LAKELAND BANCORP, INC. This section should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K/A for the year ended
Statements Regarding Forward Looking Information
The information disclosed in this document includes various forward-looking
statements that are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 with respect to credit quality
(including delinquency trends and the allowance for loan losses), the Company's
future tax expense, corporate objectives, the anticipated impact of COVID-19 and
other financial and business matters. The words "anticipates," "projects,"
"intends," "estimates," "expects," "believes," "plans," "may," "will," "should,"
"could," and other similar expressions are intended to identify such
forward-looking statements. The Company cautions that these forward-looking
statements are necessarily speculative and speak only as of the date made, and
are subject to numerous assumptions, risks and uncertainties, all of which may
change over time. Actual results could differ materially from such
forward-looking statements.
In addition to the risk factors disclosed elsewhere in this document and in the
Company's most recently filed Annual Report on Form 10-K/A, the following
factors, among others, could cause the Company's actual results to differ
materially and adversely from such forward-looking statements: changes in the
financial services industry and the U.S. and global capital markets; changes in
economic conditions nationally, regionally and in the Company's markets; public
health crises (such as the governmental, social and economic effects of the
novel coronavirus); the nature and timing of actions of the Federal Reserve
Board and other regulators; the nature and timing of legislation and regulation
affecting the financial services industry; government intervention in the U.S.
financial system; changes in federal and state tax laws; changes in levels of
market interest rates; pricing pressures on loan and deposit products; credit
risks of Lakeland's lending and equipment financing activities; successful
implementation, deployment and upgrades of new and existing technology, systems,
services and products; and customers' acceptance of Lakeland's products and
services.
The above-listed risk factors are not necessarily exhaustive, particularly as to
possible future events, and new risk factors may emerge from time to time.
Certain events may occur that could cause the Company's actual results to be
materially different than those described in the Company's periodic filings with
the Securities and Exchange Commission . Any statements made by the Company that
are not historical facts should be considered to be forward-looking statements.
The Company is not obligated to update and does not undertake to update any of
its forward-looking statements made herein.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company and its subsidiaries
conform to accounting principles generally accepted in the United States of
America and predominant practices within the banking industry. The consolidated
financial statements include the accounts of the Company, Lakeland and their
subsidiaries, including Lakeland NJ Investment Corp. , Lakeland Investment Corp. ,
Lakeland Equity, Inc. and Lakeland Preferred Equity, Inc. All intercompany
balances and transactions have been eliminated.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions also affect reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates. There have been no material changes in the Company's
critical accounting policies, judgments and estimates, including assumptions or
estimation techniques utilized, as compared to those disclosed in the Company's
most recent Annual Report on Form 10-K/A.
Executive Summary
The coronavirus ("COVID-19") continues to have a significant, negative effect on
families and businesses in New Jersey and in the United States . The prolonged
COVID-19 outbreak, or any other epidemic that harms the global economy, the U.S.
economy or the markets in which we operate could adversely affect our
operations. If conditions worsen, we may again experience temporary closures of
our offices and/or suspension of certain services until it is safe to open and
return to work. The ultimate effect of COVID-19 on the Company's business will
depend on numerous factors and future developments that are highly uncertain and
cannot be predicted with confidence. At this time, it is unknown how long the
COVID-19 pandemic will last or when all restrictions on individuals and
businesses will be lifted and businesses and their employees will be able to
fully resume normal activities. Further, additional information may emerge
regarding the severity of COVID-19 and additional actions may be taken by
federal, state and local governments to contain COVID-19 or treat its impact.
Changes in the behavior of customers, businesses and their employees as a result
of the COVID-19 pandemic, including social distancing practices, even after
formal restrictions have been lifted, are also unknown. As a result of the
COVID-19 pandemic and the actions taken to contain it or reduce its impact, the
Company may experience changes in the value of collateral securing outstanding
loans, reductions in the credit quality of borrowers and the inability of
borrowers to repay loans in accordance with their terms. Management is actively
managing credit risk in the Company's commercial loan portfolio, including
reviewing the industries
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that the Company believes are most likely to be impacted by emerging COVID-19
events. These and similar factors and events may have substantial negative
effects on the business, financial condition, and results of operations of the
Company and its customers.
The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed
into law on March 27, 2020 and provided over $2.0 trillion in emergency economic
relief to individuals and businesses impacted by the COVID-19 pandemic. The
CARES Act authorized the Small Business Administration ("SBA") to temporarily
guarantee loans under a new 7(a) loan program called the Paycheck Protection
Program ("PPP"). As a qualified SBA lender, we were automatically authorized to
originate PPP loans. An eligible business could apply for a PPP loan up to the
lesser of (1) 2.5 times its average monthly payroll costs or (2) $10.0 million .
PPP loans have (a) an interest rate of 1.00%, (b) a two-year loan term to
maturity; and (c) principal and interest payments deferred for six months from
the date of the disbursement. The SBA guarantees 100% of the PPP loans made to
eligible borrowers. The entire principal amount of the borrower's PPP loan is
eligible to be reduced by the loan forgiveness amount under the PPP so long as
employee and compensation levels of the business are maintained and 75% of the
loan proceeds are used for payroll expenses, with the remaining 25% of the loan
proceeds used for other qualifying expenses.
In June 2020 , Congress passed the Paycheck Protection Program Flexibility Act
("PPP Flexibility") to ease provisions of PPP related to the time period
permitted to use the proceeds of loans, the deferral period of principal and
interest payments on loans not forgiven and an extension of the maturity date of
loan and loan forgiveness on loans. Key changes include (a) extending from two
to five years the minimum maturity of any remaining loan balance after an
application for loan forgiveness (for those loans closed after the enactment of
PPP Flexibility); (b) extending the "covered period" (i.e., when costs that are
eligible for forgiveness must be paid or incurred) from eight weeks to 24 weeks
(or December 31, 2020 , whichever is earlier); (c) reducing from 75 percent to 60
percent the amount of loan proceeds that must be used for payroll costs although
the remainder must continue to be allocated to interest on mortgages, rent, and
utilities; (d) permitting an exemption from reductions in loan forgiveness
amounts based on reductions in full-time equivalent employees if the borrower,
in good faith, documents an inability to return to the same level of business
activity due to standards for sanitation, social distancing, or other worker or
customer safety requirements established by the Department of Health and Human
Services ("HHS"), the Center for Disease Control ("CDC") or Occupational, Safety
and Health Administration ("OSHA"); and (e) allowing deferral of payments until
the amount of forgiveness is remitted by the SBA to the lender or, if the
borrower has not applied for forgiveness, ten months after the expiration of the
covered period. The provisions of PPP Flexibility became effective upon
enactment and will apply to all loans made under the PPP. The SBA released
guidance on PPP loan forgiveness, which presently includes three different
application methods depending primarily on the size of the PPP loan, reductions
in staffing or salaries, or a business' inability to operate at pre-COVID levels
due to compliance with certain federally imposed requirements related to
COVID-19. To qualify for full forgiveness, businesses must document that at
least 60% of the PPP loan amount was used towards payroll costs and that the
remaining 40% was used for other eligible costs such as mortgage interest, rent
payments and/or utilities. Forgiveness will be reduced by any Economic Injury
Disaster Loan ("EIDL") advance amount the business received.
Section 4013 of the CARES Act, as interpreted by the "Interagency Statement on
Loan Modifications and Reporting for Financial Institutions Working With
Customers Affected by the Coronavirus (Revised)" ("Revised Statement"), dated
April 17, 2020 , includes criteria that enable financial institutions to exclude
from TDR status loans that are modified in connection with COVID-19. Under these
provisions, TDR status is not required for the term of a loan modification if
(i) the loan modification is made in connection with COVID-19, (ii) the loan was
not past due more than 30 days as of December 31, 2019 and (iii) the loan
modification is entered into during the period between March 1, 2020 , and the
earlier of (a) 60 days after COVID-19 is no longer characterized as a National
Emergency or (b) December 31, 2020 . Furthermore, pursuant to the Revised
Statement, for loan modifications that do not meet these criteria but are made
in connection with COVID-19, such loans may be presumed not to be TDR if they
are current at a time the loan modification program was implemented and the
modifications are short-term (e.g., six months). If the criteria are not met
under either Section 4013 or the Revised Statement, banks are required to follow
their existing accounting policies to determine whether COVID-related
modifications should be accounted for as a TDR. The Company has elected to
suspend the classification of loan modifications as TDR if they qualify under
Section 4013 or the Revised Statement.
The CARES Act also provided financial institutions with the option to defer
adoption of the Financial Accounting Standards Board's Accounting Standard
Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) until
the earlier of the end of the pandemic or December 31, 2020 . The Company has
elected to defer adoption of ASU 2016-13 and its Current Expected Credit Loss
methodology ("CECL").
Management has identified that the COVID-19 pandemic could adversely affect the
liquidity of the Company. As such, management has taken specific steps to raise
awareness of the risk and taken action to minimize the risk. In addition to
processes already in place to closely monitor changes in liquidity needs,
including those that may result from the COVID-19 pandemic, the Company has
increased collateral and expanded access to additional borrowings should it be
necessary in order to meet liquidity needs. While the Company is unable to
predict actual fluctuations in deposit or cash balances, management continues to
monitor liquidity and believes that its current level of liquidity is sufficient
to meet its current and future operational needs.
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In addition, the carrying value of investment securities, right-of-use assets, goodwill and other intangibles could decrease, resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company's business. As the COVID-19 pandemic has advanced, Lakeland has made it a priority to safeguard the health of our associates and customers, while assisting customers impacted by the economic burdens of COVID-19 and providing support to our communities. Lakeland initiated remote working plans and encouraged the use of our mobile and online banking alternatives as we adjusted our branch hours, decreased lobby usage and temporarily closed branches. To assist COVID-19 impacted borrowers, we offered temporary payment deferrals on commercial, mortgage and consumer loans and we have assisted customers with the origination of PPP loans to help strengthen local businesses and preserve jobs in our communities. Additionally, to further support our customers, the Company decided to participate in the Main Street Lending Program established by theFederal Reserve to support lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Despite this challenging environment, our associates show tireless professionalism, compassion and dedication to serving our customers under these unprecedented conditions. We remain open for business, continuing to lend to qualified businesses for working capital and general business purposes. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Financial Overview For the third quarter of 2020, the Company reported net income of$14.4 million and earnings per diluted share of$0.28 compared to net income of$18.9 million and earnings per diluted share of$0.37 for the third quarter of 2019. For the third quarter of 2020, annualized return on average assets was 0.76%, annualized return on average common equity was 7.64% and annualized return on average tangible common equity was 9.71% compared to 1.17%, 10.61%, and 13.74%, respectively, for the third quarter of 2019. For the nine months endedSeptember 30, 2020 the Company reported net income of$38.7 million , compared to$52.0 million for the same period in 2019. For the nine months endedSeptember 30, 2020 , the Company reported earnings per diluted share of$0.76 , compared to$1.02 earnings per diluted share reported for the first nine months of 2019. For the first nine months of 2020, annualized return on average assets was 0.73%, annualized return on average common equity was 6.95%, and annualized return on average tangible common equity was 8.86% compared to 1.11%, 10.07% and 13.11%, respectively, for the same period in 2019. The third quarter and year-to-date results were adversely impacted by provisions for loan losses of$8.0 million and$26.2 million , respectively, compared to$536,000 and$1.0 million for the same periods last year. Of the increased provision in the first nine months of 2020, 75% was primarily due to the impact of COVID-19 on certain qualitative factors and loans placed on COVID-related payment deferment. The remainder of the provision is attributable to loan growth, a change in the loan portfolio composition and a change in loss rates. Net interest margin for the third quarter of 2020 of 2.96% decreased 29 and 10 basis points, respectively, from the third quarter of 2019 and the second quarter of 2020. Net interest margin for the first nine months of 2020 of 3.09% compared to 3.35% for the same period in 2019. The decrease in net interest margin was due primarily to a decrease in the yield on interest-earning assets partially offset by a decrease in the cost of interest-bearing liabilities. Total loans, net of deferred fees, grew$705.8 million , or 14%, to$5.84 billion during the first nine months of 2020. The increase in loans includes$325.1 million in PPP loans. Total deposits increased$972.7 million , or 18%, fromDecember 31, 2019 toSeptember 30, 2020 , to$6.27 billion .
Comparison of Operating Results for the Three Months Ended
and 2019
Net Income
Net income was $14.4 million , or $0.28 per diluted share, for the third quarter
of 2020 compared to net income of $18.9 million , or $0.37 per diluted share, for
the third quarter of 2019. The reduction in net income compared to the third
quarter of 2019 was due primarily to the increased provision for loan losses
mentioned above.
Net Interest Income
Net interest income is the difference between interest income on earning assets
and the cost of funds supporting those assets. The Company's net interest income
is determined by: (i) the volume of interest-earning assets that it holds and
the yields that it earns on those assets, and (ii) the volume of
interest-bearing liabilities that it has assumed and the rates that it pays on
those liabilities.
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Net interest income on a tax equivalent basis for the third quarter of 2020 was$52.2 million , compared to$48.8 million for the third quarter of 2019. The increase in net interest income compared to the third quarter of 2019 was due primarily to the growth of interest-earning assets partially offset by a decrease in the yield on interest earning assets. The net interest margin decreased to 2.96% in the third quarter of 2020 from 3.25% in the third quarter of 2019 primarily as a result of a decrease in the yield on interest-earning assets, particularly a reduction in the yield on loans due to decreases in the prime rate and LIBOR during 2019 and 2020, an increase in lower yielding federal funds sold and the origination of PPP loans during the second quarter of 2020, which earn an effective yield of 2.50% including amortization of fees and costs. The components of net interest income are discussed in greater detail below. The following table reflects the components of the Company's net interest income, setting forth for the periods presented, (1) average assets, liabilities and stockholders' equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) the Company's net interest spread (i.e., the average yield on interest-earning assets less the average cost of interest-bearing liabilities) and (5) the Company's net interest margin. Rates for the three months endedSeptember 30, 2020 andSeptember 30, 2019 are computed on a tax equivalent basis using a tax rate of 21%. For the Three Months Ended September 30, 2020 For the Three Months Ended September 30, 2019 Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ (dollars in thousands) Balance Expense Paid Balance Expense Paid ASSETS Interest-earning assets: Loans (1)$ 5,775,093 $ 56,801 3.91 %$ 4,937,488 $ 58,563 4.71 % Taxable investment securities and other 793,370 4,139 2.09 % 801,828 5,007 2.50 % Tax-exempt securities 79,696 509 2.55 % 67,906 458 2.70 % Federal funds sold (2) 361,780 92 0.10 % 140,423 695 1.98 % Total interest-earning assets 7,009,939 61,541 3.49 % 5,947,645 64,723 4.32 % Noninterest-earning assets: Allowance for loan losses (60,882) (39,254) Other assets 567,012 471,284 TOTAL ASSETS$ 7,516,069 $ 6,379,675 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings accounts$ 548,662 $ 77 0.06 %$ 494,377 $ 80 0.06 % Interest-bearing transaction accounts 3,086,260 3,422 0.44 % 2,678,424 8,363 1.24 % Time deposits 1,176,181 3,513 1.19 % 964,159 4,824 2.00 % Borrowings 327,939 2,287 2.73 % 361,881 2,677 2.89 % Total interest-bearing liabilities 5,139,042 9,299 0.72 % 4,498,841 15,944 1.41 % Noninterest-bearing liabilities: Demand deposits 1,475,422 1,100,413 Other liabilities 150,506 74,695 Stockholders' equity 751,099 705,726 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$ 7,516,069 $ 6,379,675 Net interest income/spread 52,242 2.77 % 48,779 2.91 % Tax equivalent basis adjustment 108 97 NET INTEREST INCOME$ 52,134 $ 48,682 Net interest margin (3) 2.96 % 3.25 % (1)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees. (2)Includes interest-bearing cash accounts. (3)Net interest income divided by interest-earning assets. 37
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Interest income on a tax equivalent basis decreased$3.2 million , or 5% from$64.7 million in the third quarter of 2019 to$61.5 million in the third quarter of 2020, as a result of a reduction in the yield on interest-earning assets due to the same reasons discussed above. Average federal funds sold in the third quarter of 2020 increased$221.4 million compared to the third quarter of 2019, while the yield decreased 188 basis points to 0.10% for the third quarter of 2020. Average loans increased$837.6 million compared to the third quarter of 2019 while the yield on average loans decreased 80 basis points to 3.91% in the third quarter of 2020 from the third quarter of 2019. Total average taxable investment securities decreased$8.5 million to$793.4 million for the third quarter of 2020 from the third quarter of 2019, while average tax-exempt securities increased$11.8 million to$79.7 million for the same periods. The yield on average taxable investment securities decreased 41 basis points from the third quarter of 2019 to 2.09% for the third quarter of 2020, while the yield on average tax-exempt investment securities decreased 15 basis points to 2.55%. Total interest expense of$9.3 million in the third quarter of 2020 was$6.6 million less than the$15.9 million reported for the same period in 2019. Total average interest-bearing liabilities increased$640.2 million compared to the third quarter of 2019 primarily as a result of organic growth in money market accounts due to increased marketing efforts and to a change in customer behavior toward more traditional banking alternatives in the current economy. The cost of average interest-bearing liabilities decreased from 1.41% in the third quarter of 2019 to 0.72% in the third quarter of 2020 largely driven by reductions in market interest rates. For the third quarter of 2020, the cost of interest-bearing transaction accounts, time deposits and borrowings decreased by 80 basis points, 81 basis points and 16 basis points, respectively, when compared to the same period in 2019. Provision for Loan Losses In determining the provision for loan losses, management considers national and local economic conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; adequacy and adherence to policies, procedures and practices; levels and trends in delinquencies, impaired loans and charge-offs and the results of independent third-party loan reviews. In the third quarter of 2020, an$8.0 million provision for loan losses was recorded, compared to$536,000 provision for the same period last year. The increase in provision was due primarily to the impact of COVID-19 on certain qualitative factors and loans on payment deferment. The Company recorded charge-offs of$682,000 and recoveries of$85,000 in the third quarter of 2020 compared to charge-offs of$809,000 and recoveries of$266,000 in the third quarter of 2019. For more information regarding the determination of the provision, see "Risk Elements" below. Noninterest Income Noninterest income increased$73,000 to$6.8 million for the third quarter of 2020 compared to$6.7 million during the same period in 2019. Gains on sales of loans for the third quarter of 2020 increased$951,000 compared to the third quarter of 2019 due primarily to increased volume of sales of residential mortgages driven by lower interest rates, while commissions and fees for the third quarter of 2020 increased$122,000 due primarily to increases in mortgage application fees and commercial loan fees. Service charges on deposit accounts for the third quarter of 2020 decreased$563,000 compared to the third quarter of 2019 due primarily to changes in customer behavior resulting from the pandemic. Third quarter 2020 results also included losses on equity securities of$170,000 compared to gains of$72,000 during the same period in 2019. Noninterest Expense Noninterest expense in the third quarter of 2020 totaled$32.1 million compared to$29.6 million reported for the same quarter of 2019, an increase of$2.5 million . Salaries and employee benefits expense was$19.7 million for the third quarter of 2020, increasing$632,000 , or 3%, from the same period last year, as a result of additions to staff to support continued growth and normal merit increases. Furniture and equipment expense increased$806,000 compared to the third quarter of 2019 due primarily to an increase in costs associated with the Company's digital strategy initiative.FDIC insurance expense totaled$625,000 for the third quarter of 2020 and increased$1.0 million compared to the same period in 2019. In the third quarter of 2019,$420,000 in previously recordedFDIC expense was reversed due toFDIC assessment credits and no third quarter 2019 accrual was made, resulting from the insurance fund reserve ratio exceeding the required level. 38
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The Company's efficiency ratio, a non-GAAP financial measure, was 53.96% in the
third quarter of 2020, compared to 52.77% for the same period last year. The
Company uses this ratio because it believes that the ratio provides a good
comparison of period-to-period performance and because the ratio is widely
accepted in the banking industry. The following table shows the calculation of
the efficiency ratio for the periods presented:
For the Three Months Ended September 30,
(dollars in thousands) 2020 2019
Total noninterest expense $ 32,097 $ 29,563
Amortization of core deposit intangibles (250) (288)
Noninterest expense, as adjusted $ 31,847 $ 29,275
Net interest income $ 52,134 $ 48,682
Noninterest income 6,773 6,700
Total revenue 58,907 55,382
Tax-equivalent adjustment on municipal securities 108 97
Total revenue, as adjusted $ 59,015 $ 55,479
Efficiency ratio 53.96 % 52.77 %
Income Tax Expense
The effective tax rate in the third quarter of 2020 was 23.3% compared to 25.3%
during the same period in 2019 primarily as a result of an increase in tax
advantaged items as a percent of pretax income.
Comparison of Operating Results for the Nine Months Ended September 30, 2020 and
2019
Net Income
Net income was $38.7 million , or $0.76 per diluted share, for the first nine
months of 2020 compared to net income of $52.0 million , or $1.02 per diluted
share, for the first nine months of 2019. Net income decreased primarily as a
result of the $25.2 million increase in provision for loan losses mentioned in
the financial overview. Net interest income increased $6.1 million compared to
the first nine months of 2019 resulting primarily from an increase in
interest-earning assets and a decrease in the cost of interest-bearing
liabilities, partially offset by a decrease in the yield on interest-earning
assets.
Net Interest Income
Net interest income on a tax equivalent basis for the first nine months of 2020
was $152.8 million , compared to $146.8 million for the first nine months of
2019. The net interest margin of 3.09% in the first nine months of 2020 compared
to 3.35% for the same period in 2019. The decrease in net interest margin
resulted primarily from a 64 basis point decrease in the yield on
interest-earning assets, partially offset by a 48 basis point decrease in the
cost of interest-bearing liabilities. The components of net interest income are
discussed in greater detail below.
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The following table reflects the components of the Company's net interest
income, setting forth for the periods presented, (1) average assets, liabilities
and stockholders' equity, (2) interest income earned on interest-earning assets
and interest expense paid on interest-bearing liabilities, (3) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) the Company's net interest spread (i.e., the average yield on
interest-earning assets less the average cost of interest-bearing liabilities)
and (5) the Company's net interest margin. Rates for the nine months ended
September 30, 2020 and September 30, 2019 are computed on a tax equivalent basis
using a tax rate of 21%.
For the Nine Months Ended September 30, 2020 For the Nine Months Ended September 30, 2019
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(dollars in thousands) Balance Expense Paid Balance Expense Paid
ASSETS
Interest-earning assets:
Loans (1) $ 5,519,621 $ 170,483 4.13 % $ 4,908,952 $ 175,324 4.78 %
Taxable investment securities and
other 811,924 14,131 2.32 % 788,736 14,865 2.51 %
Tax-exempt securities 69,408 1,371 2.63 % 72,104 1,475 2.73 %
Federal funds sold (2) 198,528 287 0.19 % 83,127 1,297 2.08 %
Total interest-earning assets 6,599,481 186,272 3.77 % 5,852,919 192,961 4.41 %
Noninterest-earning assets:
Allowance for loan losses (51,236) (39,985)
Other assets 525,193 460,926
TOTAL ASSETS $ 7,073,438 $ 6,273,860
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings accounts $ 523,653 $ 248 0.06 % $ 503,260 $ 253 0.07 %
Interest-bearing transaction
accounts 2,942,307 14,204 0.64 % 2,599,004 23,742 1.22 %
Time deposits 1,048,115 11,517 1.47 % 938,751 13,531 1.92 %
Borrowings 373,870 7,462 2.62 % 396,897 8,639 2.87 %
Total interest-bearing liabilities 4,887,945 33,431 0.91 % 4,437,912 46,165 1.39 %
Noninterest-bearing liabilities:
Demand deposits 1,317,195 1,080,235
Other liabilities 124,980 66,175
Stockholders' equity 743,318 689,538
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,073,438 $ 6,273,860
Net interest income/spread 152,841 2.86 % 146,796 3.02 %
Tax equivalent basis adjustment 289 310
NET INTEREST INCOME $ 152,552 $ 146,486
Net interest margin (3) 3.09 % 3.35 %
(1)Includes non-accrual loans, the effect of which is to reduce the yield earned
on loans, and deferred loan fees.
(2)Includes interest-bearing cash accounts.
(3)Net interest income divided by interest-earning assets.
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Interest income on a tax equivalent basis decreased from $193.0 million in the
first nine months of 2019 to $186.3 million in the first nine months of 2020, a
decrease of $6.7 million , or 3%. The decrease in interest income was primarily
due to the same reasons discussed in the quarterly analysis. Average federal
funds sold increased $115.4 million in the first nine months of 2020 compared to
the same period in 2019, while the yield on federal funds sold decreased 189
basis points compared to the first nine months of 2019. Average loans increased
$610.7 million compared to the first nine months of 2019, while the yield on
average loans at 4.13% in the first nine months of 2020 was 65 basis points
lower than the same period in 2019. The yield on average taxable and tax-exempt
investment securities decreased 19 basis points and 10 basis points,
respectively.
Total interest expense of $33.4 million in the first nine months of 2020 was
$12.7 million less than the $46.2 million reported for the same period in 2019.
Total average interest-bearing liabilities increased $450.0 million , while the
cost of average interest-bearing liabilities decreased from 1.39% in the first
nine months of 2019 to 0.91% in the first nine months of 2020. The increase in
the balance and reduction in cost of interest-bearing liabilities was due
primarily to the same reasons discussed in the quarterly analysis. The cost of
interest-bearing transaction accounts and time deposits decreased by 58 basis
points and 45 basis points, respectively, while the cost of borrowings decreased
25 basis points compared to the first nine months of 2019.
Provision for Loan Losses
In the first nine months of 2020, a $26.2 million provision for loan losses was
recorded, compared to $1.0 million for the same period last year. As previously
noted, approximately 75% of the increase in the provision was due to the impact
of COVID-19 on certain qualitative factors as well as the downgrade of loans for
which deferral of payments was granted. The remainder of the provision is
attributable to loan growth, a change in the loan portfolio composition and a
change in loss rates. The Company charged off $1.3 million and recovered
$322,000 in the first nine months of 2020 compared to $1.7 million and $1.7
million , respectively, in the first nine months of 2019. For more information
regarding the determination of the provision, see "Risk Elements" below.
Noninterest Income
Noninterest income of $20.3 million in the first nine months of 2020 increased
by $1.5 million from $18.8 million in the first nine months of 2019 due
primarily to a $2.6 million increase in swap income. Additionally, gains on
sales of loans increased $1.3 million due to an increase in sales of residential
mortgages. Noninterest income for the first nine months of 2020 included
$342,000 in gains on sales of securities compared to none during the same period
in 2019. Service charges on deposits decreased $1.5 million compared to the
first nine months of 2019 due to the same reasons discussed in the quarterly
comparison. Noninterest income for the first nine months of 2020 also included a
$625,000 loss on equity securities compared to a gain of $525,000 during the
same period in 2019.
Noninterest Expense
Noninterest expense in the first nine months of 2020 totaled $96.1 million ,
which was $830,000 greater than the $95.2 million reported for the first nine
months of 2019. The first nine months of 2019 included $3.2 million in merger
related expenses related to the acquisition of Highlands Bancorp . Salaries and
employee benefits increased $2.5 million , while furniture and equipment expense
increased $1.9 million from the same period last year, both due to the same
reasons discussed in the quarterly comparison. Marketing expense decreased
$590,000 compared to the first nine months of 2019 due to the timing of
marketing campaigns impacted by the pandemic. The Company's efficiency ratio, a
non-GAAP financial measure, was 54.95% in the first nine months of 2020,
compared to 55.05% for the same period last year. The Company uses this ratio
because it believes that the ratio provides a good comparison of
period-to-period performance and because the ratio is widely accepted in the
banking industry.
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The following table shows the calculation of the efficiency ratio for the
periods presented:
Nine Months Ended September 30,
(dollars in thousands) 2020 2019
Total noninterest expense $ 96,063 $ 95,233
Amortization of core deposit intangibles (776) (893)
Merger-related expenses - (3,178)
Long-term debt prepayment fee (356) -
Noninterest expense, as adjusted $ 94,931 $ 91,162
Net interest income $ 152,552 $ 146,486
Noninterest income 20,265 18,812
Total revenue 172,817 165,298
Tax-equivalent adjustment on municipal securities 289 310
(Gains) losses on sales of investment securities (342) -
Total revenue, as adjusted $ 172,764 $ 165,608
Efficiency ratio 54.95 % 55.05 %
Income Tax Expense
The effective tax rate in the first nine months of 2020 was 23.5% compared to
24.7% during the same period last year due primarily to an increase in tax
advantaged items as a percent of pretax income.
Financial Condition
The Company's total assets increased $810.9 million from December 31, 2019 , to
$7.52 billion at September 30, 2020 . Total loans, net of deferred fees, were
$5.84 billion , an increase of $705.8 million , or 14%, from $5.14 billion at
December 31, 2019 . Total deposits were $6.27 billion , an increase of $972.7
million , or 18%, from December 31, 2019 , while total borrowings decreased $261.5
million to $351.2 million at September 30, 2020 .
Loans
Gross loans of $5.86 billion at September 30, 2020 increased $714.1 million from
December 31, 2019 , primarily in the commercial loans secured by real estate and
paycheck protection program ("PPP") categories, which increased $459.7 million ,
and $325.1 million , respectively. For more information on the loan portfolio,
see Note 6 in Notes to the Consolidated Financial Statements in this Quarterly
Report on Form 10-Q.
Risk Elements
Non-performing assets, excluding PCI loans, increased from $21.7 million at
December 31, 2019 to $33.1 million at September 30, 2020 . The increase in
non-performing assets primarily resulted from loans related to one loan
relationship totaling $9.2 million moving into non-accrual status for reasons
unrelated to COVID-19. Non-accrual loans in the commercial loans secured by real
estate category increased $12.9 million , while the residential mortgage category
decreased $733,000 . The percentage of non-performing assets to total assets was
0.44% at September 30, 2020 compared to 0.32% at December 31, 2019 . Non-accrual
loans at September 30, 2020 included six loan relationships with a balance of
$1 million or greater, totaling $18.4 million and eight loan relationships
between $500,000 and $1.0 million , totaling $5.5 million . Loans past due ninety
days or more and still accruing totaled $165,000 at September 30, 2020 compared
to none at December 31, 2019 .
Troubled debt restructurings are those loans where the Company has granted
concessions to the borrower in payment terms, either in rate or in term, as a
result of the financial condition of the borrower. On September 30, 2020 , the
Company had $4.3 million in loans that were troubled debt restructurings and
accruing interest income compared to $5.7 million at December 31, 2019 . These
loans are expected to be able to perform under the modified terms of the loan.
On September 30, 2020 , the Company had $1.3 million in troubled debt
restructurings that were included in non-accrual loans compared to $1.6 million
at December 31, 2019 .
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Since the end ofMarch 2020 , the Company has been working with borrowers negatively impacted by the COVID-19 pandemic. AtSeptember 30, 2020 , we have on deferral, approximately$149.0 million in commercial loans (includes commercial loans secured by real estate, commercial and industrial and other loans),$3.0 million in equipment finance loans and$3.0 million in residential mortgage and consumer loans, compared to$927.0 million ,$40.0 million and$53.0 million , respectively, atJune 30, 2020 . OnSeptember 30, 2020 , the Company had$32.4 million in impaired loans (consisting primarily of non-accrual and restructured loans) compared to$22.1 million at year-end 2019. The Company also had purchased credit impaired loans from prior acquisitions with carrying values of$7.8 million atSeptember 30, 2020 . For more information on impaired loans see Note 6 in Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q. The allowance for impaired loans is based primarily on the fair value of the underlying collateral. Based on such evaluation,$223,000 of the allowance for loan losses has been allocated for impairment atSeptember 30, 2020 compared to$352,000 atDecember 31, 2019 . AtSeptember 30, 2020 andDecember 31, 2019 , the Company had$101.4 million and$47.7 million , respectively, in loans that were rated substandard that were not classified as non-performing or impaired. The increase in substandard loans that were not classified as non-performing or impaired relates to the COVID-19 pandemic and the resulting loans that are on deferral. There were no loans atSeptember 30, 2020 , other than those designated non-performing, impaired or substandard, where the Company was aware of any credit conditions of any borrowers or obligors that would indicate a strong possibility of the borrowers not complying with present terms and conditions of repayment and which may result in such loans being included as non-accrual, past due or renegotiated at a future date. Allowance for loan losses As noted earlier in this discussion, pursuant to the CARES Act, the Company has delayed implementation of ASU 2016-13, the CECL accounting standard. Upon the Company's future adoption of CECL, the change from the incurred loss methodology to the CECL methodology will be recognized through an adjustment to retained earnings, with an effective retrospective implementation date ofJanuary 1, 2020 . The overall balance of the allowance for loan losses of$65.2 million atSeptember 30, 2020 increased$25.2 million fromDecember 31, 2019 , an increase of 63%. The change in the allowance within loan segments during the two comparable periods is principally due to factors relating to COVID-19 to the extent identified by the Company and gives effect to changes in the Company's level of loan growth and related credit downgrades. 43
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The following table sets forth for the periods presented, the historical relationships among the allowance for loan losses, the provision for loan losses, the amount of loans charged-off and the amount of loan recoveries:
For the Nine Months For the Nine Months
Ended September 30, Ended September 30, For the Year Ended
(dollars in thousands) 2020 2019 December 31, 2019
Balance at the beginning of the year $ 40,003 $ 37,688 $ 37,688
Loans charged off:
Commercial, secured by real estate (498) (501) (544)
Commercial, industrial and other (204) (610) (645)
Equipment finance (194) (380) (414)
Real estate - mortgage (116) (50) (50)
Home equity and consumer (294) (197) (283)
Total loans charged off (1,306) (1,738) (1,936)
Recoveries:
Commercial, secured by real estate 57 212 251
Commercial, industrial and other 74 1,076 1,100
Equipment finance 39 2 332
Real estate - mortgage 21 66 66
Real estate - construction 69 104 126
Home equity and consumer 62 201 246
Total recoveries 322 1,661 2,121
Net recoveries (charge-offs) (984) (77) 185
Provision for loan losses 26,223 1,044 2,130
Ending balance $ 65,242 $ 38,655 $ 40,003
Net charge-offs as a percentage of average
loans outstanding 0.02 % - % - %
Allowance as a percentage of total loans
outstanding 1.11 % 0.78 % 0.78 %
Allowance as a percentage of non-accrual loans 197.17 %
242.85 % 189.25 %
The determination of the adequacy of the allowance for loan losses and the
periodic provisioning for estimated losses included in the consolidated
financial statements is the responsibility of management and the Board of
Directors. Management performs a formal quarterly evaluation of the allowance
for loan losses. This quarterly process is performed by the Credit
Administration Department and approved by the Chief Credit Officer. All
supporting documentation with regard to the evaluation process is maintained by
the Credit Administration Department . Each quarter, the evaluation along with
the supporting documentation is reviewed by the finance department before
approval by the Chief Credit Officer. The allowance evaluation is then presented
to an Allowance for Loan Losses Committee, which gives final approval to the
allowance evaluation before being presented to the Board of Directors for its
approval.
The methodology employed for assessing the adequacy of the allowance consists of
the following criteria:
•The establishment of specific reserve amounts for impaired loans, including PCI
loans.
•The establishment of reserves for pools of homogeneous loans not subject to
specific review, including impaired loans under $500,000 , equipment finance, 1 -
4 family residential mortgages, and consumer loans.
The establishment of reserve amounts for pools of homogeneous loans are based
upon the determination of historical loss rates, which are adjusted to reflect
current conditions through the use of qualitative factors. The qualitative
factors considered by the Company include an evaluation of the results of the
Company's independent loan review function, the Company's reporting
capabilities, the adequacy and expertise of Lakeland's lending staff,
underwriting policies, loss histories, trends in the portfolio, delinquency
trends, economic and business conditions and capitalization rates. Since many of
Lakeland's loans depend on the sufficiency of collateral as a secondary source
of repayment, any adverse trends in the real estate market could affect the
underlying values available to protect Lakeland from losses.
Additionally, management determines the loss emergence periods for each loan
segment, which are used to define loss migration periods and establish
appropriate ranges for qualitative adjustments for each loan segment. The loss
emergence period is the estimated time from the date of a loss event (such as a
personal bankruptcy) to the actual recognition of the loss
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(typically via the first partial or full loan charge-off), and is determined based upon a study of our past loss experience by loan segment. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. Non-performing loans of$33.1 million atSeptember 30, 2020 increased$12.0 million fromDecember 31, 2019 . The allowance for loan losses as a percent of total loans was 1.11% atSeptember 30, 2020 compared to 0.78% atDecember 31, 2019 . Excluding the loans from prior acquisitions and PPP loans, the allowance as a percent of total loans would be 1.28% as ofSeptember 30, 2020 compared to 0.88% atDecember 31, 2019 . The increase in the percentage of the allowance for loan losses as a percent of total loans was primarily due to the$26.2 million provision recorded in the first nine months of 2020 primarily resulting from the impact of COVID-19. Management believes, based on appraisals and estimated selling costs, that the majority of the Company's non-performing loans are adequately secured and that reserves on its non-performing loans are adequate. Based upon the process employed and giving recognition to all accompanying factors related to the loan portfolio, management considers the allowance for loan losses to be adequate atSeptember 30, 2020 .Investment Securities Investment securities totaled$881.2 million atSeptember 30, 2020 and$879.9 million atDecember 31, 2019 , increasing$1.3 million from year-end. For detailed information on the composition and maturity distribution of the Company's investment securities portfolio, see Note 5 in Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. Deposits Total deposits increased from$5.29 billion atDecember 31, 2019 to$6.27 billion atSeptember 30, 2020 , an increase of$972.7 million , or 18%. Time deposits increased$273.5 million , due primarily to an increase in brokered deposits of$261.2 million , while savings and interest-bearing transaction accounts increased$348.5 million due primarily to an increase in money market deposit accounts resulting from increased marketing efforts and a change in customer behavior towards more traditional banking alternatives in the current economy. Noninterest-bearing deposits increased$350.7 million during the first nine months of 2020 due in part to deposits of PPP loan proceeds. Liquidity "Liquidity" measures whether an entity has sufficient cash flow to meet its financial obligations and commitments on a timely basis. The Company is liquid when its subsidiary bank has the cash available to meet the borrowing and cash withdrawal requirements of customers and the Company can pay for current and planned expenditures and satisfy its debt obligations. Lakeland funds loan demand and operation expenses from several sources: •Net income. Cash provided by operating activities was$61.7 million for the first nine months of 2020 compared to$61.3 million for the same period in 2019. •Deposits. Lakeland can offer new products or change its rate structure in order to increase deposits. In the first nine months of 2020, Lakeland's deposits increased$972.7 million compared to an increase of$181.0 million during the first nine months of 2019. •Sales of securities. AtSeptember 30, 2020 the Company had$783.3 million in securities designated "available for sale." Of these securities,$499.1 million were pledged to secure public deposits and for other purposes required by applicable laws and regulations. •Repayments on loans can also be a source of liquidity. •Credit lines. As a member of the FHLB, Lakeland has the ability to borrow overnight based on the market value of collateral pledged. Lakeland had$40.0 million in overnight borrowings from the FHLB onSeptember 30, 2020 . Lakeland also has overnight federal funds lines available for it to borrow up to$215.0 million , of which none were outstanding atSeptember 30, 2020 . Lakeland may also borrow from the discount window of theFederal Reserve Bank of New York based on the market value of collateral pledged. Lakeland had no borrowings with theFederal Reserve Bank of New York as ofSeptember 30, 2020 . •Other borrowings. Lakeland can also generate funds by utilizing long-term debt or securities sold under agreements to repurchase that would be collateralized by security or mortgage collateral. At times the market values of securities collateralizing our securities sold under agreements to repurchase may decline due to changes in interest rates and may necessitate our lenders to issue a "margin call" which requires Lakeland to pledge additional collateral to meet that margin call. 45
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Management and the Board monitor the Company's liquidity through the Asset/Liability Committee, which monitors the Company's compliance with certain regulatory ratios and other various liquidity guidelines. As noted in the Executive Summary, management is closely monitoring changes in liquidity needs, including those that may result from the COVID-19 pandemic. The Company has increased collateral and expanded access to additional borrowings should it be necessary in order to meet liquidity needs. While we are unable to predict actual fluctuations in deposit or cash balances, management continues to monitor liquidity and believes that its current level of liquidity is sufficient to meet its current and future operational needs. The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash, as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statement for the nine months endedSeptember 30, 2020 follows. Cash and cash equivalents totaling$345.9 million onSeptember 30, 2020 increased$63.6 million fromDecember 31, 2019 . Operating activities provided$61.7 million in net cash. Investing activities used$688.2 million in net cash, primarily reflecting an increase in loans. Financing activities provided$690.0 million in net cash primarily reflecting the net increase in deposits of$972.9 million , partially offset by a$230.8 million decrease in federal funds purchased and securities sold under agreements to repurchase. The Company anticipates that it will have sufficient funds available to meet its current loan commitments and deposit maturities. This constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as ofSeptember 30, 2020 . Interest on subordinated debentures and long-term borrowed funds is calculated based on current contractual interest rates. After One After Three Within But Within But Within After (in thousands) Total One Year Three Years Five Years Five Years Minimum annual rentals on noncancellable operating leases$ 22,194 $ 3,309
5,017 397 818 755 3,047
Remaining contractual maturities of
time deposits 1,144,341 912,653 223,994 7,694 -
Subordinated debentures 118,248 - - 5,284 112,964
Loan commitments 1,204,412 889,292 151,560 14,449 149,111
Other borrowings 135,111 30,331 79,780 25,000 -
Interest on other borrowings* 44,204 8,189 13,512 11,021 11,482
Standby letters of credit 14,626 14,065 481 80 -
Total $ 2,688,153 $ 1,858,236 $ 475,550 $ 68,603 $ 285,764
*Includes interest on other borrowings and subordinated debentures at a weighted
rate of 3.33%.
Capital Resources
Total stockholders' equity increased to $753.6 million on September 30, 2020
from $725.3 million on December 31, 2019 , an increase of $28.3 million . Book
value per common share increased to $14.93 on September 30, 2020 from $14.36 on
December 31, 2019 . Tangible book value per share increased from $11.18 per share
on December 31, 2019 to $11.77 per share on September 30, 2020 , an increase of
5%. Please see "Non-GAAP Financial Measures" below. The increase in
stockholders' equity from December 31, 2019 to September 30, 2020 was primarily
due to $38.7 million of net income and other comprehensive income of $8.6
million , which was partially offset by the payment of cash dividends on common
stock of $19.1 million and purchase of treasury stock under the Company's stock
buyback program of $1.5 million .
The Company and Lakeland are subject to various regulatory capital requirements
that are monitored by federal banking agencies. Failure to meet minimum capital
requirements can lead to certain supervisory actions by regulators; any
supervisory action could have a direct material adverse effect on the Company or
Lakeland or their financial statements. As of September 30, 2020 , the Company
and Lakeland met all capital adequacy requirements to which they are subject.
As of September 30, 2020 , the Company's capital levels remained characterized as
"well-capitalized."
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The capital ratios for the Company and Lakeland for the periods presented are as
follows:
Common Equity Tier 1 to
Tier 1 Capital to Total Risk-Weighted Assets Tier 1 Capital to Risk- Total Capital to Risk-
Average Assets Ratio Ratio Weighted Assets Ratio Weighted Assets Ratio
September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019
The Company 8.36 % 9.41 % 9.83 % 10.46 % 10.34 % 11.02 % 12.93 % 13.40 %
Lakeland Bank 9.05 % 10.16 % 11.19 % 11.89 % 11.19 % 11.89 % 12.33 % 12.67 %
Required capital ratios
including conservation buffer 4.00 % 4.00 % 7.00 % 7.00 % 8.50 % 8.50 % 10.50 % 10.50 %
"Well capitalized"
institution under FDIC
Regulations 5.00 % 5.00 % 6.50 % 6.50 % 8.00 % 8.00 % 10.00 % 10.00 %
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Act")
was signed into law during the second quarter of 2018. The Act, among other
matters, amends the Federal Deposit Insurance Act to require federal banking
agencies to develop a specified Community Bank Leverage Ratio (the ratio of a
bank's equity capital to its average total consolidated assets) for banks with
assets of less than $10 billion . Qualifying participating banks that exceed this
ratio shall be deemed to comply with all other capital and leverage
requirements. In September 2019 , the FDIC approved a final rule allowing
community banks with a leverage capital ratio of at least 9% to be considered in
compliance with Basel III capital requirements and exempt from the Basel
Calculation. Under the final rule, banks with less than $10 billion in assets
may elect the community bank leverage ratio framework if they meet the 9% ratio
and if they hold 25% or less of assets in off-balance sheet exposures, and 5% or
less of assets in trading assets and liabilities. For institutions that fall
below the 9% capital requirement but remain above 8%, the final rule establishes
a two-quarter grace period to either meet the qualifying criteria again or
comply with the generally applicable capital rule. Lakeland Bancorp and Lakeland
Bank elected not to use the Community Bank Leverage Ratio framework.
Non-GAAP Financial Measures
Reported amounts are presented in accordance with U.S. GAAP. The Company's
management uses certain supplemental non-GAAP information in its analysis of the
Company's financial results. Specifically, the Company provides measurements and
ratios based on tangible equity and tangible assets. These measures are utilized
by regulators and market analysts to evaluate a company's financial condition
and therefore, such information is useful to investors.
The Company also provides measures based on what it believes are its operating
earnings on a consistent basis, and excludes material non-routine operating
items which affect the GAAP reporting of results of operations. The Company's
management believes that providing this information to analysts and investors
allows them to better understand and evaluate the Company's core financial
results for the periods in question.
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These disclosures should not be viewed as a substitute for financial results determined in accordance withU.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. (dollars in thousands, except per share amounts) September 30, 2020 December 31, 2019 Calculation of Tangible Book Value per Common Share Total common stockholders' equity at end of period - GAAP $ 753,572 $ 725,263 Less: Goodwill 156,277 156,277 Other identifiable intangible assets, net 3,538 4,314
Total tangible common stockholders' equity at end of period - Non-GAAP
$ 593,757 $ 564,672
Shares outstanding at end of period 50,468 50,498
Book value per share - GAAP $ 14.93 $ 14.36
Tangible book value per share - Non-GAAP $ 11.77 $ 11.18
Calculation of Tangible Common Equity to Tangible Assets Total tangible common stockholders' equity at end of period - Non-GAAP
$ 593,757 $ 564,672
Total assets at end of period$ 7,522,184 $ 6,711,236 Less: Goodwill 156,277 156,277 Other identifiable intangible assets, net 3,538 4,314
Total tangible assets at end of period - Non-GAAP
10.02 % 10.81 %
Tangible common equity to tangible assets - Non-GAAP 8.06 % 8.62 %
For the Three Months Ended September For the Nine Months Ended September
30, 30
(dollars in thousands) 2020 2019 2020 2019
Calculation of Return on Average Tangible
Common Equity
Net income - GAAP $ 14,427 $ 18,874 $ 38,670 $ 51,957
Total average common stockholders' equity $ 751,099 $ 705,726 $ 743,318 $ 689,538 Less:
Average goodwill 156,277 155,835 156,277 154,531 Average other identifiable intangible assets, net 3,689 4,761 3,944 5,022 Total average tangible common stockholders' equity - Non-GAAP$ 591,133 $ 545,130 $ 583,097 $ 529,985 Return on average common stockholders' equity - GAAP 7.64 % 10.61 % 6.95 % 10.07 % Return on average tangible common stockholders' equity - Non-GAAP 9.71 % 13.74 % 8.86 % 13.11 % 48
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Recent Accounting Pronouncements InMarch 2020 , theFinancial Accounting Standards Board ("FASB") issued Update 2020-04, an update to Topic 848, Reference Rate Reform. The update provides guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The update provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and only applies to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In addition, the update provides optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification for contracts that are modified because of reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. The ASU allows companies to apply the standard as of the beginning of the interim period that includesMarch 12, 2020 or any date thereafter. The Company is currently assessing the impact to its financial statements; however, the impact is not expected to be material. InJanuary 2020 , FASB issued Update 2020-01, an update to Topic 321, Investments, Topic 323, Joint Ventures and Topic 815, Derivatives and Hedging. The update clarifies the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting in accordance with Topic 321. In addition, the update clarifies scope considerations for forward contracts and purchased options on certain securities. This update will be effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2020 . The Company does not expect the update to have a material impact on the Company's financial statements. InDecember 2019 , FASB issued Update 2019-12, an update to Topic 740, Income Taxes, as part of an initiative to reduce complexity in accounting standards for income taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update will be effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2021 with early adoption permitted. The Company does not expect the update to have a material impact on the Company's financial statements. InAugust 2018 , the FASB issued Update 2018-13, an update to Topic 820, Fair Value Measurement, to improve the effectiveness of fair value measurement disclosures. Among other provisions, the update removes requirements to disclose amounts of and reasons for transfers between Level 1 and Level 2 in the fair value hierarchy, and it modifies the disclosures regarding transfers in and out of Level 3 of the fair value hierarchy. The update requires a discussion regarding the change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This update is effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2019 . Because the Company does not typically have Level 3 fair value measurements, the update did not have a material impact on the Company's financial statements. InAugust 2018 , the FASB issued Update 2018-15, an update to Subtopic 350-40, Intangibles -Goodwill and Other -Internal-Use Software , which aligns the requirements for capitalizing implementation costs in a cloud-computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Implementation costs incurred by customers in a cloud computing arrangement are to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. This update is effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2019 . The adoption of this update did not have a material impact on the Company's financial statements. InAugust 2018 , the FASB issued Update 2018-14, an update to Subtopic 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General, which changes the disclosure of accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in the update remove disclosures that are no longer considered cost-beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. For calendar-year public companies, the changes will be effective for annual periods, including interim periods within those annual periods, in 2020. Because the Company has minimal pension plans that require calculation of projected benefit obligations or accumulated benefit obligations, the update did not have a material impact on the Company's financial statements. InAugust 2017 , the FASB issued Update 2017-05, an update to Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, intended to improve and simplify accounting rules around hedge accounting. Amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update also make certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This update is effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2019 . The adoption of this update did not have a material impact on the Company's financial statements. 49
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InJanuary 2017 , the FASB issued Update 2017-04, an update to Topic 350, Intangibles -Goodwill and Other, to simplify the test for goodwill impairment. This amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. This update is effective for the Company's financial statements for annual years beginning afterDecember 15, 2019 . The update was adopted by the Company as ofJanuary 1, 2020 with prospective application and did not impact the year-to-dateSeptember 30, 2020 results. The future impact of the update will depend upon the performance of the Company and the market conditions impacting the fair value of the Company going forward. InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"), further amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. Topic 326 pertains to the measurement of credit losses on financial instruments. This update requires the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This update is effective for financial statements issued for fiscal years and interim periods beginning afterDecember 15, 2019 ; however, the Company has elected to defer implementation of the update as allowed as part of the CARES Act, which allows for an optional delay in implementation untilPresident Trump declares the COVID-19 national emergency to be over or the end of 2020, whichever comes first. The Company elected to delay CECL because of the rapidly changing economic forecast and uncertainty surrounding the economic impact of COVID-19 at the time of the Company's election. The additional time has allowed the Company to better understand the impact of the pandemic and variousU.S. government stimulus programs. Upon the Company's future adoption of CECL, the change from the incurred loss methodology to the CECL methodology will be recognized through an adjustment to retained earnings, with an effective retrospective implementation date ofJanuary 1, 2020 . Once final, the calculation will require approval by the Company's Allowance for Credit Losses Committee and governance in accordance with the Company's internal controls over financial reporting. When we adopt Topic 326, we anticipate using a modified retrospective approach. Our CECL methodology includes the following key factors and assumptions for all loan portfolio segments: a) the calculation of a baseline lifetime loss by applying a segment-specific historical average annual loss rate, calculated using an open pool method, applied over the remaining life of each instrument; b) a single set of economic forecast inputs for the reasonable and supportable period; c) an initial reasonable and supportable forecast period, which reflects management's expectations of losses based on forward-looking economic scenarios over that time; d) baseline lifetime loss rates adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period via a series of adjustment factors developed using a third-party developed and supported top-down statistical model suite that uses a set of relevant economic forecast inputs sourced from a leading global forecasting firm; e) a reversion period (after the reasonable and supportable forecast period) using a straight-line approach; f) a historical loss period which represents a full economic credit cycle (with the exception of equipment finance loans which will use a shorter time period due to circumstances unique to that segment); and g) expected prepayment rates estimated on more recent historical experience adjusted for refinance incentive, seasoning and burnout, as applicable. The Company expects that upon adoption of CECL, the allowance for loan losses and the reserve for unfunded commitments will increase, as a result of changing from an incurred loss model, which encompasses allowances for current known and inherent losses within the portfolio, to an expected loss model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The future impact of CECL on the Company's allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including forecasting and qualitative factors. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets; however, we do not expect these allowances to be significant. 50
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