ATLANTIC UNION BANKSHARES CORPORATION Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of the Company. This discussion and analysis should be read with the Company's consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company's 2021 Form 10-K, including the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section therein. Highlighted in the discussion are material changes from prior reporting periods and identifiable trends materially affecting the Company. Results of operations for the interim periods are not necessarily indicative of results that may be expected for the full year or for any other period. Amounts are rounded for presentation purposes; however, some of the percentages presented are computed based on unrounded amounts. In management's discussion and analysis, the Company provides certain financial information determined by methods other than in accordance withU.S. GAAP. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company's financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company's non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company believes that these non-GAAP financial measures provide additional understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented without the impact of items or events that may obscure trends in the Company's underlying performance. Non-GAAP financial measures may be identified with the symbol (+) and may be labeled as adjusted. Refer to the "Non-GAAP Financial Measures" section within this Item 2 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable financial measures in accordance with GAAP.
FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, statements regarding future interest rate environments and potential impacts on the Company's net interest margin, future economic conditions, and the impacts of the COVID-19 pandemic, and statements that include other projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such forward-looking statements are based on certain assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance, or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," "intend," "will," "may," "view," "opportunity," "potential," or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual future results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to the effects of or changes in:
? market interest rates; and the impacts on macroeconomic conditions, customer
and client behavior and the Company's funding costs;
? higher inflation and its impacts;
general economic and financial market conditions, in
generally and particularly in the markets in which the Company operates and
? which its loans are concentrated, including the effects of declines in real
estate values, an increase in unemployment levels and slowdowns in economic
growth, including as a result of COVID-19;
? the quality or composition of the loan or investment portfolios and changes
therein;
? demand for loan products and financial services in the Company's market area;
? the Company's ability to manage its growth or implement its growth strategy;
? the effectiveness of expense reduction plans;
? the introduction of new lines of business or new products and services;
? the Company's ability to recruit and retain key employees;
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? real estate values in the Bank's lending area;
? an insufficient ACL;
? changes in accounting principles, including, without limitation, relating to
the CECL methodology;
? the Company's liquidity and capital positions;
? concentrations of loans secured by real estate, particularly commercial real
estate;
? the effectiveness of the Company's credit processes and management of the
Company's credit risk;
? the Company's ability to compete in the market for financial services and
increased competition from fintech companies;
? technological risks and developments, and cyber threats, attacks, or events;
the potential adverse effects of unusual and infrequently occurring events,
such as weather-related disasters, terrorist acts, geopolitical conflicts (such
as the ongoing conflict between
(such as COVID-19), and of governmental and societal responses thereto; these
potential adverse effects may include, without limitation, adverse effects on
? the ability of the Company's borrowers to satisfy their obligations to the
Company, on the value of collateral securing loans, on the demand for the
Company's loans or its other products and services, on supply chains and
methods used to distribute products and services, on incidents of cyberattack
and fraud, on the Company's liquidity or capital positions, on risks posed by
reliance on third-party service providers, on other aspects of the Company's
business operations and on financial markets and economic growth;
the effect of steps the Company takes in response to COVID-19, the severity and
duration of the pandemic, the uncertainty regarding new variants of COVID-19
? that have emerged, the speed and efficacy of vaccine and treatment
developments, the impact of loosening or tightening of government restrictions,
the pace of recovery when the pandemic subsides and the heightened impact it
has on many of the risks described herein;
the discontinuation of LIBOR and its impact on the financial markets, and the
? Company's ability to manage operational, legal and compliance risks related to
the discontinuation of LIBOR and implementation of one or more alternate
reference rates,
? performance by the Company's counterparties or vendors;
? deposit flows;
? the availability of financing and the terms thereof;
? the level of prepayments on loans and MBS;
legislative or regulatory changes and requirements, including the impact of the
? CARES Act, as amended by the CAA, and other legislative and regulatory
reactions to COVID-19;
potential claims, damages, and fines related to litigation or government
actions, including litigation or actions arising from the Company's
? participation in and administration of programs related to COVID-19, including,
among other things, under the CARES Act, as amended by the CAA, and other
legislative and regulatory reactions to COVID-19;
? the effects of changes in federal, state or local tax laws and regulations;
? monetary and fiscal policies of the
? changes to applicable accounting principles and guidelines; and
? other factors, many of which are beyond the control of the Company.
Please refer to the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of the 2021 Form 10-K and related disclosures in other filings, which have been filed with theSEC and are available on theSEC's website at www.sec.gov. All risk factors and uncertainties described herein should be considered in evaluating forward-looking statements, all of the forward-looking statements made in this report are expressly qualified by the cautionary statements contained or referred to in this Quarterly Report. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Readers are cautioned not to rely too heavily on the forward-looking statements contained in this Quarterly Report, and undue reliance should not be placed on such forward-looking statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend or assume any obligation to update, revise or clarify any forward-looking statements that may be made from time to time by or on behalf of the Company, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting and reporting policies of the Company are in accordance withU.S. GAAP and conform to general practices within the banking industry. The Company's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of -49-
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assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company's consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Management has discussed the Company's critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company. The critical accounting and reporting policies include the Company's accounting for the ALLL, acquired loans, and goodwill. The Company's accounting policies are fundamental to understanding the Company's consolidated financial position and consolidated results of operations. Accordingly, the Company's significant accounting policies are discussed in detail in Note 1 "Summary of Significant Accounting Policies" in the "Notes to the Consolidated Financial Statements" contained in Item 8 "Financial Statements and Supplementary Data" of the Company's 2021 Form 10-K. The Company provides additional information on its critical accounting policies and estimates under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in its 2021 Form 10-K and in Note 1 "Summary of Significant Accounting Policies" in Part I, Item 1 of this Quarterly Report.
RECENT ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT FULLY ADOPTED)
InMarch 2022 , the FASB issued ASU No. 2022-02 "Financial Instruments- Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." This guidance eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The amendments are effective for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. Early adoption of the amendments is permitted if ASU 2016-13 has been adopted, including adoption in an interim period. The Company is evaluating the impact ASU No. 2022-02 will have on its consolidated financial statements. InMarch 2022 , the FASB issued ASU No. 2022-01 "Derivatives and Hedging (Topic 815): Fair Value Hedging- Portfolio Layer Method" to allow nonprepayable financial assets to be included in a closed portfolio hedge using the portfolio layer method and to allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. The amendments are effective for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. Early adoption of the amendments is permitted if the amendments in ASU 2017-12 have been adopted for the corresponding period. The Company is evaluating the impact ASU No. 2022-01 will have on its consolidated financial statements. InMarch 2020 , the FASB issued ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This guidance provides temporary, optional guidance to ease the potential burden in accounting for reference rate reform associated with the LIBOR transition. LIBOR and other interbank offered rates are widely used benchmark or reference rates that have been used in the valuation of loans, derivatives, and other financial contracts. Global capital markets are going to be required to move away from LIBOR and other interbank offered rates and toward rates that are more observable or transaction based and less susceptible to manipulation. Topic 848 provides optional expedients and exceptions, subject to meeting certain criteria, for applying current GAAP to contract modifications and hedging relationships, for contracts that reference LIBOR or another reference rate expected to be discontinued. Topic 848 is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective as ofMarch 12, 2020 throughDecember 31, 2022 and can be adopted at an instrument level. As ofMarch 31, 2021 , the Company utilized the expedient to assert probability of hedged interest as detailed in Note 1 "Summary of Significant Accounting Policies" in the "Notes to the Consolidated Financial Statements" contained in Item 8 "Financial Statements and Supplementary Data" of the Company's 2021 Form 10-K. The Company may incorporate other components of Topic 848 at a later date as it continues to evaluate the remaining components of Topic 848 and its impact to the Company.
ABOUT
Headquartered inRichmond, Virginia ,Atlantic Union Bankshares Corporation (Nasdaq: AUB) is the holding company forAtlantic Union Bank .Atlantic Union Bank has 114 branches and approximately 130 ATMs located throughoutVirginia , and in -50- Table of Contents portions ofMaryland andNorth Carolina . Certain non-bank financial services affiliates ofAtlantic Union Bank include:Atlantic Union Equipment Finance, Inc. , which provides equipment financing;Dixon, Hubard, Feinour & Brown, Inc. , which provides investment advisory services;Atlantic Union Financial Consultants, LLC , which provides brokerage services; andUnion Insurance Group, LLC , which offers various lines of insurance products. Shares of the Company's common stock are traded on the Nasdaq Global Select Market under the symbol "AUB". Additional information is available on the Company's website at https://investors.atlanticunionbank.com. The information contained on the Company's website is not a part of or incorporated into this Quarterly Report. RESULTS OF OPERATIONS SIGNIFICANT ACTIVITIES Strategic Initiatives During the fourth quarter of 2021, the Company took certain actions to reduce expenses in light of the period's prevailing and expected operating environment, including the closure of the Company's operations center and consolidation of 16 branches, all of which were completed inMarch 2022 . These actions resulted in restructuring expenses in the first quarter of 2022 of approximately$5.5 million , compared to$16.5 million in the quarter endedDecember 31, 2021 . Restructuring expenses in the first quarter of 2022 primarily related to lease and other asset write downs, as well as severance costs.
Share Repurchase Program
On
COVID-19 UPDATE
The Company's financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in its primary markets where it operates and inthe United States as a whole. COVID has had, and may have in the future, a wide range of economic impacts nationally and in the Company's primary markets. The Company will carefully monitor any future economic impacts attributable to the COVID-19 pandemic and potential impact on the Company's borrowers and their ability to repay loans. Since the start of the pandemic, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank's employees and customers during COVID-19. The Bank has implemented additional safety policies and procedures and follows guidance issued by theCenters for Disease Control and Prevention , state health authorities, and state and local executive orders where our branches and corporate offices are located. The Bank remains very focused on the safety and well-being of its employees and customers during COVID-19 and is committed to safely and responsibly operating its branch network and maintaining appropriate staffing in each branch. COVID-19 has adversely affected the Company's business, financial condition, and results of operations since the first quarter of 2020. The duration, nature and severity of future impacts of COVID-19 on the Company's operational and financial performance will depend on future developments with respect to COVID-19, many of which remain highly uncertain and cannot be predicted.
SUMMARY OF QUARTERLY FINANCIAL RESULTS
Net Income and Performance Metrics
Net income available to common shareholders was
? diluted EPS was
and$0.67 for the first quarter of 2021. -51- Table of Contents
Adjusted operating earnings available to common shareholders(+) totaled
million and diluted adjusted operating EPS(+) was
? of 2022, compared to adjusted operating earnings available to common
shareholders(+) of
for the first quarter of 2021.
Balance Sheet
At
million or approximately 5.7% (annualized) from
declined from the prior quarter due to a decrease in cash and cash equivalents
? of
fund loan growth and deposit run-off. In addition, the investment securities
portfolio decreased
value of the AFS securities portfolio.
LHFI (net of deferred fees and costs) were
million in PPP loans at
? (annualized) from
(net of deferred fees and costs) increased
during this period.
? Total deposits were
million or 3.1% (annualized) from
Net Interest Income
For the Three Months Ended
March 31,
2022 2021 Change
(Dollars in thousands)
Average interest-earning assets $ 17,885,018 $ 17,692,095 $ 192,923
Interest and dividend income $ 138,456 $ 147,673 $ (9,217)
Interest and dividend income (FTE) (+) $ 141,792 $ 150,726 $ (8,934)
Yield on interest-earning assets 3.14 % 3.39 % (25) bps
Yield on interest-earning assets (FTE) (+) 3.22 % 3.46 % (24) bps
Average interest-bearing liabilities $ 11,797,999 $ 12,065,807 $ (267,808)
Interest expense $ 7,525 $ 12,775 $ (5,250)
Cost of interest-bearing liabilities 0.26 % 0.43 % (17) bps
Cost of funds 0.18 % 0.30 % (12) bps
Net interest income $ 130,931 $ 134,898 $ (3,967)
Net interest income (FTE) (+) $ 134,267 $ 137,951 $ (3,684)
Net interest margin 2.97 % 3.09 % (12) bps
Net interest margin (FTE) (+) 3.04 % 3.16 % (12) bps
For the first quarter of 2022, net interest income was$130.9 million , a decrease of$4.0 million from the first quarter of 2021. For the first quarter of 2022, net interest income (FTE)(+) was$134.3 million , a decrease of$3.7 million from the first quarter of 2021. In the first quarter of 2022, net interest margin decreased 12 bps to 2.97% from 3.09% in the first quarter of 2021, and net interest margin (FTE)(+) also decreased 12 bps compared to the first quarter of 2021. The declines in net interest margin and net interest margin (FTE)(+) measures were primarily the result of a decline in loan yields driven by lower PPP interest income and fees and lower prepayment activity, which drove lower accretion from acquisition accounting fair value adjustments. These decreases were partially offset by higher investment interest income due to growth in the average balance of the investment portfolio and by a decrease in the cost of funds driven by a reduction in deposit costs and lower borrowing costs. OnMarch 16, 2022 , theFOMC increased its Federal Funds target rates to its current range of 0.25% to 0.5%, which was the first increase sinceDecember 2018 . TheFOMC also forecasted potential further increases throughout the year. The Company anticipates that this will result in an expansion on its net interest margin due to the Company's asset-sensitive position atMarch 31, 2022 . Refer to "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 3 of this Quarterly Report for additional information about the Company's interest rate sensitivity. -52-
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The following table shows interest income on earning assets and related average
yields as well as interest expense on interest-bearing liabilities and related
average rates paid for the periods indicated:
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT
BASIS)
For the Three Months Ended March 31,
2022 2021
Interest Interest
Average Income / Yield / Average Income / Yield /
Balance Expense (1) Rate (1)(2) Balance Expense (1) Rate (1)(2)
(Dollars in thousands)
Assets:
Securities:
Taxable $ 2,617,156 $ 13,666 2.12 % $ 1,906,585 $ 10,353 2.20 %
Tax-exempt 1,581,426 13,240 3.40 % 1,302,792 11,693 3.64 %
Total securities 4,198,582 26,906 2.60 % 3,209,377 22,046 2.79 %
Loans, net (3) 13,300,789 114,602 3.49 % 14,064,123 128,122 3.69 %
Other earning assets 385,647 284 0.30 % 418,595 558 0.54 %
Total earning assets 17,885,018 $ 141,792 3.22 % 17,692,095 $ 150,726 3.46 %
Allowance for credit losses (100,342) (157,802)
Total non-earning assets 2,135,692 2,152,561
Total assets $ 19,920,368 $ 19,686,854
Liabilities and Stockholders'
Equity:
Interest-bearing deposits:
Transaction and money market
accounts $ 8,376,766 $ 1,324 0.06 % $ 8,060,328 $ 2,152 0.11 %
Regular savings 1,142,854 55 0.02 % 940,369 59 0.03 %
Time deposits 1,766,657 3,104 0.71 % 2,490,432 6,917 1.13 %Total interest-bearing deposits 11,286,277 4,483
0.16 % 11,491,129 9,128 0.32 % Other borrowings 511,722 3,042 2.41 % 574,678 3,647 2.57 % Total interest-bearing liabilities 11,797,999$ 7,525 0.26 % 12,065,807$ 12,775 0.43 % Noninterest-bearing liabilities: Demand deposits 5,228,098 4,583,521 Other liabilities 233,287 317,585 Total liabilities 17,259,384 16,966,913 Stockholders' equity 2,660,984 2,719,941 Total liabilities and stockholders' equity$ 19,920,368 $ 19,686,854 Net interest income$ 134,267 $ 137,951 Interest rate spread 2.96 % 3.03 % Cost of funds 0.18 % 0.30 % Net interest margin 3.04 % 3.16 %
(1) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 21%.
(2) Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above.
(3) Nonaccrual loans are included in average loans outstanding.
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The Volume Rate Analysis table below presents changes in interest income and
interest expense and distinguishes between the changes related to increases or
decreases in average outstanding balances of interest-earning assets and
interest-bearing liabilities (volume), and the changes related to increases or
decreases in average interest rates on such assets and liabilities (rate).
Changes attributable to both volume and rate have been allocated proportionally.
Results, on a taxable equivalent basis, are as follows (dollars in thousands):
Three Months Ended
March 31, 2022 vs. March 31, 2021
Increase (Decrease) Due to Change in:
Volume Rate Total
Earning Assets:
Securities:
Taxable $ 3,724 $ (411) $ 3,313
Tax-exempt 2,373 (826) 1,547
Total securities 6,097 (1,237) 4,860
Loans, net (6,765) (6,755) (13,520)
Other earning assets (40) (234) (274)
Total earning assets $ (708) $ (8,226) $ (8,934)
Interest-Bearing Liabilities:
Interest-bearing deposits:Transaction and money market accounts $ 81$ (909)
$ (828) Regular savings 11 (15) (4) Time Deposits (1,684) (2,129) (3,813)
Total interest-bearing deposits (1,592) (3,053)
(4,645)
Other borrowings (384) (221)
(605)
Total interest-bearing liabilities (1,976) (3,274)
(5,250) Change in net interest income$ 1,268 $ (4,952) $ (3,684) The Company's net interest margin (FTE)(+) includes the impact of acquisition accounting fair value adjustments. The impact of net accretion related to acquisition accounting fair value adjustments for the first quarter of 2021, and the first quarter of 2022 are reflected in the following table (dollars in
thousands):
Loan Deposit Borrowings
Accretion Accretion (Amortization) Amortization Total
For the quarter ended March 31, 2021 $ 4,287 $ 20 $ (198) $ 4,109
For the quarter ended March 31, 2022 2,253
(10) (203) 2,040
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Noninterest Income
For the Three Months Ended
March 31, Change
2022 2021 $ %
(Dollars in thousands)
Noninterest income:Service charges on deposit accounts$ 7,596 $ 5,509 $ 2,087 37.9 % Other service charges, commissions, and fees 1,655 1,701 (46) (2.7) % Interchange fees 1,810 1,847 (37) (2.0) % Fiduciary and asset management fees 7,255 6,475 780 12.0 % Mortgage banking income 3,117 8,255 (5,138) (62.2) % Bank owned life insurance income 2,697 2,265 432 19.1 % Loan-related interest rate swap fees 3,860 1,754 2,106 120.1 % Other operating income 2,163 3,179 (1,016) (32.0) % Total noninterest income$ 30,153 $
30,985
Noninterest income decreased$832,000 or 2.7% to$30.2 million for the quarter endedMarch 31, 2022 , compared to$31.0 million for the quarter endedMarch 31, 2021 . The decrease was primarily driven by a decrease in mortgage banking income of$5.1 million due to a decline in mortgage origination volumes and a decline in unrealized gains on equity method investments of$487,000 included within other operating income. These noninterest income declines were partially offset by an increase in loan-related interest swap fee income of$2.1 million due to higher transaction volumes, a$2.1 million increase in service charges on deposit accounts, and a$780,000 increase in fiduciary and asset management fees due to market driven increases in assets under management. In future periods, noninterest income could be impacted by modifications to the Company's non-sufficient funds and overdraft policies, which the Company expects to finalize and begin implementing later in 2022 and which could lead to a reduction in certain service charges on deposit accounts. -55- Table of Contents Noninterest Expense For the Three Months Ended March 31, Change 2022 2021 $ % (Dollars in thousands) Noninterest expense: Salaries and benefits$ 58,298 $ 52,660 $ 5,638 10.7 % Occupancy expenses 6,883 7,315 (432) (5.9) %
Furniture and equipment expenses 3,597 3,968 (371) (9.3) % Technology and data processing 7,796 6,904 892 12.9 % Professional services 4,090 4,960 (870) (17.5) % Marketing and advertising expense 2,163 2,044 119 5.8 % FDIC assessment premiums and other insurance 2,485
2,307 178 7.7 % Other taxes 4,499 4,436 63 1.4 % Loan-related expenses 1,776 1,877 (101) (5.4) %
Amortization of intangible assets 3,039 3,730 (691) (18.5) % Loss on debt extinguishment - 14,695 (14,695) (100.0) % Other expenses 10,695 7,041 3,654 51.9 % Total noninterest expense$ 105,321 $
111,937
Noninterest expense decreased$6.6 million or 5.9% to$105.3 million for the quarter endedMarch 31, 2022 , compared to$111.9 million for the quarter endedMarch 31, 2021 . Excluding amortization of intangible assets ($3.0 million for the quarter endedMarch 31, 2022 compared to$3.7 million for the quarter endedMarch 31, 2021 ), losses related to balance sheet repositioning ($0 for the quarter endedMarch 31, 2022 compared to$14.7 million for the quarter endedMarch 31, 2021 ), and branch closing and facility consolidation costs ($5.5 million for the quarter endedMarch 31, 2022 compared to$924,000 for the quarter endedMarch 31, 2021 ) adjusted operating noninterest expense(+) for the quarter endedMarch 31, 2022 increased by$4.2 million or 4.5% from the prior year quarter. The increase was mainly due to an increase of$5.6 million in salaries and benefits primarily driven by an increase in salaries, wages, and variable incentive compensation, and an increase of$892,000 in technology and data processing expense primarily driven by an increase in software licensing and maintenance expenses. These noninterest expense category increases were partially offset by a decrease of$870,000 in professional services expenses, a$432,000 decrease in occupancy expenses, and a$371,000 decrease in equipment expenses. Income Taxes The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. The effective tax rate for the three months endedMarch 31, 2022 and 2021 was 17.5% and 16.8%, respectively. The increase in the effective tax rates is primarily due to the lower proportion of tax-exempt income to pre-tax income in the first quarter of 2022. -56- Table of Contents
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Overview
Assets
AtMarch 31, 2022 , total assets were$19.8 billion , a decrease of$282.4 million or approximately 5.7% (annualized) from$20.1 billion atDecember 31, 2021 . The decrease in assets was primarily a result of a decrease in cash and cash equivalents related to the deployment of excess liquidity to fund loan growth and deposit run-off. In addition, the Company incurred a decrease in the investment securities portfolio primarily due to a decline in the market value of the AFS securities portfolio, reflecting the impact of a rise in the interest rates. LHFI (net of deferred fees and costs) were$13.5 billion , including$67.4 million in PPP loans, atMarch 31, 2022 , an increase of$263.5 million or 8.1% (annualized) fromDecember 31, 2021 . Excluding the effects of the PPP(+), LHFI (net of deferred fees and costs) atMarch 31, 2022 increased$346.4 million or 10.8% (annualized) fromDecember 31, 2021 . Average loans decreased$763.3 million fromMarch 31, 2021 . Excluding the effects of the PPP(+), the average loan balances atMarch 31, 2022 increased$443.0 million or 3.5% fromMarch 31, 2021 . Refer to "Loan Portfolio" within Item 2 and Note 3 "Loans and Allowance for Loan and Lease Losses" in Part I, Item 1 of this Quarterly Report for additional information on the Company's loan activity.
Liabilities and Stockholders' Equity
At
Total deposits atMarch 31, 2022 were$16.5 billion , a decrease of$126.8 million or approximately 3.1% (annualized) fromDecember 31, 2021 . For the quarter endedMarch 31, 2022 , quarterly average deposits increased$439.7 million or 2.7% compared to the quarter endedMarch 31, 2021 primarily due to additional liquidity of bank customers since the start of COVID-19 and increased savings. Refer to "Deposits" within this Item 2 for further discussion on this topic. Total short-term and long-term borrowings atMarch 31, 2022 were$504.0 million , a decrease of$2.6 million or 0.5% when compared to$506.6 million atDecember 31, 2021 . Refer to Note 6 "Borrowings" in Part I, Item I for further discussion on this topic. AtMarch 31, 2022 , stockholders' equity was$2.5 billion , a decrease of$211.7 million fromDecember 31, 2021 . Refer to "Capital Resources" within this Item 2, as well as Note 9 "Stockholders' Equity" in Part I, Item 1 of this Quarterly Report for additional information on the Company's capital resources.
For information related to the Company's stock repurchase activity and the Repurchase Program, please refer to Note 9 "Stockholders' Equity" in Part I, Item 1 and Part II, Item 2 of this Quarterly Report.
During the first quarter of 2022, the Company declared and paid a quarterly dividend on the outstanding shares of Series A preferred stock of$171.88 per share (equivalent to$0.43 per outstanding depositary share), consistent with the fourth quarter of 2021 and the first quarter of 2021. During the first quarter of 2022, the Company also declared and paid a cash dividend of$0.28 per common share, consistent with the fourth quarter of 2021, and an increase of$0.03 , or approximately 12.0%, compared to the first quarter of 2021. -57- Table of Contents Securities
AtMarch 31, 2022 , the Company had total investments in the amount of$4.0 billion , or 20.4% of total assets, as compared to$4.2 billion , or 20.9% of total assets, atDecember 31, 2021 . This decline in the Company's investment portfolio was primarily due to a decline in the market value of the AFS securities portfolio. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing MBS for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. The majority of the Company's MBS are agency-backed securities, which have a government guarantee. For information regarding the hedge transaction related to AFS securities, see Note 8 "Derivatives" in Part I, Item 1 of this Quarterly Report.
The table below sets forth a summary of the AFS securities, HTM securities, and restricted stock as of the dates indicated (dollars in thousands):
March 31 ,December 31, 2022 2021 Available for Sale:
U.S. government and agency securities$ 68,039 $ 73,849 Obligations of states and political subdivisions 888,300
1,008,396
Corporate and other bonds 183,923 153,376
MBS
Commercial 434,491 471,157
Residential 1,616,882 1,773,232
Total MBS 2,051,373 2,244,389
Other securities 1,645 1,640Total AFS securities, at fair value 3,193,280
3,481,650
Held to Maturity:U.S. government and agency securities 2,483
2,604
Obligations of states and political subdivisions 684,294
620,873
MBS
Commercial 31,221 4,523
Residential 38,874 -
Total MBS 70,095 4,523Total held to maturity securities, at carrying value 756,872
628,000
Restricted Stock:
FRB stock 67,032 67,032
FHLB stock 10,001 9,793Total restricted stock, at cost 77,033
76,825
Total investments $ 4,027,185 $ 4,186,475
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The following table summarizes the weighted average yields(1) for AFS securities
by contractual maturity date of the underlying securities as of March 31, 2022 :
1 Year or 5 - 10 Over 10
Less 1 - 5 Years Years Years TotalU.S. government and agency securities - % 2.57 % 1.42 % - % 1.45 % Obligations of states and political subdivisions 5.00 % 2.79 % 2.63 % 2.77 % 2.77 % Corporate bonds and other securities 0.25 % 4.54 %
3.91 % 2.57 % 3.74 % MBS: Commercial 3.74 % 3.28 % 2.40 % 2.56 % 2.80 % Residential 2.41 % 2.35 % 2.39 % 1.97 % 1.99 % Total MBS 3.16 % 3.21 % 2.39 % 2.06 % 2.16 % Total AFS securities 3.04 % 3.25 % 2.88 % 2.29 % 2.40 %
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.
The following table summarizes the weighted average yields(1) for HTM securities by contractual maturity date of the underlying securities as ofMarch 31, 2022 : 1 Year or 5 - 10 Over 10 Less 1 - 5 Years Years Years Total
U.S. government and agency securities 4.14 % 4.03 % - % - % 4.09 % Obligations of states and political subdivisions 2.31 % 3.86 % 3.85 % 3.64 % 3.64 % MBS: Commercial - % - % - % 2.44 % 2.44 % Residential - % - % - % 2.25 % 2.25 % Total MBS - % - % - % 2.34 % 2.34 % Total HTM securities 2.85 % 3.88 % 3.85 % 3.51 % 3.52 %
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.
Weighted average yield is calculated as the tax-equivalent yield on a pro rata basis for each security based on its relative amortized cost.
As ofMarch 31, 2022 , the Company maintained a diversified municipal bond portfolio with approximately 65% of its holdings in general obligation issues and the majority of the remainder primarily backed by revenue bonds. Issuances within theState of Texas represented 19% of the total municipal portfolio; no other state had a concentration above 10%. Substantially all municipal holdings are considered investment grade. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues. -59- Table of Contents Liquidity Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, LHFS, and securities and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, the Federal Reserve Discount Window, the purchase of brokered certificates of deposit, corporate line of credit with a large correspondent bank, and debt and capital issuance. Management considers the Company's overall liquidity to be sufficient to satisfy its depositors' requirements and to meet its customers' credit needs. The Company has continued to see elevated customer deposit balances as a result of the impacts of COVID-19, including as a result of government stimulus programs. The Company considers a portion of the increases in customer deposits to be temporary, which it expects will result in outflows in subsequent quarters. As ofMarch 31, 2022 , liquid assets totaled$5.1 billion or 25.7% of total assets, and liquid earning assets totaled$4.9 billion or 27.7% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As ofMarch 31, 2022 , loan payments of approximately$4.3 billion or 32.2% of total loans are expected within one year based on contractual terms, adjusted for expected prepayments, and approximately$332.8 million or 8.3% of total securities are scheduled to be paid down within one year based on contractual terms, adjusted for expected prepayments. For additional information and the available balances on various lines of credit, please refer to Note 6 "Borrowings" in Part I, Item 1 of this Quarterly Report. In addition to lines of credit, the Bank may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. For additional information and outstanding balances on purchased certificates of deposits, please refer to "Deposits" within this Item 2.
Cash Requirements
The Company's cash requirements, outside of lending transactions, consist primarily of borrowings, debt and capital instruments which are used as part of the Company's overall liquidity and capital management strategy. Cash required to repay these obligations will be sourced from future debt and capital issuances and from other general liquidity sources as described above under "Liquidity" within this Item 2.
The following table presents the Company's contractual obligations related to
its major cash requirements and the scheduled payments due at the various
intervals over the next year and beyond as of
Less than More than
Total 1 year 1 year
Long-term debt (1) $ 250,000 $ - $ 250,000
Trust preferred capital notes (1) 155,159 - 155,159
Leases (2) 214,071 37,728 176,343
Repurchase agreements 115,027 115,027 -
Total contractual obligations
(1) Excludes related unamortized premium/discount and interest payments.
(2) Represents lease payments due on non-cancellable operating leases at March
31, 2022. Excluded from these tables are variable lease payments or renewals.
For more information pertaining to the previous table, reference Note 5 "Leases" and Note 6 "Borrowings" in Part I, Item 1 of this Quarterly Report.
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Loan Portfolio
LHFI, net of deferred fees and costs, were$13.5 billion atMarch 31, 2022 , and$13.2 billion atDecember 31, 2021 . Commercial & industrial loans and commercial real estate-non-owner occupied loans represented the Company's largest categories atMarch 31, 2022 . Commercial and industrial loans included approximately$66.3 million in loans from the PPP loan program as ofMarch 31, 2022 .
The following table presents the remaining maturities, based on contractual
maturity, by loan type and by rate type (variable or fixed), as of
Variable Rate Fixed Rate
Total Less than 1 More than More than
Maturities year Total 1-5years 5-15 years 15 years Total 1-5 years 5-15 years 15 years Construction and Land Development$ 969,059 $ 361,917 $ 462,982 $ 401,318 $ 60,399 $ 1,265 $ 144,160 $ 84,211 $ 25,101 $ 34,848 Commercial Real Estate - Owner Occupied 2,007,671 185,951 645,878 120,766 506,347 18,765 1,175,842 475,436 669,873 30,533 Commercial Real Estate - Non-Owner Occupied 3,875,681 406,424 2,086,321 913,994 1,154,467 17,860 1,382,936 984,951 341,157 56,828 Multifamily Real Estate 723,940 70,472 427,586 107,912 319,674 - 225,882 158,757 67,125 - Commercial & Industrial 2,540,680 404,695 1,284,023
1,072,807 204,842 6,374 851,962 530,090 311,456 10,416 Residential 1-4 Family - Commercial 569,801 85,334 113,904 30,156 74,497 9,251 370,563 269,226 89,083 12,254 Residential 1-4 Family - Consumer 824,163 5,101 177,437 1,978 28,868 146,591 641,625 8,281 71,942 561,402 Residential 1-4 Family - Revolving 568,403 32,738 480,322 33,433 135,698 311,191 55,343 2,256 16,796 36,291 Auto 499,855 3,061 - - - - 496,794 189,760 307,034 - Consumer 171,875 12,644 24,230 21,357 2,180 693 135,001 56,921 52,695 25,385 Other Commercial 708,221 67,034 112,152 7,975 71,172 33,005 529,035 156,029 246,938 126,068 Total LHFI$ 13,459,349 $ 1,635,371 $ 5,814,835 $
2,711,696
The Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. As reflected in the loan table, atMarch 31, 2022 , the largest components of the Company's loan portfolio consisted of commercial real estate and commercial & industrial loans. The risks attributable to these concentrations are mitigated by the Company's credit underwriting and monitoring processes, including oversight by a centralized credit administration function and credit policy and risk management committee, as well as seasoned bankers focusing their lending to borrowers with proven track records in markets with which the Company is familiar. The Company had no short-term loan modifications related to COVID-19 as ofMarch 31, 2022 and had insignificant short-term loan modifications related to COVID-19 as ofDecember 31, 2021 . -61- Table of Contents Asset Quality Overview AtMarch 31, 2022 , the Company experienced decreases in NPAs compared toDecember 31, 2021 and decreases in accruing past due loan levels as a percentage of total LHFI compared to the prior year end. Net charge-offs decreased$1.2 million from the prior year and were insignificant for the quarter endedMarch 31, 2022 . The ACL increased fromDecember 31, 2021 primarily due to increased uncertainty in the macroeconomic outlook and the impact of loan growth in the first quarter of 2022. The Company believes its continued proactive efforts to effectively manage its loan portfolio, combined with the unprecedented government stimulus and programs and regulatory support, have contributed to the sustained historically low levels of NPAs. The Company's efforts included identifying potential problem credits through early identification and diligent monitoring of specific problem credits where the uncertainty has been realized, or conversely, has been reduced or eliminated. The Company continues to refrain from originating or purchasing loans from foreign entities. The Company selectively originates loans to higher risk borrowers. The Company's loan portfolio generally does not include exposure to option adjustable rate mortgage products, high loan-to-value ratio mortgages, interest only mortgage loans, subprime mortgage loans or mortgage loans with initial teaser rates, which are all considered higher risk instruments.
Nonperforming Assets
AtMarch 31, 2022 , NPAs totaled$30.7 million , a decrease of$2.1 million or 6.3% fromDecember 31, 2021 . NPAs as a percentage of total outstanding loans atMarch 31, 2022 were 0.23%, a decrease of 2 bps fromDecember 31, 2021 .
The following table shows a summary of asset quality balances and related ratios as of and for the quarters ended (dollars in thousands):
March 31, December 31,
2022 2021
Nonaccrual loans $ 29,032 $ 31,100
Foreclosed properties 1,696 1,696
Total NPAs 30,728 32,796Loans past due 90 days and accruing interest 8,247
9,132
Total NPAs and loans past due 90 days and accruing interest$ 38,975 $ 41,928 Performing TDRs$ 12,157 $ 10,313 Balances
Allowance for loan and lease losses$ 102,591 $ 99,787 Allowance for credit losses 110,591
107,787
Average loans, net of deferred fees and costs 13,300,789
13,082,412
Loans, net of deferred fees and costs 13,459,349
13,195,843
Ratios
Nonaccrual loans to total loans 0.22 % 0.24 % NPAs to total loans 0.23 %
0.25 % NPAs & loans 90 days past due and accruing interest to total loans
0.29 % 0.32 %
NPAs to total loans & foreclosed property 0.23 % 0.25 % NPAs & loans 90 days past due and accruing interest to total loans & foreclosed property
0.29 % 0.32 %
ALLL to nonaccrual loans 353.37 % 320.86 %
ALLL to nonaccrual loans & loans 90 days past due and
accruing interest 275.20 % 248.03 %
ACL to nonaccrual loans 380.93 % 346.58 %
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NPAs at March 31, 2022 included $29.0 million in nonaccrual loans, a net
decrease of $2.1 million or 6.6% from December 31, 2021 . The following table
shows the activity in nonaccrual loans for the quarters ended (dollars in
thousands):
March 31, December 31,
2022 2021
Beginning Balance $ 31,100 $ 35,472
Net customer payments (4,132) (5,068)
Additions 2,087 1,294
Charge-offs (23) (598)
Ending Balance $ 29,032 $ 31,100
The following table presents the composition of nonaccrual loans and the
coverage ratio, which is the ALLL expressed as a percentage of nonaccrual loans,
as of (dollars in thousands):
March 31, December 31,
2022 2021
Construction and Land Development $ 869 $ 2,697
Commercial Real Estate - Owner Occupied 4,865
5,637
Commercial Real Estate - Non-owner Occupied 3,287 3,641 Multifamily Real Estate - 113 Commercial & Industrial 1,975 1,647 Residential 1-4 Family - Commercial 2,239
2,285
Residential 1-4 Family - Consumer 12,039
11,397
Residential 1-4 Family - Revolving 3,371 3,406 Auto 333 223 Consumer 54 54 Total$ 29,032 $ 31,100 Coverage Ratio(1) 353.37 % 320.86 %
(1) Represents the ALLL divided by nonaccrual loans.
Past Due Loans
AtMarch 31, 2022 , past due loans still accruing interest totaled$29.6 million or 0.22% of total LHFI, compared to$29.9 million or 0.23% of total LHFI atDecember 31, 2021 . Of the total past due loans still accruing interest,$8.2 million or 0.06% of total LHFI were past due 90 days or more atMarch 31, 2022 , compared to$9.1 million or 0.07% of total LHFI atDecember 31, 2021 .
Troubled Debt Restructurings
A modification of a loan's terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower's financial difficulties. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, extension of terms that are considered to be below market, conversion to interest only, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. The total recorded investment in TDRs atMarch 31, 2022 was$19.7 million , an increase of$1.7 million or 9.8% from$18.0 million atDecember 31, 2021 . Of the$19.7 million of TDRs atMarch 31, 2022 ,$12.2 million or 61.7% were considered performing, while the remaining$7.5 million were considered nonperforming. Of the$18.0 million of TDRs atDecember 31, 2021 ,$10.3 million or 57.4% were considered performing while the remaining$7.6 million were considered nonperforming. Loans are removed from TDR status in accordance with the established policy described in Note 1 "Summary of Significant Accounting Policies" in Item 8 "Financial Statements and Supplementary Data" in the Company's 2021 Form 10-K. -63- Table of Contents Net Charge-offs
For the quarter endedMarch 31, 2022 , net charge-offs were less than 0.01% of average loans on an annualized basis, compared to$1.2 million or 0.03% for the first quarter of 2021. The net charge-offs of loans continue to be insignificant, driven by benign credit impacts since the pandemic began.
Provision for Credit Losses
The Company recorded a provision for credit losses of$2.8 million for the quarter endedMarch 31, 2022 , an increase of$16.4 million compared to the negative provision for credit losses of$13.6 million recorded during the same quarter of 2021. The provision for credit losses for the first quarter of 2022 reflected a provision of$2.8 million for loan losses and no provision for unfunded commitments.
Allowance for Credit Losses
AtMarch 31, 2022 , the ACL was$110.6 million and included an ALLL of$102.6 million and an RUC of$8.0 million . The ACL increased$2.8 million fromDecember 31, 2021 , primarily due to increased uncertainty in the macroeconomic outlook and the impact of loan growth in the first quarter of 2022.
The ACL as a percentage of the total loan portfolio and as a percentage of total
adjusted loans(+) was 0.82% and 0.83%, respectively, at
The following table summarizes activity in the ALLL during the quarters ended (dollars in thousands):
March 31, December 31,
2022 2021
Total ALLL $ 102,591 $ 99,787
Total RUC 8,000 8,000
Total ACL $ 110,591 $ 107,787
ALLL to total loans 0.76 % 0.76 %
ACL to total loans 0.82 % 0.82 %
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The following table summarizes the net-charge off activity by segment for the quarters ended (dollars in thousands):
March 31, March 31,
2022 2021
Commercial Consumer Total Commercial Consumer Total
Loans charged-off $ (759) $ (750) $ (1,509) $ (1,974) $ (1,667) $ (3,641)
Recoveries 726 787 1,513 1,606 863 2,469
Net charge-offs $ (33) $ 37 $ 4 $ (368) $ (804) $ (1,172)
Net charge-offs to average
loans(1) 0.00 % (0.01) % 0.00 % 0.01 % 0.16 % 0.03 %
(1) Annualized
The following table shows the ACL by loan segment and the percentage of the loan
portfolio that the related ACL covers as of the quarters ended (dollars in
thousands):
March 31, December 31,
2022 2021
Commercial Consumer Total Commercial Consumer Total
ACL $ 87,182 $ 23,409 $ 110,591 $ 85,323 $ 22,464 $ 107,787
Loan %(1) 84.7 % 15.3 % 100.0 % 84.7 % 15.3 % 100.0 %
ACL to total loans 0.77 % 1.13 % 0.82 % 0.76 % 1.11 % 0.82 %
(1) The percentage represents the loan balance divided by total loans
The increase in the ACL for both loan segments is due to increased uncertainty in the macroeconomic outlook and the impact of loan growth in the first quarter of 2022. Deposits As ofMarch 31, 2022 , total deposits were$16.5 billion , a decrease of$126.8 million or 3.1% annualized fromDecember 31, 2021 . Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of$1.7 billion accounted for 15.1% of total interest-bearing deposits atMarch 31, 2022 , compared to$1.9 billion and 16.3% atDecember 31, 2021 .
The following table presents the deposit balances by major category as of the quarters ended (dollars in thousands):
March 31, 2022
% of total % of total
Deposits: Amount deposits Amount deposits
Non-interest bearing $ 5,370,063 32.6 % $ 5,207,324 31.3 %
NOW accounts 4,121,257 25.0 % 4,176,032 25.1 %
Money market accounts 4,151,155 25.2 % 4,249,858 25.6 %
Savings accounts 1,166,922 7.1 % 1,121,297 6.8 %
Time deposits of $250,000 and over 365,796 2.2 %
452,193 2.7 %
Other time deposits 1,309,030 7.9 % 1,404,364 8.5 %
Total Deposits (1) $ 16,484,223 100.0 % $ 16,611,068 100.0 %
(1) Includes uninsured deposits of $5.7 billion and $5.9 billion as of March
31, 2022 and December 31, 2021 , respectively. Amounts are based on estimated
amounts of uninsured deposits as of the reported period.
The Company may also borrow additional funds by purchasing certificates of
deposit through a nationally recognized network of financial institutions. The
Company utilizes this funding source when rates are more favorable than other
funding sources. There were no purchased certificates of deposit included in
certificates of deposit on the Company's Consolidated Balance
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Sheets as ofMarch 31, 2022 andDecember 31, 2021 . The reduced usage of purchase certificates of deposit as ofMarch 31, 2021 andDecember 31, 2021 , as compared to historical levels, is due to the increase in customer deposits since the beginning of COVID-19.
Maturities of uninsured time deposits in excess of
March 31, 2022 December 31, 2021
Amount Amount
Within 3 Months $ 19,862 $ 42,696
3 - 6 Months 68,788 30,313
6 - 12 Months 85,752 101,942
Over 12 Months 39,191 104,242
Total $ 213,593 $ 279,193
Capital Resources
Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company's capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company's resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders. OnDecember 10, 2021 , the Company's Board of Directors authorized the Repurchase Program to purchase up to$100.0 million of the Company's common stock throughDecember 9, 2022 in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and /or Rule 10b-18 under the Exchange Act. During the quarter endedMarch 31, 2022 , the Company repurchased an aggregate of approximately 630,000 shares (or$25.0 million ), at an average price of$39.73 . No shares were repurchased during the quarter endedDecember 31, 2021 . For information about the Company's stock repurchase activity and the Repurchase Program, please refer to Note 9 "Stockholders' Equity" in Part I, Item 1 and Part II, Item 2 of this Quarterly Report. OnJanuary 28, 2022 , the Company announced that its Board of Directors declared a quarterly dividend on the outstanding shares of its Series A preferred stock. The dividend of$171.88 per share (equivalent to$0.43 per outstanding depositary share) was payable onMarch 1, 2022 to preferred shareholders of record as ofFebruary 14, 2022 . The Board also declared a quarterly dividend of$0.28 per share of common stock. The common stock dividend was payable onFebruary 25, 2022 to common shareholders on record as ofFebruary 11, 2022 . TheFederal Reserve requires the Company and the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 7.0% of risk-weighted assets; (ii) a Tier 1 capital ratio of 8.5% of risk-weighted assets; (iii) a total capital ratio of 10.5% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These ratios, with the exception of the leverage ratio, include a 2.5% capital conservation buffer, which is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. OnMarch 27, 2020 , the banking agencies issued an interim final rule that allows the Company to phase in the impact of adopting the CECL methodology up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. The Company is allowed to include the impact of the CECL transition, which is defined as the CECL Day 1 impact to capital plus 25% of the Company's provision for credit losses during 2020, in regulatory capital through 2021. The Company elected to phase-in the regulatory capital impact as permitted under the aforementioned interim final rule. Beginning in 2022, the transition amount will begin to impact regulatory capital by phasing it in over a three-year period ending
in
2024.
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The table summarizes the Company's regulatory capital and related ratios for the
periods presented (
March 31 ,December 31 ,
2022 2021 2021
Common equity Tier 1 capital$ 1,557,135 $ 1,569,752 $ 1,547,675 Tier 1 capital 1,723,491 1,736,108 1,714,031 Tier 2 capital 454,002 437,435 374,101 Total risk-based capital 2,177,493 2,173,543 2,088,132 Risk-weighted assets 15,795,239 15,336,432 14,651,486 Capital ratios:
Common equity Tier 1 capital ratio 9.86% 10.24%
10.56% Tier 1 capital ratio 10.91% 11.32% 11.70% Total capital ratio 13.79% 14.17% 14.25%
Leverage ratio (Tier 1 capital to average 9.08% 9.01%
9.18%
assets)
Capital conservation buffer ratio (1) 4.91% 5.32%
5.70%
Common equity to total assets 11.79% 12.68%
12.81%
Tangible common equity to tangible assets 7.21% 8.20%
8.24%
(+)
(1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company's actual ratio results for Common equity, Tier 1, and Total risk based capital. The lowest of the three measures represents the Company's capital conservation buffer ratio. (2) All ratios and amounts atMarch 31, 2022 are estimates and subject to change pending the Company's filing of its FRY9 -C. All other periods are presented as filed. (+) Refer to "Non-GAAP Financial Measures" section within this Item 2 for more information about this non-GAAP financial measure, including a reconciliation of this measure to the most directly comparable financial measure calculated in accordance with GAAP. For the quarter endedMarch 31, 2022 , the Company's common equity to total assets capital ratio and the tangible common equity to tangible assets capital ratio decreased from the prior quarter primarily due to the unrealized losses on the AFS securities portfolio recorded in OCI due to market interest rate increases in the first quarter of 2022.
NON-GAAP FINANCIAL MEASURES
In this Quarterly Report, the Company has provided supplemental performance
measures on a tax-equivalent, tangible, operating, adjusted or pre-tax
pre-provision basis. These non-GAAP financial measures are a supplement to GAAP,
which is used to prepare the Company's financial statements and should not be
considered in isolation or as a substitute for comparable measures calculated in
accordance with GAAP. In addition, the Company's non-GAAP financial measures may
not be comparable to non-GAAP financial measures of other companies. The Company
uses the non-GAAP financial measures discussed herein in its analysis of the
Company's performance. The Company's management believes that these non-GAAP
financial measures provide additional understanding of ongoing operations,
enhance comparability of results of operations with prior periods and show the
effects of significant gains and charges in the periods presented without the
impact of items or events that may obscure trends in the Company's underlying
performance.
Net interest income (FTE), total revenue (FTE) and total adjusted revenue (FTE),
which are used in computing net interest margin (FTE) and adjusted operating
efficiency ratio (FTE), respectively, provide valuable additional insight into
the net interest margin and the efficiency ratio by adjusting for differences in
the tax treatment of interest income sources. The entire FTE adjustment is
attributable to interest income on earning assets, which is used in computing
the yield on earning assets. Interest expense and the related cost of
interest-bearing liabilities and cost of funds ratios are not affected by the
FTE components.
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The following table reconciles non-GAAP financial measures from the most
directly comparable GAAP financial measures for each of the periods presented
(dollars in thousands):
Three Months Ended
March 31,
2022 2021
Interest Income (FTE)
Interest and dividend income (GAAP) $ 138,456 $ 147,673
FTE adjustment 3,336
3,053
Interest and dividend income FTE (non-GAAP)
$ 17,885,018 $
17,692,095
Yield on interest-earning assets (GAAP) 3.14 % 3.39 % Yield on interest-earning assets (FTE) (non-GAAP) 3.22 %
3.46 % Net Interest Income (FTE) Net interest income (GAAP)$ 130,931 $ 134,898 FTE adjustment 3,336 3,053 Net interest income (FTE) (non-GAAP)$ 134,267 $
137,951
Noninterest income (GAAP) 30,153
30,985
Total revenue (FTE) (non-GAAP)$ 164,420 $ 168,936 Average earning assets$ 17,885,018 $ 17,692,095 Net interest margin (GAAP) 2.97 % 3.09 %
Net interest margin (FTE) (non-GAAP) 3.04 %
3.16 %
The Company believes tangible common equity is an important indication of its
ability to grow organically and through business combinations as well as its
ability to pay dividends and to engage in various capital management strategies.
Tangible common equity is used in the calculation of certain profitability,
capital, and per share ratios. The Company believes tangible common equity and
related ratios are meaningful measures of capital adequacy because they provide
a meaningful basis for period-to-period and company-to-company comparisons,
which the Company believes will assist investors in assessing the capital of the
Company and its ability to absorb potential losses.
The following table reconciles non-GAAP financial measures from the most
directly comparable GAAP financial measures for each of the periods presented
(dollars in thousands):
Three Months Ended
March 31, December 31, March 31,
2022 2021 2021
Tangible Assets
Ending Assets (GAAP) $ 19,782,430 $ 20,064,796 $ 19,854,612
Less: Ending goodwill 935,560 935,560 935,560Less: Ending amortizable intangibles 40,273 43,312 53,471 Ending tangible assets (non-GAAP)$ 18,806,597 $
19,085,924$ 18,865,581 Tangible Common Equity Ending Equity (GAAP)$ 2,498,335 $ 2,710,071 $ 2,709,732 Less: Ending goodwill 935,560 935,560 935,560
Less: Ending amortizable intangibles 40,273 43,312 53,471 Less: Perpetual preferred stock 166,357 166,357 166,357 Ending tangible common equity (non-GAAP)$ 1,356,145 $
1,564,842$ 1,554,344 Average equity (GAAP)$ 2,660,984 $ 2,715,610 $ 2,719,941 Less: Average goodwill 935,560 935,560 935,560
Less: Average amortizable intangibles 41,743 44,866 55,450 Less: Average perpetual preferred stock 166,356 166,356 166,356 Average tangible common equity (non-GAAP)$ 1,517,325 $ 1,568,828 $ 1,562,575 Common equity to total assets (GAAP) 11.79 % 12.68 % 12.81 % Tangible common equity to tangible assets (non-GAAP) 7.21 % 8.20 % 8.24 % Book value per share (GAAP)$ 31.12 $ 33.80$ 32.37 Tangible book value per share (non-GAAP)$ 18.10 $
20.79
Adjusted operating measures exclude the losses related to balance sheet
repositioning (principally composed of losses on debt extinguishment), gains on
sale of securities, as well as branch closing and facility consolidation costs
(principally composed of leases and other assets write downs, as well as
severance associated with branch closing and corporate expense reduction
initiatives). The Company believes these non-GAAP adjusted measures provide
investors with important information about the continuing economic results of
the organization's operations. Prior periods in this Quarterly Report have been
adjusted for previously announced branch closing and corporate expense reduction
initiatives.
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The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands, except per share amounts):
Three Months Ended
March 31,
2022 2021
Adjusted Operating Earnings & EPS
Net income (GAAP) $ 43,690
- 11,609
Less: Gain on sale of securities, net of tax -
62
Less: Gain on Visa, Inc. Class B common stock, net of tax - - Plus: Branch closing and facility consolidation costs, net of tax 4,351
730
Adjusted operating earnings (non-GAAP)$ 48,041 $ 68,466 Less: Dividends on preferred stock 2,967
2,967
Adjusted operating earnings available to common shareholders (non-GAAP)$ 45,074
Weighted average common shares outstanding, diluted 75,556,127
78,884,235
Earnings per common share, diluted (GAAP)$ 0.54
$ 0.60
Adjusted operating measures exclude the amortization of intangible assets and
the losses related to balance sheet repositioning, principally composed of
losses on debt extinguishment and gains on sale of securities. The Company
believes this adjusted measure provides investors with important information
about the combined economic results of the organization's operations. The
adjusted operating efficiency ratio (FTE) excludes the amortization of
intangible assets and losses related to balance sheet repositioning (principally
composed of losses on debt extinguishment), as well as branch closing and
facility consolidation costs. This measure is similar to the measure utilized by
the Company when analyzing corporate performance and is also similar to the
measure utilized for incentive compensation. Net interest income (FTE) and total
adjusted revenue (FTE), which are used in computing net interest margin (FTE)
and adjusted operating efficiency ratio (FTE), respectively, provide valuable
additional insight into the net interest margin and the efficiency ratio by
adjusting for differences in tax treatment of interest income sources. The
entire FTE adjustment is attributable to interest income on earning assets,
which is used in computing yield on earning assets. Interest expense and the
related cost of interest-bearing liabilities and cost of funds ratios are not
affected by the FTE components.
The following table reconciles non-GAAP financial measures from the most
directly comparable GAAP financial measures for each of the periods presented
(dollars in thousands):
Three Months Ended
March 31,
2022 2021Adjusted Operating Noninterest Expense, Noninterest Income & Efficiency Ratio Noninterest expense (GAAP)
$ 105,321 $
111,937
Less: Amortization of intangible assets 3,039
3,730
Less: Losses related to balance sheet repositioning -
14,695
Less: Branch closing and facility consolidation costs 5,508
924
Adjusted operating noninterest expense (non-GAAP)$ 96,774 $
92,588
Noninterest income (GAAP)$ 30,153 $
30,985
Less: Gains on sale of securities -
78
Adjusted operating noninterest income (non-GAAP)$ 30,153 $
30,907
Net interest income (FTE) (non-GAAP)$ 134,267 $
137,951
Adjusted operating noninterest income (non-GAAP) 30,153
30,907
Total adjusted revenue (FTE)(non-GAAP)$ 164,420 $
168,858
Efficiency ratio (GAAP) 65.38 % 67.48 % Adjusted operating efficiency ratio (FTE) (non-GAAP) 58.86 %
54.83 %
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PPP adjustment impact excludes the unforgiven portion of PPP loans. The Company believes LHFI (net of deferred fees and costs), excluding PPP is useful to investors as it provides more clarity on the Company's organic growth.
The following table reconciles non-GAAP financial measures from the most
directly comparable GAAP financial measures for each of the periods presented
(dollars in thousands):
Three Months Ended
March 31, December 31, March 31,
2022 2021 2021
Adjusted Loans
Loans held for investment (net of
deferred fees and costs)(GAAP) $ 13,459,349 $ 13,195,843 $ 14,272,280
Less: PPP adjustments (net of
deferred fees and costs) 67,444 150,363 1,512,714
Total adjusted loans (non-GAAP)
Average loans held for investment (net of deferred fees and costs) (GAAP)$ 13,300,789 $ 13,082,412 $
14,064,123
Less: Average PPP adjustments (net of deferred fees and costs) 103,041 288,204
1,309,326
Total adjusted average loans (non-GAAP)$ 13,197,748 $ 12,794,208 $
12,754,797
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