|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s telephone, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 29, 2022, the registrant had outstanding
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,” “target,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, liquidity, results of operations, business strategy and growth prospects.
Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements and, therefore, you are cautioned not to place undue reliance on such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
● difficulties and delays in integrating the mergers of NBHC, Community Bancorporation, and Bancshares of Jackson Hole Incorporated (the “mergers”) businesses or fully realizing cost savings and other benefits;
● our ability to obtain regulatory approval for Bancshares of Jackson Hole Incorporated and meet other closing conditions for the mergers on the expected terms and schedule;
● a delay in closing the mergers;
● business disruption following the proposed transactions;
● our ability to execute our business strategy, including our digital strategy, as well as changes in our business strategy or development plans;
● business and economic conditions generally and in the financial services industry;
● effects of any potential government shutdowns;
● economic, market, operational, liquidity, credit and interest rate risks associated with our business;
● effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
● changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions;
● effects of inflation, including its associated impact on labor costs, as well as, interest rate, securities market and monetary supply fluctuations;
● changes in the economy or supply-demand imbalances affecting local real estate values;
● changes in consumer spending, borrowings and savings habits;
● with respect to our mortgage business, our inability to negotiate our fees with Fannie Mae, Freddie Mac, Ginnie Mae or other investors for the purchase of our loans, our obligation to indemnify purchasers or to repurchase the related loans if the loans fail to meet certain criteria, or higher rate of delinquencies and defaults as a result of the geographic concentration of our servicing portfolio;
● our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions, consolidations or other expansion opportunities on attractive terms, or at all;
● our ability to integrate acquisitions or consolidations and to achieve synergies, operating efficiencies and/or other expected benefits within expected time-frames, or at all, or within expected cost projections, and to preserve the goodwill of acquired financial institutions;
3
● our ability to realize the anticipated benefits from enhancements or updates to our core operating systems from time to time without significant change in our client service or risk to our control environment;
● our dependence on information technology and telecommunications systems of third-party service providers and the risk of system failures, interruptions or breaches of security, including those that could result in disclosure or misuse of confidential or proprietary client or other information;
● our ability to achieve organic loan and deposit growth and the composition of such growth;
● changes in sources and uses of funds, including loans, deposits and borrowings;
● increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other things, lower returns;
● continued consolidation in the financial services industry;
● our ability to maintain or increase market share and control expenses;
● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters;
● the trading price of shares of the Company's stock;
● the effects of tax legislation, including the potential of future increases to prevailing tax rates, or challenges to our
positions;
● our ability to realize deferred tax assets or the need for a valuation allowance, or the effects of changes in tax laws on our deferred tax assets;
● costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, changes in regulation that affect the fees that we charge, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquiries; and changes in regulations that apply to us as a Colorado state-chartered bank;
● technological changes;
● the timely development and acceptance of new products and services, including in the digital technology space and our digital solution 2UniFiSM, and perceived overall value of these products and services by our clients;
● changes in our management personnel and our continued ability to attract, hire and retain qualified personnel;
● ability to implement and/or improve operational management and other internal risk controls and processes and our reporting system and procedures;
● regulatory limitations on dividends from our bank subsidiary;
● changes in estimates of future credit reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
● widespread natural and other disasters, dislocations, political instability, pandemics, acts of war or terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically;
● a cyber-security incident, data breach or a failure of a key information technology system;
● adverse effects due to the novel Coronavirus Disease 2019 (“COVID-19”) on the Company and its clients, counterparties, employees and third-party service providers, and the adverse impacts on our business, financial position, results of operations and prospects;
● impact of reputational risk on such matters as business generation and retention;
4
● other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission; and
● our success at managing the risks involved in the foregoing items.
Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.
5
PART I: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
(In thousands, except share and per share data)
| June 30, 2022 |
| December 31, 2021 | |||
ASSETS | ||||||
Cash and due from banks | $ | | $ | | ||
Interest bearing bank deposits |
| |
| | ||
Cash and cash equivalents | | | ||||
Investment securities available-for-sale (at fair value) |
| |
| | ||
Investment securities held-to-maturity (fair value of $ |
| |
| | ||
Non-marketable securities |
| |
| | ||
Loans |
| |
| | ||
Allowance for credit losses |
| ( |
| ( | ||
Loans, net |
| |
| | ||
Loans held for sale |
| |
| | ||
Other real estate owned |
| |
| | ||
Premises and equipment, net |
| |
| | ||
Goodwill |
| |
| | ||
Intangible assets, net |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Liabilities: | ||||||
Deposits: | ||||||
Non-interest bearing demand deposits | $ | | $ | | ||
Interest bearing demand deposits |
| |
| | ||
Savings and money market |
| |
| | ||
Time deposits |
| |
| | ||
Total deposits |
| |
| | ||
Securities sold under agreements to repurchase |
| |
| | ||
Long-term debt, net | | | ||||
Other liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Shareholders’ equity: | ||||||
Common stock, par value $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Treasury stock of |
| ( |
| ( | ||
Accumulated other comprehensive loss, net of tax |
| ( |
| ( | ||
Total shareholders’ equity |
| |
| | ||
Total liabilities and shareholders’ equity | $ | | $ | | ||
See accompanying notes to the consolidated interim financial statements.
6
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share data)
For the three months ended | For the six months ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Interest and dividend income: | |||||||||||
Interest and fees on loans | $ | | $ | | $ | | $ | | |||
Interest and dividends on investment securities |
| |
| |
| |
| | |||
Dividends on non-marketable securities |
| |
| |
| |
| | |||
Interest on interest-bearing bank deposits |
| |
| |
| |
| | |||
Total interest and dividend income |
| |
| |
| |
| | |||
Interest expense: | |||||||||||
Interest on deposits |
| |
| |
| |
| | |||
Interest on borrowings |
| |
| |
| |
| | |||
Total interest expense |
| |
| |
| |
| | |||
Net interest income before provision for loan losses |
| |
| |
| |
| | |||
Provision expense (release) for loan losses |
| |
| ( |
| |
| ( | |||
Net interest income after provision for loan losses |
| |
| |
| |
| | |||
Non-interest income: | |||||||||||
Service charges |
| |
| |
| |
| | |||
Bank card fees |
| |
| |
| |
| | |||
Mortgage banking income |
| |
| |
| |
| | |||
Bank-owned life insurance income |
| |
| |
| |
| | |||
Other non-interest income |
| |
| |
| |
| | |||
Total non-interest income |
| |
| |
| |
| | |||
Non-interest expense: | |||||||||||
Salaries and benefits |
| |
| |
| |
| | |||
Occupancy and equipment |
| |
| |
| |
| | |||
Telecommunications and data processing |
| |
| |
| |
| | |||
Marketing and business development |
| |
| |
| |
| | |||
FDIC deposit insurance |
| |
| |
| |
| | |||
Bank card expenses |
| |
| |
| |
| | |||
Professional fees |
| |
| |
| |
| | |||
Other non-interest expense |
| |
| |
| |
| | |||
Problem asset workout | | | | | |||||||
Loss (gain) on OREO sales, net | | | ( | | |||||||
Core deposit intangible asset amortization |
| |
| |
| |
| | |||
Banking center consolidation-related expense |
| — |
| |
| — |
| | |||
Total non-interest expense |
| |
| |
| |
| | |||
Income before income taxes |
| |
| |
| |
| | |||
Income tax expense |
| |
| |
| |
| | |||
Net income | $ | | $ | | $ | | $ | | |||
Earnings per share—basic | $ | | $ | | $ | | $ | | |||
Earnings per share—diluted | | | | | |||||||
Weighted average number of common shares outstanding: | |||||||||||
Basic |
| |
| |
| |
| | |||
Diluted |
| |
| |
| |
| | |||
See accompanying notes to the consolidated interim financial statements.
7
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
For the three months ended | For the six months ended | ||||||||||
June 30, | June 30, | ||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Net income | $ | |
| $ | |
| $ | |
| $ | |
Other comprehensive (loss) income, net of tax: | |||||||||||
Securities available-for-sale: | |||||||||||
Net unrealized (losses) gains arising during the period, net of tax benefit (expense) of $ |
| ( |
| |
| ( |
| ( | |||
Less: amortization of net unrealized holding gains to income, net of tax benefit of $ |
| ( |
| ( |
| ( |
| ( | |||
Other comprehensive (loss) income |
| ( |
| |
| ( |
| ( | |||
Comprehensive income (loss) | $ | | $ | | $ | ( | $ | | |||
See accompanying notes to the consolidated interim financial statements.
8
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(In thousands, except share and per share data)
For the three months ended June 30, | ||||||||||||||||||
|
|
|
| Accumulated |
| |||||||||||||
Additional | other | |||||||||||||||||
Common | paid-in | Retained | Treasury | comprehensive | ||||||||||||||
stock | capital | earnings | stock | income (loss), net | Total | |||||||||||||
Balance, March 31, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Net income |
| — | — | | — | — |
| | ||||||||||
Stock-based compensation |
| — | | — | — | — |
| | ||||||||||
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $ |
| — | ( | — | | — |
| ( | ||||||||||
Cash dividends declared ($ |
| — | — | ( | — | — | ( | |||||||||||
Other comprehensive income |
| — | — | — | — | | | |||||||||||
Balance, June 30, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Balance, March 31, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income |
| — | — | | — | — |
| | ||||||||||
Stock-based compensation |
| — | | — | — | — |
| | ||||||||||
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $ |
| — | ( | — | | — |
| ( | ||||||||||
Cash dividends declared ($ |
| — | — | ( | — | — | ( | |||||||||||
Other comprehensive loss |
| — | — | — | — | ( |
| ( | ||||||||||
Balance, June 30, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
For the six months ended June 30, | ||||||||||||||||||
|
|
|
| Accumulated |
| |||||||||||||
Additional | other | |||||||||||||||||
Common | paid-in | Retained | Treasury | comprehensive | ||||||||||||||
stock | capital | earnings | stock | income (loss), net | Total | |||||||||||||
Balance, December 31, 2020 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Net income | — | — | | — | — | | ||||||||||||
Stock-based compensation |
| — |
| |
| — |
| — |
| — |
| | ||||||
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $ |
| — |
| ( |
| — |
| |
| — |
| ( | ||||||
Cash dividends declared ($ |
| — |
| — |
| ( |
| — |
| — | ( | |||||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Balance, June 30, 2021 | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Balance, December 31, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income | — | — | | — | — | | ||||||||||||
Stock-based compensation |
| — | | — | — | — |
| | ||||||||||
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $ |
| — | ( | — | | — |
| ( | ||||||||||
Cash dividends declared ($ |
| — | — | ( | — | — | ( | |||||||||||
Other comprehensive loss |
| — | — | — | — | ( |
| ( | ||||||||||
Balance, June 30, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
See accompanying notes to the consolidated interim financial statements.
9
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| For the six months ended June 30, | |||||
2022 |
| 2021 | ||||
Cash flows from operating activities: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Provision expense (release) for loan losses |
| |
| ( | ||
Depreciation and amortization |
| |
| | ||
Change in current income tax receivable |
| |
| ( | ||
Change in deferred income taxes |
|
| ( |
| ||
Net excess tax benefit from stock-based compensation | ( | ( | ||||
Discount accretion, net of premium amortization on securities |
| |
| | ||
Gain on sale of mortgages, net |
| ( |
| ( | ||
Origination of loans held for sale, net of repayments |
| ( |
| ( | ||
Proceeds from sales of loans held for sale |
| |
| |||
Originations of mortgage serving rights | ( | ( | ||||
Impairment on other real estate owned |
| | — | |||
Impairment on fixed assets related to banking center consolidations |
| — |
| | ||
Gain on sale of fixed assets | ( | ( | ||||
Stock-based compensation |
| |
| | ||
Operating lease payments | ( | ( | ||||
Change in other assets |
| ( |
| |||
Change in other liabilities |
| |
| ( | ||
Net cash provided by operating activities |
| |
| | ||
Cash flows from investing activities: | ||||||
Proceeds from non-marketable securities | | | ||||
Proceeds from maturities of investment securities available-for-sale |
| |
| | ||
Proceeds from maturities of investment securities held-to-maturity |
| |
| | ||
Proceeds from sales of other real estate owned |
| |
| | ||
Purchase of non-marketable securities | ( | ( | ||||
Purchase of investment securities available-for-sale | ( | ( | ||||
Purchase of investment securities held-to-maturity | ( | ( | ||||
(Purchases) sales of premises and equipment, net |
| ( |
| | ||
Net (increase) decrease in loans | ( |
| | |||
Proceeds from the sale of loans |
| | — | |||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: | ||||||
Net (decrease) increase in deposits |
| ( |
| | ||
Net increase in repurchase agreements and other short-term borrowings |
| |
| | ||
Issuance of stock under purchase and equity compensation plans | ( | ( | ||||
Proceeds from exercise of stock options | | | ||||
Payment of dividends |
| ( |
| ( | ||
Net cash (used in) provided by financing activities |
| ( |
| | ||
(Decrease) increase in cash, cash equivalents and restricted cash(1) |
| ( |
| | ||
Cash, cash equivalents and restricted cash at beginning of the year(1) |
| |
| | ||
Cash, cash equivalents and restricted cash at end of period(1) | $ | | $ | | ||
Supplemental disclosure of cash flow information during the period: | ||||||
Cash paid for interest | $ | | $ | | ||
Net tax payments | | | ||||
Supplemental schedule of non-cash activities: | ||||||
Loans transferred to other real estate owned at fair value | $ | | $ | | ||
Increase in loans purchased but not settled | — | | ||||
Loans transferred from loans held for sale to loans | | | ||||
(1) | Included in restricted cash at June 30, 2022 and 2021 is $ |
See accompanying notes to the consolidated interim financial statements.
10
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2022
Note 1 Basis of Presentation
National Bank Holdings Corporation (NBHC or the Company) is a bank holding company that was incorporated in the State of Delaware in 2009. The Company is headquartered in Greenwood Village, Colorado, and its primary operations are conducted through its wholly owned subsidiary, NBH Bank (the Bank), a Colorado state-chartered bank and a member of the Federal Reserve System. The Company provides a variety of banking products to both commercial and consumer clients through a network of
The accompanying interim unaudited consolidated financial statements serve to update the National Bank Holdings Corporation Annual Report on Form 10-K for the year ended December 31, 2021 and include the accounts of the Company and its wholly owned subsidiary, NBH Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and, where applicable, with general practices in the banking industry or guidelines prescribed by bank regulatory agencies. However, they may not include all information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods and accordingly should be read in conjunction with the financial information contained in the Company's most recent Form 10-K. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results presented. All such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years' amounts are made whenever necessary to conform to current period presentation. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the full year or any other interim period. All amounts are in thousands, except share data, or as otherwise noted.
GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment and available information. Management has made significant estimates in certain areas, such as the fair values of financial instruments, contingent liabilities and the allowance for credit losses (“ACL”). Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.
The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in note 2 of the audited financial statements and notes for the year ended December 31, 2021 and are contained in the Company's Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2021.
Note 2 Recent Accounting Pronouncements
The Company has not adopted any recent accounting pronouncements in addition to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Note 3 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities. These investment securities totaled $
11
Available-for-sale
Available-for-sale securities are summarized as follows as of the dates indicated:
June 30, 2022 | ||||||||||||
| Amortized |
| Gross |
| Gross |
| ||||||
cost | unrealized gains | unrealized losses | Fair value | |||||||||
U.S. Treasury securities | $ | | $ | — | $ | ( | $ | | ||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | | | ( | | ||||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| |
| |
| ( |
| | ||||
Municipal securities | | — | — | | ||||||||
Corporate debt | | | — | | ||||||||
Other securities |
| |
| — |
| — |
| | ||||
Total investment securities available-for-sale | $ | | $ | | $ | ( | $ | | ||||
December 31, 2021 | ||||||||||||
| Amortized |
| Gross |
| Gross |
| ||||||
cost | unrealized gains | unrealized losses | Fair value | |||||||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | $ | | $ | | $ | ( | $ | | ||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| |
| |
| ( |
| | ||||
Municipal securities | | | — | | ||||||||
Corporate debt | | | — | | ||||||||
Other securities |
| |
| — |
| — |
| | ||||
Total investment securities available-for-sale | $ | | $ | | $ | ( | $ | | ||||
During the six months ended June 30, 2022 and 2021, purchases of available-for-sale securities totaled $
At June 30, 2022 and December 31, 2021, the Company’s available-for-sale investment portfolio was primarily comprised of mortgage-backed securities, and all mortgage-backed securities were backed by government sponsored enterprises (“GSE”) collateral such as Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) and the government owned agency Government National Mortgage Association (“GNMA”).
12
The tables below summarize the available-for-sale securities with unrealized losses as of the dates shown, along with the length of the impairment period:
June 30, 2022 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |||||||
value | losses | value | losses | value | losses | |||||||||||||
U.S. Treasury securities | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
Mortgage-backed securities: | ||||||||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | | ( | | ( | | ( | ||||||||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises | | ( | | ( | | ( | ||||||||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
December 31, 2021 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |||||||
value | losses | value | losses | value | losses | |||||||||||||
Mortgage-backed securities: | ||||||||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises | | ( | | ( | | ( | ||||||||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Management evaluated all of the available-for-sale securities in an unrealized loss position at June 30, 2022 and December 31, 2021. The portfolio included
Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the Federal Reserve Bank (“FRB”), if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $
13
A summary of the available-for-sale securities by maturity is shown in the following table as of June 30, 2022. Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. Additionally, the Company holds other available-for-sale securities with an amortized cost and of $
June 30, 2022 | ||||||||
Weighted | ||||||||
Amortized Cost | Fair Value | Average Yield | ||||||
U.S. Treasury securities | ||||||||
After one but within five years | $ | | $ | | ||||
Total U.S. Treasury securities | | | ||||||
Municipal securities | ||||||||
After one but within five years | | | ||||||
Total municipal securities | | | ||||||
Corporate debt | ||||||||
After five but within ten years | | | ||||||
Total corporate debt | | | ||||||
Total | $ | | $ | | ||||
As of June 30, 2022 and December 31, 2021, accrued interest receivable (“AIR”) from available-for-sale investment securities totaled $
Held-to-maturity
Held-to-maturity investment securities are summarized as follows as of the dates indicated:
June 30, 2022 | ||||||||||||
|
| Gross |
| Gross |
| |||||||
Amortized | unrealized | unrealized | ||||||||||
cost | gains | losses | Fair value | |||||||||
U.S. Treasury securities | $ | | $ | | $ | — | $ | | ||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | | — | ( | | ||||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| |
| — |
| ( |
| | ||||
Total investment securities held-to-maturity | $ | | $ | | $ | ( | $ | | ||||
December 31, 2021 | ||||||||||||
|
| Gross |
| Gross |
| |||||||
Amortized | unrealized | unrealized | ||||||||||
cost | gains | losses | Fair value | |||||||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | $ | | $ | | $ | ( | $ | | ||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| |
| |
| ( |
| | ||||
Total investment securities held-to-maturity | $ | | $ | | $ | ( | $ | | ||||
During the six months ended June 30, 2022 and 2021, purchases of held-to-maturity securities totaled $
14
The held-to-maturity portfolio included
June 30, 2022 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |||||||
value | losses | value | losses | value | losses | |||||||||||||
Mortgage-backed securities: | ||||||||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises | | ( | | ( | | ( | ||||||||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
December 31, 2021 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |||||||
value | losses | value | losses | value | losses | |||||||||||||
Mortgage-backed securities: | ||||||||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises | | ( | — | — | | ( | ||||||||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
The Company does not measure expected credit losses on a financial asset, or group of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell any held-to-maturity securities and believes it will not be required to sell any held-to-maturity securities before the recovery of their amortized cost.
Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the FRB, if needed. The carrying value of held-to-maturity investment securities pledged as collateral totaled $
A summary of the held-to-maturity securities by maturity is shown in the following table as of June 30, 2022. Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments.
June 30, 2022 | ||||||||
Weighted | ||||||||
Amortized Cost | Fair Value | Average Yield | ||||||
U.S. Treasury securities | ||||||||
After one but within five years | $ | | $ | | ||||
Total | $ | | $ | | ||||
15
As of June 30, 2022 and December 31, 2021, AIR from held-to-maturity investment securities totaled $
Note 4 Non-marketable Securities
Non-marketable securities totaled $
At June 30, 2022, the Company held $
Note 5 Loans
The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. The tables below show the loan portfolio composition including carrying value by segment as of the dates shown. The carrying value of loans is net of discounts, fees, costs and fair value marks of $
June 30, 2022 | ||||
Total loans |
| % of total | ||
Commercial | $ | | ||
Commercial real estate non-owner occupied |
| | ||
Residential real estate |
| | ||
Consumer |
| | ||
Total | $ | | ||
December 31, 2021 | ||||
Total loans |
| % of total | ||
Commercial | $ | | ||
Commercial real estate non-owner occupied |
| | ||
Residential real estate |
| | ||
Consumer |
| | ||
Total | $ | | ||
16
Information about delinquent and non-accrual loans is shown in the following tables at June 30, 2022 and December 31, 2021:
June 30, 2022 | ||||||||||||||||||
Greater | ||||||||||||||||||
30-89 days | than 90 days | Total past | ||||||||||||||||
past due and | past due and | Non-accrual | due and | |||||||||||||||
accruing | accruing | loans | non-accrual | Current | Total loans | |||||||||||||
Commercial: | ||||||||||||||||||
Commercial and industrial | $ | | $ | — | $ | | $ | | $ | | $ | | ||||||
Municipal and non-profit | — | — | — | — | | | ||||||||||||
Owner occupied commercial real estate | — | — | | | | | ||||||||||||
Food and agribusiness | | — | | | | | ||||||||||||
Total commercial | | — | | | | | ||||||||||||
Commercial real estate non-owner occupied: | ||||||||||||||||||
Construction |
| — |
| — |
| — |
| — |
| |
| | ||||||
Acquisition/development |
| — |
| — |
| — |
| — |
| |
| | ||||||
Multifamily |
| — |
| — |
| — |
| — |
| |
| | ||||||
Non-owner occupied |
| |
| |
| |
| |
| |
| | ||||||
Total commercial real estate |
| |
| |
| |
| |
| |
| | ||||||
Residential real estate: |
|
|
|
|
|
| ||||||||||||
Senior lien | | — | | | | | ||||||||||||
Junior lien |
| | — | | | | | |||||||||||
Total residential real estate |
| | — | | | | | |||||||||||
Consumer |
| | | | | |
| | ||||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
June 30, 2022 | ||||||||
Non-accrual loans | Non-accrual loans | |||||||
with a related | with no related | |||||||
allowance for | allowance for | Non-accrual | ||||||
credit loss | credit loss | loans | ||||||
Commercial: | ||||||||
Commercial and industrial | $ | | $ | | $ | | ||
Municipal and non-profit | — | — | — | |||||
Owner occupied commercial real estate | | | | |||||
Food and agribusiness | | — | | |||||
Total commercial | | | | |||||
Commercial real estate non-owner occupied: | ||||||||
Construction |
| — |
| — |
| — | ||
Acquisition/development |
| — |
| — |
| — | ||
Multifamily |
| — |
| — |
| — | ||
Non-owner occupied |
| |
| — |
| | ||
Total commercial real estate |
| |
| — |
| | ||
Residential real estate: |
|
|
| |||||
Senior lien | | | | |||||
Junior lien | | — |
| | ||||
Total residential real estate | | |
| | ||||
Consumer |
| |
| — |
| | ||
Total loans | $ | | $ | | $ | | ||
17
December 31, 2021 | ||||||||||||||||||
Greater | ||||||||||||||||||
30-89 days | than 90 days | Total past | ||||||||||||||||
past due and | past due and | Non-accrual | due and | |||||||||||||||
accruing | accruing | loans | non-accrual | Current | Total loans | |||||||||||||
Commercial: | ||||||||||||||||||
Commercial and industrial | $ | | $ | — | $ | | $ | | $ | | $ | | ||||||
Municipal and non-profit | | — | — | | | | ||||||||||||
Owner occupied commercial real estate |
| |
| — | |
| |
| |
| | |||||||
Food and agribusiness |
| |
| — | |
| |
| |
| | |||||||
Total commercial | | — | | | | | ||||||||||||
Commercial real estate non-owner occupied: | ||||||||||||||||||
Construction |
| — |
| — |
| — |
| — |
| |
| | ||||||
Acquisition/development |
| — |
| — |
| — |
| — |
| |
| | ||||||
Multifamily |
| — |
| — |
| — |
| — |
| |
| | ||||||
Non-owner occupied |
| |
| |
| |
| |
| |
| | ||||||
Total commercial real estate |
| |
| |
| |
| |
| |
| | ||||||
Residential real estate: |
| |||||||||||||||||
Senior lien |
| |
| | |
| |
| | | ||||||||
Junior lien |
| |
| — | | | | | ||||||||||
Total residential real estate |
| |
| | | | | | ||||||||||
Consumer |
| |
| |
| | | | | |||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
December 31, 2021 | ||||||||
Non-accrual loans | Non-accrual loans | |||||||
with a related | with no related | |||||||
allowance for | allowance for | Non-accrual | ||||||
credit loss | credit loss | loans | ||||||
Commercial: | ||||||||
Commercial and industrial | $ | | $ | — | $ | | ||
Municipal and non-profit | — | — | — | |||||
Owner occupied commercial real estate | | — | | |||||
Food and agribusiness | | — | | |||||
Total commercial | | — | | |||||
Commercial real estate non-owner occupied: | ||||||||
Construction |
| — |
| — |
| — | ||
Acquisition/development |
| — |
| — |
| — | ||
Multifamily |
| — |
| — |
| — | ||
Non-owner occupied |
| |
| — |
| | ||
Total commercial real estate |
| |
| — |
| | ||
Residential real estate: |
|
|
| |||||
Senior lien | | | | |||||
Junior lien | | — |
| | ||||
Total residential real estate | | |
| | ||||
Consumer |
| |
| — |
| | ||
Total loans | $ | | $ | | $ | | ||
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include non-accrual loans and troubled debt restructurings (“TDRs”) on non-accrual status. There was
The Company’s internal risk rating system uses a series of grades, which reflect our assessment of the credit quality of loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”. For a description of the general characteristics of the risk grades, refer to note 2 Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2021 Annual Report on Form 10-K.
18
The amortized cost basis for all loans as determined by the Company’s internal risk rating system and year of origination is shown in the following tables as of June 30, 2022 and December 31, 2021:
June 30, 2022 | |||||||||||||||||||||||||||
Revolving | Revolving | ||||||||||||||||||||||||||
loans | loans | ||||||||||||||||||||||||||
Origination year | amortized | converted | |||||||||||||||||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | Prior | cost basis | to term | Total | |||||||||||||||||||
Commercial: | |||||||||||||||||||||||||||
Commercial and industrial: | |||||||||||||||||||||||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special mention | — | — | | | | | | — | | ||||||||||||||||||
Substandard | | — | — | | | | | | | ||||||||||||||||||
Total commercial and industrial | | | | | | | | | | ||||||||||||||||||
Municipal and non-profit: | |||||||||||||||||||||||||||
Pass | | | | | | | | — | | ||||||||||||||||||
Total municipal and non-profit | | | | | | | | — | | ||||||||||||||||||
Owner occupied commercial real estate: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | — | | | | — | — | | ||||||||||||||||||
Substandard | — | — | | | — | | — | — | | ||||||||||||||||||
Doubtful | — | — | | | — | — | — | — | | ||||||||||||||||||
Total owner occupied commercial real estate | | | | | | | | | | ||||||||||||||||||
Food and agribusiness: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | | | — | | | — | | ||||||||||||||||||
Substandard | — | — | — | — | — | | — | — | | ||||||||||||||||||
Total food and agribusiness | | | | | | | | | | ||||||||||||||||||
Total commercial | | | | | | | | | | ||||||||||||||||||
Commercial real estate non-owner occupied: | |||||||||||||||||||||||||||
Construction: | |||||||||||||||||||||||||||
Pass | | | | | — | | | — | | ||||||||||||||||||
Total construction | | | | | — | | | — | | ||||||||||||||||||
Acquisition/development: | |||||||||||||||||||||||||||
Pass | | | | | | | — | — | | ||||||||||||||||||
Total acquisition/development | | | | | | | — | — | | ||||||||||||||||||
Multifamily: | |||||||||||||||||||||||||||
Pass | | | | — | | | — | — | | ||||||||||||||||||
Total multifamily | | | | — | | | — | — | | ||||||||||||||||||
Non-owner occupied | |||||||||||||||||||||||||||
Pass | | | | | | | | — | | ||||||||||||||||||
Special mention | — | — | — | | | | — | — | | ||||||||||||||||||
Substandard | — | — | — | — | | | — | — | | ||||||||||||||||||
Doubtful | — | — | — | — | — | | — | — | | ||||||||||||||||||
Total non-owner occupied | | | | | | | | — | | ||||||||||||||||||
Total commercial real estate non-owner occupied | | | | | | | | — | | ||||||||||||||||||
Residential real estate: | |||||||||||||||||||||||||||
Senior lien | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | — | — | — | | — | — | | ||||||||||||||||||
Substandard | — | | | | | | — | — | | ||||||||||||||||||
Total senior lien | | | | | | | | | | ||||||||||||||||||
Junior lien | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | — | — | — | | — | | | ||||||||||||||||||
Substandard | — | — | | — | | | — | — | | ||||||||||||||||||
Total junior lien | | | | | | | | | | ||||||||||||||||||
Total residential real estate | | | | | | | | | | ||||||||||||||||||
Consumer | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Substandard | — | — | — | | — | | | — | | ||||||||||||||||||
Total consumer | | | | | | | | | | ||||||||||||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
19
December 31, 2021 | |||||||||||||||||||||||||||
Revolving | Revolving | ||||||||||||||||||||||||||
loans | loans | ||||||||||||||||||||||||||
Origination year | amortized | converted | |||||||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | Prior | cost basis | to term | Total | |||||||||||||||||||
Commercial: | |||||||||||||||||||||||||||
Commercial and industrial: | |||||||||||||||||||||||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special mention | — | | | | | | | | | ||||||||||||||||||
Substandard | — | | | | | | | — | | ||||||||||||||||||
Doubtful | — | | — | | | | — | — | | ||||||||||||||||||
Total commercial and industrial | | | | | | | | | | ||||||||||||||||||
Municipal and non-profit: | |||||||||||||||||||||||||||
Pass | | | | | | | | — | | ||||||||||||||||||
Total municipal and non-profit | | | | | | | | — | | ||||||||||||||||||
Owner occupied commercial real estate: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | | | | | — | — | | ||||||||||||||||||
Substandard | — | | | — | | | — | — | | ||||||||||||||||||
Doubtful | — | | | — | — | | — | — | | ||||||||||||||||||
Total owner occupied commercial real estate | | | | | | | | | | ||||||||||||||||||
Food and agribusiness: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | | | — | — | | | — | | ||||||||||||||||||
Substandard | — | — | — | — | | | — | — | | ||||||||||||||||||
Total food and agribusiness | | | | | | | | | | ||||||||||||||||||
Total commercial | | | | | | | | | | ||||||||||||||||||
Commercial real estate non-owner occupied: | |||||||||||||||||||||||||||
Construction: | |||||||||||||||||||||||||||
Pass | | | | — | | — | | — | | ||||||||||||||||||
Total construction | | | | — | | — | | — | | ||||||||||||||||||
Acquisition/development: | |||||||||||||||||||||||||||
Pass | | | | | | | — | — | | ||||||||||||||||||
Total acquisition/development | | | | | | | — | — | | ||||||||||||||||||
Multifamily: | |||||||||||||||||||||||||||
Pass | | | | | | | — | — | | ||||||||||||||||||
Special mention | — | — | — | — | — | | — | — | | ||||||||||||||||||
Total multifamily | | | | | | | — | — | | ||||||||||||||||||
Non-owner occupied | |||||||||||||||||||||||||||
Pass | | | | | | | | — | | ||||||||||||||||||
Special mention | — | — | | | | | — | — | | ||||||||||||||||||
Substandard | — | — | — | | — | | — | — | | ||||||||||||||||||
Total non-owner occupied | | | | | | | | — | | ||||||||||||||||||
Total commercial real estate non-owner occupied | | | | | | | | — | | ||||||||||||||||||
Residential real estate: | |||||||||||||||||||||||||||
Senior lien | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | — | — | — | | — | — | | ||||||||||||||||||
Substandard | | | | | | | — | — | | ||||||||||||||||||
Total senior lien | | | | | | | | | | ||||||||||||||||||
Junior lien | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | — | — | — | — | | | | ||||||||||||||||||
Substandard | — | | — | | | | — | — | | ||||||||||||||||||
Total junior lien | | | | | | | | | | ||||||||||||||||||
Total residential real estate | | | | | | | | | | ||||||||||||||||||
Consumer: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Substandard | — | — | — | — | — | | — | — | | ||||||||||||||||||
Total consumer | | | | | | | | | | ||||||||||||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
20
Loans evaluated individually
We evaluate loans individually when they no longer share risk characteristics with pooled loans. These loans include loans on non-accrual status, loans in bankruptcy, and TDRs as described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted expected cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral-dependent loans.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Management individually evaluates collateral-dependent loans with an amortized cost basis of $
June 30, 2022 | ||||||||
Total amortized | ||||||||
Real property | Business assets | cost basis | ||||||
Commercial | ||||||||
Commercial and industrial | $ | | $ | | $ | | ||
Owner-occupied commercial real estate | | — | | |||||
Total Commercial | | | | |||||
Commercial real estate non owner-occupied | ||||||||
Non-owner occupied |
| |
| — |
| | ||
Total commercial real estate |
| |
| — |
| | ||
Residential real estate |
|
|
| |||||
Senior lien |
| |
| |
| | ||
Total residential real estate |
| |
| |
| | ||
Total loans | $ | | $ | | $ | | ||
December 31, 2021 | ||||||||
Total amortized | ||||||||
Real property | Business assets | cost basis | ||||||
Commercial | ||||||||
Commercial and industrial | $ | | $ | | $ | | ||
Owner-occupied commercial real estate | | | | |||||
Total Commercial | | | | |||||
Residential real estate |
|
|
| |||||
Senior lien |
| |
| — |
| | ||
Total residential real estate |
| |
| — |
| | ||
Total loans | $ | | $ | | $ | | ||
Loan modifications and troubled debt restructurings
The Company’s policy is to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include restructuring a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Additionally, if a borrower’s repayment obligation has been discharged by a court, and that debt has not been reaffirmed by the borrower, regardless of past due status, the loan is considered to be a TDR.
21
During the three months ended June 30, 2022, the Company restructured
June 30, 2022 | ||||||||||||
Amortized | Average year-to-date | Unpaid | Unfunded commitments | |||||||||
cost basis | amortized cost basis | principal balance | to fund TDRs | |||||||||
Commercial | $ | | $ | | $ | | $ | | ||||
Commercial real estate non-owner occupied |
| |
| |
| |
| — | ||||
Residential real estate |
| |
| |
| |
| — | ||||
Consumer |
| — |
| — |
| — |
| — | ||||
Total | $ | | $ | | $ | | $ | | ||||
December 31, 2021 | ||||||||||||
Amortized | Average year-to-date | Unpaid | Unfunded commitments | |||||||||
cost basis | amortized cost basis | principal balance | to fund TDRs | |||||||||
Commercial | $ | | $ | | $ | | $ | — | ||||
Commercial real estate non-owner occupied |
| |
| |
| |
| — | ||||
Residential real estate |
| |
| |
| |
| — | ||||
Consumer |
| — |
| — |
| — |
| — | ||||
Total | $ | | $ | | $ | | $ | — | ||||
The following table summarizes the Company’s carrying value of non-accrual TDRs as of June 30, 2022 and December 31, 2021:
June 30, 2022 | December 31, 2021 | |||||
Commercial |
| $ | |
| $ | |
Commercial real estate non-owner occupied |
| |
| | ||
Residential real estate |
| |
| | ||
Consumer |
| — |
| — | ||
Total non-accruing TDRs | $ | | $ | | ||
Accrual of interest is resumed on loans that were previously on non-accrual only after the loan has performed sufficiently for a period of time. The Company had
22
Note 6 Allowance for Credit Losses
The tables below detail the Company’s allowance for credit losses as of the dates shown:
Three months ended June 30, 2022 | |||||||||||||||
Non-owner | |||||||||||||||
occupied | |||||||||||||||
commercial | Residential | ||||||||||||||
| Commercial |
| real estate |
| real estate |
| Consumer |
| Total | ||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| — |
| — | ( |
| ( | ||||||
Recoveries |
| |
| |
| |
| |
| | |||||
Provision expense (release) for loan losses |
| |
| ( |
| |
| |
| | |||||
Ending balance | $ | | $ | | $ | | $ | | $ | | |||||
Six months ended June 30, 2022 | |||||||||||||||
|
| Non-owner |
|
|
| ||||||||||
occupied | |||||||||||||||
commercial | Residential | ||||||||||||||
Commercial | real estate | real estate | Consumer | Total | |||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| — |
| ( |
| ( |
| ( | |||||
Recoveries |
| |
| |
| |
| |
| | |||||
Provision expense (release) for loan losses |
| |
| ( |
| |
| |
| | |||||
Ending balance | $ | | $ | | $ | | $ | | $ | | |||||
Three months ended June 30, 2021 | |||||||||||||||
Non-owner | |||||||||||||||
occupied | |||||||||||||||
commercial | Residential | ||||||||||||||
| Commercial |
| real estate |
| real estate |
| Consumer |
| Total | ||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| — |
| — |
| ( |
| ( | |||||
Recoveries |
| |
| — |
| |
| |
| | |||||
Provision expense (release) for loan losses |
| |
| ( |
| ( |
| |
| ( | |||||
Ending balance | $ | | $ | | $ | | $ | | $ | | |||||
Six months ended June 30, 2021 | |||||||||||||||
|
| Non-owner |
|
|
| ||||||||||
occupied | |||||||||||||||
commercial | Residential | ||||||||||||||
Commercial | real estate | real estate | Consumer | Total | |||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| — |
| ( |
| ( |
| ( | |||||
Recoveries |
| |
| |
| |
| |
| | |||||
Provision (release) expense for loan losses |
| ( |
| ( |
| ( |
| |
| ( | |||||
Ending balance | $ | | $ | | $ | | $ | | $ | | |||||
In evaluating the loan portfolio for an appropriate ACL level, excluding loans evaluated individually, loans were grouped into segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio was further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of developing the underlying data used within the discounted cash flow model including, but not limited to, prepayment and recovery rates as well as loss rates tied to macro-economic conditions within management’s reasonable and supportable forecast. The ACL also includes subjective adjustments based upon qualitative risk factors including asset quality, loss trends, lending management, portfolio growth and loan review/internal audit results.
Net charge-offs on loans during the three and six months ended June 30, 2022 were $
23
which included a provision expense of $
Net charge-offs on loans during the three and six months ended June 30, 2021 were $
The Company has elected to exclude AIR from the allowance for credit losses calculation. As of June 30, 2022 and December 31, 2021, AIR from loans totaled $
Note 7 Other Real Estate Owned
A summary of the activity in other real estate owned (“OREO”) during the six months ended June 30, 2022 and 2021 is as follows:
For the six months ended June 30, | |||||
2022 | 2021 | ||||
Beginning balance | $ | |
| $ | |
Transfers from loan portfolio, at fair value |
| |
| | |
Impairments |
| ( |
| — | |
Sales |
| ( |
| ( | |
Ending balance | $ | | $ | | |
During the three months ended June 30, 2022 and 2021, the Company sold OREO properties with net book balances of $
Note 8 Goodwill and Intangible Assets
Goodwill and core deposit intangible
In connection with our acquisitions, the Company recorded goodwill of $
The gross carrying amount of the core deposit intangibles (“CDI”) and the associated accumulated amortization at June 30, 2022 and December 31, 2021, are presented as follows:
June 30, 2022 | December 31, 2021 | ||||||||||||||||
Gross | Net | Gross | Net | ||||||||||||||
carrying | Accumulated | carrying | carrying | Accumulated | carrying | ||||||||||||
amount | amortization | amount | amount | amortization | amount | ||||||||||||
Core deposit intangible | $ | |
| $ | ( | $ | | $ | |
| $ | ( | $ | | |||
The Company is amortizing the CDI from acquisitions on a straight-line basis over -
24
million and $
The following table shows the estimated future amortization expense for the CDI as of June 30, 2022:
Years ending December 31, | Amount | |
For the six months ending December 31, 2022 | $ | |
For the year ending December 31, 2023 | | |
For the year ending December 31, 2024 | | |
For the year ending December 31, 2025 | | |
For the year ending December 31, 2026 | |
Mortgage servicing rights
Mortgage servicing rights (“MSRs”) represent rights to service loans originated by the Company and sold to government-sponsored enterprises including FHLMC, FNMA, GNMA and FHLB and are included in other assets in the consolidated statements of financial condition. Mortgage loans serviced for others were $
Below are the changes in the MSRs for the periods presented:
For the six months ended June 30, | |||||
2022 | 2021 | ||||
Beginning balance | $ | |
| $ | |
Originations | | | |||
(Impairment) recovery | ( | | |||
Amortization |
| ( |
| ( | |
Ending balance | | | |||
Fair value of mortgage servicing rights | $ | | $ | | |
The fair value of MSRs was determined based upon a discounted cash flow analysis. The cash flow analysis included assumptions for discount rates and prepayment speeds. The discount rate was
MSRs are evaluated and impairment is recognized to the extent fair value is less than the carrying amount. The Company evaluates impairment by stratifying MSRs based on the predominant risk characteristics of the underlying loans, including loan type and loan term. The Company is amortizing the MSRs in proportion to and over the period of the estimated net servicing income of the underlying loans.
The following table shows the estimated future amortization expense for the MSRs as of June 30, 2022:
Years ending December 31, | Amount | |
For the six months ending December 31, 2022 | $ | |
For the year ending December 31, 2023 | | |
For the year ending December 31, 2024 | | |
For the year ending December 31, 2025 | | |
For the year ending December 31, 2026 | |
25
Note 9 Borrowings
Borrowings consist of securities sold under agreements to repurchase, long-term debt and FHLB advances.
Securities sold under agreements to repurchase
The Company enters into repurchase agreements to facilitate the needs of its clients. As of June 30, 2022 and December 31, 2021, the Company sold securities under agreements to repurchase totaling $
Long-term debt
On November 5, 2021, the Company entered into a subordinated note purchase agreement to issue and sell a fixed-to-floating rate note totaling $
The note is subordinated, unsecured and matures on November 15, 2031. Payments consist of interest only. Interest expense on the note is payable semi-annually in arrears and will bear interest at
FHLB advances
As a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $
Note 10 Regulatory Capital
As a bank holding company that has elected to be treated as a financial holding company, the Company and NBH Bank is subject to regulatory capital adequacy requirements implemented by the Federal Reserve, including maintaining capital positions at the “well-capitalized” level. The federal banking agencies have risk based capital adequacy regulations intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations. Under these regulations, assets are assigned to one of several risk categories, and nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by a risk adjustment percentage for the category.
26
Under the Basel III requirements, at June 30, 2022 and December 31, 2021, the Company and the Bank met all capital requirements, including the capital conservation buffer of
June 30, 2022 | |||||||||||||||
Required to be | Required to be | ||||||||||||||
well capitalized under | considered | ||||||||||||||
prompt corrective | adequately | ||||||||||||||
Actual | action provisions | capitalized(1) | |||||||||||||
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount | ||||
Tier 1 leverage ratio: | |||||||||||||||
Consolidated |
| $ | |
| N/A | N/A |
| $ | | ||||||
NBH Bank |
|
| |
| $ | |
|
| | ||||||
Common equity tier 1 risk based capital: | |||||||||||||||
Consolidated | $ | | N/A | N/A | $ | | |||||||||
NBH Bank | | $ | | | |||||||||||
Tier 1 risk based capital ratio: | |||||||||||||||
Consolidated |
| $ | |
| N/A | N/A |
| $ | | ||||||
NBH Bank |
|
| |
| $ | |
|
| | ||||||
Total risk based capital ratio: | |||||||||||||||
Consolidated |
| $ | |
| N/A | N/A |
| $ | | ||||||
NBH Bank |
|
| |
| $ | |
|
| | ||||||
December 31, 2021 | |||||||||||||||
Required to be | Required to be | ||||||||||||||
well capitalized under | considered | ||||||||||||||
prompt corrective | adequately | ||||||||||||||
Actual | action provisions | capitalized(1) | |||||||||||||
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount | ||||
Tier 1 leverage ratio: | |||||||||||||||
Consolidated |
| $ | |
| N/A | N/A |
| $ | | ||||||
NBH Bank |
|
| |
| $ | |
|
| | ||||||
Common equity tier 1 risk based capital: | |||||||||||||||
Consolidated | $ | | N/A | N/A | $ | | |||||||||
NBH Bank | | $ | | | |||||||||||
Tier 1 risk based capital ratio: | |||||||||||||||
Consolidated |
| $ | |
| N/A | N/A |
| $ | | ||||||
NBH Bank |
|
| |
| $ | |
|
| | ||||||
Total risk based capital ratio: | |||||||||||||||
Consolidated |
| $ | |
| N/A | N/A |
| $ | | ||||||
NBH Bank |
|
| |
| $ | |
|
| | ||||||
(1) |
| Includes the capital conservation buffer of 2.5%. |
Note 11 Revenue from Contracts with Clients
Revenue is recognized when obligations under the terms of a contract with clients are satisfied. Below is the detail of the Company’s revenue from contracts with clients.
Service charges and other fees
Service charge fees are primarily comprised of monthly service fees, check orders and other deposit account related fees. Other fees include revenue from processing wire transfers, bill pay service, cashier’s checks and other services. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account-related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to clients’ accounts.
27
Bank card fees
Bank card fees are primarily comprised of debit card income, ATM fees, merchant services income and other fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Merchant services income mainly represents fees charged to merchants to process their debit card transactions. The Company’s performance obligation for bank card fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Gain on OREO sales, net
Gain on OREO sales, net is recognized when the Company meets its performance obligation to transfer title to the buyer. The gain or loss is measured as the excess of the proceeds received compared to the OREO carrying value. Sales proceeds are received in cash at the time of transfer.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, and non-interest expense in-scope of Topic 606 for the three and six months ended June 30, 2022 and 2021:
For the three months ended June 30, | For the six months ended June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Non-interest income | ||||||||||||
In-scope of Topic 606: | ||||||||||||
Service charges and other fees | $ | | $ | | $ | | $ | | ||||
Bank card fees | | | | | ||||||||
Non-interest income (in-scope of Topic 606) | | | | | ||||||||
Non-interest income (out-of-scope of Topic 606) | | | | | ||||||||
Total non-interest income | $ | | $ | | $ | | $ | | ||||
Non-interest expense | ||||||||||||
In-scope of Topic 606: | ||||||||||||
(Loss) gain on OREO sales, net | $ | ( | $ | ( | $ | | $ | ( | ||||
Total revenue in-scope of Topic 606 | $ | | $ | | $ | | $ | | ||||
Contract acquisition costs
The Company utilizes the practical expedient which allows entities to expense immediately contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company has not capitalized any contract acquisition costs.
Note 12 Stock-based Compensation and Benefits
The Company provides stock-based compensation in accordance with shareholder-approved plans and is authorized to issue awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, other stock-based awards, or any combination thereof to eligible persons.
Stock options
The Company issues stock options, which are primarily time-vesting with vesting on each of the first, second and third anniversary of the date of grant or date of hire.
The expense associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing model. The outstanding option awards vest or have vested on a graded basis over
28
The following table summarizes stock option activity for the six months ended June 30, 2022:
|
|
| Weighted |
| ||||||
average | ||||||||||
Weighted | remaining | |||||||||
average | contractual | Aggregate | ||||||||
exercise | term in | intrinsic | ||||||||
Options | price | years | value | |||||||
Outstanding at December 31, 2021 |
| | $ | |
| $ | | |||
Granted |
| |
| | ||||||
Exercised | ( | | ||||||||
Forfeited |
| ( |
| | ||||||
Outstanding at June 30, 2022 |
| | |
| | |||||
Options exercisable at June 30, 2022 |
| | |
| | |||||
Options vested and expected to vest |
| | |
| | |||||
Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $
Restricted stock awards
The Company issues primarily time-based restricted stock awards that vest over a range of a
Performance stock units
The Company grants performance stock units which represent initial target awards and do not reflect potential increases or decreases resulting from the final performance results, which are to be determined at the end of the
In establishing PSU components during 2021 and 2020, the Compensation Committee determined the EPS target portion of the award would not be an effective metric in light of economic uncertainty surrounding COVID-19. Consequently, the Compensation Committee granted an award based upon a relative return on tangible assets (“ROTA”). Annually, the Company’s ROTA is compared to the respective ROTA of companies comprising the KBW Regional Index. At the end of the measurement period, the Company’s ranking will be averaged to determine the shares awarded. The fair value of the ROTA award was determined based on the closing stock price of the Company’s common stock on the grant date.
The weighted-average grant date fair value per unit for the awards granted during the six months ended June 30, 2022 of the EPS target portion and the TSR target portion was $
29
The following table summarizes restricted stock and performance stock unit activity during the six months ended June 30, 2022:
|
| Weighted | Weighted | |||||||
Restricted | average grant- | Performance | average grant- | |||||||
stock shares | date fair value | stock units | date fair value | |||||||
Unvested at December 31, 2021 | | $ | | | $ | | ||||
Granted | | | | | ||||||
Adjustment due to performance | — | — | | | ||||||
Vested | ( | | ( | | ||||||
Forfeited | ( | | ( | | ||||||
Unvested at June 30, 2022 | | $ | | | $ | | ||||
As of June 30, 2022, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance stock units totaled $
Employee stock purchase plan
The 2014 Employee Stock Purchase Plan (“ESPP”) is intended to be a qualified plan within the meaning of Section 423 of the Internal Revenue Code of 1986 and allows eligible employees to purchase shares of common stock through payroll deductions up to a limit of $
Under the ESPP, employees purchased
Note 13 Common Stock
The Company had
On February 24, 2021, the Company’s Board of Directors authorized a program to repurchase up to $
Note 14 Earnings Per Share
The Company calculates earnings per share under the two-class method, as certain non-vested share awards contain non-forfeitable rights to dividends. As such, these awards are considered securities that participate in the earnings of the Company. Non-vested shares are discussed further in note 12.
The Company had
30
dilutive securities, but are not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive for the three and six months ended June 30, 2022 and 2021.
The following table illustrates the computation of basic and diluted earnings per share for the three and six months ended June 30, 2022 and 2021:
For the three months ended | For the six months ended | |||||||||||
| June 30, 2022 |
| June 30, 2021 |
| June 30, 2022 |
| June 30, 2021 | |||||
Net income | $ | | $ | | $ | | $ | | ||||
Less: income allocated to participating securities |
| ( |
| ( |
| ( |
| ( | ||||
Income allocated to common shareholders | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding for basic earnings per common share |
| |
| |
| |
| | ||||
Dilutive effect of equity awards |
| |
| |
| |
| | ||||
Weighted average shares outstanding for diluted earnings per common share |
| |
| |
| |
| | ||||
Basic earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share | | | | | ||||||||
The Company had
Note 15 Derivatives
Risk management objective of using derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company has established policies stipulating that neither carrying value nor fair value at risk should exceed established guidelines. The Company has designed strategies to confine these risks within the established limits and identify appropriate trade-offs in the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its clients. Currently, the Company employs certain interest rate swaps that are designated as fair value hedges as well as economic hedges. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
31
Fair values of derivative instruments on the balance sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated statements of financial condition as of June 30, 2022 and December 31, 2021. Information about the valuation methods used to measure fair value is provided in note 17.
Asset derivatives fair value | Liability derivatives fair value | |||||||||||||||
Balance Sheet | June 30, | December 31, | Balance Sheet | June 30, | December 31, | |||||||||||
| location |
| 2022 |
| 2021 |
| Location |
| 2022 |
| 2021 | |||||
Derivatives designated as hedging instruments: | ||||||||||||||||
Interest rate products |
| Other assets | $ | | $ | |
| Other liabilities | $ | | $ | | ||||
Total derivatives designated as hedging instruments | $ | | $ | | $ | | $ | | ||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Interest rate products |
| Other assets | $ | | $ | |
| Other liabilities | $ | | $ | | ||||
Interest rate lock commitments | Other assets | | | Other liabilities | | | ||||||||||
Forward contracts | Other assets | | | Other liabilities | | | ||||||||||
Total derivatives not designated as hedging instruments | $ | | $ | | $ | | $ | | ||||||||
Fair value hedges
Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2022, the Company had interest rate swaps with a notional amount of $
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.
Non-designated hedges
Derivatives not designated as hedges are not speculative and consist of interest rate swaps with commercial banking clients that facilitate their respective risk management strategies. Interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the client swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2022, the Company had matched interest rate swap transactions with an aggregate notional amount of $
As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the clients have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (best efforts) or commits to deliver the locked loan in a binding (mandatory) delivery program with an investor. Fair value changes of certain loans under interest rate lock commitments are hedged with forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in non-interest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying assets. The fair value of
32
the underlying assets is impacted by current interest rates, remaining origination fees, costs of production to be incurred and the probability that the interest rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Company does not expect any counterparty to any MBS contract to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Company fails to deliver the loans subject to interest rate risk lock commitments, it will still be obligated to “pair off” MBS to the counterparty. Should this be required, the Company could incur significant costs in acquiring replacement loans and such costs could have an adverse effect on the consolidated financial statements.
The fair value of the mortgage banking derivative is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.
The Company had interest rate lock commitments with a notional value of $
Effect of derivative instruments on the consolidated statements of operations
The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three and six months ended June 30, 2022 and 2021:
Location of gain (loss) | Amount of (loss) gain recognized in income on derivatives | |||||||||||||
Derivatives in fair value | recognized in income on | For the three months ended June 30, | For the six months ended June 30, | |||||||||||
hedging relationships |
| derivatives |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest rate products |
| Interest and fees on loans | $ | ( | $ | ( | $ | | $ | ( | ||||
Location of gain (loss) | Amount of gain (loss) recognized in income on hedged items | |||||||||||||
recognized in income on | For the three months ended June 30, | For the six months ended June 30, | ||||||||||||
Hedged items |
| hedged items |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest rate products |
| Interest and fees on loans | $ | |
| $ | | $ | ( |
| $ | | ||
Location of gain (loss) | Amount of (loss) gain recognized in income on derivatives | |||||||||||||
Derivatives not designated | recognized in income on | For the three months ended June 30, | For the six months ended June 30, | |||||||||||
as hedging instruments |
| derivatives |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest rate products |
| Other non-interest expense |
| $ | ( |
| $ | | $ | ( |
| $ | | |
Interest rate lock commitments | Mortgage banking income | | ( | ( | ( | |||||||||
Forward contracts | Mortgage banking income | ( | ( | ( | | |||||||||
Total |
| $ | ( |
| $ | ( | $ | ( |
| $ | ( | |||
Credit-risk-related contingent features
The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness for reasons other than an error or omission of an administrative or operational nature, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty has the right to terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of June 30, 2022, the termination value of derivatives in a net liability position related to these agreements was $
33
Note 16 Commitments and Contingencies
In the normal course of business, the Company enters into various off-balance sheet commitments to help meet the financing needs of clients. These financial instruments include commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. The same credit policies are applied to these commitments as the loans in the consolidated statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these commitments, offset by any additional collateral pledged, represents the Company’s potential credit loss exposure.
Total unfunded commitments at June 30, 2022 and December 31, 2021 were as follows:
| June 30, 2022 |
| December 31, 2021 | |||
Commitments to fund loans | $ | | $ | | ||
Unfunded commitments under lines of credit |
| |
| | ||
Commercial and standby letters of credit |
| |
| | ||
Total unfunded commitments | $ | | $ | | ||
Commitments to fund loans—Commitments to fund loans are legally binding agreements to lend to clients in accordance with predetermined contractual provisions providing there have been no violations of any conditions specified in the contract. These commitments are generally at variable interest rates and are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments are not necessarily representative of future credit exposure or cash requirements, as commitments often expire without being drawn upon.
Unfunded commitments under lines of credit—In the ordinary course of business, the Company extends revolving credit to its clients. These arrangements may require the payment of a fee.
Commercial and standby letters of credit—As a provider of financial services, the Company routinely issues commercial and standby letters of credit, which may be financial standby letters of credit or performance standby letters of credit. These are various forms of “back-up” commitments to guarantee the performance of a client to a third party. While these arrangements represent a potential cash outlay for the Company, the majority of these letters of credit will expire without being drawn upon. Letters of credit are subject to the same underwriting and credit approval process as traditional loans, and as such, many of them have various forms of collateral securing the commitment, which may include real estate, personal property, receivables or marketable securities.
Contingencies
Mortgage loans sold to investors may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company established a reserve liability for expected losses related to these representations and warranties based upon management’s evaluation of actual and historic loss history, delinquency trends in the portfolio and economic conditions. Charges against the reserve during the three and six months ended June 30, 2022 totaling $
The following table summarizes mortgage repurchase reserve activity for the periods presented:
For the three months ended June 30, | For the six months ended June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Beginning balance | $ | | $ | | $ | | $ | | ||||
Provision charged to (released from) operating expense, net | | ( | ( | ( | ||||||||
Charge-offs | ( | ( | ( | ( | ||||||||
Ending balance | $ | | $ | | $ | | $ | | ||||
34
In the ordinary course of business, the Company and the Bank may be subject to litigation. Based upon the available information and advice from the Company’s legal counsel, management does not believe that any potential, threatened or pending litigation to which it is a party will have a material adverse effect on the Company’s liquidity, financial condition or results of operations.
Note 17 Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels are defined as follows:
| ● | Level 1—Includes assets or liabilities in which the valuation methodologies are based on unadjusted quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2—Includes assets or liabilities in which the inputs to the valuation methodologies are based on similar assets or liabilities in inactive markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs other than quoted prices that are observable, such as interest rates, yield curves, volatilities, prepayment speeds and other inputs obtained from observable market input. |
| ● | Level 3—Includes assets or liabilities in which the inputs to the valuation methodology are based on at least one significant assumption that is not observable in the marketplace. These valuations may rely on management’s judgment and may include internally-developed model-based valuation techniques. |
Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. While third-party price indications may be available in those cases, limited trading activity can challenge the observability of those inputs.
Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfer occurs. During the six months ended June 30, 2022 and 2021, there were
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the valuation hierarchy:
Fair Value of Financial Instruments Measured on a Recurring Basis
Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as level 1. When quoted market prices in active markets for identical assets or liabilities are not available, quoted prices of securities with similar characteristics, discounted cash flows or other pricing characteristics are used to estimate fair values and the securities are then classified as level 2.
Loans held for sale—The Company has elected to record loans originated and intended for sale in the secondary market at estimated fair value. The portfolio consists primarily of fixed rate residential mortgage loans that are sold within
Interest rate swap derivatives—The Company's derivative instruments are limited to interest rate swaps that may be accounted for as fair value hedges or non-designated hedges. The fair values of the swaps incorporate credit valuation adjustments in order to appropriately reflect nonperformance risk in the fair value measurements. The credit valuation adjustment is the dollar amount of the
35
fair value adjustment related to credit risk and utilizes a probability weighted calculation to quantify the potential loss over the life of the trade. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the respective counterparties’ credit spreads to the exposure offset by marketable collateral posted, if any. Certain derivative transactions are executed with counterparties who are large financial institutions (dealers). International Swaps and Derivative Association Master Agreements (ISDA) and Credit Support Annexes (CSA) are employed for all contracts with dealers. These contracts contain bilateral collateral arrangements. The fair value inputs of these financial instruments are determined using discounted cash flow analysis through the use of third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk, and are classified as level 2.
Mortgage banking derivatives—The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an average
The tables below present the financial instruments measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 in the consolidated statements of financial condition utilizing the hierarchy structure described above:
June 30, 2022 | ||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: |
|
|
|
|
|
|
|
| ||||
Investment securities available-for-sale: | ||||||||||||
U.S. Treasuries | $ | | $ | — | $ | — | $ | | ||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | — | | — | | ||||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| — |
| |
| — |
| | ||||
Municipal securities | — | | — | | ||||||||
Corporate debt | — |
| |
| — |
| | |||||
Loans held for sale |
| — |
| |
| — |
| | ||||
Interest rate swap derivatives |
| — |
| |
| — |
| | ||||
Mortgage banking derivatives | — | — | | | ||||||||
Total assets at fair value | $ | | $ | | $ | | $ | | ||||
Liabilities: | ||||||||||||
Interest rate swap derivatives | $ | — | $ | | $ | — | $ | | ||||
Mortgage banking derivatives | — | — | | | ||||||||
Total liabilities at fair value | $ | — | $ | | $ | | $ | | ||||
36
December 31, 2021 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Assets: | ||||||||||||
Investment securities available-for-sale: | ||||||||||||
Mortgage-backed securities: | ||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | $ | — | $ | | $ | — | $ | | ||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| — |
| |
| — |
| | ||||
Municipal securities | — | | — | | ||||||||
Corporate debt | — | | — | | ||||||||
Loans held for sale |
| — |
| |
| — |
| | ||||
Interest rate swap derivatives |
| — |
| |
| — |
| | ||||
Mortgage banking derivatives | — | — | | | ||||||||
Total assets at fair value | $ | — | $ | | $ | | $ | | ||||
Liabilities: | ||||||||||||
Interest rate swap derivatives | $ | — | $ | | $ | — | $ | | ||||
Mortgage banking derivatives | — | — | | | ||||||||
Total liabilities at fair value | $ | — | $ | | $ | | $ | | ||||
The table below details the changes in level 3 financial instruments during the six months ended June 30, 2022:
| Mortgage banking | ||
derivatives, net | |||
Balance at December 31, 2021 | $ | | |
Loss included in earnings, net | ( | ||
Fees and costs included in earnings, net |
| | |
Balance at June 30, 2022 | $ | |
Fair Value of Financial Instruments Measured on a Non-recurring Basis
Certain assets may be recorded at fair value on a non-recurring basis as conditions warrant. These non-recurring fair value measurements typically result from the application of lower of cost or fair value accounting or a write-down occurring during the period.
Individually evaluated loans—The Company records individually evaluated loans based on the fair value of the collateral when it is probable that the Company will be unable to collect all contractual amounts due in accordance with the terms of the loan agreement. The Company relies on third-party appraisals and internal assessments, utilizing a discount rate in the range of
OREO—OREO is recorded at the fair value of the collateral less estimated selling costs using a range of
Mortgage servicing rights—MSRs represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes a discount rate and weighted average rate of
37
values of these MSRs are reviewed quarterly for impairment based upon the calculation of fair value. For purposes of measuring impairment, the MSRs are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance and the adjustment is included in mortgage banking income in the consolidated statements of operations. During the six months ended June 30, 2022, the Company recorded $
Premises and equipment—During the first quarter of 2021, the Company approved plans to consolidate
The Company may be required to record fair value adjustments on other available-for-sale and municipal securities valued at par on a non-recurring basis.
The tables below provide information regarding losses from assets recorded at fair value on a non-recurring basis during the six months ended June 30, 2022 and 2021:
June 30, 2022 | ||||||
Total | Losses from fair value changes | |||||
Individually evaluated loans | $ | | $ | | ||
Other real estate owned |
| |
| | ||
Mortgage servicing rights |
| |
| | ||
Total | $ | | $ | | ||
June 30, 2021 | ||||||
Total | Losses from fair value changes | |||||
Individually evaluated loans | $ | | $ | | ||
Premises and equipment |
| | | |||
Total | $ | | $ | | ||
The Company did not record any liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2022.
Note 18 Fair Value of Financial Instruments
The fair value of a financial instrument is the amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is determined based upon quoted market prices to the extent possible; however, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques that may be significantly impacted by the assumptions used, including the discount rate and estimates of future cash flows. Changes in any of these assumptions could significantly affect the fair value estimates. The fair value of the financial instruments listed below does not reflect a premium or discount that could result from offering all of the Company’s holdings of financial instruments at one time, nor does it reflect the underlying value of the Company, as ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are based on the exit price concept within ASC Topic 825 and applied to this disclosure on a prospective basis. Considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.
38
The fair value of financial instruments at June 30, 2022 and December 31, 2021 are set forth below:
| Level in fair value |
| June 30, 2022 |
| December 31, 2021 | |||||||||
measurement | Carrying | Estimated | Carrying | Estimated | ||||||||||
hierarchy | amount |
| fair value |
| amount |
| fair value | |||||||
ASSETS | ||||||||||||||
Cash and cash equivalents |
| Level 1 | $ | | $ | | $ | | $ | | ||||
U.S. Treasury securities - AFS | Level 1 | | | — | — | |||||||||
U.S. Treasury securities - HTM | Level 1 | | | — | — | |||||||||
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale |
| Level 2 |
| |
| |
| |
| | ||||
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale |
| Level 2 |
| |
| |
| |
| | ||||
Municipal securities available-for-sale | Level 2 | | | | | |||||||||
Municipal securities available-for-sale | Level 3 | — | — | — | — | |||||||||
Corporate debt | Level 2 | | | | | |||||||||
Other available-for-sale securities |
| Level 3 |
| |
| |
| |
| | ||||
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity |
| Level 2 |
| |
| |
| |
| | ||||
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity |
| Level 2 |
| |
| |
| |
| | ||||
Non-marketable securities | Level 2 | | | | | |||||||||
Loans receivable |
| Level 3 |
| |
| |
| |
| | ||||
Loans held for sale |
| Level 2 |
| |
| |
| |
| | ||||
Accrued interest receivable |
| Level 2 |
| |
| |
| |
| | ||||
Interest rate swap derivatives |
| Level 2 |
| |
| |
| |
| | ||||
Mortgage banking derivatives | Level 3 | | | | | |||||||||
LIABILITIES | ||||||||||||||
Deposit transaction accounts |
| Level 2 |
| |
| |
| |
| | ||||
Time deposits |
| Level 2 |
| |
| |
| |
| | ||||
Securities sold under agreements to repurchase |
| Level 2 |
| |
| |
| |
| | ||||
Long-term debt | Level 2 | | | | | |||||||||
Accrued interest payable |
| Level 2 |
| |
| |
| |
| | ||||
Interest rate swap derivatives | Level 2 | | |
| |
| | |||||||
Mortgage banking derivatives |
| Level 3 |
| |
| | | | ||||||
39
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and six months ended June 30, 2022, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2021, 2020 and 2019. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” located elsewhere in this quarterly report and in Item 1A“Risk Factors” in the annual report on Form 10-K, referenced above, and should be read herewith.
All amounts are in thousands, except share and per share data, or as otherwise noted.
Overview
Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We are executing on strategic acquisition opportunities to expand our presence in attractive markets and to diversify our revenue streams. Additionally, we are innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for our clients. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to blockchain payment tools, under the safety of a regulated bank. We believe that our established presence in our core markets of Colorado, the greater Kansas City region, Texas, Utah and New Mexico, as well as our ongoing investment in digital and blockchain solutions and strategic acquisitions position us well for growth opportunities. As of June 30, 2022, we had $7.2 billion in assets, $4.8 billion in loans, $6.2 billion in deposits and $0.8 billion in equity.
Operating Highlights and Key Challenges
Profitability and returns
● |
| Net income totaled $38.7 million, or $1.27 per diluted share, for the six months ended June 30, 2022, compared to net income of $51.0 million, or $1.63 per diluted share, for the same period in the prior year. Adjusting for $1.3 million of non-recurring expenses related to the previously announced acquisitions of Bank of Jackson Hole (“BOJH”) and Rock Canyon Bank (“RCB”), net income totaled $39.7 million, or $1.30 per diluted share, for the six months ended June 30, 2022. |
● |
| The return on average tangible assets was 1.11% for the six months ended June 30, 2022, compared to 1.53% for the same period in the prior year. Adjusting for non-recurring acquisition-related expenses, the return on average tangible assets for the six months ended June 30, 2022 was 1.14%. |
● |
| The return on average tangible common equity was 10.97% for the six months ended June 30, 2022, compared to 14.29% for the same period in the prior year. Adjusting for non-recurring acquisition-related expenses, the return on average tangible common equity for the six months ended June 30, 2022 was 11.24%. |
Strategic execution
● | Announced a merger agreement with Community Bancorporation (“CB”), the holding company for RCB, which had $814.3 million in assets, $736.6 million in deposits and $494.2 million in loans as of December 31, 2021, further expanding our presence in the Salt Lake City region. We received regulatory approval on July 21, 2022, and the acquisition is expected to close in September 2022. | |
● | Announced a merger agreement with BOJH located in the fast-growing Wyoming and Boise markets, which had $1.6 billion in assets, $1.5 billion in deposits, $1.0 billion in loans and a favorable Wyoming-domiciled trust business with $0.6 billion in assets under management as of December 31, 2021. | |
● | Upon completion of the BOJH and CB mergers, NBHC will have approximately $9.6 billion in pro forma assets measured as of December 31, 2021. |
40
● | Continued to invest in digital solutions for our clients through our financial eco-system, 2UniFiSM, for small and medium-sized businesses that we believe will increase access to financial services while reducing the costs of banking services. | |
● |
| Maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most industry sector concentrations at 5% or less of total loans, and all concentration levels remain well below our self-imposed limits. |
Loan portfolio
● | Total loans ended the quarter at $4.8 billion increasing $303.7 million, or 13.6% annualized, since December 31, 2021. | |
● |
| New loan fundings over the trailing 12 months totaled a record $1.8 billion, led by commercial loan fundings of $1.3 billion. |
Credit quality
● | Allowance for credit losses totaled 1.06% of total loans at June 30, 2022, compared to 1.10% at December 31, 2021. | |
● | The Company recorded an allowance for loan losses provision expense of $2.2 million for the six months ended June 30, 2022, compared to an allowance for loan losses provision release of $9.4 million for the six months ended June 30, 2021. The provision expense was driven by loan growth and higher reserve requirements from changes in the CECL model’s underlying macro-economic forecast. | |
● | Net charge-offs to average total loans for the six months ended June 30, 2022 totaled 0.04%, annualized, compared to 0.03% for the full year ended December 31, 2021. | |
● | Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs) improved to a record low 0.20% of total loans, compared to 0.24% at December 31, 2021. Non-performing assets to total loans and OREO improved to a record low 0.31% at June 30, 2022, compared to 0.39% at December 31, 2021. |
Client deposit funded balance sheet
● | Average transaction deposits for the six months ended June 30, 2022 increased 8.6% to $5.4 billion, compared to $5.0 billion for the same period in the prior year. | |
● |
| Average total deposits totaled $6.2 billion during the six months ended June 30, 2022, increasing 4.8%, compared to $5.9 billion for the same period in the prior year. |
● |
| The mix of transaction deposits to total deposits improved 90 basis points to 87.4% at June 30, 2022, compared to 86.5% at December 31, 2021. |
● |
| Cost of deposits totaled a record low 0.16% during the six months ended June 30, 2022, compared to 0.26% for the same period in the prior year. |
Revenues
● | Fully taxable equivalent (“FTE”) net interest income totaled $105.3 million during the six months ended June 30, 2022, increasing $12.7 million, or 13.7%, compared to the same period in the prior year. | |
● | The FTE net interest margin widened 23 basis points to 3.15% for the six months ended June 30, 2022, as compared to the same period in the prior year. The yield on earning assets increased 16 basis points, led by the remix of assets into higher-yielding loan balances and increases in the federal funds rate since March 2022. The cost of funds decreased eight basis points to 0.18% for the six months ended June 30, 2022, compared to the same period in the prior year. | |
● | Non-interest income totaled $35.8 million during the six months ended June 30, 2022, compared to $58.6 million for the same period in 2021, primarily due to lower mortgage banking income from reduced refinance activity and tighter gain on sale margins for mortgage loans sold in the secondary market. |
Expenses
● |
| Non-interest expense totaled $89.6 million during the six months ended June 30, 2022, representing a decrease of $6.4 million, or 6.6%, compared to the six months ended June 30, 2021, primarily due to lower salaries and benefits from lower mortgage banking-related compensation. |
● | Included in the first six months of 2022 were $1.3 million of non-recurring acquisition-related expenses, with $1.1 million included in professional fees and $0.2 million included in other non-interest expense. |
41
● | The FTE efficiency ratio during the six months ended June 30, 2022 totaled 63.09%, compared to 63.08% during the six months ended June 30, 2021. Adjusting for non-recurring acquisition-related expenses, the FTE efficiency ratio improved 89 basis points to 62.19% during the six months ended June 30, 2022, compared to the same period in the prior year. | |
● | Income tax expense totaled $8.0 million during the six months ended June 30, 2022, compared to $11.1 million during the six months ended June 30, 2021. The effective tax rate for the six months ended June 30, 2022 was 17.1%, compared to 17.9% for the six months ended June 30, 2021. |
Strong capital position
● |
| Capital ratios continue to be strong and in excess of federal bank regulatory agency “well capitalized” thresholds. As of June 30, 2022, our consolidated tier 1 leverage ratio was 10.54%, and our common equity tier 1 and consolidated tier 1 risk based capital ratios were 13.75%. |
● |
| At June 30, 2022, common book value per share was $27.12. The tangible common book value per share decreased $0.88 to $23.45 at June 30, 2022 compared to December 31, 2022 as earnings, net of dividends paid, were outpaced by an increase in accumulated other comprehensive loss. Excluding accumulated other comprehensive loss, the tangible book value per share increased $0.82 to $25.38 at June 30, 2022. |
Key Challenges
There are a number of significant challenges confronting us and our industry. We face continual challenges implementing our business strategy. These include growing our assets, particularly loans, and deposits amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive environment.
The COVID-19 pandemic has caused disruption to the U.S. labor market, supply chain, consumer spending and business operations. The prolonged economic impacts from the pandemic, including inflationary pressures, are likely to continue to present challenges to our business and to our clients.
We are focused on growing our loan portfolio while adhering to our established underwriting standards and self-imposed concentration limits. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio.
The agriculture industry continues to be impacted by elevated and volatile commodity prices and intermittent disruptions in supply chains. Our food and agribusiness portfolio is only 4.1% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 0.7% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.
Future growth in our interest income will ultimately be dependent on our ability to originate high-quality loans and other high-quality earning assets such as investment securities. Cash balances total $0.5 billion as of June 30, 2022 and have decreased $397.3 million from December 31, 2021 and $556.1 million from June 30, 2021. Investment securities totaled $1.4 billion as of June 30, 2022 and increased $87.6 million, or 6.7%, compared to December 31, 2021. As of June 30, 2022, our loans outstanding totaled $4.8 billion, increasing $303.7 million, or 6.7%, compared to December 31, 2021. During 2022, our weighted average rate on new loans funded at the time of origination was 4.32%, compared to the weighted average yield of our originated loan portfolio of 4.05% (FTE). During the six months ended June 30, 2022, the Federal Reserve increased prevailing interest rates by a total of 1.50%. Our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions.
Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including fintechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges and expand our offerings in digital technology, including by partnering with and investing in fintechs where appropriate. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.
42
Performance Overview
In evaluating our consolidated statements of financial condition and results of operations financial statement line items, we evaluate and manage our performance based on key earnings indicators, balance sheet ratios, asset quality metrics and regulatory capital ratios, among others. The table below presents some of the primary performance indicators that we use to analyze our business on a regular basis for the periods indicated:
Key Ratios(1)
As of and for the three months ended | As of and for the six months ended | |||||||||
June 30, | December 31, | June 30, | June 30, | June 30, | ||||||
2022 | 2021 |
| 2021 |
| 2022 |
| 2021 | |||
Return on average assets |
| 1.13% | 1.26% | 1.38% | 1.08% | 1.49% | ||||
Return on average tangible assets(2) |
| 1.16% | 1.30% | 1.41% | 1.11% | 1.53% | ||||
Return on average tangible assets, adjusted(2)(10) | 1.20% | 1.30% | 1.41% | 1.14% | 1.53% | |||||
Return on average equity |
| 9.96% | 10.64% | 11.51% | 9.40% | 12.26% | ||||
Return on average tangible common equity(2) |
| 11.64% | 12.37% | 13.41% | 10.97% | 14.29% | ||||
Return on average tangible common equity, adjusted(2)(10) | 12.08% | 12.37% | 13.41% | 11.24% | 14.29% | |||||
Loan to deposit ratio (end of period) | 77.76% | 72.47% | 69.84% | 77.76% | 69.84% | |||||
Non-interest bearing deposits to total deposits (end of period) |
| 39.63% | 40.24% | 39.58% | 39.63% | 39.58% | ||||
Net interest margin(3) |
| 3.30% | 2.95% | 2.74% | 3.07% | 2.84% | ||||
Net interest margin FTE(2)(3)(4) |
| 3.38% | 3.03% | 2.82% | 3.15% | 2.92% | ||||
Interest rate spread FTE(4)(5) |
| 3.26% | 2.89% | 2.66% | 3.02% | 2.75% | ||||
Yield on earning assets(6) |
| 3.47% | 3.13% | 2.96% | 3.24% | 3.08% | ||||
Yield on earning assets FTE(2)(4)(6) |
| 3.55% | 3.21% | 3.04% | 3.32% | 3.16% | ||||
Cost of interest bearing liabilities |
| 0.29% | 0.32% | 0.38% | 0.30% | 0.41% | ||||
Cost of deposits |
| 0.16% | 0.18% | 0.24% | 0.16% | 0.26% | ||||
Non-interest income to total revenue FTE(4) | 22.62% | 31.37% | 35.38% | 25.38% | 38.76% | |||||
Non-interest expense to average assets |
| 2.53% | 2.47% | 2.63% | 2.51% | 2.80% | ||||
Efficiency ratio | 62.18% | 60.81% | 65.66% | 64.29% | 64.16% | |||||
Efficiency ratio FTE(2)(4) |
| 61.06% | 59.74% | 64.48% | 63.09% | 63.08% | ||||
Efficiency ratio FTE, adjusted(2)(4)(10) | 59.70% | 59.74% | 64.48% | 62.19% | 63.08% | |||||
Total Loans Asset Quality Data(7)(8)(9) | ||||||||||
Non-performing loans to total loans |
| 0.20% | 0.24% | 0.32% | 0.20% | 0.32% | ||||
Non-performing assets to total loans and OREO |
| 0.31% | 0.39% | 0.44% | 0.31% | 0.44% | ||||
Allowance for credit losses to total loans |
| 1.06% | 1.10% | 1.14% | 1.06% | 1.14% | ||||
Allowance for credit losses to non-performing loans |
| 515.72% | 458.77% | 353.22% | 515.72% | 353.22% | ||||
Net charge-offs to average loans |
| 0.03% | 0.02% | 0.07% | 0.04% | 0.04% | ||||
(1) |
| Ratios are annualized. |
(2) |
| Ratio represents non-GAAP financial measure. See non-GAAP reconciliations below. |
(3) |
| Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average interest earning assets. |
(4) |
| Presented on an FTE basis using the statutory rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,336, $1,299 and $1,279 for the three months ended June 30, 2022, December 31, 2021 and June 30, 2021, respectively. The taxable equivalent adjustments included above are $2,649 and $2,547 for the six months ended June 30, 20221 and June 30, 2021, respectively. |
(5) |
| Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average cost of interest bearing liabilities. |
(6) | Interest earning assets include assets that earn interest/accretion or dividends. Any market value adjustments on investment securities are excluded from interest earning assets. | |
(7) | Non-performing loans consist of non-accruing loans and restructured loans on non-accrual. | |
(8) | Non-performing assets include non-performing loans and OREO. | |
(9) | Total loans are net of unearned discounts and fees. | |
(10) | Ratios are adjusted for acquisition-related expenses. See non-GAAP reconciliation below. |
43
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “tangible assets,” “average tangible assets,” “return on average tangible assets,” “return on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible common equity,” “tangible common equity to tangible assets,” “adjusted non-interest expense,” “non-interest expense to average assets, adjusted,” “adjusted net income,” “adjusted earnings per share - diluted,” “adjusted return on average tangible assets,” “adjusted return on average tangible common equity,” “Tangible common book value, excluding accumulated other comprehensive loss (income), net of tax,” “Tangible common book value per share, excluding accumulated other comprehensive loss (income), net of tax,” “Adjusted efficiency ratio FTE,” “Adjusted net income excluding CDI amortization expense, after tax” and “fully taxable equivalent” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenses or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on an FTE basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.
These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.
44
A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows:
Tangible Common Book Value Ratios
June 30, | December 31, | June 30, | |||||||
| 2022 |
| 2021 |
| 2021 | ||||
Total shareholders’ equity | $ | 815,551 | $ | 840,106 | $ | 851,866 | |||
Less: goodwill and CDI assets, net |
| (120,800) |
| (121,392) |
| (121,983) | |||
Add: deferred tax liability related to goodwill |
| 10,527 |
| 10,070 |
| 9,612 | |||
Tangible common equity (non-GAAP) | $ | 705,278 | $ | 728,784 | $ | 739,495 | |||
Total assets | $ | 7,167,999 | $ | 7,214,011 | $ | 7,136,128 | |||
Less: goodwill and CDI assets, net |
| (120,800) |
| (121,392) |
| (121,983) | |||
Add: deferred tax liability related to goodwill |
| 10,527 |
| 10,070 |
| 9,612 | |||
Tangible assets (non-GAAP) | $ | 7,057,726 | $ | 7,102,689 | $ | 7,023,757 | |||
Tangible common equity to tangible assets calculations: | |||||||||
Total shareholders' equity to total assets |
| 11.38% |
| 11.65% |
| 11.94% | |||
Less: impact of goodwill and CDI assets, net |
| (1.39)% |
| (1.39)% |
| (1.41)% | |||
Tangible common equity to tangible assets (non-GAAP) |
| 9.99% |
| 10.26% |
| 10.53% | |||
Tangible common book value per share calculations: | |||||||||
Tangible common equity (non-GAAP) | $ | 705,278 | $ | 728,784 | $ | 739,495 | |||
Divided by: ending shares outstanding |
| 30,075,175 |
| 29,958,764 |
| 30,800,985 | |||
Tangible common book value per share (non-GAAP) | $ | 23.45 | $ | 24.33 | $ | 24.01 | |||
Tangible common book value per share, excluding accumulated other comprehensive loss (income) calculations: | |||||||||
Tangible common equity (non-GAAP) | $ | 705,278 | $ | 728,784 | $ | 739,495 | |||
Accumulated other comprehensive loss (income), net of tax |
| 58,001 |
| 6,963 |
| (1,695) | |||
Tangible common book value, excluding accumulated other comprehensive loss (income), net of tax (non-GAAP) |
| 763,279 |
| 735,747 |
| 737,800 | |||
Divided by: ending shares outstanding |
| 30,075,175 |
| 29,958,764 |
| 30,800,985 | |||
Tangible common book value per share, excluding accumulated other comprehensive loss (income), net of tax (non-GAAP) | $ | 25.38 | $ | 24.56 | $ | 23.95 | |||
45
Return on Average Tangible Assets and Return on Average Tangible Equity
As of and for the three months ended | As of and for the six months ended | ||||||||||||||
June 30, | December 31, | June 30, | June 30, | June 30, | |||||||||||
2022 | 2021 | 2021 | 2022 | 2021 | |||||||||||
Net income | $ | 20,362 | $ | 22,769 | $ | 24,200 | $ | 38,714 | $ | 51,012 | |||||
Add: impact of CDI amortization expense, after tax |
| 227 |
| 227 |
| 228 |
| 455 |
| 455 | |||||
Net income excluding the impact of CDI amortization expense, after tax | $ | 20,589 | $ | 22,996 | $ | 24,428 | $ | 39,169 | $ | 51,467 | |||||
Average assets | $ | 7,231,319 | $ | 7,146,571 | $ | 7,056,894 | $ | 7,203,016 | $ | 6,907,022 | |||||
Less: average goodwill and CDI asset, net of deferred tax liability related to goodwill |
| (110,446) |
| (111,508) |
| (112,552) |
| (110,594) |
| (112,698) | |||||
Average tangible assets (non-GAAP) | $ | 7,120,873 | $ | 7,035,063 | $ | 6,944,342 | $ | 7,092,422 | $ | 6,794,324 | |||||
Average shareholders' equity | $ | 819,614 | $ | 848,803 | $ | 843,116 | $ | 830,716 | $ | 838,930 | |||||
Less: average goodwill and CDI asset, net of deferred tax liability related to goodwill |
| (110,446) |
| (111,508) |
| (112,552) |
| (110,594) |
| (112,698) | |||||
Average tangible common equity (non-GAAP) | $ | 709,168 | $ | 737,295 | $ | 730,564 | $ | 720,122 | $ | 726,232 | |||||
Return on average assets |
| 1.13% |
| 1.26% |
| 1.38% |
| 1.08% |
| 1.49% | |||||
Return on average tangible assets (non-GAAP) |
| 1.16% |
| 1.30% |
| 1.41% |
| 1.11% |
| 1.53% | |||||
Return on average equity |
| 9.96% |
| 10.64% |
| 11.51% |
| 9.40% |
| 12.26% | |||||
Return on average tangible common equity (non-GAAP) |
| 11.64% |
| 12.37% |
| 13.41% |
| 10.97% |
| 14.29% | |||||
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
As of and for the three months ended | As of and for the six months ended | ||||||||||||||
| June 30, | December 31, | June 30, | June 30, | June 30, | ||||||||||
2022 |
| 2021 |
| 2021 |
| 2022 |
| 2021 | |||||||
Interest income | $ | 58,836 | $ | 52,501 | $ | 48,450 | $ | 108,361 | $ | 97,663 | |||||
Add: impact of taxable equivalent adjustment |
| 1,336 |
| 1,299 |
| 1,279 |
| 2,649 |
| 2,547 | |||||
Interest income FTE (non-GAAP) | $ | 60,172 | $ | 53,800 | $ | 49,729 | $ | 111,010 | $ | 100,210 | |||||
Net interest income | $ | 56,017 | $ | 49,486 | $ | 44,868 | $ | 102,678 | $ | 90,089 | |||||
Add: impact of taxable equivalent adjustment |
| 1,336 |
| 1,299 |
| 1,279 |
| 2,649 |
| 2,547 | |||||
Net interest income FTE (non-GAAP) | $ | 57,353 | $ | 50,785 | $ | 46,147 | $ | 105,327 | $ | 92,636 | |||||
Average earning assets | $ | 6,802,300 | $ | 6,655,918 | $ | 6,561,588 | $ | 6,752,676 | $ | 6,400,651 | |||||
Yield on earning assets |
| 3.47% |
| 3.13% |
| 2.96% |
| 3.24% |
| 3.08% | |||||
Yield on earning assets FTE (non-GAAP) |
| 3.55% |
| 3.21% |
| 3.04% |
| 3.32% |
| 3.16% | |||||
Net interest margin |
| 3.30% |
| 2.95% |
| 2.74% |
| 3.07% |
| 2.84% | |||||
Net interest margin FTE (non-GAAP) |
| 3.38% |
| 3.03% |
| 2.82% |
| 3.15% |
| 2.92% | |||||
46
Efficiency Ratio
As of and for the three months ended | As of and for the six months ended | ||||||||||||||
June 30, | December 31, | June 30, | June 30, | June 30, | |||||||||||
2022 |
| 2021 |
| 2021 |
| 2022 |
| 2021 | |||||||
Net interest income | $ | 56,017 | $ | 49,486 | $ | 44,868 | $ | 102,678 | $ | 90,089 | |||||
Add: impact of taxable equivalent adjustment |
| 1,336 |
| 1,299 |
| 1,279 |
| 2,649 |
| 2,547 | |||||
Net interest income, FTE (non-GAAP) | $ | 57,353 | $ | 50,785 | $ | 46,147 | $ | 105,327 | $ | 92,636 | |||||
Non-interest income | $ | 16,762 | $ | 23,215 | $ | 25,266 | $ | 35,816 | $ | 58,627 | |||||
Non-interest expense | $ | 45,552 | $ | 44,505 | $ | 46,343 | $ | 89,634 | $ | 96,011 | |||||
Less: CDI asset amortization | (296) |
| (296) |
| (296) |
| (592) |
| (592) | ||||||
Non-interest expense, excluding CDI asset amortization (non-GAAP) | $ | 45,256 | $ | 44,209 | $ | 46,047 | $ | 89,042 | $ | 95,419 | |||||
Non-interest expense, excluding CDI asset amortization | $ | 45,256 | $ | 44,209 | $ | 46,047 | $ | 89,042 | $ | 95,419 | |||||
Acquisition-related expenses | (1,006) | — | — | (1,260) | — | ||||||||||
Adjusted non-interest expense (non-GAAP) | $ | 44,250 | $ | 44,209 | $ | 46,047 | $ | 87,782 | $ | 95,419 | |||||
Efficiency ratio | 62.18% | 60.81% | 65.66% | 64.29% | 64.16% | ||||||||||
Efficiency ratio FTE (non-GAAP) | 61.06% | 59.74% | 64.48% | 63.09% | 63.08% | ||||||||||
Adjusted efficiency ratio FTE (non-GAAP) | 59.70% | 59.74% | 64.48% | 62.19% | 63.08% | ||||||||||
47
Adjusted Financial Results
As of and for the three months ended | As of and for the six months ended | ||||||||||||||
June 30, | December 31, | June 30, | June 30, | June 30, | |||||||||||
2022 | 2021 | 2021 | 2022 | 2021 | |||||||||||
Adjustments to net income: | |||||||||||||||
Net income | $ | 20,362 | $ | 22,769 | $ | 24,200 | $ | 38,714 | $ | 51,012 | |||||
Adjustments(1) |
| 773 |
| — | — | 968 | — | ||||||||
Adjusted net income (non-GAAP) | $ | 21,135 | $ | 22,769 | $ | 24,200 | $ | 39,682 | $ | 51,012 | |||||
Adjustments to earnings per share: | |||||||||||||||
Earnings per share - diluted | $ | 0.67 | $ | 0.75 | $ | 0.77 | $ | 1.27 | $ | 1.63 | |||||
Adjustments(1) |
| 0.02 |
| — | — | 0.03 | — | ||||||||
Adjusted earnings per share - diluted (non-GAAP) | $ | 0.69 | $ | 0.75 | $ | 0.77 | $ | 1.30 | $ | 1.63 | |||||
Adjustments to return on average tangible assets: | |||||||||||||||
Adjusted net income (non-GAAP) | $ | 21,135 | $ | 22,769 | $ | 24,200 | $ | 39,682 | $ | 51,012 | |||||
Add: impact of CDI amortization expense, after tax | 227 | 227 | 228 | 455 | 455 | ||||||||||
Adjusted net income excluding CDI amortization expense, after tax (non-GAAP) | 21,362 | 22,996 | 24,428 | 40,137 | 51,467 | ||||||||||
Average tangible assets (non-GAAP) |
| 7,120,873 |
| 7,035,063 | 6,944,342 | 7,092,422 | 6,794,324 | ||||||||
Adjusted return on average tangible assets (non-GAAP) | 1.20% | 1.30% | 1.41% | 1.14% | 1.53% | ||||||||||
Adjustments to return on average tangible common equity: | |||||||||||||||
Adjusted net income excluding CDI amortization expense, after tax (non-GAAP) | $ | 21,362 | $ | 22,996 | $ | 24,428 | $ | 40,137 | $ | 51,467 | |||||
Average tangible common equity (non-GAAP) | 709,168 | 737,295 | 730,564 | 720,122 | 726,232 | ||||||||||
Adjusted return on average tangible common equity (non-GAAP) | 12.08% | 12.37% | 13.41% | 11.24% | 14.29% | ||||||||||
Adjustments to non-interest expense: | |||||||||||||||
Non-interest expense | $ | 45,552 | $ | 44,505 | $ | 46,343 | $ | 89,634 | $ | 96,011 | |||||
Adjustments(1) | 1,006 | — | — | 1,260 | — | ||||||||||
Adjusted non-interest expense (non-GAAP) | 44,546 | 44,505 | 46,343 | 88,374 | 96,011 | ||||||||||
Non-interest expense to average assets, adjusted (non-GAAP) | 2.47% | 2.47% | 2.63% | 2.47% | 2.80% | ||||||||||
(1) Adjustments: | |||||||||||||||
Non-interest expense adjustments: | |||||||||||||||
Acquisition-related expenses | $ | 1,006 | $ | — | $ | — | $ | 1,260 | $ | — | |||||
Tax expense impact | (233) | — | — | (292) | — | ||||||||||
Adjustments (non-GAAP) | $ | 773 | $ | — | $ | — | $ | 968 | $ | — | |||||
Application of Critical Accounting Policies and Significant Estimates
We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the determination of the ACL. See additional discussion of our ACL policy in note 2 – Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2021 Annual Report on Form 10-K.
48
Future Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was effective upon issuance and can be adopted during any interim period through December 31, 2022. It provides optional expedients and guidance for applying generally accepted accounting principles to contract modifications and hedging relationships, if certain criteria are met, that reference LIBOR or any other reference rate that is expected to be discontinued. To address reference rate reform, the Company established a LIBOR transition subcommittee in January of 2020 to identify exposure to reference rates within loan and derivative contracts. The Company had no exposure to LIBOR tenors that were discontinued as of January 1, 2022. For tenors expiring on future dates the Company is working to ensure all documentation includes contingency terms, if necessary, that may be utilized at such time when the LIBOR is discontinued. Beginning January 1, 2022, the Company no longer originates loans using LIBOR as a reference rate. The Company has assessed, and will continue to evaluate, the impact from ASU 2020-04 and does not expect the adoption of ASU 2020-04, or any updates issued to date, to have a material impact on its financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance on TDRs and requires disclosure of current-period gross write-offs by year of origination. The guidance also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancing and restructuring for borrowers experiencing financial difficulty. The guidance will be effective for fiscal years, and interim periods, beginning after December 15, 2022 for entities that have adopted ASU 2016-13. The Company is reviewing ASU 2022-02 and does not expect the adoption of that pronouncement to have a material impact on its financial statements.
Financial Condition
Total assets remained consistent at $7.2 billion from December 31, 2021 to June 30, 2022 as the increases in loans and investment securities were offset by a decrease in cash. Cash and cash equivalents decreased $397.3 million, or 47.0%, from December 31, 2021 as excess cash liquidity was deployed into higher earning investment securities and loans. Investment securities increased $87.6 million, or 6.7%, and loans increased $303.7 million, or 6.7%, compared to December 31, 2021. The allowance for credit losses increased $1.2 million to $50.9 million at June 30, 2022, compared to December 31, 2021.
During the six months ended June 30, 2022, lower cost demand, savings, and money market deposits (transaction deposits) increased $22.2 million, or 0.8% annualized, compared to December 31, 2021, as we continued developing full banking relationships with our clients. In addition to providing excess cash liquidity, the increase in transaction deposits provided low-cost funding utilized to fund loan growth.
Investment securities
Available-for-sale
Total investment securities available-for-sale increased 16.5% during the six months ended June 30, 2022 to $0.8 billion. Purchases of available-for-sale securities during the six months ended June 30, 2022 and 2021 totaled $260.2 million and $86.2 million, respectively. Paydowns and maturities totaled $79.1 million and $131.1 million during the six months ended June 30, 2022 and 2021, respectively.
49
Our available-for-sale investment securities portfolio is summarized in the following table as of the dates indicated. The weighted average yield was calculated based on amortized cost. Yields on tax exempt securities have not been adjusted for tax exempt status.
June 30, 2022 | December 31, 2021 | |||||||||||||||||||
|
|
|
| Weighted |
|
|
|
| Weighted | |||||||||||
Amortized | Fair | Percent of | average | Amortized | Fair | Percent of | average | |||||||||||||
cost | value | portfolio | yield | cost | value | portfolio | yield | |||||||||||||
Treasury securities | $ | 73,793 | $ | 73,054 | 9.1% | 2.54% | $ | — | $ | — | — | — | ||||||||
Mortgage-backed securities: | ||||||||||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | 282,052 | 252,778 | 31.4% | 1.72% | 231,523 | 227,696 | 32.9% | 1.38% | ||||||||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| 523,891 |
| 477,301 | 59.1% | 1.69% |
| 467,490 |
| 461,334 | 66.7% | 1.47% | ||||||||
Municipal securities | 230 | 230 | 0.0% | 3.17% | 230 | 237 | 0.0% | 3.17% | ||||||||||||
Corporate debt | 2,000 | 2,026 | 0.3% | 5.87% | 2,000 | 2,111 | 0.3% | 5.80% | ||||||||||||
Other securities |
| 469 |
| 469 | 0.1% | 0.00% |
| 469 |
| 469 | 0.1% | 0.00% | ||||||||
Total investment securities available-for-sale | $ | 882,435 | $ | 805,858 | 100.0% | 1.78% | $ | 701,712 | $ | 691,847 | 100.0% | 1.46% | ||||||||
As of June 30, 2022 and December 31, 2021, nearly all the available-for-sale investment portfolio was backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate FHLMC, FNMA and GNMA securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 5.6 years and 4.2 years at June 30, 2022 and December 31, 2021, respectively. This estimate is based on assumptions and actual results may differ. At June 30, 2022 and December 31, 2021, the duration of the total available-for-sale investment portfolio was 4.8 years and 3.8 years, respectively.
At June 30, 2022 and December 31, 2021, adjustable rate securities comprised 10.4% and 1.7%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 1.76% per annum and 1.70% per annum at June 30, 2022 and December 31, 2021, respectively.
The available-for-sale investment portfolio included $76.7 million of unrealized losses and $0.1 million of unrealized gains at June 30, 2022 and $13.3 million of unrealized losses and $3.4 million of unrealized gains at December 31, 2021. We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities and U.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.
50
Held-to-maturity
Held-to-maturity investment securities decreased 4.3% during the six months ended June 30, 2022 to $0.6 billion. Purchases during the six months ended June 30, 2022 and 2021 totaled $44.3 million and $377.7 million, respectively. Paydowns and maturities totaled $69.7 million and $64.8 million during the six months ended June 30, 2022 and 2021, respectively.
Held-to-maturity investment securities are summarized as follows as of the dates indicated:
June 30, 2022 | December 31, 2021 | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
| Amortized |
| Fair |
| Percent of |
| average |
| Amortized |
| Fair |
| Percent of |
| average | |||||
cost | value | portfolio | yield | cost | value | portfolio | yield | |||||||||||||
Treasury securities | $ | 24,794 | $ | 24,918 | 4.3% | 3.18% | $ | — | $ | — | — | — | ||||||||
Mortgage-backed securities: | ||||||||||||||||||||
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises | 303,370 | 271,016 | 52.0 % | 1.75% | 312,916 | 309,614 | 51.4% | 1.56% | ||||||||||||
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises |
| 254,486 |
| 220,751 | 43.7% | 1.31% |
| 296,096 |
| 289,646 | 48.6% | 1.25% | ||||||||
Total investment securities held-to-maturity | $ | 582,650 | $ | 516,685 | 100.0% | 1.62% | $ | 609,012 | $ | 599,260 | 100.0% | 1.41% | ||||||||
The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities.
The fair value of the held-to-maturity investment portfolio included $66.1 million of unrealized losses and $0.1 million of unrealized gains at June 30, 2022. At December 31, 2021, the held-to-maturity investment portfolio included $11.9 million of unrealized losses and $2.2 million of unrealized gains.
The Company does not measure expected credit losses on a financial asset, or groups of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell the securities and believes it will not be required to sell the securities before the recovery of their amortized cost.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of June 30, 2022 and December 31, 2021 was 6.4 years and 4.1 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 5.3 years and 3.8 years as of June 30, 2022 and December 31, 2021, respectively.
Non-marketable securities
Non-marketable securities totaled $59.8 million and $50.7 million at June 30, 2022 and December 31, 2021, respectively, and included FRB stock, FHLB stock and other non-marketable securities. At June 30, 2022, other non-marketable securities totaled $45.2 million and consisted of equity method investments totaling $19.2 million and convertible preferred stock without a readily determinable fair value totaling $26.0 million. At December 31, 2021, other non-marketable securities totaled $36.2 million and consisted of equity method investments totaling $14.2 million and convertible preferred stock without a readily determinable fair value totaling $22.0 million. The Company continues to invest with fintech solution providers to support our ecosystem buildout, support our core bank products and offerings, and to leverage efficiencies and technological solutions in our shared services areas. Purchases of non-marketable securities totaled $9.4 million and $3.8 million during the six months ended June 30, 2022 and 2021, respectively.
51
At June 30, 2022, the Company held $13.9 million of FRB stock and $0.7 million of FHLB stock for regulatory or debt facility purposes, consistent with December 31, 2021. These are restricted securities which, lacking a market, are carried at cost. The Company is not aware of any events or changes in circumstances that may have an adverse effect on the investments carried at cost.
Loans overview
At June 30, 2022, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our six acquisitions to date.
The table below shows the loan portfolio composition at the respective dates:
June 30, 2022 vs. | |||||||
December 31, 2021 | |||||||
June 30, 2022 | December 31, 2021 | % Change | |||||
Originated: | |||||||
Commercial: | |||||||
Commercial and industrial | $ | 1,588,241 | $ | 1,479,895 | 7.3% | ||
Municipal and non-profit | 996,223 | 928,705 | 7.3% | ||||
Owner-occupied commercial real estate | 592,334 | 503,663 | 17.6% | ||||
Food and agribusiness | 196,829 | 200,412 | (1.8)% | ||||
Total commercial | 3,373,627 | 3,112,675 | 8.4% | ||||
Commercial real estate non-owner occupied | 620,133 | 611,765 | 1.4% | ||||
Residential real estate | 682,272 | 616,135 | 10.7% | ||||
Consumer | 17,486 | 17,336 | 0.9% | ||||
Total originated | 4,693,518 | 4,357,911 | 7.7% | ||||
Acquired: | |||||||
Commercial: | |||||||
Commercial and industrial | 15,056 | 16,252 | (7.4)% | ||||
Municipal and non-profit | 330 | 340 | (2.9)% | ||||
Owner-occupied commercial real estate | 18,849 | 29,973 | (37.1)% | ||||
Food and agribusiness | 2,849 | 3,177 | (10.3)% | ||||
Total commercial | 37,084 | 49,742 | (25.4)% | ||||
Commercial real estate non-owner occupied | 42,771 | 52,964 | (19.2)% | ||||
Residential real estate | 43,486 | 52,521 | (17.2)% | ||||
Consumer | 211 | 245 | (13.9)% | ||||
Total acquired | 123,552 | 155,472 | (20.5)% | ||||
Total loans | $ | 4,817,070 | $ | 4,513,383 | 6.7% | ||
The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. The loan portfolio increased $303.7 million, or 13.6% annualized, from December 31, 2021 to June 30, 2022. The increase was led by commercial loan growth of $248.3 million, or 15.8% annualized. Loan fundings for the first half of 2022 totaled a record $912.2 million, led by commercial loan fundings of $614.0 million.
Our commercial and industrial loan portfolio is comprised of diverse industry segments. At June 30, 2022, these segments included finance and financial services, primarily lender finance loans, of $174.1 million, hospital/medical loans of $346.8 million, manufacturing-related loans of $143.4 million, and a variety of smaller subcategories of commercial and industrial loans. Food and agribusiness loans, which are well-diversified across food production, crop and livestock types, totaled $199.7 million and were 23.6% of the Company’s risk based capital. Crop and livestock loans represent 0.7% of total loans.
Non-owner occupied CRE loans were 78.5% of the Company’s risk based capital, or 13.8% of total loans, and no specific property type comprised more than 5.0% of total loans. The Company maintains very little exposure to non-owner occupied CRE retail properties, comprising 1.3% of total loans. Multi-family loans totaled $70.9 million, or 1.5% of total loans as of June 30, 2022.
New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan fundings totaled a record $1.8 billion over the past 12 months, led by commercial loan fundings of $1.3 billion. Fundings are defined as closed-end funded loans and revolving lines of credit advances, net of any
52
current period paydowns. Management utilizes this more conservative definition of fundings to better approximate the impact of fundings on loans outstanding and ultimately net interest income.
The following table represents new loan fundings for the periods presented:
Second quarter |
| First quarter |
| Fourth quarter |
| Third quarter |
| Second quarter | ||||||
2022 | 2022 | 2021 | 2021 | 2021 | ||||||||||
Commercial: | ||||||||||||||
Commercial and industrial | $ | 152,550 | $ | 169,168 | $ | 229,529 | $ | 196,289 | $ | 147,030 | ||||
Municipal and non-profit | 81,428 | 49,906 | 101,450 | 43,516 | 25,131 | |||||||||
Owner occupied commercial real estate |
| 78,905 |
| 67,597 |
| 28,914 |
| 53,445 |
| 48,225 | ||||
Food and agribusiness |
| (4,186) |
| 18,620 |
| 11,016 |
| 8,442 |
| 26,956 | ||||
Total commercial | 308,697 | 305,291 | 370,909 | 301,692 | 247,342 | |||||||||
Commercial real estate non-owner occupied |
| 88,612 |
| 63,416 |
| 46,128 |
| 55,392 |
| 58,532 | ||||
Residential real estate |
| 93,220 |
| 49,040 |
| 55,873 |
| 54,442 |
| 53,962 | ||||
Consumer |
| 1,989 |
| 1,904 |
| 2,524 |
| 1,810 |
| 2,267 | ||||
Total | $ | 492,518 | $ | 419,651 | $ | 475,434 | $ | 413,336 | $ | 362,103 | ||||
Included in fundings are net fundings under revolving lines of credit totaling $21,762, $66,430, $138,777, $29,154, and $59,250 as of the second and first quarters of 2022 and the fourth, third and second quarters of 2021, respectively.
The tables below show the contractual maturities of our total loans for the dates indicated:
June 30, 2022 | |||||||||||||||
| Due within |
| Due after 1 but |
| Due after 5 but |
| Due after |
| |||||||
1 year | within 5 years | within 15 years | 15 Years | Total | |||||||||||
Commercial: | |||||||||||||||
Commercial and industrial | $ | 154,565 | $ | 1,179,280 | $ | 260,290 | $ | 9,162 | $ | 1,603,297 | |||||
Municipal and non-profit | (2,074) | 140,808 | 547,362 | 310,457 | 996,553 | ||||||||||
Owner occupied commercial real estate |
| 38,688 |
| 186,951 |
| 313,042 |
| 72,502 |
| 611,183 | |||||
Food and agribusiness |
| 47,769 |
| 139,972 |
| 8,093 |
| 3,844 |
| 199,678 | |||||
Total commercial | 238,948 | 1,647,011 | 1,128,787 | 395,965 | 3,410,711 | ||||||||||
Commercial real estate non-owner occupied |
| 184,630 |
| 321,847 |
| 156,302 |
| 125 |
| 662,904 | |||||
Residential real estate |
| 8,358 |
| 35,602 |
| 178,425 |
| 503,373 |
| 725,758 | |||||
Consumer |
| 4,394 |
| 11,165 |
| 2,138 |
| — |
| 17,697 | |||||
Total loans | $ | 436,330 | $ | 2,015,625 | $ | 1,465,652 | $ | 899,463 | $ | 4,817,070 | |||||
December 31, 2021 | |||||||||||||||
| Due within |
| Due after 1 but |
| Due after 5 but |
| Due after |
| |||||||
1 year | within 5 years | within 15 years | 15 Years | Total | |||||||||||
Commercial: | |||||||||||||||
Commercial and industrial | $ | 143,152 | $ | 1,119,195 | $ | 226,793 | $ | 7,007 | $ | 1,496,147 | |||||
Municipal and non-profit | 23,827 | 112,022 | 559,493 | 233,703 | 929,045 | ||||||||||
Owner occupied commercial real estate |
| 40,510 |
| 160,853 |
| 266,664 |
| 65,609 |
| 533,636 | |||||
Food and agribusiness |
| 79,507 |
| 107,799 |
| 11,193 |
| 5,090 |
| 203,589 | |||||
Total commercial | 286,996 | 1,499,869 | 1,064,143 | 311,409 | 3,162,417 | ||||||||||
Commercial real estate non-owner occupied |
| 200,042 |
| 316,473 |
| 147,783 |
| 431 |
| 664,729 | |||||
Residential real estate |
| 12,605 |
| 30,233 |
| 201,918 |
| 423,900 |
| 668,656 | |||||
Consumer |
| 3,504 |
| 11,507 |
| 2,570 |
| — |
| 17,581 | |||||
Total loans | $ | 503,147 | $ | 1,858,082 | $ | 1,416,414 | $ | 735,740 | $ | 4,513,383 | |||||
53
The stated interest rate (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of total loans with maturities over one year is as follows at the dates indicated:
June 30, 2022 | |||||||||||||||
Fixed | Variable | Total | |||||||||||||
|
| Weighted |
|
| Weighted |
|
| Weighted | |||||||
Balance | average rate | Balance | average rate | Balance | average rate | ||||||||||
Commercial | |||||||||||||||
Commercial and industrial | $ | 623,325 |
| 4.27% | $ | 825,408 |
| 4.47% | $ | 1,448,733 |
| 4.38% | |||
Municipal and non-profit(1) | 975,049 | 3.44% | 23,580 | 3.28% | 998,629 | 3.43% | |||||||||
Owner occupied commercial real estate |
| 357,833 |
| 4.39% |
| 214,662 |
| 4.43% |
| 572,495 |
| 4.53% | |||
Food and agribusiness |
| 45,138 |
| 5.17% |
| 106,770 |
| 4.96% |
| 151,908 |
| 5.02% | |||
Total commercial | 2,001,345 | 3.94% | 1,170,420 | 4.48% | 3,171,765 | 4.14% | |||||||||
Commercial real estate non-owner occupied |
| 207,690 |
| 4.35% |
| 270,583 |
| 4.38% |
| 478,273 |
| 4.37% | |||
Residential real estate |
| 391,076 |
| 3.51% |
| 326,323 |
| 4.17% |
| 717,399 |
| 3.81% | |||
Consumer |
| 10,473 |
| 4.46% |
| 2,830 |
| 4.14% |
| 13,303 |
| 4.39% | |||
Total loans with 1 year maturity | $ | 2,610,584 |
| 3.91% | $ | 1,770,156 |
| 4.41% | $ | 4,380,740 |
| 4.11% | |||
December 31, 2021 | |||||||||||||||
Fixed | Variable | Total | |||||||||||||
|
| Weighted |
|
| Weighted |
|
| Weighted | |||||||
Balance | average rate | Balance | average rate | Balance | average rate | ||||||||||
Commercial | |||||||||||||||
Commercial and industrial | $ | 480,034 |
| 4.05% | $ | 872,961 |
| 3.41% | $ | 1,352,995 |
| 3.63% | |||
Municipal and non-profit(1) | 881,339 | 3.37% | 23,879 | 2.76% | 905,218 | 3.35% | |||||||||
Owner occupied commercial real estate |
| 293,190 |
| 4.70% |
| 199,936 |
| 3.75% |
| 493,126 |
| 4.45% | |||
Food and agribusiness |
| 49,303 |
| 5.21% |
| 74,779 |
| 3.95% |
| 124,082 |
| 4.45% | |||
Total commercial | 1,703,866 | 3.88% | 1,171,555 | 3.49% | 2,875,421 | 3.72% | |||||||||
Commercial real estate non-owner occupied |
| 214,463 |
| 4.28% |
| 250,224 |
| 3.51% |
| 464,687 |
| 3.86% | |||
Residential real estate |
| 360,648 |
| 3.45% |
| 295,403 |
| 4.00% |
| 656,051 |
| 3.70% | |||
Consumer |
| 11,567 |
| 4.37% |
| 2,510 |
| 3.52% |
| 14,077 |
| 4.21% | |||
Total loans with 1 year maturity | $ | 2,290,544 |
| 3.85% | $ | 1,719,692 |
| 3.58% | $ | 4,010,236 |
| 3.74% | |||
(1) |
| Included in municipal and non-profit fixed rate loans are loans totaling $344,648 and $343,089 that have been swapped to variable rates at current market pricing at June 30, 2022 and December 31, 2021, respectively. Included in the municipal and non-profit segment are tax exempt loans totaling $776,558 and $746,508 with an FTE weighted average rate of 4.00% and 3.97% at June 30, 2022 and December 31, 2021, respectively. |
Asset quality
Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.
Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution for the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below.
54
In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered TDRs in accordance with ASC 310-40. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ACL and any subsequent declines in carrying value charged to impairments on OREO.
Non-performing assets and past due loans
Non-performing assets consist of non-accrual loans and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and six months ended June 30, 2022 was $0.1 million and $0.3 million, respectively, and $0.2 million and $0.5 million during the three and six months ended June 30, 2021, respectively.
Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of collection.
The following table sets forth the non-performing assets and past due loans as of the dates presented:
June 30, 2022 |
| December 31, 2021 | |||
Non-accrual loans: | |||||
Non-accrual loans, excluding restructured loans | $ | 7,951 | $ | 8,466 | |
Restructured loans on non-accrual |
| 1,911 |
| 2,366 | |
Non-performing loans |
| 9,862 |
| 10,832 | |
OREO |
| 4,992 |
| 7,005 | |
Total non-performing assets | $ | 14,854 | $ | 17,837 | |
Loans 30-89 days past due and still accruing interest | $ | 1,781 | $ | 1,687 | |
Loans 90 days or more past due and still accruing interest |
| 194 |
| 420 | |
Non-accrual loans | 9,862 | 10,832 | |||
Total past due and non-accrual loans | $ | 11,837 | $ | 12,939 | |
Accruing restructured loans | $ | 7,208 | $ | 7,186 | |
Allowance for credit losses | 50,860 | 49,694 | |||
Non-performing loans to total loans |
| 0.20% |
| 0.24% | |
Total 90 days past due and still accruing interest and non-accrual loans to total loans |
| 0.21% |
| 0.25% | |
Total non-performing assets to total loans and OREO |
| 0.31% |
| 0.39% | |
ACL to non-performing loans |
| 515.72% |
| 458.77% | |
During the six months ended June 30, 2022, total non-performing loans decreased $1.0 million, or 9.0%, from December 31, 2021 to a record low $9.9 million.
Loans 30-89 days past due and still accruing interest were 0.04% of total loans at both June 30, 2022 and December 31, 2021. Loans 90 days or more past due and still accruing interest were 0.00% of total loans at June 30, 2022 and 0.01% at December 31, 2021.
Allowance for credit losses
The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. On January 1, 2020, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology for recognizing credit losses with a CECL model. The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing
55
delays. The model incorporates forecasts of certain national macro-economic factors, including unemployment rates, home price index (“HPI”), retail sales and gross domestic product (“GDP”), which drive correlated loss rates. The determination and application of the ACL accounting policy involves judgments, estimates and uncertainties that are subject to change. For periods beyond the reasonable and supportable forecast period, we revert to historical long-term average loss rates on a straight-line basis.
We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary loan segments within the ACL model that are further stratified into 11 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following are the loan classes within each of the four primary loan segments:
Non-owner occupied | ||||||
Commercial | commercial real estate | Residential real estate | Consumer | |||
Commercial and industrial | Construction | Senior lien | Consumer | |||
Owner occupied commercial real estate | Acquisition and development | Junior lien | ||||
Food and agribusiness | Multifamily | |||||
Municipal and non-profit | Non-owner occupied |
Loans on non-accrual, in bankruptcy and TDRs with a balance greater than $250,000 are excluded from the pooled analysis and are evaluated individually. If management determines that foreclosure is probable, expected credit losses are evaluated based on the criteria listed below, adjusted for selling costs as appropriate. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:
● |
| the borrower's resources, ability, and willingness to repay in accordance with the terms of the loan agreement; |
● |
| the likelihood of receiving financial support from any guarantors; |
● |
| the adequacy and present value of future cash flows, less disposal costs, of any collateral; and |
● |
| the impact current economic conditions may have on the borrower's financial condition and liquidity or the value of the collateral. |
The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.
Net charge-offs on loans during the three and six months ended June 30, 2022 were $0.3 million and $0.9 million, respectively. The Company recorded an allowance for loan losses provision expense of $2.5 million for the three months ended June 30, 2022, which included a provision expense of $2.4 million for funded loans and a provision expense of $0.1 million for unfunded loan commitments. During the six months ended June 30, 2022, the Company recorded an allowance for loan losses provision expense of $2.2 million, which included a provision expense of $2.1 million for funded loans and a provision expense of $0.1 million for unfunded loan commitments. Provision expense was driven by loan growth and higher reserve requirements from changes in the CECL model’s underlying economic forecast. Specific reserves on loans totaled $0.5 million at June 30, 2022.
Net charge-offs on loans during the three and six months ended June 30, 2021 were $0.7 million and $0.8 million, respectively. The Company recorded an allowance for loan losses provision release of $5.9 million for the three months ended June 30, 2021, which included a provision release of $5.3 million for funded loans and a provision release of $0.6 million for unfunded loan commitments. During the six months ended June 30, 2021, the Company recorded total provision release of $9.4 million, which included a provision release of $9.9 million for funded loans, partially offset by a provision expense of $0.5 million for unfunded loan commitments. Provision release was driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. Specific reserves on loans totaled $1.4 million at June 30, 2021.
56
The Company has elected to exclude AIR from the ACL calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. As of June 30, 2022 and December 31, 2021, AIR from loans totaled $17.2 million and $15.7 million, respectively.
Total ACL
After considering the above mentioned factors, we believe that the ACL of $50.9 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at June 30, 2022. However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively affect the Company's results of operations, liquidity or financial condition.
The following schedules present, by class stratification, the changes in the ACL during the periods listed:
As of and for the three months ended | ||||||||||
June 30, 2022 | June 30, 2021 | |||||||||
Total loans | % NCOs(1) | Total loans | % NCOs(1) | |||||||
Beginning allowance for credit losses | $ | 48,810 | $ | 55,057 | ||||||
Charge-offs: | ||||||||||
Commercial |
| (291) | 0.02% |
| (781) | 0.06% | ||||
Commercial real estate non owner-occupied |
| — | 0.00% |
| — | 0.00% | ||||
Residential real estate |
| — | 0.00% |
| — | 0.00% | ||||
Consumer |
| (160) | 0.01% |
| (144) | 0.01% | ||||
Total charge-offs |
| (451) |
| (925) | ||||||
Recoveries |
| 115 |
| 198 | ||||||
Net charge-offs |
| (336) | 0.03% |
| (727) | 0.07% | ||||
Provision expense (release) for loan losses |
| 2,386 |
| (5,300) | ||||||
Ending allowance for credit losses | $ | 50,860 | $ | 49,030 | ||||||
Average total loans outstanding during the period | $ | 4,711,416 | $ | 4,312,128 | ||||||
As of and for the six months ended | ||||||||||
June 30, 2022 | June 30, 2021 | |||||||||
Total loans | % NCOs(1) | Total loans | % NCOs(1) | |||||||
Beginning balance | $ | 49,694 | $ | 59,777 | ||||||
Charge-offs: | ||||||||||
Commercial |
| (754) | 0.03% | (942) | 0.03% | |||||
Commercial real estate non-owner occupied |
| — | 0.00% | — | 0.00% | |||||
Residential real estate |
| (2) | 0.00% | (22) | 0.00% | |||||
Consumer |
| (329) | 0.01% | (263) | 0.01% | |||||
Total charge-offs |
| (1,085) | (1,227) | |||||||
Recoveries |
| 190 | 380 | |||||||
Net charge-offs |
| (895) | 0.04% | (847) | 0.04% | |||||
Provision expense (release) for loan losses |
| 2,061 | (9,900) | |||||||
Ending allowance for credit losses | $ | 50,860 | $ | 49,030 | ||||||
Ratio of ACL to total loans outstanding at period end |
| 1.06% | 1.14% | |||||||
Ratio of ACL to total non-performing loans at period end |
| 515.72% | 353.22% | |||||||
Total loans | $ | 4,817,070 | $ | 4,300,757 | ||||||
Average total loans outstanding during the period | 4,616,339 | 4,294,900 | ||||||||
Non-performing loans | 9,862 | 13,881 | ||||||||
(1) | Ratio of annualized net charge-offs to average total loans. |
57
The following tables present the allocation of the ACL and the percentage of the total amount of loans in each loan category listed as of the dates presented:
June 30, 2022 | ||||||||||
ACL as a % | ||||||||||
| Total loans |
| % of total loans |
| Related ACL |
| of total ACL | |||
Commercial | $ | 3,410,711 |
| 70.8% | $ | 32,011 |
| 62.9% | ||
Commercial real estate non-owner occupied |
| 662,904 |
| 13.8% |
| 8,426 |
| 16.6% | ||
Residential real estate |
| 725,758 |
| 15.0% |
| 10,072 |
| 19.8% | ||
Consumer |
| 17,697 |
| 0.4% |
| 351 |
| 0.7% | ||
Total | $ | 4,817,070 |
| 100.0% | $ | 50,860 |
| 100.0% | ||
December 31, 2021 | ||||||||||
ACL as a % | ||||||||||
| Total loans |
| % of total loans |
| Related ACL |
| of total ACL | |||
Commercial | $ | 3,162,417 |
| 70.1% | $ | 31,256 |
| 62.9% | ||
Commercial real estate non-owner occupied |
| 664,729 |
| 14.7% |
| 10,033 |
| 20.2% | ||
Residential real estate |
| 668,656 |
| 14.8% |
| 8,056 |
| 16.2% | ||
Consumer |
| 17,581 |
| 0.4% |
| 349 |
| 0.7% | ||
Total | $ | 4,513,383 |
| 100.0% | $ | 49,694 |
| 100.0% | ||
Deposits
Deposits from banking clients serve as a primary funding source for our banking operations, and our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a low-cost funding source for our loans, but also provide a foundation for the client relationships that are critical to future loan growth. The following table presents information regarding our deposit composition at June 30, 2022 and December 31, 2021:
Increase (decrease) | ||||||||||||||
June 30, 2022 | December 31, 2021 | Amount | % Change | |||||||||||
Non-interest bearing demand deposits | $ | 2,454,740 | 39.6% | $ | 2,506,265 | 40.2% | $ | (51,525) |
| (2.1)% | ||||
Interest bearing demand deposits |
| 597,000 | 9.6% |
| 555,401 | 8.9% |
| 41,599 |
| 7.5% | ||||
Savings accounts |
| 782,579 | 12.6% |
| 774,559 | 12.4% |
| 8,020 |
| 1.0% | ||||
Money market accounts |
| 1,582,102 | 25.6% |
| 1,558,032 | 25.0% |
| 24,070 |
| 1.5% | ||||
Total transaction deposits |
| 5,416,421 | 87.4% |
| 5,394,257 | 86.5% |
| 22,164 |
| 0.4% | ||||
Time deposits $250,000 |
| 663,847 | 10.7% |
| 703,741 | 11.4% |
| (39,894) |
| (5.7)% | ||||
Time deposits $250,000 |
| 114,130 | 1.9% |
| 130,175 | 2.1% |
| (16,045) |
| (12.3)% | ||||
Total time deposits |
| 777,977 | 12.6% |
| 833,916 | 13.5% |
| (55,939) |
| (6.7)% | ||||
Total deposits | $ | 6,194,398 | 100.0% | $ | 6,228,173 | 100.0% | $ | (33,775) |
| (0.5)% | ||||
The following table shows uninsured time deposits by scheduled maturity as of June 30, 2022:
| June 30, 2022 | ||
Three months or less | $ | 5,293 | |
Over 3 months through 6 months |
| 10,454 | |
Over 6 months through 12 months |
| 10,880 | |
Thereafter |
| 21,754 | |
Total uninsured time deposits | $ | 48,381 | |
At June 30, 2022 and December 31, 2021, time deposits that were scheduled to mature within 12 months totaled $536.7 million and $555.4 million, respectively. Of the time deposits scheduled to mature within 12 months at June 30, 2022, $69.4 million were in denominations of $250,000 or more, and $467.3 million were in denominations less than $250,000.
58
Long-term debt
On November 5, 2021, the Company entered into a subordinated note purchase agreement to issue and sell a fixed-to-floating rate note totaling $40.0 million. The balance on the note at June 30, 2022, net of long-term debt issuance costs totaling $0.5 million, totaled $39.5 million. Interest expense totaling $0.3 million and $0.6 million was recorded in the consolidated statements of operations during the three and six months ended June 30, 2022, respectively.
The note is subordinated, unsecured and matures on November 15, 2031. Payments consist of interest only. Interest expense on the note is payable semi-annually in arrears and will bear interest at 3.00% per annum until November 15, 2026 (or any earlier redemption date). From November 15, 2026 until November 15, 2031 (or any earlier redemption date) payments will be made quarterly in arrears, and the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month term SOFR plus 203 basis points. The Company is using the net proceeds from the sale of the note for general corporate purposes. Prior to November 5, 2026, the Company may redeem the note only under certain limited circumstances. Beginning on November 5, 2026 through maturity, the note may be redeemed, at the Company’s option, on any scheduled interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the note being redeemed, together with any accrued and unpaid interest on the note being redeemed up to but excluding the date of redemption. The note is not subject to redemption at the option of the holder.
Other borrowings
As of June 30, 2022 and December 31, 2021, the Bank sold securities under agreements to repurchase totaling $24.4 million and $22.8 million, respectively. In addition, as a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $1.0 billion at June 30, 2022. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At June 30, 2022 and December 31, 2021, the Bank had no outstanding borrowings with the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at June 30, 2022 or December 31, 2021. Loans pledged were $1.4 billion and $1.3 billion at June 30, 2022 and December 31, 2021, respectively. The Company incurred no interest expense related to FHLB advances or other short-term borrowings for the three and six months ended June 30, 2022 or 2021.
Results of Operations
Our net income depends largely on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan losses and non-interest income, such as service charges, bank card income, swap fee income, and gain on sale of mortgages. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, occupancy costs, telecommunications data processing expense and intangible asset amortization. Any expenses related to the resolution of problem assets are also included in non-interest expense.
Overview of results of operations
Net income totaled $20.4 million and $38.7 million, or $0.67 and $1.27 per diluted share, during the three and six months ended June 30, 2022, respectively. Excluding $1.0 million of non-recurring acquisition-related expenses, net income totaled $21.1 million, or $0.69 per diluted share, during the three months ended June 30, 2022. Excluding $1.3 million of non-recurring acquisition-related expenses, net income totaled $39.7 million, or $1.30 per diluted share, during the six months ended June 30, 2022. During the three and six months ended June 30, 2021, net income totaled $24.2 million and $51.0 million, or $0.77 and $1.63 per diluted share, respectively. The rise in mortgage rates in 2022 has resulted in lower mortgage banking income during the first six months of 2022. However, the increases in the Federal Reserve’s interest rates are driving higher loan yields resulting in increasing levels of net interest income.
Net interest income
We regularly review net interest income metrics to provide us with indicators of how the various components of net interest income are performing. We regularly review: (i) our loan mix and the yield on loans; (ii) the investment portfolio and the related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast periods.
59
The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale and loans.
The table below presents the components of net interest income on a FTE basis for the three months ended June 30, 2022 and 2021.
For the three months ended | For the three months ended | |||||||||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||
Interest earning assets: | ||||||||||||||||||
Originated loans FTE(1)(2)(3) | $ | 4,594,799 | $ | 47,787 | 4.17% | $ | 4,077,142 | $ | 40,036 | 3.94% | ||||||||
Acquired loans |
| 128,107 |
| 4,403 | 13.79% |
| 211,126 | 3,923 | 7.45% | |||||||||
Loans held for sale | 78,574 | 881 | 4.50% | 159,068 | 1,213 | 3.06% | ||||||||||||
Investment securities available-for-sale |
| 898,928 |
| 3,808 | 1.69% |
| 638,039 |
| 2,397 | 1.50% | ||||||||
Investment securities held-to-maturity |
| 559,712 |
| 2,067 | 1.48% |
| 572,534 |
| 1,723 | 1.20% | ||||||||
Other securities |
| 14,591 |
| 211 | 5.78% |
| 15,079 |
| 209 | 5.54% | ||||||||
Interest earning deposits and securities purchased under agreements to resell |
| 527,589 |
| 1,015 | 0.77% |
| 888,600 |
| 228 | 0.10% | ||||||||
Total interest earning assets FTE(2) | $ | 6,802,300 | $ | 60,172 | 3.55% | $ | 6,561,588 | $ | 49,729 | 3.04% | ||||||||
Cash and due from banks | $ | 75,616 | $ | 78,148 | ||||||||||||||
Other assets |
| 402,529 |
| 472,142 | ||||||||||||||
Allowance for credit losses |
| (49,126) |
| (54,984) | ||||||||||||||
Total assets | $ | 7,231,319 | $ | 7,056,894 | ||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||
Interest bearing demand, savings and money market deposits | $ | 2,992,986 | $ | 1,494 | 0.20% | $ | 2,789,681 | $ | 1,572 | 0.23% | ||||||||
Time deposits |
| 790,998 |
| 991 | 0.50% |
| 937,579 |
| 2,004 | 0.86% | ||||||||
Securities sold under agreements to repurchase |
| 21,761 |
| 6 | 0.11% |
| 19,891 |
| 6 | 0.12% | ||||||||
Long-term debt, net |
| 39,516 |
| 328 | 3.33% |
| — |
| — | 0.00% | ||||||||
Total interest bearing liabilities | $ | 3,845,261 | $ | 2,819 | 0.29% | $ | 3,747,151 | $ | 3,582 | 0.38% | ||||||||
Demand deposits | $ | 2,469,729 | $ | 2,368,810 | ||||||||||||||
Other liabilities |
| 96,715 |
| 97,817 | ||||||||||||||
Total liabilities |
| 6,411,705 |
| 6,213,778 | ||||||||||||||
Shareholders' equity |
| 819,614 |
| 843,116 | ||||||||||||||
Total liabilities and shareholders' equity | $ | 7,231,319 | $ | 7,056,894 | ||||||||||||||
Net interest income FTE(2) | $ | 57,353 | $ | 46,147 | ||||||||||||||
Interest rate spread FTE(2) | 3.26% | 2.66% | ||||||||||||||||
Net interest earning assets | $ | 2,957,039 | $ | 2,814,437 | ||||||||||||||
Net interest margin FTE(2) | 3.38% | 2.82% | ||||||||||||||||
Average transaction deposits | $ | 5,462,715 | $ | 5,158,491 | ||||||||||||||
Average total deposits | 6,253,713 | 6,096,070 | ||||||||||||||||
Ratio of average interest earning assets to average interest bearing liabilities | 176.90% | 175.11% | ||||||||||||||||
(1) |
| Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan. |
(2) |
| Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,336 and $1,279 for the three months ended June 30, 2022 and 2021, respectively. |
(3) |
| Loan fees included in interest income totaled $2,586 and $4,695 for the three months ended June 30, 2022 and 2021, respectively. |
Net interest income totaled $56.0 million and $44.9 million during the three months ended June 30, 2022 and 2021, respectively. Net interest income on an FTE basis totaled a record $57.4 million and $46.1 million during the three months ended June 30, 2022 and 2021, respectively. During the three months ended June 30, 2022, the FTE net interest margin widened 56 basis points to 3.38%, compared to the three months ended June 30, 2021. The yield on earning assets increased 51 basis points, primarily driven by increases in the federal funds rate since March 2022 and excess cash being deployed into higher-yielding originated loans and
60
investment securities. The cost of funds decreased five basis points to a record low 0.18% during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
Average loans comprised $4.7 billion, or 69.4%, of total average interest earning assets during the three months ended June 30, 2022, compared to $4.3 billion, or 65.4%, during the three months ended June 30, 2021. The increase in average loan balances was driven by a $517.7 million increase in average originated loans.
Average investment securities comprised 21.4% and 18.4% of total interest earning assets during the three months ended June 30, 2022 and 2021, respectively. The increase in the investment portfolio was driven by a strategic decision to deploy a portion of the excess cash liquidity into higher-yielding investment securities.
Average balances of interest bearing liabilities increased $98.1 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $203.3 million, long-term debt totaling $39.5 million and securities sold under agreement to repurchase totaling $1.9 million. The increase was partially offset by a decrease in time deposits of $146.6 million.
61
The table below presents the components of net interest income on an FTE basis for the six months ended June 30, 2022 and 2021:
For the six months ended | For the six months ended | |||||||||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||
Interest earning assets: | ||||||||||||||||||
Originated loans FTE(1)(2)(3) | $ | 4,479,002 | $ | 89,872 | 4.05% | $ | 4,041,268 | $ | 79,596 | 3.97% | ||||||||
Acquired loans |
| 137,819 |
| 6,971 | 10.20% |
| 224,722 |
| 9,051 | 8.12% | ||||||||
Loans held for sale | 86,065 | 1,637 | 3.84% | 195,094 | 2,730 | 2.82% | ||||||||||||
Investment securities available-for-sale |
| 825,694 |
| 6,657 | 1.61% |
| 662,250 |
| 4,882 | 1.47% | ||||||||
Investment securities held-to-maturity |
| 574,688 |
| 4,079 | 1.42% |
| 497,245 |
| 3,139 | 1.26% | ||||||||
Other securities |
| 14,590 |
| 420 | 5.76% |
| 15,446 |
| 419 | 5.43% | ||||||||
Interest earning deposits and securities purchased under agreements to resell |
| 634,818 |
| 1,374 | 0.44% |
| 764,626 |
| 393 | 0.10% | ||||||||
Total interest earning assets FTE(2) | $ | 6,752,676 | $ | 111,010 | 3.32% | $ | 6,400,651 | $ | 100,210 | 3.16% | ||||||||
Cash and due from banks | $ | 77,489 | $ | 79,692 | ||||||||||||||
Other assets |
| 422,205 |
| 483,617 | ||||||||||||||
Allowance for credit losses |
| (49,354) |
| (56,938) | ||||||||||||||
Total assets | $ | 7,203,016 | $ | 6,907,022 | ||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||
Interest bearing demand, savings and money market deposits | $ | 2,964,729 | $ | 2,931 | 0.20% | $ | 2,717,983 | $ | 3,224 | 0.24% | ||||||||
Time deposits |
| 806,321 |
| 2,085 | 0.52% |
| 952,431 |
| 4,339 | 0.92% | ||||||||
Securities sold under agreements to repurchase |
| 22,263 |
| 13 | 0.12% |
| 20,630 |
| 11 | 0.11% | ||||||||
Long-term debt, net |
| 39,503 |
| 654 | 3.34% |
| — |
| — | 0.00% | ||||||||
Total interest bearing liabilities | $ | 3,832,816 | $ | 5,683 | 0.30% | $ | 3,691,044 | $ | 7,574 | 0.41% | ||||||||
Demand deposits | $ | 2,452,062 | $ | 2,267,900 | ||||||||||||||
Other liabilities |
| 87,422 |
| 109,148 | ||||||||||||||
Total liabilities |
| 6,372,300 |
| 6,068,092 | ||||||||||||||
Shareholders' equity |
| 830,716 |
| 838,930 | ||||||||||||||
Total liabilities and shareholders' equity | $ | 7,203,016 | $ | 6,907,022 | ||||||||||||||
Net interest income FTE(2) | $ | 105,327 | $ | 92,636 | ||||||||||||||
Interest rate spread FTE(2) | 3.02% | 2.75% | ||||||||||||||||
Net interest earning assets | $ | 2,919,860 | $ | 2,709,607 | ||||||||||||||
Net interest margin FTE(2) | 3.15% | 2.92% | ||||||||||||||||
Average transaction deposits | $ | 5,416,791 | $ | 4,985,883 | ||||||||||||||
Average total deposits | 6,223,112 | 5,938,314 | ||||||||||||||||
Ratio of average interest earning assets to average interest bearing liabilities | 176.18% | 173.41% | ||||||||||||||||
(1) |
| Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan. |
(2) |
| Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $2,649 and $2,547 for the six months ended June 30, 2022 and 2021, respectively. |
(3) |
| Loan fees included in interest income totaled $4,950 and $9,238 for the six months ended June 30, 2022 and 2021, respectively. |
Net interest income totaled $102.7 million and $90.1 million during the six months ended June 30, 2022 and 2021, respectively. Net interest income on an FTE basis totaled $105.3 million and $92.6 million during the six months ended June 30, 2022 and 2021, respectively. During the six months ended June 30, 2022, the FTE net interest margin widened 23 basis points to 3.15%, compared to the six months ended June 30, 2021. The yield on earnings assets increased 16 basis points, primarily driven by increases in the federal funds rate since March 2022 and excess cash being deployed into higher-yielding originated loans and investment securities. The cost of funds decreased eight basis points to a record low 0.18% during the six months ended June 30, 2022, compared to the six months ended June 30, 2021.
62
Average loans comprised $4.6 billion, or 68.4%, of total average interest earning assets during the six months ended June 30, 2022, compared to $4.3 billion, or 66.6%, of total average interest earning assets during the six months ended June 30, 2021. The increase in average loan balances was driven by a $437.7 million increase in average originated loans. Year-to-date loan fundings through June 30, 2022 totaled a record $912.2 million.
Average investment securities comprised 20.7% and 18.1% of total interest earning assets during the six months ended June 30, 2022 and 2021, respectively. The increase in the investment portfolio was driven by strategic decisions to deploy a portion of excess cash liquidity into higher-yielding investment securities.
Average balances of interest bearing liabilities increased $141.8 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase was driven by higher interest bearing demand, savings and money market deposits totaling $246.8 million, long-term debt totaling $39.5 million and securities sold under agreements to repurchase totaling $1.6 million. The increase was partially offset by a decrease in time deposits of $146.1 million. The cost of deposits decreased 10 basis points to a record low 0.16% during the six months ended June 30, 2022, compared to 0.26% during the six months ended June 30, 2021.
63
The following table summarizes the changes in net interest income on an FTE basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021:
| Three months ended June 30, 2022 | Six months ended June 30, 2022 | ||||||||||||||||
compared to | compared to | |||||||||||||||||
Three months ended June 30, 2021 | Six months ended June 30, 2021 | |||||||||||||||||
Increase (decrease) due to | Increase (decrease) due to | |||||||||||||||||
| Volume |
| Rate |
| Net |
| Volume |
| Rate |
| Net | |||||||
Interest income: | ||||||||||||||||||
Originated loans FTE(1)(2)(3) | $ | 5,384 | $ | 2,367 | $ | 7,751 | $ | 8,783 | $ | 1,493 | $ | 10,276 | ||||||
Acquired loans | (2,853) | 3,333 | 480 | (4,396) | 2,316 | (2,080) | ||||||||||||
Loans held for sale |
| (903) |
| 571 |
| (332) |
| (2,074) |
| 981 |
| (1,093) | ||||||
Investment securities available-for-sale |
| 1,105 |
| 306 |
| 1,411 |
| 1,318 |
| 457 |
| 1,775 | ||||||
Investment securities held-to-maturity |
| (47) |
| 391 |
| 344 |
| 550 |
| 390 |
| 940 | ||||||
Other securities |
| (7) |
| 9 |
| 2 |
| (25) |
| 26 |
| 1 | ||||||
Interest earning deposits and securities purchased under agreements to resell |
| (695) |
| 1,482 |
| 787 |
| (281) |
| 1,262 |
| 981 | ||||||
Total interest income | $ | 1,984 | $ | 8,459 | $ | 10,443 | $ | 3,875 | $ | 6,925 | $ | 10,800 | ||||||
Interest expense: | ||||||||||||||||||
Interest bearing demand, savings and money market deposits | $ | 101 | $ | (179) | $ | (78) | $ | 244 | $ | (537) | $ | (293) | ||||||
Time deposits |
| (184) |
| (829) |
| (1,013) |
| (378) |
| (1,876) |
| (2,254) | ||||||
Securities sold under agreements to repurchase |
| 1 |
| (1) |
| — |
| 1 |
| 1 |
| 2 | ||||||
Long-term debt, net | 328 | — | 328 | 654 |
| — |
| 654 | ||||||||||
Total interest expense |
| 246 |
| (1,009) |
| (763) |
| 521 |
| (2,412) |
| (1,891) | ||||||
Net change in net interest income | $ | 1,738 | $ | 9,468 | $ | 11,206 | $ | 3,354 | $ | 9,337 | $ | 12,691 | ||||||
(1) |
| Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan. |
(2) |
| Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,336 and $1,279 for the three months ended June 30, 2022 and 2021, respectively. The taxable equivalent adjustments included above are $2,649 and $2,547 for the six months ended June 30, 2022 and 2021, respectively. |
(3) |
| Loan fees included in interest income totaled $2,586 and $4,695 for the three months ended June 30, 2022 and 2021, respectively. Loan fees included in interest income totaled $4,950 and $9,238 for the six months ended June 30, 2022 and 2021, respectively. |
Below is a breakdown of average deposits and the average rates paid during the periods indicated:
For the three months ended | For the six months ended | ||||||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | ||||||||||||||||
Average | Average | Average | Average | ||||||||||||||||
Average | rate | Average | rate | Average | rate | Average | rate | ||||||||||||
balance |
| paid |
| balance |
| paid |
| balance |
| paid |
| balance |
| paid | |||||
Non-interest bearing demand | $ | 2,469,729 | 0.00% | $ | 2,368,810 |
| 0.00% | $ | 2,452,062 |
| 0.00% | $ | 2,267,900 | 0.00% | |||||
Interest bearing demand |
| 599,874 | 0.18% |
| 560,591 | 0.21% |
| 588,792 | 0.18% |
| 551,371 | 0.22% | |||||||
Money market accounts |
| 1,608,317 | 0.24% |
| 1,509,395 | 0.26% |
| 1,592,044 | 0.24% |
| 1,469,344 | 0.28% | |||||||
Savings accounts |
| 784,795 | 0.14% |
| 719,695 | 0.16% |
| 783,893 | 0.14% |
| 697,268 | 0.17% | |||||||
Time deposits |
| 790,998 | 0.50% |
| 937,579 | 0.86% |
| 806,321 | 0.52% |
| 952,431 | 0.92% | |||||||
Total average deposits | $ | 6,253,713 | 0.16% | $ | 6,096,070 | 0.24% | $ | 6,223,112 | 0.16% | $ | 5,938,314 | 0.26% | |||||||
Provision for loan losses
The provision for loan losses represents the amount of expense that is necessary to bring the ACL to a level that we deem appropriate to absorb estimated lifetime losses inherent in the loan portfolio as of the balance sheet date. The determination of the ACL, and the resultant provision for loan losses, is subjective and involves significant estimates and assumptions. The allowance for credit losses totaled 1.06% of total loans at June 30, 2022, compared to the allowance for credit losses of 1.14% at June 30, 2021.
The Company recorded loan losses provision expense of $2.5 million and $2.2 million for the three and six months ended June 30, 2022, respectively, which included a provision expense of $2.4 million and $2.1 million, respectively, for funded loans and a provision
64
expense of $0.1 million and $0.1 million, respectively, for unfunded loan commitments, driven by strong loan growth and higher reserve requirements from changes in the CECL model’s underlying economic forecast
During the three and six months ended June 30, 2021, the Company recorded a provision release of $5.9 million and $9.4 million, respectively, which included a provision release of $5.3 million and $9.9 million, respectively, for funded loans and a provision release of $0.6 million and a provision expense of $0.5 million, respectively, for unfunded loan commitments, driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast.
Non-interest income
The table below details the components of non-interest income for the periods presented:
For the three months ended June 30, | For the six months ended June 30, | Three months | Six months | |||||||||||||||||||
Increase (decrease) | Increase (decrease) | |||||||||||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | Amount | % Change | Amount | % Change | |||||||||||
Service charges | $ | 3,956 | $ | 3,568 | $ | 7,666 | $ | 7,042 | $ | 388 | 10.9 % | $ | 624 | 8.9 % | ||||||||
Bank card fees |
| 4,541 |
| 4,614 |
| 8,664 |
| 8,687 | (73) | (1.6)% | (23) | (0.3)% | ||||||||||
Mortgage banking income |
| 6,948 |
| 13,979 |
| 16,614 |
| 36,358 | (7,031) | (50.3)% | (19,744) | (54.3)% | ||||||||||
Bank-owned life insurance income | 540 | 553 | 1,072 | 1,101 | (13) | (2.4)% | (29) | (2.6)% | ||||||||||||||
Other non-interest income |
| 772 |
| 2,552 |
| 1,795 |
| 5,404 | (1,780) | (69.7)% | (3,609) | (66.8)% | ||||||||||
OREO-related income |
| 5 |
| — |
| 5 |
| 35 | 5 | 100.0 % | (30) | (85.7)% | ||||||||||
Total non-interest income | $ | 16,762 | $ | 25,266 | $ | 35,816 | $ | 58,627 | $ | (8,504) | (33.7)% | $ | (22,811) | (38.9)% | ||||||||
Non-interest income totaled $16.8 million for the three months ended June 30, 2022, compared to $25.3 million for the three months ended June 30, 2021. The decrease in mortgage banking income was driven by lower refinance activity and competition driving tighter gain on sale margins. Other non-interest income decreased $1.8 million primarily due to market adjustments on company-owned life insurance, equity method investments and banking center consolidation-related income. Service charges and bank card fees increased a combined $0.3 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, due to changes in consumer behavior.
Non-interest income totaled $35.8 million for the six months ended June 30, 2022, compared to $58.6 million for the six months ended June 30, 2021. The decrease in mortgage banking income was driven by lower refinance activity and competition driving tighter gain on sale margins. Other non-interest income decreased $3.6 million primarily due to market adjustments on company-owned life insurance, equity method investments and banking center consolidation-related income. Service charges and bank card fees increased a combined $0.6 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, due to changes in consumer behavior.
65
Non-interest expense
The table below details the components of non-interest expense for the periods presented:
For the three months ended June 30, | For the six months ended June 30, | Three months | Six months | ||||||||||||||||||
Increase (decrease) | Increase (decrease) | ||||||||||||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | Amount | % Change | Amount | % Change | |||||||||||
Salaries and benefits | $ | 28,776 | $ | 31,439 | $ | 58,112 | $ | 64,962 | $ | (2,663) | (8.5)% | $ | (6,850) | (10.5)% | |||||||
Occupancy and equipment |
| 6,665 |
| 6,131 |
| 13,061 |
| 12,681 |
| 534 | 8.7 % | 380 | 3.0 % | ||||||||
Telecommunications and data processing |
| 2,453 |
| 2,315 |
| 4,834 |
| 4,652 |
| 138 | 6.0 % | 182 | 3.9 % | ||||||||
Marketing and business development |
| 674 |
| 570 |
| 1,347 |
| 1,022 |
| 104 | 18.2 % | 325 | 31.8 % | ||||||||
FDIC deposit insurance |
| 486 |
| 456 |
| 968 |
| 900 |
| 30 | 6.6 % | 68 | 7.6 % | ||||||||
Bank card expenses |
| 1,398 |
| 1,330 |
| 2,666 |
| 2,474 |
| 68 | 5.1 % | 192 | 7.8 % | ||||||||
Professional fees |
| 1,486 |
| 649 |
| 2,300 |
| 1,391 |
| 837 | 129.0 % | 909 | 65.3 % | ||||||||
Other non-interest expense |
| 3,169 |
| 2,348 |
| 5,717 |
| 4,824 |
| 821 | 35.0 % | 893 | 18.5 % | ||||||||
Problem asset workout | 144 | 294 | 307 | 732 | (150) | (51.0)% | (425) | (58.1)% | |||||||||||||
Loss (gain) on OREO sales, net | 5 | 221 | (270) | 192 | (216) | (97.7)% | (462) | (240.6)% | |||||||||||||
Core deposit intangible asset amortization |
| 296 |
| 296 |
| 592 |
| 592 |
| — | — | — | — | ||||||||
Banking center consolidation-related expense |
| — |
| 294 |
| — |
| 1,589 |
| (294) | (100.0)% | (1,589) | (100.0)% | ||||||||
Total non-interest expense | $ | 45,552 | $ | 46,343 | $ | 89,634 | $ | 96,011 | $ | (791) | (1.7)% | $ | (6,377) | (6.6)% | |||||||
During the three and six months ended June 30, 2022, non-interest expense decreased $0.8 million, or 1.7%, and $6.4 million, or 6.6%, respectively, compared to the three and six months ended June 30, 2021. Salaries and benefits decreased primarily due to lower mortgage banking-related compensation. The three months ended June 30, 2022 included $1.0 million of non-recurring acquisition-related expenses with $0.8 million included in professional fees and $0.2 million included in other non-interest expense. The six months ended June 30, 2022 included $1.3 million of non-recurring acquisition-related expenses with $1.1 million included in professional fees and $0.2 million included in other non-interest expense.
Income taxes
Income tax expense totaled $4.4 million and $8.0 million for the three and six months ended June 30, 2022, respectively. Income tax expense for the three and six months ended June 30, 2021 was $5.4 million and $11.1 million, respectively. The effective tax rate for the three and six months ended June 30, 2022 was 17.6% and 17.1%, respectively, compared to 18.4% and 17.9% for the same periods in the prior year. The effective tax rate is lower than the federal statutory rate primarily due to interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax income.
Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our 2021 Annual Report on Form 10-K.
Liquidity and Capital Resources
Liquidity
Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay our obligations to depositors and other creditors, while providing ample available funds for opportunistic and strategic investments. Management believes that the Company's excess cash, borrowing capacity and access to sufficient sources of capital are adequate to meet its short-term and long-term liquidity needs in the foreseeable future. Our primary sources of funds are deposits, securities sold under agreements to repurchase, prepayments and maturities of loans and investment securities, the sale of investment securities, and funds provided from operations. We anticipate having access to other third party funding sources, including the ability to raise funds through the issuance of shares of our common stock or other equity or equity-related securities, incurrence of debt, and federal funds purchased, that may also be a source of liquidity. We anticipate that these sources of liquidity will provide adequate funding and liquidity for at least a 12-month period, and we may utilize any combination of these funding sources for long-term liquidity needs if deemed prudent.
66
On-balance sheet liquidity is represented by our cash and cash equivalents and unencumbered investment securities, and is detailed in the table below as of June 30, 2022 and December 31, 2021:
| June 30, 2022 |
| December 31, 2021 | |||
Cash and due from banks | $ | 447,875 | $ | 845,195 | ||
Interest bearing bank deposits |
| 500 |
| 500 | ||
Unencumbered investment securities, at fair value |
| 686,212 |
| 781,166 | ||
Total | $ | 1,134,587 | $ | 1,626,861 | ||
Total on-balance sheet liquidity decreased $492.3 million at June 30, 2022, compared to December 31, 2021. The decrease was due to $95.0 million lower unencumbered available-for-sale and held-to-maturity securities balances and lower cash and due from banks of $397.3 million.
At present, financing activities primarily consist of changes in deposits and repurchase agreements, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As of June 30, 2022, $536.7 million of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions, and our consumer banking strategy focusing on lower cost transaction accounts, our strategy is to replace a portion of those maturing time deposits with transaction deposits and market-rate time deposits. During 2021, the Company entered into a subordinated note purchase agreement maturing on November 15, 2031. The Company is using the net proceeds from the sale of the note for general corporate purposes. At June 30, 2022, the balance on the note, net of issuance costs totaling $0.5 million, totaled $39.5 million.
Through our relationship with the FHLB, the Bank may pledge qualifying loans and investment securities allowing us to obtain additional liquidity through FHLB advances and lines of credit. There were no investment securities pledged at June 30, 2022 or December 31, 2021. The Bank had loans pledged as collateral for FHLB advances of $1.4 billion at June 30, 2022 and $1.3 billion at December 31, 2021. FHLB advances, lines of credit and other short-term borrowing availability totaled $1.0 billion at June 30, 2022. The Bank can obtain additional liquidity through the FHLB facility, if required, and also has access to federal funds lines of credit with correspondent banks. Currently, the Company does not have any advances from the FHLB.
Our primary uses of funds are loan fundings, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses, and share repurchases. For additional information regarding our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying consolidated financial statements.
Exclusive from the investing activities related to acquisitions, our primary investing activities are loan fundings and pay-offs and paydowns of loans and purchases and sales of investment securities. At June 30, 2022, pledgeable investment securities represented a significant source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled $1.4 billion at June 30, 2022, inclusive of pre-tax net unrealized losses of $76.6 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $66.0 million of pre-tax net unrealized losses at June 30, 2022. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of June 30, 2022, our investment securities portfolio consisted primarily of MBS, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base.
Capital
Under the Basel III requirements, at June 30, 2022, the Company and the Bank met all capital adequacy requirements and the Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on regulatory capital, see note 10 in our consolidated financial statements.
Our shareholders' equity is impacted by earnings, changes in unrealized gains and losses on securities, net of tax, stock-based compensation activity, share repurchases and the payment of dividends.
67
The Board of Directors has from time to time authorized multiple programs to repurchase shares of the Company’s common stock either in open market or in privately negotiated transactions in accordance with applicable regulations of the SEC. On February 24, 2021, the Company’s Board of Directors authorized a program to repurchase up to $75.0 million of the Company’s stock. The remaining authorization under the program as of June 30, 2022 was $38.6 million.
On August 2, 2022, our Board of Directors declared a quarterly dividend of $0.23 per common share, payable on September 15, 2022 to shareholders of record at the close of business on August 26, 2022.
Asset/Liability Management and Interest Rate Risk
Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows.
The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee with direction from the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and utilize various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at June 30, 2022. At June 30, 2022, our asset sensitivity decreased slightly for a rising rate environment as a result of the balance sheet mix. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 25 basis point decrease in interest rates on net interest income based on the interest rate risk model at June 30, 2022 at the respective dates:
Hypothetical |
| |||
shift in interest | % change in projected net interest income | |||
rates (in bps) | June 30, 2022 |
| December 31, 2021 | |
200 | 6.45% | 11.12% | ||
100 | 3.22% | 5.37% | ||
(25) | (1.39)% | (0.67)% | ||
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.
As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of longer duration loans. The strategy with respect to liabilities has been to continue to emphasize transaction deposit growth, particularly non-interest or low interest bearing non-maturing deposit accounts
68
while building long-term client relationships. Non-maturing deposit accounts totaled 87.4% of total deposits at June 30, 2022, compared to 86.5% at December 31, 2021. We currently have no brokered time deposits.
Impact of Inflation and Changing Prices
The primary impact of inflation on our operations is reflected in increasing operating costs and non-interest expense. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than do changes in the general rate of inflation and changes in prices. Interest rate changes do not necessarily move in the same direction, nor have the same magnitude, as changes in the prices of goods and services. Although not as critical to the banking industry as many other industries, inflationary factors may have some impact on our ability to grow, total assets, earnings and capital levels. While we plan to continue our disciplined approach to expense management, an inflationary environment may cause wage pressures and general increases in our cost of doing business, which may increase our non-interest expense.
Off-Balance Sheet Activities
In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As of June 30, 2022 and December 31, 2021, we had loan commitments totaling $1.2 billion and $992.5 million, respectively, and standby letters of credit that totaled $7.2 million and $7.3 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of June 30, 2022. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.
During the most recently completed fiscal quarter, there were no changes made in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
69
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
Item 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 with the exception of the following:
With respect to the merger between the Company and Bancshares of Jackson Hole Inc., regulatory approval may not be received, may take longer than expected, or regulators may impose conditions that are not presently anticipated or that could have an adverse effect on the Company. In addition, the Company is expected to incur significant costs related to the mergers and integration of both Bancshares of Jackson Hole Inc. and Community Bancorporation.
Before the mergers may be completed, various approvals, consents and non-objections must be obtained from the Board of Governors of the Federal Reserve System, and the relevant state regulators. Full regulatory approval for the merger between the Company and Community Bancorporation was received on July 21, 2022. Approvals related to Bancshares of Jackson Hole Inc. could be delayed or not obtained at all, including due to any or all of the following: an adverse development in the party’s regulatory standing, or any other factors considered by regulators in granting such approval; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment, including as a result of changes in regulatory agency leadership. Despite the Company’s commitments to use their reasonable best efforts to resolve any objection that may be asserted by any governmental entity with respect to the merger agreement, under the terms of the merger agreement, the Company is not required to take any action or agree to any condition or restriction in connection with obtaining these approvals that would reasonably be expected to have a material adverse effect on the Company’s business.
Additionally, the Company is expected to incur substantial costs in connection with the mergers, including legal, financial advisory, accounting, consulting and other advisory fees, severance/employee benefit-related costs, and other regulatory fees and related costs. There are a large number of processes, policies, procedures, operations, technologies, and systems that may need to be integrated, including purchasing, accounting and finance, payroll, compliance, treasury management, banking center operations, vendor management, risk management, lines of business, pricing, and benefits. While the Company has assumed that a certain level of costs will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration costs. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. These integration costs may result in the Company taking charges against earnings following the completion of the mergers, the amount, and timing of which are uncertain at present.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
| Maximum | ||||||
Total number of | approximate dollar | |||||||||
shares purchased | value of shares | |||||||||
as part of publicly | that may yet be | |||||||||
Total number | Average price | announced plans | purchased under the | |||||||
Period | of shares purchased | paid per share | or programs | plans or programs (2) | ||||||
April 1 - April 30, 2022(1) | 19,933 | $ | 37.05 | — | $ | 38,618,179 | ||||
May 1 - May 31, 2022(1) | 3,355 | 37.03 | — | 38,618,179 | ||||||
June 1 - June 30, 2022(1) | 1,049 | 41.10 | — | $ | 38,618,179 | |||||
Total |
| 24,337 | 37.22 |
| — | |||||
(1) | Represents shares purchased other than through publicly announced plans purchased pursuant to the Company’s stock incentive plans at the then current market value in satisfaction of stock option exercise prices, settlements of restricted stock and tax withholdings. | |
(2) |
| On February 24, 2021, the Company’s Board of Directors authorized a program to repurchase up to $75.0 million of the Company’s stock from time to time in either the open market or through privately negotiated transactions. The remaining authorization under the program as of June 30, 2022 was $38.6 million. |
70
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
10.1 | ||
10.2 | ||
10.3 | ||
31.1 | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
71