lower than the carrying
value of that loan.
Expected credit losses are estimated over the contractual term of the loans,
adjusted for expected prepayments when appropriate. The contractual term
excludes expected extensions, renewals, and modifications unless either of the
following applies:
• Management has a reasonable expectation at the reporting date that
troubled debt restructuring will be executed with an individual
borrower.
• The extension or renewal options are included in the original ormodified contract at the reporting date and are not unconditionally
cancellable by the Company.
Loans considered impaired, according to ASC 326, are loans for which, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
aggregate amount of impairment of loans is utilized in evaluating the adequacy
of the allowance for credit losses and amount of provisions thereto. Losses on
impaired loans are charged against the allowance for credit losses when in the
process of collection, it appears likely that such losses will be realized. The
accrual of interest on impaired loans is discontinued when, in management's
opinion the collection of interest is doubtful or generally when loans are 90
days or more past due. When accrual of interest is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received in excess of principal due. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Loans are placed on non-accrual status when management believes that the
borrower's financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of interest
is doubtful, or generally when loans are 90 days or more past due. Loans are
charged against the allowance for credit losses when management believes that
the collectability of the principal is unlikely. Accrued interest related to
non-accrual loans is generally charged against the allowance for credit losses
when accrued in prior years and reversed from interest income if accrued in the
current year. Interest income on non-accrual loans may be recognized to the
extent cash payments are received, although the majority of payments received
are usually applied to principal. Non-accrual loans are generally returned to
accrual status when principal and interest payments are less than 90 days past
due, the customer has made required payments for at least six months, and we
reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under
FASB ASC Topic 805, Business Combinations, which requires the use of the
acquisition method of accounting. All identifiable assets acquired, including
loans, are recorded at fair value. In accordance with ASC 326, the Company
records both a discount and an allowance for credit losses on acquired
loans. All purchased loans are recorded at fair value in accordance with the
fair value methodology prescribed in FASB ASC Topic 820, Fair Value
Measurements. The fair value estimates associated with the loans include
estimates related to expected prepayments and the amount and timing of
undiscounted expected principal, interest and other cash flows.
The Company has purchased loans, some of which have experienced more than
insignificant credit deterioration since origination. PCD loans are recorded at
the amount paid. An allowance for credit losses is determined using the same
methodology as other loans. The initial allowance for credit losses determined
on a collective basis is allocated to individual loans. The sum of the loan's
purchase price and allowance for credit losses 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 allowance
for credit losses are recorded through provision for credit loss.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company
estimates expected credit losses over the contractual period in which the
Company is exposed to credit risk via a contractual obligation to extend credit,
unless that obligation is unconditionally cancellable by the Company. The
allowance for credit losses on off-balance sheet credit exposures is adjusted as
a provision for credit loss expense. The estimate includes consideration of the
likelihood that funding will occur and an estimate of expected credit losses on
commitments expected to be funded over its estimated life.
75
-------------------------------------------------------------------------------- Specific Allocations. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. Typically, when it becomes evident through the payment history or a financial statement review that a loan or relationship is no longer supported by the cash flows of the asset and/or borrower and has become collateral dependent, we will use appraisals or other collateral analysis to determine if collateral impairment has occurred. The amount or likelihood of loss on this credit may not yet be evident, so a charge-off would not be prudent. However, if the analysis indicates that an impairment has occurred, then a specific allocation will be determined for this loan. If our existing appraisal is outdated or the collateral has been subject to significant market changes, we will obtain a new appraisal for this impairment analysis. The majority of our impaired loans are collateral dependent at the present time, so third-party appraisals were used to determine the necessary impairment for these loans. Cash flow available to service debt was used for the other impaired loans. This analysis is performed each quarter in connection with the preparation of the analysis of the adequacy of the allowance for credit losses, and if necessary, adjustments are made to the specific allocation provided for a particular loan. For collateral dependent loans, we do not consider an appraisal outdated simply due to the passage of time. However, if an appraisal is older than 13 months and if market or other conditions have deteriorated and we believe that the current market value of the property is not within approximately 20% of the appraised value, we will consider the appraisal outdated and order either a new appraisal or an internal validation report for the impairment analysis. The recognition of any provision or related charge-off on a collateral dependent loan is either through annual credit analysis or, many times, when the relationship becomes delinquent. If the borrower is not current, we will update our credit and cash flow analysis to determine the borrower's repayment ability. If we determine this ability does not exist and it appears that the collection of the entire principal and interest is not likely, then the loan could be placed on non-accrual status. In any case, loans are classified as non-accrual no later than 105 days past due. If the loan requires a quarterly impairment analysis, this analysis is completed in conjunction with the completion of the analysis of the adequacy of the allowance for credit losses. Any exposure identified through the impairment analysis is shown as a specific reserve on the individual impairment. If it is determined that a new appraisal or internal validation report is required, it is ordered and will be taken into consideration during completion of the next impairment analysis. In estimating the net realizable value of the collateral, management may deem it appropriate to discount the appraisal based on the applicable circumstances. In such case, the amount charged off may result in loan principal outstanding being below fair value as presented in the appraisal. Between the receipt of the original appraisal and the updated appraisal, we monitor the loan's repayment history. If the loan is$3.0 million or greater or the total loan relationship is$5.0 million or greater, our policy requires an annual credit review. For these loans, our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually on these loans. As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or by law at 105 days past due, we will reflect that loan as non-performing. It will remain non-performing until it performs in a manner that it is reasonable to expect that we will collect the full principal and accrued interest.
When the amount or likelihood of a loss on a loan has been determined, a charge-off should be taken in the period it is determined. If a partial charge-off occurs, the quarterly impairment analysis will determine if the loan is still impaired, and thus continues to require a specific allocation.
Loans Collectively Evaluated for Impairment. Loans receivable collectively evaluated for impairment increased by approximately$640.0 million from$10.66 billion atDecember 31, 2019 to$11.30 billion atSeptember 30, 2020 . The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 2.09% and 0.91% atSeptember 30, 2020 andDecember 31, 2019 , respectively. Charge-offs and Recoveries. Total charge-offs increased to$4.6 million for the three months endedSeptember 30, 2020 , compared to$2.3 million for the same period in 2019. Total charge-offs increased to$11.4 million for the nine months endedSeptember 30, 2020 , compared to$8.0 million for the same period in 2019. Total recoveries decreased to$483,000 for the three months endedSeptember 30, 2020 , compared to$540,000 for the same period in 2019. Total recoveries decreased to$1.8 million for the nine months endedSeptember 30, 2020 , compared to$2.2 million for the same period in 2019. For the three months endedSeptember 30, 2020 , net charge-offs were$1.6 million forArkansas ,$2.5 million forFlorida ,$1,000 forAlabama ,$8,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of$4.1 million . For the nine months endedSeptember 30, 2020 , net charge-offs were$2.7 million forArkansas ,$7.0 million forFlorida ,$7,000 forAlabama ,$8,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of$9.7 million . 76
-------------------------------------------------------------------------------- We have not charged off an amount less than what was determined to be the fair value of the collateral as presented in the appraisal, less estimated costs to sell (for collateral dependent loans), for any period presented. Loans partially charged-off are placed on non-accrual status until it is proven that the borrower's repayment ability with respect to the remaining principal balance can be reasonably assured. This is usually established over a period of 6-12 months of timely payment performance.
Table 13 shows the allowance for credit losses, charge-offs and recoveries as of
and for the three and nine months ended
Table 13: Analysis of Allowance for Credit Losses
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(Dollars in thousands)
Balance, beginning of period $ 238,340 $ 106,066 $ 102,122 $ 108,791
Impact of adopting ASC 326 - - 43,988 -
Allowance for credit losses on acquired
loans - - 357 -
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential 994 858 3,003 2,360
Construction/land development - 133 443 1,445
Agricultural - - - -
Residential real estate loans:
Residential 1-4 family 93 522 450 1,183
Multifamily residential - - - -
Total real estate 1,087 1,513 3,896 4,988
Consumer 133 76 161 278
Commercial and industrial 3,057 143 6,207 1,152
Agricultural - - - -
Other 322 570 1,182 1,554
Total loans charged off 4,599 2,302 11,446 7,972
Recoveries of loans previously charged
off
Real estate:
Commercial real estate loans:
Non-farm/non-residential 129 22 614 226
Construction/land development 79 (40 ) 94 78
Agricultural - - - -
Residential real estate loans:
Residential 1-4 family 59 274 296 770
Multifamily residential 9 3 9 11
Total real estate 276 259 1,013 1,085
Consumer 24 61 77 98
Commercial and industrial 36 62 142 466
Agricultural - - - -
Other 147 158 549 511
Total recoveries 483 540 1,781 2,160
Net loans charged off (recovered) 4,116 1,762 9,665 5,812
Provision for credit losses 14,000 - 111,422 1,325
Balance, September 30 $ 248,224 $ 104,304 $ 248,224 $ 104,304
Net charge-offs (recoveries) to average
loans receivable 0.14 % 0.06 % 0.11 % 0.07 %
Allowance for credit losses to total
loans 2.12 0.97 2.12 0.97
Allowance for credit losses to net
charge-offs (recoveries) 1,516 1,492 1,923 1,342
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Table 14 presents the allocation of allowance for credit losses as of
Table 14: Allocation of Allowance for Credit Losses
As of September 30, 2020 As of December 31, 2019
Allowance Amount % of loans(1) Allowance Amount % of loans(1)
(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential $ 96,641 37.1 % $ 32,776 40.6 %
Construction/land development 38,815 15.0 26,433 16.3
Agricultural 1,323 0.8 753 0.8
Residential real estate loans:
Residential 1-4 family 41,454 14.2 16,758 16.7
Multifamily residential 3,766 4.2 3,377 4.5
Total real estate 181,999 71.3 80,097 78.9
Consumer 23,195 7.6 1,906 4.7
Commercial and industrial 39,660 18.5 16,615 14.1
Agricultural 497 0.7 3,504 0.6
Other 2,873 1.9 - 1.7
Total allowance for credit losses $ 248,224 100.0 % $ 102,122 100.0 %
(1) Percentage of loans in each category to total loans receivable.
Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 2.6 years as ofSeptember 30, 2020 . Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders' equity as other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. Available-for-sale securities were$2.36 billion and$2.08 billion asSeptember 30, 2020 andDecember 31, 2019 , respectively. As ofSeptember 30, 2020 ,$1.15 billion , or 48.8%, of our available-for-sale securities were invested in mortgage-backed securities, compared to$1.21 billion , or 58.2%, of our available-for-sale securities as ofDecember 31, 2019 . To reduce our income tax burden,$866.4 million , or 36.7%, of our available-for-sale securities portfolio as ofSeptember 30, 2020 , were primarily invested in tax-exempt obligations of state and political subdivisions, compared to$439.6 million , or 21.1%, of our available-for-sale securities as ofDecember 31, 2019 . We had$304.3 million , or 12.9%, invested in obligations ofU.S. Government -sponsored enterprises as ofSeptember 30, 2020 , compared to$397.6 million , or 19.1%, of our available-for-sale securities as ofDecember 31, 2019 . Also, we had approximately$37.8 million , or 1.6%, invested in other securities as ofSeptember 30, 2020 , compared to$33.0 million , or 1.6% of our available-for-sale securities as ofDecember 31, 2019 . 78
-------------------------------------------------------------------------------- BeginningJanuary 1, 2020 , the Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. For the three months endedMarch 30, 2020 , the Company determined a provision for credit losses of$842,000 was necessary for the state and political subdivision portfolio as a result of economic uncertainties related to COVID-19. For the three months endedJune 30, 2020 and three months endedSeptember 30, 2020 , the Company determined that no additional provision for credit losses was necessary for the portfolio.
See Note 3 "
Deposits
Our deposits averaged$12.94 billion and$12.30 billion for the three and nine months endedSeptember 30, 2020 , respectively. Total deposits were$12.94 billion as ofSeptember 30, 2020 , and$11.28 billion as ofDecember 31, 2019 . Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent,U.S. Government and other depository institutions. Our policy also permits the acceptance of brokered deposits. From time to time, when appropriate in order to fund strong loan demand, we accept brokered time deposits, generally in denominations of less than$250,000 , from a regional brokerage firm, and other national brokerage networks. We also participate in the One-Way Buy Insured Cash Sweep ("ICS") service and similar services, which provide for one-way buy transactions among banks for the purpose of purchasing cost-effective floating-rate funding without collateralization or stock purchase requirements. Management believes these sources represent a reliable and cost-efficient alternative funding source for the Company. However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.
Table 15 reflects the classification of the brokered deposits as of
Table 15: Brokered Deposits
September 30, 2020 December 31, 2019
(In thousands)
Time Deposits $ 30,000 $ 95,399
CDARS - 109
Insured Cash Sweep and Other Transaction Accounts 593,621 484,169
Total Brokered Deposits $ 623,621 $ 579,677
The interest rates paid are competitively priced for each particular deposit
product and structured to meet our funding requirements. We will continue to
manage interest expense through deposit pricing. We may allow higher rate
deposits to run off during periods of limited loan demand. We believe that
additional funds can be attracted, and deposit growth can be realized through
deposit pricing if we experience increased loan demand or other liquidity
needs.
79
-------------------------------------------------------------------------------- TheFederal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. TheFederal Reserve lowered the target rate three times during 2019. First, the target rate was lowered to 2.00% to 2.25% onJuly 31, 2019 ; second, the rate was lowered onSeptember 18, 2019 to 1.75% to 2.00%; and third, the rate was lowered onOctober 30, 2019 to 1.50% to 1.75%. The Federal reserve lowered the target rate two times in 2020. First, the target rate was lowered to 1.00% to 1.25% onMarch 3, 2020 ; second, the rate was lowered to 0.00% to 0.25% onMarch 15, 2020 . The target rate is currently at 0.00% to 0.25% as ofSeptember 30, 2020 , which has decreased from the target rate of 1.75% to 2.00% as ofSeptember 30, 2019 . Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three and nine months endedSeptember 30, 2020 and 2019. Table 16: Average Deposit Balances and Rates Three Months Ended September 30, 2020 2019 Average Average Average Average Amount Rate Paid Amount Rate Paid (Dollars in thousands) Non-interest-bearing transaction accounts$ 3,259,501 - %$ 2,530,664 - % Interest-bearing transaction accounts 7,197,123 0.36 6,000,823 1.27 Savings deposits 740,289 0.09 628,668 0.25 Time deposits:$100,000 or more 1,340,508 1.66 1,556,618 2.16 Other time deposits 404,771 0.94 458,012 1.28 Total$ 12,942,192 0.41 %$ 11,174,785 1.05 % Nine Months Ended September 30, 2020 2019 Average Average Average Average Amount Rate Paid Amount Rate Paid (Dollars in
thousands)
Non-interest-bearing transaction accounts$ 2,904,159 - %$ 2,508,082 - % Interest-bearing transaction accounts$ 6,852,251 0.58 6,006,220 1.30 Savings deposits$ 692,512 0.14 628,589 0.26 Time deposits:$100,000 or more 1,430,542 1.76 1,489,161 2.09 Other time deposits 417,291 1.10 465,021 1.20 Total$ 12,296,755 0.57 %$ 11,097,073 1.05 %
Securities Sold Under Agreements to Repurchase
We enter into short-term purchases of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) of substantially identical securities. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the balance sheet at the amount advanced. Interest incurred on repurchase agreements is reported as interest expense. Securities sold under agreements to repurchase increased$14.7 million , or 10.2%, from$143.7 million as ofDecember 31, 2019 to$158.4 million as ofSeptember 30, 2020 .
FHLB and Other Borrowed Funds
The Company's FHLB borrowed funds, which are secured by our loan portfolio, were$403.4 million and$621.4 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. The Company had no other borrowed funds as ofSeptember 30, 2020 orDecember 31, 2019 . AtSeptember 30, 2020 , all of the outstanding balances were classified as long-term advances. AtDecember 31, 2019 ,$75.0 million and$546.4 million of the outstanding balance were issued as short-term and long-term advances, respectively. Our remaining FHLB borrowing capacity was$2.95 billion and$2.79 billion as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. The FHLB advances mature from 2020 to 2033 with fixed interest rates ranging from 1.76% to 2.85%. Maturities of borrowings as ofSeptember 30, 2020 include: 2020 -$3.43 million ; 2021 - zero; 2022 - zero; 2023 - zero; 2024 - zero; after 2024 -$400.0 million . Expected maturities could differ from contractual maturities because FHLB may have the right to call or HBI the right to prepay certain obligations. 80
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Subordinated Debentures
Subordinated debentures, which consist of subordinated debt securities and
guaranteed payments on trust preferred securities, were
The trust preferred securities are tax-advantaged issues that qualify for Tier 1 capital treatment subject to certain limitations. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in our subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. We wholly own the common securities of each trust. Each trust's ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related subordinated debentures. Our obligations under the subordinated securities and other relevant trust agreements, in the aggregate, constitute a full and unconditional guarantee by us of each respective trust's obligations under the trust securities issued by each respective trust. The Bank acquired$12.5 million in trust preferred securities with a fair value of$9.8 million from the Stonegate acquisition. The difference between the fair value purchased of$9.8 million and the$12.5 million face amount, is being amortized into interest expense over the remaining life of the debentures. The associated subordinated debentures are redeemable, in whole or in part, prior to maturity at our option on a quarterly basis when interest is due and payable and in whole at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the debentures. OnApril 3, 2017 , the Company completed an underwritten public offering of$300 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the "Notes"). The Notes were issued at 99.997% of par, resulting in net proceeds, after underwriting discounts and issuance costs, of approximately$297.0 million . The Notes are unsecured, subordinated debt obligations of the Company and will mature onApril 15, 2027 . The Notes qualify as Tier 2 capital for regulatory purposes.
Stockholders' Equity
Stockholders' equity was$2.54 billion atSeptember 30, 2020 compared to$2.51 billion atDecember 31, 2019 . The$29.3 million increase in stockholders' equity is primarily associated with$22.1 million in other comprehensive income and$132.7 million in net income for nine months endedSeptember 30, 2020 , which was partially offset by the$44.0 million impact of the adoption of ASC 326,$64.6 million of shareholder dividends paid and stock repurchases of$23.9 million in 2020. The annualized increase in stockholders' equity for the first nine months of 2020 was 1.6%. As ofSeptember 30, 2020 andDecember 31, 2019 , our equity to asset ratio was 15.4% and 16.7%, respectively. Book value per share was$15.38 as ofSeptember 30, 2020 , compared to$15.10 as ofDecember 31, 2019 , a 2.5% annualized increase. Common Stock Cash Dividends. We declared cash dividends on our common stock of$0.13 per share for the three months endedSeptember 30, 2020 and 2019. The common stock dividend payout ratio for the three months endedSeptember 30, 2020 and 2019 was 31.0% and 29.9%, respectively. The common stock dividend payout ratio for the nine months endedSeptember 30, 2020 and 2019 was 48.7% and 29.6%, respectively. OnOctober 16, 2020 , the Board of Directors declared a regular$0.14 per share quarterly cash dividend payableDecember 2, 2020 , to shareholders of recordNovember 11, 2020 . Stock Repurchase Program. OnJanuary 18, 2019 , the Company's Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of its common stock under the previously approved stock repurchase program, which brought the remaining amount of authorized shares to repurchase to 9,919,447 shares. We repurchased a total of 1,423,560 shares with a weighted-average stock price of$16.73 per share during the first three months of 2020. The Company did not repurchase any stock during the second or third quarter of 2020. The remaining balance available for repurchase was 3,953,665 shares atSeptember 30, 2020 .
Liquidity and Capital Adequacy Requirements
Risk-Based Capital . We, as well as our bank subsidiary, are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors. 81
-------------------------------------------------------------------------------- InJuly 2013 , theFederal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by theBasel Committee on Banking Supervision in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" and certain provisions of the Dodd-Frank Act ("Basel III"). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of$500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary onJanuary 1, 2015 . The capital conservation buffer requirement began being phased in beginningJanuary 1, 2016 at the 0.625% level and increased by 0.625% on each subsequentJanuary 1 , until it reached 2.5% onJanuary 1, 2019 when the phase-in period ended, and the full capital conservation buffer requirement became effective. Basel III amended the prompt corrective action rules to incorporate a "common equity Tier 1 capital" requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% "common equity Tier 1 risk-based capital" ratio, a 4% "Tier 1 leverage capital" ratio, a 6% "Tier 1 risk-based capital" ratio and an 8% "total risk-based capital" ratio. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as ofSeptember 30, 2020 andDecember 31, 2019 , we met all regulatory capital adequacy requirements to which we were subject. OnDecember 21, 2018 , the federal banking agencies issued a joint final rule to revise their regulatory capital rules to permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, onMarch 27, 2020 , the federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company has elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below. 82
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Table 17 presents our risk-based capital ratios on a consolidated basis as of
Table 17: Risk-Based Capital
As of As of
September 30, December 31,
2020 2019
(Dollars in thousands)
Tier 1 capital
Stockholders' equity $ 2,540,799 $ 2,511,531
ASC 326 transitional period adjustment 58,020 -
Goodwill and core deposit intangibles, net (1,004,709 ) (994,554 )
Unrealized gain on available-for-sale securities (38,345 ) (16,221 )
Total common equity Tier 1 capital 1,555,765 1,500,756
Qualifying trust preferred securities 71,091
70,984
Total Tier 1 capital 1,626,856
1,571,740
Tier 2 capital
Allowance for credit losses 248,224
102,122
ASC 326 transitional period adjustment (58,020 ) -
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets)
(35,638 ) -
Qualifying allowance for credit losses 154,566 102,122
Qualifying subordinated notes 299,042 298,573
Total Tier 2 capital 453,608 400,695
Total risk-based capital $ 2,080,464 $ 1,972,435
Average total assets for leverage ratio $ 15,647,806 $ 13,949,814
Risk weighted assets $ 12,307,369 $ 12,066,643
Ratios at end of period
Common equity Tier 1 capital 12.64 % 12.44 %
Leverage ratio 10.40 11.27
Tier 1 risk-based capital 13.22 13.03
Total risk-based capital 16.90 16.35
Minimum guidelines - Basel III phase-in schedule
Common equity Tier 1 capital 7.00 % 7.00 %
Leverage ratio 4.00 4.00
Tier 1 risk-based capital 8.50 8.500
Total risk-based capital 10.50 10.500
Minimum guidelines - Basel III fully phased-in
Common equity Tier 1 capital 7.00 % 7.00 %
Leverage ratio 4.00 4.00
Tier 1 risk-based capital 8.50 8.50
Total risk-based capital 10.50 10.50
Well-capitalized guidelines
Common equity Tier 1 capital 6.50 % 6.50 %
Leverage ratio 5.00 5.00
Tier 1 risk-based capital 8.00 8.00
Total risk-based capital 10.00 10.00
As of the most recent notification from regulatory agencies, our bank subsidiary
was "well-capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well-capitalized," we, as well as our banking
subsidiary, must maintain minimum common equity Tier 1 capital, leverage, Tier 1
risk-based capital, and total risk-based capital ratios as set forth in the
table. There are no conditions or events since that notification that we believe
have changed the bank subsidiary's category.
83
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Non-GAAP Financial Measurements
Our accounting and reporting policies conform to generally accepted accounting principles inthe United States ("GAAP") and the prevailing practices in the banking industry. However, this report contains financial information determined by methods other than in accordance with GAAP, including earnings, as adjusted; diluted earnings per common share, as adjusted; tangible book value per share; return on average assets excluding intangible amortization; return on average tangible equity, excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and 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. The tables below present non-GAAP reconciliations of earnings, as adjusted, and diluted earnings per share, as adjusted as well as the non-GAAP computations of tangible book value per share, return on average assets, return on average tangible equity excluding intangible amortization, tangible equity to tangible assets and the efficiency ratio, as adjusted. The items used in these calculations are included in financial results presented in accordance with GAAP. Earnings, as adjusted, and diluted earnings per common share, as adjusted, are meaningful non-GAAP financial measures for management, as they exclude items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business. 84
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In Table 18 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Table 18: Earnings, As Adjusted
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(Dollars in thousands)
GAAP net income available to common
shareholders (A) $ 69,320 $ 72,763 $ 132,654 $ 216,277
Adjustments:
Outsourced special project - - 1,092 900
Merger and acquisition expense - - 711 -
Fair value adjustment for marketable
securities 1,350 - 6,249 -
Unfunded commitment expense(1) - - 16,989 -
Provision for credit losses(2) 14,000 - 112,264 1,325
Special dividend from equity investment (3,181 ) - (10,185 ) (2,134 )
FDIC Small Bank Assessment credit - (2,291 ) - (2,291 )
Branch write-off expense - - 981 -
Hurricane expense - - - 897
Total adjustments 12,169 (2,291 ) 128,101 (1,303 )
Tax-effect of adjustments (3) 3,181 (592 ) 33,479 (336 )
Adjustments after-tax 8,988 (1,699 ) 94,622 (967 )
Florida tax savings - (497 ) - -
BOLI redemption tax - 3,667 - 3,667
Total adjustments after-tax (B) 8,988 1,471 94,622 2,700
Earnings, as adjusted (C) $ 78,308 $ 74,234 $ 227,276 $ 218,977
Average diluted shares outstanding (D) 165,200 167,178 165,458 168,178
GAAP diluted earnings per share: A/D $ 0.42 $ 0.44 $ 0.80 $ 1.29
Adjustments after-tax B/D 0.05 - 0.57 0.01
Diluted earnings per common share, as
adjusted: C/D $ 0.47 $ 0.44 $ 1.37 $ 1.30 (1) The total amount of the unfunded commitment expense was due to an increase in
the expected funding percentages for the Company's unfunded commitments as
well as an increase in the unemployment rate projections from
to
is significantly tied to projected unemployment rates.
(2) The provision for credit losses for the three months ended
is entirely related to COVID-19, and the provision for credit losses for the
nine months ended
provision for credit loss - investment securities:
credit loss - acquired loans:
loss - loans:
(3) Blended statutory tax rate of 25.819% for the three and nine months ended
We had$1.01 billion ,$995.0 million , and$996.5 million total goodwill, core deposit intangibles and other intangible assets as ofSeptember 30, 2020 ,December 31, 2019 andSeptember 30, 2019 , respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets, as adjusted, return on average tangible equity excluding intangible amortization, return on average tangible equity, as adjusted, and tangible equity to tangible assets are useful in evaluating our company. These calculations, which are similar to the GAAP calculations of book value per share, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively. Table 19: Tangible Book Value Per Share As of As of September 30, December 31, 2020 2019 (In thousands, except per share data) Book value per share: A/B $ 15.38 $ 15.10 Tangible book value per share: (A-C-D)/B 9.30 9.12 (A) Total equity $ 2,540,799$ 2,511,531 (B) Shares outstanding 165,163 166,373 (C) Goodwill $ 973,025$ 958,408 (D) Core deposit and other intangibles 32,149 36,572 85
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Table 20: Return on Average Assets
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(Dollars inthousands)
Return on average assets: A/D 1.66 % 1.93 % 1.11 % 1.92 % Return on average assets excluding intangible amortization: B/(D-E) 1.80 2.10 1.21 2.09 Return on average assets excluding special dividend from equity investment, provision for credit losses, fair value adjustment for marketable securities, branch write-off expense, unfunded commitment expense, outsourced special project expense, merger and acquisition expenses, FDIC Small Bank Assessment Credit, hurricane expense,Florida tax savings and BOLI redemption tax: (ROA, as adjusted): (A+C)/D 1.88 1.96 1.90 1.94 (A) Net income$ 69,320 $ 72,763 $ 132,654 $ 216,277 Intangible amortization after-tax 1,049 1,177 3,268 3,531 (B) Earnings excluding intangible amortization$ 70,369 $ 73,940 $ 135,922 $ 219,808 (C) Adjustments after-tax$ 8,988 $ 1,471 $ 94,622 $ 2,700 (D) Average assets 16,594,495 14,993,232 16,017,838 15,056,852 (E) Average goodwill, core deposits and other intangible assets 1,005,864 997,309 1,004,065 998,889 Table 21: Return on Average Tangible Equity Excluding Intangible Amortization Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (Dollars in thousands) Return on average equity: A/D 10.97 % 11.84 % 7.13 % 12.12 % Return on average common equity excluding special dividend from equity investment, provision for credit losses, fair value adjustment for marketable securities, branch write-off expense, unfunded commitment expense, outsourced special project expense, merger and acquisition expenses, FDIC Small Bank Assessment Credit, hurricane expense, Florida tax
savings and BOLI redemption tax:
(ROE, as adjusted) ((A+C)/D) 12.39 12.08 12.22 12.27 Return on average tangible common equity: (A/(D-E)) 18.29 20.04 11.96 20.84 Return on average tangible equity excluding intangible amortization: B/(D-E) 18.56 20.36 12.26 21.18 Return on average tangible common equity excluding special dividend from equity investment, provision for credit losses, fair value adjustment for marketable securities, branch write-off expense, unfunded commitment expense, outsourced special project expense, merger and acquisition expenses, FDIC Small Bank Assessment Credit, hurricane expense,Florida tax savings and BOLI redemption tax: (ROTCE, as adjusted) ((A+C)/(D-E)) 20.66 20.45 20.50 21.10 (A) Net income$ 69,320 $ 72,763 $ 132,654 $ 216,277 (B) Earnings excluding intangible amortization 70,369 73,940 135,922 219,808 (C) Adjustments after-tax 8,988 1,471 94,622 2,700 (D) Average equity 2,513,792 2,437,820 2,485,051 2,386,740 (E) Average goodwill, core deposits and other intangible assets 1,005,864 997,309 1,004,065 998,889 86
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Table 22: Tangible Equity to Tangible Assets
As of As of
September 30, December 31,
2020 2019
(Dollars in thousands)
Equity to assets: B/A 15.35 % 16.71 %
Tangible equity to tangible assets: (B-C-D)/(A-C-D) 9.88 10.80
(A) Total assets $ 16,549,758 $ 15,032,047
(B) Total equity 2,540,799 2,511,531
(C) Goodwill 973,025 958,408
(D) Core deposit and other intangibles 32,149 36,572
The efficiency ratio is a standard measure used in the banking industry and is
calculated by dividing non-interest expense less amortization of core deposit
intangibles by the sum of net interest income on a tax equivalent basis and
non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP
measure for management, as it excludes certain items and is calculated by
dividing non-interest expense less amortization of core deposit intangibles by
the sum of net interest income on a tax equivalent basis and non-interest income
excluding items such as merger expenses and/or certain gains, losses and other
non-interest income and expenses. In Table 23 below, we have provided a
reconciliation of the non-GAAP calculation of the financial measure for the
periods indicated.
Table 23: Efficiency Ratio, As Adjusted
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(Dollars in thousands)
Net interest income (A) $ 146,138 $ 142,977 $ 434,530 $ 423,434
Non-interest income (B) 29,951 24,749 77,901 71,487
Non-interest expense (C) 71,712 67,764 230,133 204,445
FTE Adjustment (D) 1,576 1,247 4,237 3,933
Amortization of intangibles (E) 1,420 1,587 4,423 4,760
Adjustments:
Non-interest income:
Special dividend from equity investments $ 3,181 $ - $ 10,185 $ 2,134
Fair value adjustment for marketable
securities (1,350 ) - (6,249 ) -
Gain (loss) on OREO, net 470 334 982 598
Gain (loss) on sale of branches,
equipment and
other assets, net (27 ) 12 109 (38 )
Total non-interest income adjustments
(F) $ 2,274 $ 346 $ 5,027 $ 2,694
Non-interest expense:
Branch write-off expense $ - $ - $ 981 $ -
FDIC Small Bank Assessment Credit - (2,291 ) - $ (2,291 )
Merger expense - - 711 -
Hurricane expenses - - - 897
Outsourced special project expense - - 1,092 900
Unfunded commitment expense - - 16,989 -
Total non-interest expense adjustments
(G) $ - $ (2,291 ) $ 19,773 $ (494 )
Efficiency ratio
(reported): ((C-E)/(A+B+D)) 39.56 % 39.16 % 43.69 % 40.03 %
Efficiency ratio, as adjusted
(non-GAAP):
((C-E-G)/(A+B+D-F)) 40.08 % 40.60 % 40.25 % 40.35 %
Recently Issued Accounting Pronouncements
See Note 21 in the Condensed Notes to Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.
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