NATIONAL BANK HOLDINGS CORPORATION The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and nine months ended September 30, 2022, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years endedDecember 31, 2021 , 2020 and 2019. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled "Cautionary Note Regarding Forward-Looking Statements" located elsewhere in this quarterly report and in Item 1A"Risk Factors" in the annual report on Form 10-K , referenced above, and should be read herewith.
All amounts are in thousands, except share and per share data, or as otherwise noted.
Overview Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We are executing on strategic acquisition opportunities to expand our presence in attractive markets and to diversify our revenue streams. Additionally, we are innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for our clients. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to blockchain payment tools, under the safety of a regulated bank. We believe that our established presence in our core markets ofColorado , the greaterKansas City region,Utah ,Wyoming ,Texas ,New Mexico andIdaho , as well as our ongoing investment in digital and blockchain solutions and strategic acquisitions position us well for growth opportunities. As ofSeptember 30, 2022 , we had$7.9 billion in assets,$5.7 billion in loans,$6.8 billion in deposits and$0.9 billion in equity.
Operating Highlights and Key Challenges
OnSeptember 1, 2022 , the Company completed its acquisition of Community Bancorporation, the holding company forRock Canyon Bank , headquartered inProvo, Utah . At the close of the acquisition, the Company acquired seven banking centers in the greaterSalt Lake City region. The acquisition added approximately$832.2 million in total assets,$537.7 million in loans and$734.5 million in deposits. The merger consideration totaled$140.4 million and consisted of$124.3 million in Company stock and$16.1 million in cash. All core operating systems were converted in October. OnOctober 1, 2022 , the Company completed its acquisition ofBancshares of Jackson Hole Incorporated , the holding company forBank of Jackson Hole , with operations inJackson Hole, Wyoming andIdaho . At the close of the acquisition, the Company acquired 12 banking centers. The acquisition added approximately$1.5 billion in total assets,$1.2 billion in loans and$1.4 billion in deposits and an attractiveWyoming -based trust and wealth management business with$0.8 billion in assets under management. The merger consideration totaled$213.4 million and consisted of$162.5 million in Company stock and$51.0 million in cash. All core operating systems will be converted during the fourth quarter of 2022. Profitability and returns
? Net income totaled
months ended
acquisitions of
million for a CECL Day 1 provision expense, net income totaled
or
Adjusting for non-recurring acquisition-related expenses, the return on
average tangible assets for the nine months ended September 30, 2022 was
1.23%.
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? The return on average tangible common equity was 10.17% for the nine months
ended
year. Adjusting for non-recurring acquisition-related expenses, the return on
average tangible common equity for the nine months ended
was 12.10%.
Strategic execution
? Completed the acquisition of Community Bancorporation, the holding company
for RCB, on
volume in the state of
billion in loans,
trust business with $0.8 billion in assets under management at the
acquisition date.
? With the completion of these exclusively negotiated transactions, NBHC has
approximately
measured as of September 30, 2022 .
? Continued to invest in digital solutions for our clients through our
financial eco-system, 2UniFiSM, for small and medium-sized businesses that we
believe will increase access to financial services while reducing the costs
of banking services. ? Maintained a conservatively structured loan portfolio represented by diverse
industries and concentrations with most industry sector concentrations at 5%
or less of total loans, and all concentration levels remain well below our
self-imposed limits.
Loan portfolio
? Generated record organic loan growth of 30.2% annualized fueled by record
year-to-date loan fundings.
? New loan fundings over the trailing 12 months totaled a record
led by commercial loan fundings of
loans totaling $537.7 million on September 1, 2022 .
? Total loans ended the quarter at $5.7 billion increasing $1.2 billion , or
35.8% annualized, since December 31, 2021 .
Credit quality
? Allowance for credit losses totaled 1.15% of total loans at
2022, compared to 1.10% at
million for the nine months ended
CECL allowance reserve of
and a
provision expense was driven by record loan growth and higher reserve
requirements from changes in the CECL model's underlying macro-economic
forecast. For the nine months ended
an allowance for credit loss release of
30, 2022 totaled 0.03%, annualized, compared to 0.03% for the full year ended
December 31, 2021 . ? Credit quality remained strong, as non-performing loans (comprised of
non-accrual loans and non-accrual TDRs) totaled 0.26% of loans, compared to
0.24% at
improved to 0.32% at
2021.
Client deposit funded balance sheet
? Average transaction deposits for the nine months ended
increased 8.2% to
in the prior year.
? Average total deposits totaled
period in the prior year. ? The mix of transaction deposits to total deposits improved 120 basis points
to 87.7% at
including
deposits on
2022, compared to 0.24% for the same period in the prior year.
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Revenues
? Fully taxable equivalent ("FTE") net interest income totaled
during the nine months ended
24.2%, compared to the same period in the prior year. ? The FTE net interest margin widened 52 basis points to 3.44% for the nine
months ended
year. The yield on earning assets increased 48 basis points, led by the remix
of assets into higher-yielding loan balances and multiple increases in the
federal funds rate since
points to 0.19% for the nine months ended
same period in the prior year.
? Non-interest income totaled $53.2 million during the nine months endedprimarily due to lower mortgage banking income from reduced refinance
activity and tighter gain on sale margins for mortgage loans sold in the
secondary market.
Expenses
? Non-interest expense totaled
compared to the nine months ended
salaries and benefits from lower mortgage banking-related compensation.
? Included in the first nine months of 2022 were
acquisition-related expenses, including
expense for credit losses,
salaries and benefits,
expense,
other non-interest expense in the consolidated statements of operations.
? The FTE efficiency ratio during the nine months ended
totaled 62.69%, compared to 64.43% during the nine months ended
2021. Adjusting for CDI asset amortization and non-recurring
acquisition-related expenses, the FTE efficiency ratio improved 538 basis
points to 58.66% during the nine months ended
the same period in the prior year.
? Income tax expense totaled $12.0 million during the nine months endedSeptember 30, 2021 . Strong capital position
? Capital ratios continue to be strong and in excess of federal bank regulatory
agency "well capitalized" thresholds. As of
consolidated tier 1 leverage ratio was 10.45%, and our common equity tier 1
and consolidated tier 1 risk based capital ratio was 12.75%.
? At
common book value per share decreased
compared to
outpaced by a
issuance of shares for the RCB acquisition. Excluding accumulated other
comprehensive loss, the tangible book value per share increased
Key Challenges
There are a number of significant challenges confronting us and our industry. We face continual challenges implementing our business strategy. These include growing our assets, particularly loans, and deposits amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive and inflationary environment. The COVID-19 pandemic has caused disruption to theU.S. labor market, supply chain, consumer spending and business operations. The prolonged economic impacts from the pandemic, including inflationary pressures and demand for labor, are likely to continue to present challenges to our business and to our clients. We are focused on growing our loan portfolio while adhering to our established underwriting standards and self-imposed concentration limits. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio. 47 Table of Contents
The agriculture industry continues to be impacted by elevated and volatile commodity prices and intermittent disruptions in supply chains. Our food and agribusiness portfolio is only 5.9% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 1.8% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future. Future growth in our interest income will ultimately be dependent on our ability to originate high-quality loans and other high-quality earning assets such as investment securities. Cash balances total$0.3 billion as ofSeptember 30, 2022 and have decreased$589.5 million fromDecember 31, 2021 and$551.2 million fromSeptember 30, 2021 . Investment securities totaled$1.3 billion as ofSeptember 30, 2022 and increased$36.2 million , or 2.8%, compared toDecember 31, 2021 . As ofSeptember 30, 2022 , our loans outstanding totaled$5.7 billion , increasing$1.2 billion , or 26.8%, compared toDecember 31, 2021 . During 2022, our weighted average rate on new loans funded at the time of origination was 4.80%, compared to the weighted average yield of our originated loan portfolio of 4.30% (FTE). During the nine months endedSeptember 30, 2022 , theFederal Reserve increased prevailing interest rates by a total of 300 basis points. Our future earnings will be impacted by theFederal Reserve's future interest rate policy decisions. Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to allU.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including fintechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges and expand our offerings in digital technology, including by partnering with and investing in fintechs where appropriate. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany
such
changes.
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Performance Overview
In evaluating our consolidated statements of financial condition and results of
operations financial statement line items, we evaluate and manage our
performance based on key earnings indicators, balance sheet ratios, asset
quality metrics and regulatory capital ratios, among others. The table below
presents some of the primary performance indicators that we use to analyze our
business on a regular basis for the periods indicated:
Key Metrics(1)
As of and for the three months ended As of and for the nine months ended
September 30 , December 31, September 30, September 30,
September 30,
2022 2021 2021 2022 2021
Return on average assets 0.84% 1.26% 1.11% 1.00% 1.36%
Return on average tangible assets(2) 0.87% 1.30% 1.14% 1.03% 1.39%
Return on average tangible assets, adjusted(2)(10) 1.39%
1.30% 1.14% 1.23% 1.39%
Return on average equity 7.22% 10.64% 9.15% 8.64% 11.20%Return on average tangible common equity(2) 8.66% 12.37% 10.65% 10.17% 13.04% Return on average tangible common equity, adjusted(2)(10) 13.76% 12.37% 10.65% 12.10% 13.04% Loan to deposit ratio (end of period) 84.10% 72.47% 72.08% 84.10% 72.08% Non-interest bearing deposits to total deposits (end of period) 40.21% 40.24% 39.89% 40.21% 39.89% Net interest margin(3) 3.93% 2.95% 2.85% 3.36% 2.84%
Net interest margin FTE(2)(3)(4) 4.01% 3.03% 2.93% 3.44% 2.92% Interest rate spread FTE(4)(5) 3.86%
2.89% 2.78% 3.31% 2.75%
Yield on earning assets(6) 4.11% 3.13% 3.04% 3.54% 3.07%Yield on earning assets FTE(2)(4)(6) 4.19% 3.21% 3.12% 3.62% 3.14% Cost of interest bearing liabilities 0.33%
0.32% 0.34% 0.31% 0.39%
Cost of deposits 0.18% 0.18% 0.21% 0.17% 0.24%Non-interest income to total revenue FTE(4) 19.76% 31.37% 36.85% 23.22% 38.11% Non-interest expense to average assets 2.87%
2.47% 2.86% 2.63% 2.82%
Efficiency ratio 62.39% 61.22% 67.44% 63.83% 65.53%
Efficiency ratio FTE(2)(4) 61.39% 60.14% 66.29% 62.69% 64.43%Efficiency ratio FTE, adjusted(2)(4)(10) 52.99%
59.74% 65.91% 58.66% 64.04%
Pre-provision net revenue $ 32,511 $ 28,196 $ 24,777 $ 81,371 $ 77,482Pre-provision net revenue FTE(2) 33,920 29,495 26,092 85,429 81,344 Pre-provision net revenue FTE adjusted for acquisition-related expense(2)(10) 40,916 29,495 26,092 93,685 81,344 Total Loans Asset Quality Data(7)(8)(9) Non-performing loans to total loans 0.26% 0.24% 0.29% 0.26% 0.29% Non-performing assets to total loans and OREO 0.32% 0.39% 0.39% 0.32% 0.39% Allowance for credit losses to total loans 1.15% 1.10% 1.11% 1.15% 1.11% Allowance for credit losses to non-performing loans 447.72% 458.77% 382.59% 447.72% 382.59% Net charge-offs to average loans 0.01%
0.02% 0.02% 0.03% 0.03%
(1) Ratios are annualized. (2) Ratio represents non-GAAP financial measure. See non-GAAP reconciliations
below.
(3) Net interest margin represents net interest income, including accretion
income on interest earning assets, as a percentage of average interest
earning assets. (4) Presented on an FTE basis using the statutory rate of 21% for all periods
presented. The taxable equivalent adjustments included above are
31, 2021 and
adjustments included above are
yield on interest earning assets and the weighted average cost of interest
bearing liabilities.
(6) Interest earning assets include assets that earn interest/accretion or
dividends. Any market value adjustments on investment securities areexcluded from interest earning assets. (7) Non-performing loans consist of non-accruing loans and restructured loans on
non-accrual.
(8) Non-performing assets include non-performing loans and OREO. (9) Total loans are net of unearned discounts and fees. (10) Ratios are adjusted for acquisition-related expenses. See non-GAAP
reconciliation below.
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About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including "tangible assets," "average tangible assets," "return on average tangible assets," "tangible common equity," "tangible common equity to tangible assets," "return on average tangible common equity," "tangible common book value," "tangible common book value per share," "tangible common equity to tangible assets," "tangible common book value, excluding accumulated other comprehensive loss, net of tax," "tangible common book value per share, excluding accumulated other comprehensive loss, net of tax," "adjusted non-interest expense," "non-interest expense to average assets, adjusted," "adjusted net income," "adjusted net income excluding core deposit intangible amortization expense, after tax," "adjusted earnings per share - diluted," "adjusted return on average tangible assets," "adjusted return on average tangible common equity," "non-interest expense adjusted for CDI asset amortization and acquisition-related expenses," "non-interest expense adjusted for acquisition-related expenses," "efficiency ratio adjusted for CDI and acquisition-related expenses," "pre-provision net revenue," "pre-provision net revenue adjusted for acquisition-related expenses," "tangible common book value, excluding accumulated other comprehensive loss (income), net of tax," "tangible common book value per share, excluding accumulated other comprehensive loss (income), net of tax," "adjusted net income excluding CDI amortization expense, after tax" and "fully taxable equivalent" metrics, are supplemental measures that are not required by, or are not presented in accordance with,U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as "non-GAAP financial measures." We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenses or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on an FTE basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods. These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our
performance.
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A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows:
Tangible Common Book Value Ratios
September 30, December 31, September 30,
2022 2021 2021
Total shareholders' equity $ 919,426 $ 840,106 $ 844,716
Less: goodwill and CDI assets, net (186,608) (121,392) (121,688)
Add: deferred tax liability related to
goodwill 10,755 10,070 9,841
Tangible common equity (non-GAAP) $ 743,573 $
728,784
Total assets$ 7,922,921 $ 7,214,011 $ 7,100,991 Less: goodwill and CDI assets, net (186,608) (121,392) (121,688) Add: deferred tax liability related to goodwill 10,755 10,070 9,841 Tangible assets (non-GAAP)$ 7,747,068 $ 7,102,689 $ 6,989,144 Tangible common equity to tangible assets calculations: Total shareholders' equity to total assets 11.60% 11.65% 11.90% Less: impact of goodwill and CDI assets, net (2.00)% (1.39)% (1.41)% Tangible common equity to tangible assets (non-GAAP) 9.60% 10.26% 10.49% Tangible common book value per share calculations: Tangible common equity (non-GAAP)$ 743,573 $ 728,784 $ 732,869 Divided by: ending shares outstanding 33,189,253 29,958,764 30,288,131 Tangible common book value per share (non-GAAP) $ 22.40 $
24.33 $ 24.20
Tangible common book value per share, excluding accumulated other comprehensive loss calculations: Tangible common equity (non-GAAP)$ 743,573 $ 728,784 $ 732,869 Accumulated other comprehensive loss, net of tax 89,339 6,963 1,397 Tangible common book value, excluding accumulated other comprehensive loss, net of tax (non-GAAP) 832,912 735,747 734,266 Divided by: ending shares outstanding 33,189,253 29,958,764 30,288,131 Tangible common book value per share, excluding accumulated other comprehensive loss, net of tax (non-GAAP) $ 25.10 $ 24.56 $ 24.24 51 Table of Contents
Return on Average Tangible Assets and Return on Average Tangible Equity
As of and for the three months ended As of and for the nine months ended
September 30, December 31, September 30, September 30, September 30,
2022 2021 2021 2022 2021
Net income $ 15,839 $ 22,769 $ 19,825 $ 54,553 $ 70,837
Add: impact of CDI amortization expense,
after tax 295 227 227 751 682
Net income excluding the impact of CDI amortization expense, after tax$ 16,134 $ 22,996 $ 20,052 $ 55,304 $
71,519
Net income excluding impact of CDI amortization expense, after tax$ 16,134 $ 22,996 $ 20,052 $ 55,304 $
71,519
Add: acquisition-related adjustments, after tax (non-GAAP)(1) 9,510 - - 10,480
-
Net income excluding impact of CDI amortization expense adjusted, after tax (non-GAAP)(1)$ 25,644 $ 22,996 $ 20,052 $ 65,784 $ 71,519 Average assets$ 7,449,066 $ 7,146,571 $ 7,116,141 $ 7,285,934$ 6,977,494 Less: average goodwill and CDI asset, net of deferred tax liability related to goodwill (131,490) (111,508) (112,026) (117,485)
(112,320)
Average tangible assets (non-GAAP)$ 7,317,576 $ 7,035,063 $ 7,004,115 $ 7,168,449$ 6,865,174 Average shareholders' equity$ 870,849 $ 848,803 $ 859,245 $ 844,241$ 845,776 Less: average goodwill and CDI asset, net of deferred tax liability related to goodwill (131,490) (111,508) (112,026) (117,485)
(112,320)
Average tangible common equity (non-GAAP)
726,756 $ 733,456
Return on average assets (non-GAAP) 0.84% 1.26% 1.11% 1.00%
1.36%
Return on average tangible assets (non-GAAP) 0.87% 1.30% 1.14% 1.03%
1.39%
Adjusted return on average tangible assets (non-GAAP) 1.39% 1.30% 1.14% 1.23%
1.39%
Return on average equity (non-GAAP) 7.22% 10.64% 9.15% 8.64%
11.20%
Return on average tangible common equity (non-GAAP) 8.66% 12.37% 10.65% 10.17%
13.04%
Adjusted return on average tangible common equity (non-GAAP) 13.76% 12.37% 10.65% 12.10%
13.04%
(1) Acquisition-related adjustments: Provision expense adjustments: CECL day 1 provision expense (non-GAAP) $ 5,358 $ - $ - $ 5,358 $
-
Non-interest expense adjustments: Acquisition-related expenses (non-GAAP) 6,996 - - 8,256
-
Acquisition-related adjustments before tax
(non-GAAP) 12,354 - - 13,614 -
Tax expense impact (2,844) - - (3,134) -
Acquisition-related adjustments, after tax
(non-GAAP) $ 9,510 $ - $ - $ 10,480 $ -
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Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
As of and for the three months ended As of and for the nine months ended
September 30, December 31, September 30, September 30, September 30,
2022 2021 2021 2022 2021
Interest income $ 72,369 $ 52,501 $ 50,801 $ 180,730 $ 148,464 Add: impact of taxable equivalent adjustment
1,409 1,299 1,315 4,058 3,862
Interest income FTE (non-GAAP) $ 73,778
$ 52,116 $ 184,788 $ 152,326
Net interest income $ 69,091$ 49,486
$ 47,569 $ 171,769 $ 137,658 Add: impact of taxable equivalent adjustment
1,409 1,299 1,315 4,058 3,862
Net interest income FTE (non-GAAP) $ 70,500
$ 48,884 $ 175,827 $ 141,520 Average earning assets$ 6,982,048 $ 6,655,918 $ 6,624,047 $ 6,829,975 $ 6,475,934 Yield on earning assets 4.11% 3.13% 3.04% 3.54% 3.07% Yield on earning assets FTE (non-GAAP) 4.19% 3.21% 3.12% 3.62% 3.14% Net interest margin 3.93% 2.95% 2.85% 3.36% 2.84%
Net interest margin FTE (non-GAAP) 4.01% 3.03% 2.93% 3.44% 2.92%
Efficiency Ratio and Pre-Provision Net Revenue
As of and for the three months ended As of and for the six months ended
September 30, December 31, September 30, September 30, September 30,
2022 2021 2021 2022 2021
Net interest income $ 69,091 $
49,486
1,409 1,299 1,315 4,058 3,862
Net interest income, FTE (non-GAAP) $ 70,500 $ 50,785 $ 48,884 $ 175,827 $ 141,520
Non-interest income $ 17,358 $ 23,215 $ 28,522 $ 53,174 $ 87,149
Non-interest expense $ 53,938 $ 44,505 $ 51,314 $ 143,572 $ 147,325
Less: CDI asset amortization (383) (296) (295) (975) (887)Less: Acquisition-related expenses (6,996) - - (8,256) - Non-interest expense adjusted for CDI asset amortization and acquisition-related expenses (non-GAAP) $ 46,559$ 44,209 $ 51,019 $ 134,341 $ 146,438 Non-interest expense $ 53,938 $
44,505
(6,996) - - (8,256) -
Non-interest expense adjusted for
acquisition-related expenses (non-GAAP) $ 46,942
Efficiency ratio 62.39% 61.22% 67.44% 63.83% 65.53% Efficiency ratio FTE (non-GAAP) 61.39% 60.14% 66.29% 62.69% 64.43% Efficiency ratio FTE adjusted for CDI asset amortization and acquisition-related expenses (non-GAAP) 52.99% 59.74% 65.91% 58.66% 64.04%
Pre-provision net revenue (non-GAAP) $ 32,511
33,920 29,495 26,092 85,429 81,344
Pre-provision net revenue, FTE adjusted
for acquisition-related expenses
(non-GAAP) 40,916 29,495 26,092 93,685 81,344
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Adjusted Net Income and Earnings Per Share
As of and for the three months ended As of and for the nine months ended
September 30, December 31, September 30, September 30, September 30,
2022 2021 2021 2022 2021
Adjustments to net income:
Net income $ 15,839 $ 22,769 $ 19,825 $ 54,553 $ 70,837
Add: Acquisition-related adjustments, after tax
(non-GAAP) 9,510 - - 10,480 -
Adjusted net income (non-GAAP) $ 25,349 $ 22,769 $ 19,825 $ 65,033 Adjustments to earnings per share: Earnings per share - diluted $ 0.50 $ 0.75 $ 0.64 $ 1.77 $ 2.27 Add: Acquisition-related adjustments, after tax (non-GAAP) 0.30 - - 0.34 - Adjusted earnings per share - diluted (non-GAAP) $ 0.80 $ 0.75 $ 0.64 $ 2.11 $ 2.27
Application of Critical Accounting Policies and Significant Estimates
We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the determination of the ACL. See additional discussion of our ACL policy in note 2 - Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2021 Annual Report on Form 10-K .
Accounting for Acquired Loans
ASC Topic 805, Business Combinations, all acquired loans are recorded at fair value at the date of acquisition. The fair value for acquired loans at the time of acquisition is based on a variety of factors including discounted expected cash flows, adjusted for estimated prepayments and credit losses. In accordance with ASC 326, the fair value adjustment is recorded as premium or discount to the unpaid principal balance of each acquired loan. Loans that have been identified as having experienced a more-than-insignificant deterioration in credit quality since origination are PCD loans. The net premium or discount on PCD loans is adjusted by our allowance for credit losses recorded at the time of acquisition. The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using the level yield method. The net premium or discount on non-PCD loans, that includes credit quality and interest rate considerations, is accreted or amortized into interest income over the remaining life of the loan using the level yield method. The Company then records the necessary allowance for credit losses on the non-PCD loans through provision for credit losses expense.
Future Accounting Pronouncements
InMarch 2020 , the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was effective upon issuance and can be adopted during any interim period throughDecember 31, 2022 . It provides optional expedients and guidance for applying generally accepted accounting principles to contract modifications and hedging relationships, if certain criteria are met, that reference LIBOR or any other reference rate that is expected to be discontinued. To address reference rate reform, the Company established a LIBOR transition subcommittee in January of 2020 to identify exposure to reference rates within loan and derivative contracts. The Company had no exposure to LIBOR tenors that were discontinued as ofJanuary 1, 2022 . For tenors expiring on future dates the Company is working to ensure all documentation includes contingency terms, if necessary, that may be utilized at such time when the LIBOR is discontinued. BeginningJanuary 1, 2022 , the Company no longer originates loans using LIBOR as a reference rate. The Company has assessed, and will continue to evaluate, the impact from ASU 2020-04 and does not expect the adoption of ASU 2020-04, or any updates issued to date, to have a material impact on its financial statements. InMarch 2022 , the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance on TDRs and requires disclosure of current-period gross write-offs by year of origination. The guidance also updates the requirements related to accounting for credit losses under ASC
Topic
326 and adds
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enhanced disclosures for creditors with respect to loan refinancing and
restructuring for borrowers experiencing financial difficulty. The guidance will
be effective for fiscal years, and interim periods, beginning after December 15,
2022 for entities that have adopted ASU 2016-13. The Company is reviewing ASU
2022-02 and does not expect the adoption of that pronouncement to have a
material impact on its financial statements.
In March 2022 , the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815):
Fair Value Hedging - Portfolio Layer Method. The purpose of this updated
guidance is to further align risk management objectives with hedge accounting
results on the application of the last-of-layer method, which was first
introduced in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities. ASU 2022-01 is effective for
public business entities for fiscal years beginning after December 15, 2022 . The
Company is reviewing ASU 2022-01 and does not expect the adoption of that
pronouncement to have a material impact on its financial statements.
Financial Condition
Total assets increased$708.9 million to$7.9 billion fromDecember 31, 2021 toSeptember 30, 2022 primarily due to the acquisition of RCB. Cash and cash equivalents decreased$589.5 million , or 69.7%, fromDecember 31, 2021 as excess cash liquidity was deployed into higher earning investment securities and loans. Investment securities decreased$36.2 million , or 2.8%, and loans increased$1.2 billion , or 26.8%, compared toDecember 31, 2021 . The allowance for credit losses increased$15.9 million to$65.6 million atSeptember 30, 2022 , compared toDecember 31, 2021 . During the nine months endedSeptember 30, 2022 , lower cost demand, savings, and money market deposits ("transaction deposits") increased$570.5 million , or 14.1% annualized, compared toDecember 31, 2021 , largely due to the acquisition of RCB, in addition to continued development of full banking relationships with our clients. In addition to providing excess cash liquidity, the increase in transaction deposits provided low-cost funding utilized to fund loan growth. Investment securities Available-for-sale Total investment securities available-for-sale increased 5.6% during the nine months endedSeptember 30, 2022 to$0.7 billion . Purchases of available-for-sale securities during the nine months endedSeptember 30, 2022 and 2021 totaled$260.2 million and$196.3 million , respectively. Paydowns and maturities totaled$116.0 million and$185.0 million during the nine months endedSeptember 30, 2022 and 2021, respectively.
Our available-for-sale investment securities portfolio is summarized in the following table as of the dates indicated. The weighted average yield was calculated based on amortized cost. Yields on tax exempt securities have not been adjusted for tax exempt status.
September 30, 2022 December 31, 2021
Weighted Weighted
Amortized Fair Percent of average Amortized Fair Percent of average
cost value
portfolio yield cost value portfolio yield
$ 73,912 $ 71,096 9.7% 2.54% $ - $ - - - Mortgage-backed securities: Residential mortgage pass-through securities issued or guaranteed byU.S. Government agencies or sponsored enterprises 272,133 229,651 31.4% 1.73% 231,523 227,696 32.9% 1.38% Other residential MBS issued or guaranteed byU.S. Government agencies or sponsored enterprises 496,878 426,982 58.5% 1.68% 467,490 461,334 66.7% 1.47% Municipal securities 230 224 0.0% 3.17% 230 237 0.0% 3.17% Corporate debt 2,000 1,958 0.3% 5.87% 2,000 2,111 0.3% 5.80% Other securities 880 880 0.1% 0.00% 469 469 0.1% 0.00% Total investment securities available-for-sale$ 846,033 $ 730,791
100.0% 1.78%
As ofSeptember 30, 2022 andDecember 31, 2021 , nearly all the available-for-sale investment portfolio was backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate FHLMC,FNMA and GNMA securities. The other mortgage-backed securities are comprised of securities backed by FHLMC,FNMA and GNMA securities. 55 Table of Contents Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 5.6 years and 4.2 years atSeptember 30, 2022 andDecember 31, 2021 , respectively. This estimate is based on assumptions and actual results may differ. AtSeptember 30, 2022 andDecember 31, 2021 , the duration of the total available-for-sale investment portfolio was 4.6 years and 3.8 years, respectively. AtSeptember 30, 2022 andDecember 31, 2021 , adjustable rate securities comprised 11.1% and 1.7%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 1.75% per annum and 1.70% per annum atSeptember 30, 2022 andDecember 31, 2021 , respectively. The available-for-sale investment portfolio included$115.3 million of unrealized losses and$12 thousand of unrealized gains atSeptember 30, 2022 and$13.3 million of unrealized losses and$3.4 million of unrealized gains atDecember 31, 2021 . We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC,FNMA and GNMA guaranteed mortgage-backed securities andU.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by theU.S. government (although limited forFNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.
Held-to-maturity
Held-to-maturity investment securities decreased 0.5% during the nine months endedSeptember 30, 2022 to$0.6 billion . Purchases during the nine months endedSeptember 30, 2022 and 2021 totaled$91.6 million and$377.7 million , respectively. Paydowns and maturities totaled$93.2 million and$109.0 million during the nine months endedSeptember 30, 2022 and 2021, respectively. Held-to-maturity investment securities are summarized as follows as of the dates indicated: September 30, 2022 December 31, 2021 Weighted Weighted Amortized Fair Percent of average Amortized Fair Percent of average cost value portfolio yield cost value portfolio yield Treasury securities$ 48,973 $ 47,412 8.1% 3.14% $ - $ - - - Mortgage-backed securities: Residential mortgage pass-through securities issued or guaranteed byU.S. Government agencies or sponsored enterprises 291,306 244,866 48.0% 1.75% 312,916 309,614 51.4% 1.56% Other residential MBS issued or guaranteed byU.S. Government agencies or sponsored enterprises 265,966 216,683 43.9%
1.54% 296,096 289,646 48.6% 1.25%
Total investment securities
held-to-maturity $ 606,245 $ 508,961 100.0% 1.77% $ 609,012 $ 599,260 100.0% 1.41%
The residential mortgage pass-through and other residential MBS held-to-maturity
investment portfolios are comprised of fixed rate FHLMC,
The fair value of the held-to-maturity investment portfolio included
The Company does not measure expected credit losses on a financial asset, or groups of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by eitherU.S. government agencies orU.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell the securities and believes it will not be required to sell the securities before the recovery of their amortized cost. Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to- 56 Table of Contents
maturity mortgage-backed securities portfolio as ofSeptember 30, 2022 andDecember 31, 2021 was 6.3 years and 4.1 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 5.0 years and 3.8 years as ofSeptember 30, 2022 andDecember 31, 2021 , respectively.
Non-marketable securities
Non-marketable securities totaled$64.0 million and$50.7 million atSeptember 30, 2022 andDecember 31, 2021 , respectively, and included FRB stock, FHLB stock and other non-marketable securities. AtSeptember 30, 2022 , other non-marketable securities totaled$48.5 million and consisted of equity method investments totaling$21.5 million and convertible preferred stock without readily determinable fair values totaling$27.0 million . AtDecember 31, 2021 , other non-marketable securities totaled$36.2 million and consisted of equity method investments totaling$14.2 million and convertible preferred stock without readily determinable fair values totaling$22.0 million . The Company continues to invest with fintech solution providers to support our digital ecosystem buildout, support our core bank products and offerings, and to leverage efficiencies and technological solutions in our shared services areas. Purchases of non-marketable securities totaled$11.5 million and$25.8 million during the nine months endedSeptember 30, 2022 and 2021, respectively. AtSeptember 30, 2022 , the Company held$13.9 million of FRB stock and$1.6 million of FHLB stock for regulatory and debt facility purposes. AtDecember 31, 2021 , the Company held$13.9 million of FRB stock and$0.7 million of FHLB stock. These are restricted securities which, lacking a market, are carried at cost. The Company is not aware of any events or changes in circumstances that may have an adverse effect on the investments carried at cost.
Loans overview
AtSeptember 30, 2022 , our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our seven acquisitions to date. The Company added$537.7 million of loans to the acquired loan portfolio onSeptember 1, 2022 from the acquisition of RCB. As discussed in note 3 to our consolidated financial statements, under ASC Topic 805, Business Combinations, all acquired loans are recorded at fair value at the date of acquisition. The fair value for acquired loans at the time of acquisition is based on a variety of factors including discounted expected cash flows, adjusted for estimated prepayments and credit losses. In accordance with ASC 326, the fair value adjustment is recorded as premium or discount to the unpaid principal balance of each acquired loan. Loans that have been identified as having experienced a more-than-insignificant deterioration in credit quality since origination are PCD loans. The net premium or discount on PCD loans is adjusted by our allowance for credit losses recorded at the time of acquisition. The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using a level yield method. The net premium or discount on non-PCD loans, that includes credit quality and interest rate considerations, is accreted or amortized into interest income over the remaining life of the loan using a level yield method. The Company then records the necessary allowance for credit losses on the non-PCD loans through provision for credit losses expense. 57 Table of Contents The table below shows the loan portfolio composition at the respective dates: September 30, 2022 vs. December 31, 2021 September 30, 2022 December 31, 2021 % Change Originated: Commercial: Commercial and industrial $ 1,724,469 $ 1,479,895 16.5% Municipal and non-profit 968,539 928,705 4.3%
Owner-occupied commercial real estate 631,783
503,663 25.4% Food and agribusiness 265,835 200,412 32.6% Total commercial 3,590,626 3,112,675 15.4%
Commercial real estate non-owner occupied 731,293
611,765 19.5% Residential real estate 750,669 616,135 21.8% Consumer 17,027 17,336 (1.8)% Total originated 5,089,615 4,357,911 16.8% Acquired: Commercial:
Commercial and industrial 82,324 16,252 >100% Municipal and non-profit 326 340 (4.1)% Owner-occupied commercial real estate 176,385
29,973 >100% Food and agribusiness 73,822 3,177 >100% Total commercial 332,857 49,742 >100%
Commercial real estate non-owner occupied 219,109
52,964 >100% Residential real estate 79,477 52,521 51.3% Consumer 927 245 >100% Total acquired 632,370 155,472 >100% Total loans $ 5,721,985 $ 4,513,383 26.8% The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. The loan portfolio increased$1.2 billion , or 35.8% annualized, fromDecember 31, 2021 toSeptember 30, 2022 . The increase was led by commercial loan growth of$761.1 million , or 32.2% annualized. Excluding loans totaling$537.7 million from the acquisition of RCB, loans increased$670.9 million led by originated commercial loan growth of$478.0 million , or 15.4%. Loan fundings during the nine months endedSeptember 30, 2022 totaled a record$1.5 billion , led by commercial loan fundings of$977.4 million . Our commercial and industrial loan portfolio is comprised of diverse industry segments. AtSeptember 30, 2022 , these segments included finance and financial services, primarily lender finance loans, of$201.8 million , hospital/medical loans of$397.4 million , manufacturing-related loans of$206.9 million , and a variety of smaller subcategories of commercial and industrial loans. Food and agribusiness loans, which are well-diversified across food production, crop and livestock types, totaled$339.7 million and were 36.6% of the Company's risk based capital. Crop and livestock loans represent 1.8% of total loans. Non-owner occupied CRE loans were 102.3% of the Company's risk based capital, or 16.6% of total loans, and no specific property type comprised more than 5.0% of total loans. The Company maintains very little exposure to non-owner occupied CRE retail properties, comprising 1.4% of total loans. Multi-family loans totaled$69.8 million , or 1.2% of total loans as ofSeptember 30, 2022 . New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan fundings totaled a record$2.0 billion over the past 12 months, led by commercial loan fundings of$1.3 billion . Fundings are defined as closed-end funded loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of fundings to better approximate the impact of fundings on loans outstanding and ultimately net interest income. 58
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The following table represents new loan fundings for the periods presented:
Third quarter Second quarter First quarter Fourth quarter Third quarter
2022 2022 2022 2021 2021
Commercial:
Commercial and industrial $ 201,106 $ 152,550 $ 169,168 $ 229,529 $ 196,289
Municipal and non-profit 20,845 81,428 49,906 101,450 43,516
Owner occupied commercial real estate 65,125 78,905 67,597 28,914 53,445
Food and agribusiness 76,293 (4,186) 18,620 11,016 8,442
Total commercial 363,369 308,697 305,291 370,909 301,692
Commercial real estate non-owner occupied 166,739 88,612 63,416 46,128 55,392
Residential real estate 99,951 93,220 49,040 55,873 54,442
Consumer 1,505 1,989 1,904 2,524 1,810
Total $ 631,564 $ 492,518 $ 419,651 $ 475,434 $ 413,336
Included in fundings are net fundings under revolving lines of credit totaling
$124,834 , $21,762 , $66,430 , $138,777 and $29,154 as of the third, second and
first quarters of 2022 and the fourth and third quarters of 2021, respectively.
The tables below show the contractual maturities of our total loans for the
dates indicated:
September 30, 2022
Due within Due after 1 but Due after 5 but Due after
1 year within 5 years within 15 years 15 Years Total
Commercial:
Commercial and industrial $ 184,939 $ 1,337,644 $ 273,871 $ 10,339 $ 1,806,793
Municipal and non-profit 2,396 151,005 510,341 305,123 968,865
Owner occupied commercial
real estate 65,345 221,255 418,251 103,317 808,168
Food and agribusiness 70,477 205,556 42,466 21,158 339,657
Total commercial 323,157 1,915,460 1,244,929 439,937 3,923,483
Commercial real estate
non-owner occupied 227,394 484,706 221,477 16,825 950,402
Residential real estate 30,029 40,215 191,432 568,470 830,146
Consumer 4,250 11,324 2,379 1 17,954
Total loans $ 584,830 $ 2,451,705 $ 1,660,217 $ 1,025,233 $ 5,721,985
December 31, 2021
Due within Due after 1 but Due after 5 but Due after
1 year within 5 years within 15 years 15 Years Total
Commercial:
Commercial and industrial $ 143,152 $ 1,119,195 $ 226,793 $ 7,007 $ 1,496,147
Municipal and non-profit 23,827 112,022 559,493 233,703 929,045
Owner occupied commercial
real estate 40,510 160,853 266,664 65,609 533,636
Food and agribusiness 79,507 107,799 11,193 5,090 203,589
Total commercial 286,996 1,499,869 1,064,143 311,409 3,162,417
Commercial real estate
non-owner occupied 200,042 316,473 147,783 431 664,729
Residential real estate 12,605 30,233 201,918 423,900 668,656
Consumer 3,504 11,507 2,570 - 17,581
Total loans $ 503,147 $ 1,858,082 $ 1,416,414 $ 735,740 $ 4,513,383
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The stated interest rate (which excludes the effects of non-refundable loan
origination and commitment fees, net of costs and the accretion of fair value
marks) of total loans with maturities over one year is as follows at the dates
indicated:
September 30, 2022
Fixed Variable Total
Weighted Weighted Weighted
Balance average rate Balance average rate Balance average rate
Commercial
Commercial and industrial $ 646,710 4.40% $ 975,144 5.91% $ 1,621,854 5.31%
Municipal and non-profit(1) 973,811 3.45% 23,430 3.90% 997,241 3.46%Owner occupied commercial real estate 381,363 4.55%
361,460 5.59% 742,823 5.10%
Food and agribusiness 51,110 5.23% 218,070 6.15% 269,180 5.98%
Total commercial 2,052,994 4.02% 1,578,104 5.84% 3,631,098 4.81%Commercial real estate non-owner occupied 264,778 4.63%
458,230 5.44% 723,008 5.14%
Residential real estate 397,691 3.57% 402,426 4.76% 800,117 4.17%
Consumer 11,055 4.78% 2,649 6.30% 13,704 5.07%Total loans with > 1 year maturity$ 2,726,518 4.02%
$ 2,441,409 5.59%$ 5,167,927 4.76% December 31, 2021 Fixed Variable Total Weighted Weighted Weighted Balance average rate Balance average rate Balance average rate Commercial Commercial and industrial$ 480,034 4.05%$ 872,961 3.41%$ 1,352,995 3.63% Municipal and non-profit(1) 881,339 3.37% 23,879 2.76% 905,218 3.35%
Owner occupied commercial real estate 293,190 4.70%
199,936 3.75% 493,126 4.45%
Food and agribusiness 49,303 5.21% 74,779 3.95% 124,082 4.45%
Total commercial 1,703,866 3.88% 1,171,555 3.49% 2,875,421 3.72%Commercial real estate non-owner occupied 214,463 4.28%
250,224 3.51% 464,687 3.86%
Residential real estate 360,648 3.45% 295,403 4.00% 656,051 3.70%
Consumer 11,567 4.37% 2,510 3.52% 14,077 4.21%Total loans with > 1 year maturity$ 2,290,544 3.85%$ 1,719,692 3.58%$ 4,010,236 3.74%
(1) Included in municipal and non-profit fixed rate loans are loans totaling
market pricing at
Included in the municipal and non-profit segment are tax exempt loans
totaling
3.97% at
Asset quality
Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate. Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution for the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over$500,000 , include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below. 60
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In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered TDRs in accordance with ASC 310-40. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ACL and any subsequent declines in carrying value charged to impairments on OREO.
Non-performing assets and past due loans
Non-performing assets consist of non-accrual loans and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and nine months endedSeptember 30, 2022 was$0.2 million and$0.4 million , respectively, and$0.2 million and$0.7 million during the three and nine months endedSeptember 30, 2021 , respectively. Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of collection. The following table sets forth the non-performing assets and past due loans as of the dates presented:September 30, 2022 December 31, 2021 Non-accrual loans:
Non-accrual loans, excluding restructured loans $ 10,232 $ 8,466 Restructured loans on non-accrual 4,425
2,366
Non-performing loans 14,657 10,832
OREO 3,695 7,005
Total non-performing assets $ 18,352 $ 17,837
Loans 30-89 days past due and still accruing
interest $ 1,548 $ 1,687
Loans 90 days or more past due and still accruing
interest 332 420
Non-accrual loans 14,657 10,832
Total past due and non-accrual loans $ 16,537 $ 12,939 Accruing restructured loans $ 4,610 $ 7,186 Allowance for credit losses 65,623 49,694
Non-performing loans to total loans 0.26% 0.24%
Total 90 days past due and still accruing interest and non-accrual loans to total loans
0.26% 0.25%
Total non-performing assets to total loans and OREO 0.32% 0.39%
ACL to non-performing loans 447.72% 458.77%
During the nine months ended
Loans 30-89 days past due and still accruing interest were 0.03% and 0.04% of total loans atSeptember 30, 2022 andDecember 31, 2021 , respectively. Loans 90 days or more past due and still accruing interest were 0.01% of total loans at bothSeptember 30, 2022 andDecember 31, 2021 .
Allowance for credit losses
The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. OnJanuary 1, 2020 , the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology for recognizing credit losses with a CECL model. The Company utilizes a DCF model developed within a third-party software tool to establish expected 61
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lifetime credit losses for the loan portfolio. The ACL is calculated as the
difference between the amortized cost basis and the projections from the DCF
analysis. The DCF model allows for individual life of loan cash flow modeling,
excluding extensions and renewals, using loan-specific interest rates and
repayment schedules including estimated prepayment rates and loss recovery
timing delays. The model incorporates forecasts of certain national
macro-economic factors, including unemployment rates, home price index ("HPI"),
retail sales and gross domestic product ("GDP"), which drive correlated loss
rates. The determination and application of the ACL accounting policy involves
judgments, estimates and uncertainties that are subject to change. For periods
beyond the reasonable and supportable forecast period, we revert to historical
long-term average loss rates on a straight-line basis.
We measure expected credit losses for loans on a pooled basis when similar risk
characteristics exist. We have identified four primary loan segments within the
ACL model that are further stratified into 11 loan classes to provide more
granularity in analyzing loss history and to allow for more definitive
qualitative adjustments based upon specific risk factors affecting each loan
class. Generally, the underlying risk of loss for each of these loan segments
will follow certain norms/trends in various economic environments. Loans that do
not share risk characteristics are evaluated on an individual basis and are not
included in the collective evaluation. Following are the loan classes within
each of the four primary loan segments:
Non-owner occupied
commercial real Residential
Commercial estate real estate Consumer
Commercial and industrial Construction Senior lien Consumer
Owner occupied commercial Acquisition and
real estate development Junior lien
Food and agribusiness Multifamily
Municipal and non-profit Non-owner occupied
Loans on non-accrual, in bankruptcy and TDRs with a balance greater than
$250,000 are excluded from the pooled analysis and are evaluated individually.
If management determines that foreclosure is probable, expected credit losses
are evaluated based on the criteria listed below, adjusted for selling costs as
appropriate. Typically, these loans consist of commercial, commercial real
estate and agriculture loans and exclude homogeneous loans such as residential
real estate and consumer loans. Specific allowances are determined by
collectively analyzing:
? the borrower's resources, ability, and willingness to repay in accordance
with the terms of the loan agreement; ? the likelihood of receiving financial support from any guarantors; ? the adequacy and present value of future cash flows, less disposal costs, of
any collateral; and ? the impact current economic conditions may have on the borrower's financial
condition and liquidity or the value of the collateral.
The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations. Net charge-offs on loans during the three and nine months endedSeptember 30, 2022 were$0.2 million and$1.1 million , respectively. The Company recorded an increase in the allowance for credit losses of$15.0 million during the three months endedSeptember 30, 2022 , which included a$5.2 million provision expense as a Day 1 allowance reserve for the RCB portfolio and a$2.5 million credit allowance for Day 1 PCD loans. The remainder of the provision expense during the quarter was driven by strong loan growth and higher reserve requirements from changes in the CECL model's underlying macro-economic forecast. During the nine months endedSeptember 30, 2022 , the Company recorded an increase in the allowance for credit losses of$17.0 million . The provision expense was driven by record loan growth, higher reserve requirements from changes in the CECL model's underlying macro-economic forecast and Day 1 reserve requirements for the acquired RCB portfolio. Specific reserves on loans totaled$2.9 million atSeptember 30, 2022 . Net charge-offs on loans during the three and nine months endedSeptember 30, 2021 were$0.2 million and$1.1 million , respectively. The Company recorded a net zero provision for credit losses for the three months endedSeptember 30, 2021 , as the provision expense of$0.3 million for funded loans was fully offset by a provision release of$0.3 million for unfunded loan commitments. During the nine months endedSeptember 30, 2021 , the Company recorded total provision release of$9.4 million , which included a provision release of$9.6 million for funded loans and a provision expense of$0.2 million for unfunded loan commitments. The provision 62 Table of Contents release was driven by strong asset quality and an improved outlook in the CECL model's underlying economic forecast. Specific reserves on loans totaled$1.2 million atSeptember 30, 2021 . The Company has elected to exclude AIR from the ACL calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. As ofSeptember 30, 2022 andDecember 31, 2021 , AIR from loans totaled$26.9 million and$15.7 million , respectively.
Total ACL
After considering the above mentioned factors, we believe that the ACL of$65.6 million is adequate to cover estimated lifetime losses inherent in the loan portfolio atSeptember 30, 2022 . However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively affect the Company's results of operations, liquidity or financial condition. The following schedules present, by class stratification, the changes in the ACL during the periods listed: As of and for the three months ended September 30, 2022 September 30, 2021 Total loans % NCOs(1) Total loans % NCOs(1) Beginning allowance for credit losses$ 50,860 $ 49,030 Charge-offs: Commercial - 0.00% (172) 0.01% Commercial real estate non owner-occupied - 0.00% - 0.00% Residential real estate - 0.00% (4) 0.00% Consumer (253) 0.02% (146) 0.01% Total charge-offs (253) (322) Recoveries 66 101 Net charge-offs (187) 0.01% (221) 0.02% Provision expense for credit losses 7,275
346
Day 1 CECL provision expense 5,201 - PCD allowance for credit loss at acquisition 2,474 - Ending allowance for credit losses$ 65,623 $ 49,155 Average total loans outstanding during the period$ 5,114,044 $ 4,352,557 As of and for the nine months ended September 30, 2022 September 30, 2021 Total loans % NCOs(1) Total loans % NCOs(1) Beginning balance$ 49,694 $ 59,777 Charge-offs: Commercial (754) 0.02% (1,112) 0.02% Commercial real estate - - non-owner occupied 0.00% 0.00% Residential real estate (2) 0.00% (26) 0.00% Consumer (582) 0.01% (410) 0.01% Total charge-offs (1,338) (1,548) Recoveries 256 480 Net charge-offs (1,082) 0.03% (1,068) 0.03% Provision expense (release) for 9,336
(9,554)
credit losses Day 1 CECL provision expense 5,201 - PCD allowance for credit loss
- at acquisition 2,474 Ending allowance for credit 65,623 49,155 losses $ $ Ratio of ACL to total loans outstanding at period end 1.15% 1.11% Ratio of ACL to total non-performing loans at period end 447.72%
382.59%
Total loans$ 5,721,985 $
4,421,760
Average total loans outstanding 4,784,064 4,314,330
during the period
Non-performing loans 14,657 12,848
(1) Ratio of annualized net charge-offs to average total loans.
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At the acquisition date, RCB had $2.1 million of previously charged off loans
for which the Company continued to have contractual rights to the cash flows. In
accordance with ASC Topic 326, PCD loan accounting is to be applied by the
acquirer whereby an allowance for credit losses should be recorded for this
subset of loans at the acquisition date, and if deemed non-collectible, the
loans are to be fully charged off on the acquirer's books. Such amounts were
fully reserved for, charged off on the acquisition date and excluded from the
table above.
The following tables present the allocation of the ACL and the percentage of the
total amount of loans in each loan category listed as of the dates presented:
September 30, 2022
ACL as a %
Total loans % of total loans Related ACL of total ACL
Commercial $ 3,923,483 68.6% $ 38,220 58.2%
Commercial real estate
non-owner occupied 950,402 16.6% 14,174 21.7%
Residential real estate 830,146 14.5% 12,874 19.6%
Consumer 17,954 0.3% 355 0.5%
Total $ 5,721,985 100.0% $ 65,623 100.0%
December 31, 2021
ACL as a %
Total loans % of total loans Related ACL of total ACL
Commercial $ 3,162,417 70.1% $ 31,256 62.9%
Commercial real estate
non-owner occupied 664,729 14.7% 10,033 20.2%
Residential real estate 668,656 14.8% 8,056 16.2%
Consumer 17,581 0.4% 349 0.7%
Total $ 4,513,383 100.0% $ 49,694 100.0%
Deposits
Deposits from banking clients serve as a primary funding source for our banking
operations, and our ability to gather and manage deposit levels is critical to
our success. Deposits not only provide a low-cost funding source for our loans,
but also provide a foundation for the client relationships that are critical to
future loan growth. The following table presents information regarding our
deposit composition at September 30, 2022 and December 31, 2021 :
Increase (decrease)
September 30, 2022 December 31, 2021 Amount % Change
Non-interest bearing demand deposits $ 2,735,832 40.2% $ 2,506,265 40.2% $ 229,567 9.2%
Interest bearing demand deposits 597,035 8.8% 555,401
8.9% 41,634 7.5%
Savings accounts 817,724 12.0% 774,559 12.4% 43,165 5.6%
Money market accounts 1,814,131 26.7% 1,558,032 25.0% 256,099 16.4%Total transaction deposits 5,964,722 87.7% 5,394,257 86.5% 570,465 10.6% Time deposits <$250,000 672,267 9.9% 703,741 11.4% (31,474) (4.5)% Time deposits >$250,000 166,563 2.4% 130,175
2.1% 36,388 28.0%
Total time deposits 838,830 12.3% 833,916 13.5% 4,914 0.6%
Total deposits $ 6,803,552 100.0% $ 6,228,173 100.0% $ 575,379 9.2%
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The following table shows uninsured time deposits by scheduled maturity as of
September 30, 2022 :
September 30, 2022
Three months or less $ 15,299
Over 3 months through 6 months 17,109
Over 6 months through 12 months 23,120
Thereafter 86,599
Total uninsured time deposits $ 142,127
At September 30, 2022 and December 31, 2021 , time deposits that were scheduled
to mature within 12 months totaled $521.7 million and $555.4 million ,
respectively. Of the time deposits scheduled to mature within 12 months at
September 30, 2022 , $72.9 million were in denominations of $250,000 or more, and
$448.8 million were in denominations less than $250,000 .
Long-term debt
OnNovember 5, 2021 , the Company entered into a subordinated note purchase agreement to issue and sell a fixed-to-floating rate note totaling$40.0 million . The balance on the note atSeptember 30, 2022 , net of long-term debt issuance costs totaling$0.4 million , totaled$39.6 million . Interest expense totaling$0.3 million and$0.9 million was recorded in the consolidated statements of operations during the three and nine months endedSeptember 30, 2022 , respectively. The note is subordinated, unsecured and matures onNovember 15, 2031 . Payments consist of interest only. Interest expense on the note is payable semi-annually in arrears and will bear interest at 3.00% per annum untilNovember 15, 2026 (or any earlier redemption date). FromNovember 15, 2026 untilNovember 15, 2031 (or any earlier redemption date) payments will be made quarterly in arrears, and the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month term SOFR plus 203 basis points. The Company is using the net proceeds from the sale of the note for general corporate purposes. Prior toNovember 5, 2026 , the Company may redeem the note only under certain limited circumstances. Beginning onNovember 5, 2026 through maturity, the note may be redeemed, at the Company's option, on any scheduled interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the note being redeemed, together with any accrued and unpaid interest on the note being redeemed up to but excluding the date of redemption. The note is not subject to redemption at the option of the holder.
Other borrowings
As ofSeptember 30, 2022 andDecember 31, 2021 , the Bank sold securities under agreements to repurchase totaling$20.0 million and$22.8 million , respectively. In addition, as a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of$1.0 billion atSeptember 30, 2022 . The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. AtSeptember 30, 2022 andDecember 31, 2021 , the Bank had no outstanding borrowings with the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged atSeptember 30, 2022 orDecember 31, 2021 . Loans pledged were$1.7 billion and$1.3 billion atSeptember 30, 2022 andDecember 31, 2021 , respectively. The Company incurred no interest expense related to FHLB advances or other short-term borrowings for the three and nine months endedSeptember 30, 2022 or 2021.
Results of Operations
Our net income depends largely on net interest income, which is the difference
between interest income from interest earning assets and interest expense on
interest bearing liabilities. Our results of operations are also affected by
provisions for credit losses and non-interest income, such as service charges,
bank card income, swap fee income, and gain on sale of mortgages. Our primary
operating expenses, aside from interest expense, consist of salaries and
benefits, occupancy costs, telecommunications data processing expense and
intangible asset amortization. Any expenses related to the resolution of problem
assets are also included in non-interest expense.
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Overview of results of operations
Net income totaled$15.8 million and$54.6 million , or$0.50 and$1.77 per diluted share, during the three and nine months endedSeptember 30, 2022 , respectively. Excluding$9.5 million of after-tax non-recurring acquisition-related expenses, net income totaled$25.3 million , or$0.80 per diluted share, during the three months endedSeptember 30, 2022 . Excluding$10.5 million of after-tax non-recurring acquisition-related expenses, net income totaled$65.0 million , or$2.11 per diluted share, during the nine months endedSeptember 30, 2022 . During the three and nine months endedSeptember 30, 2021 , net income totaled$19.8 million and$70.8 million , or$0.64 and$2.27 per diluted share, respectively. The rise in mortgage rates in 2022 has resulted in lower mortgage banking income during the first nine months of 2022. However, the increases in theFederal Reserve's interest rates are driving higher loan yields resulting in increasing levels of net interest income.
Net interest income
We regularly review net interest income metrics to provide us with indicators of
how the various components of net interest income are performing. We regularly
review: (i) our loan mix and the yield on loans; (ii) the investment portfolio
and the related yields; (iii) our deposit mix and the cost of deposits; and
(iv) net interest income simulations for various forecast periods.
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The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale and loans.
The table below presents the components of net interest income on a FTE basis
for the three months ended
For the three months ended For the three months ended
September 30, 2022 September 30, 2021
Average Average Average Average
balance Interest rate balance Interest rate
Interest earning assets:
Originated loans
FTE(1)(2)(3) $ 4,834,206 $ 58,153 4.77% $ 4,137,001 $ 41,865 4.01%
Acquired loans 295,893 6,581 8.82% 187,419 3,796 8.04%
Loans held for sale 39,532 551 5.53% 157,381 1,166 2.94%
Investment securities
available-for-sale 865,875 4,247 1.96% 656,757 2,572 1.57%
Investment securities
held-to-maturity 605,356 2,212 1.46% 671,053 2,178 1.30%
Other securities 14,909 212 5.69% 14,657 210 5.73%
Interest earning deposits
and securities purchased
under agreements to resell 326,277 1,822 2.22% 799,779 329 0.16%
Total interest earning
assets FTE(2) $ 6,982,048 $ 73,778 4.19% $ 6,624,047 $ 52,116 3.12%
Cash and due from banks $ 81,112 $ 77,498
Other assets 440,516 463,553
Allowance for credit
losses (54,610) (48,957)
Total assets $ 7,449,066 $ 7,116,141
Interest bearing
liabilities:
Interest bearing demand,
savings and money market
deposits $ 3,058,463 $ 1,829 0.24% $ 2,803,071 $ 1,516 0.21%
Time deposits 799,759 1,116 0.55% 903,935 1,711 0.75%
Securities sold under
agreements to repurchase 22,183 7 0.13% 19,681 5 0.10%
Long-term debt, net 39,543 326 3.27% - - 0.00%
Total interest bearing
liabilities $ 3,919,948 $ 3,278 0.33% $ 3,726,687 $ 3,232 0.34%
Demand deposits $ 2,557,286 $ 2,422,976
Other liabilities 100,983 107,233
Total liabilities 6,578,217 6,256,896
Shareholders' equity 870,849 859,245
Total liabilities and
shareholders' equity $ 7,449,066 $ 7,116,141
Net interest income FTE(2) $ 70,500 $ 48,884
Interest rate spread
FTE(2) 3.86% 2.78%
Net interest earning
assets $ 3,062,100 $ 2,897,360
Net interest margin FTE(2) 4.01% 2.93% Average transaction deposits$ 5,615,749 $ 5,226,047 Average total deposits 6,415,508 6,129,982 Ratio of average interest earning assets to average interest bearing liabilities 178.12% 177.75% (1) Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan. (2) Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are$1,409 and$1,315 for the three months endedSeptember 30, 2022 and 2021, respectively. (3) Loan fees included in interest income totaled$2,205 and$4,514 for the three months endedSeptember 30, 2022 and 2021, respectively. Net interest income totaled$69.1 million and$47.6 million during the three months endedSeptember 30, 2022 and 2021, respectively. Net interest income on an FTE basis totaled a record$70.5 million and$48.9 million during the three months endedSeptember 30, 2022 and 2021, respectively. During the three months endedSeptember 30, 2022 , the FTE net interest margin widened 108 basis points to 4.01%, compared to the three months endedSeptember 30, 2021 . The yield on earning assets increased 107 basis points, primarily driven by increases in the federal funds rate sinceMarch 2022 as well as excess cash being deployed into higher-yielding 67 Table of Contents
originated loans and investment securities. The cost of funds decreased one
basis point to 0.20% during the three months ended
Average loans comprised$5.1 billion , or 73.5%, of total average interest earning assets during the three months endedSeptember 30, 2022 , compared to$4.3 billion , or 65.3%, during the three months endedSeptember 30, 2021 . The increase in average loan balances was driven by a$697.2 million increase in average originated loans. Average acquired loans increased$108.5 million primarily driven by the RCB acquisition. Average investment securities comprised 21.1% and 20.0% of total interest earning assets during the three months endedSeptember 30, 2022 and 2021, respectively. The increase in the investment portfolio was driven by strategic decisions to deploy a portion of the excess cash liquidity into higher-yielding investment securities. Average balances of interest bearing liabilities increased$193.3 million during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . The increase was driven by higher interest bearing demand, savings and money market deposits totaling$255.4 million , long-term debt totaling$39.5 million and securities sold under agreement to repurchase totaling$2.5 million . The increase was partially offset by a decrease in time deposits of$104.1 million .
The
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The table below presents the components of net interest income on an FTE basis
for the nine months ended
For the nine months ended For the nine months ended
September 30, 2022 September 30, 2021
Average Average Average Average
balance Interest rate balance Interest rate
Interest earning assets:
Originated loans
FTE(1)(2)(3) $ 4,598,705 $ 148,025 4.30% $ 4,073,529 $ 121,461 3.99%
Acquired loans 191,089 13,552 9.48% 212,151 12,847 8.10%
Loans held for sale 70,384 2,188 4.16% 182,385 3,896 2.86%
Investment securities
available-for-sale 839,235 10,904 1.73% 660,399 7,454 1.50%
Investment securities
held-to-maturity 585,023 6,291 1.43% 555,818 5,317 1.28%
Other securities 14,698 632 5.73% 15,180 629 5.52%
Interest earning deposits
and securities purchased
under agreements to resell 530,841 3,196 0.80% 776,472 722 0.12%
Total interest earning
assets FTE(2) $ 6,829,975 $ 184,788 3.62% $ 6,475,934 $ 152,326 3.14%
Cash and due from banks $ 78,710 $ 78,953
Other assets 428,374 476,856
Allowance for credit
losses (51,125) (54,249)
Total assets $ 7,285,934 $ 6,977,494
Interest bearing
liabilities:
Interest bearing demand,
savings and money market
deposits $ 2,996,317 $ 4,760 0.21% $ 2,746,657 $ 4,740 0.23%
Time deposits 804,110 3,201 0.53% 936,088 6,050 0.86%
Securities sold under
agreements to repurchase 22,236 20 0.12% 20,310 16 0.11%
Long-term debt, net 39,516 980 3.32% - - 0.00%
Total interest bearing
liabilities $ 3,862,179 $ 8,961 0.31% $ 3,703,055 $ 10,806 0.39%
Demand deposits $ 2,487,522 $ 2,320,160
Other liabilities 91,992 108,503
Total liabilities 6,441,693 6,131,718
Shareholders' equity 844,241 845,776
Total liabilities and
shareholders' equity $ 7,285,934 $ 6,977,494 Net interest income FTE(2)$ 175,827 $ 141,520 Interest rate spread FTE(2) 3.31% 2.75% Net interest earning assets$ 2,967,796 $
2,772,879
Net interest margin FTE(2) 3.44% 2.92% Average transaction deposits$ 5,483,839 $ 5,066,817 Average total deposits 6,287,949 6,002,905 Ratio of average interest earning assets to average interest bearing liabilities 176.84% 174.88% (1) Originated loans are net of deferred loan fees, less costs, which are
included in interest income over the life of the loan. (2) Presented on a fully taxable equivalent basis using the statutory tax rate
of 21% for all periods presented. The taxable equivalent adjustments
included above are
2022 and 2021, respectively.
(3) Loan fees included in interest income totaled $7,155 and $13,753 for the
nine months ended September 30, 2022 and 2021, respectively.
Net interest income totaled $171.8 million and $137.7 million during the nine
months ended September 30, 2022 and 2021, respectively. Net interest income on
an FTE basis totaled $175.8 million and $141.5 million during the nine months
ended September 30, 2022 and 2021, respectively. During the nine months ended
September 30, 2022 , the FTE net interest margin widened 52 basis points to
3.44%, compared to the nine months ended September 30, 2021 . The yield on
earnings assets increased 48 basis points, primarily driven by increases in the
federal funds rate since March 2022 , the RCB acquisition as well as excess cash
being deployed into higher-yielding originated loans and investment securities.
The cost of funds decreased five basis points to 0.19% during the nine months
ended September 30, 2022 , compared to the nine months ended September 30, 2021 .
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Average loans comprised $4.8 billion , or 70.1%, of total average interest
earning assets during the nine months ended September 30, 2022 , compared to $4.3
billion , or 66.2%, of total average interest earning assets during the nine
months ended September 30, 2021 . The increase in average loan balances was
driven by a $525.2 million increase in average originated loans. Year-to-date
loan fundings through September 30, 2022 totaled a record $1.5 billion .
Average investment securities comprised 20.9% and 18.8% of total interest
earning assets during the nine months ended
Average balances of interest bearing liabilities increased$159.1 million during the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . The increase was driven by higher interest bearing demand, savings and money market deposits totaling$249.7 million , long-term debt totaling$39.5 million and securities sold under agreements to repurchase totaling$1.9 million . The increase was partially offset by a decrease in time deposits of$132.0 million . The cost of deposits decreased seven basis points to 0.17% during the nine months endedSeptember 30, 2022 , compared to 0.24% during the nine months endedSeptember 30, 2021 .
The
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The following table summarizes the changes in net interest income on an FTE basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 : Three months ended September 30, 2022 Nine months ended September 30, 2022 compared to compared to Three months ended September 30, 2021 Nine months ended September 30, 2021 Increase (decrease) due to Increase (decrease) due to Volume Rate Net Volume Rate Net Interest income: Originated loans FTE(1)(2)(3)$ 8,387 $ 7,901 $ 16,288 $ 16,905 $ 9,659 $ 26,564 Acquired loans 2,413 372 2,785 (1,494) 2,199 705 Loans held for sale (1,643) 1,028 (615) (3,482) 1,774 (1,708)
Investment securities available-for-sale 1,026 649 1,675 2,324 1,126 3,450 Investment securities held-to-maturity (240) 274 34 314 660 974 Other securities 4 (2) 2 (21) 24 3 Interest earning deposits and securities purchased under agreements to resell (2,644) 4,137 1,493 (1,479) 3,953 2,474 Total interest income$ 7,303 $ 14,359 $ 21,662 $ 13,067 $ 19,395 $ 32,462 Interest expense: Interest bearing demand, savings and money market deposits $ 153$ 160 $ 313 $ 397 $ (377) $ 20 Time deposits (145) (450) (595) (525) (2,324) (2,849) Securities sold under agreements to repurchase 1 1 2 2 2 4 Long-term debt, net 326 - 326 980 - 980 Total interest expense 335 (289) 46 854 (2,699) (1,845)
Net change in net interest income$ 6,968 $ 14,648
$ 21,616 $ 12,213 $ 22,094 $ 34,307 (1) Originated loans are net of deferred loan fees, less costs, which are
included in interest income over the life of the loan. (2) Presented on an FTE basis using the statutory tax rate of 21% for all periods
presented. The taxable equivalent adjustments included above are
The taxable equivalent adjustments included above are
the nine months ended
months ended
interest income totaled
Below is a breakdown of average deposits and the average rates paid during the periods indicated:
For the three months ended For the nine months ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Average Average Average Average
Average rate Average rate Average rate Average rate
balance paid balance paid balance paid balance paid
Non-interest bearing demand $ 2,557,286 0.00% $ 2,422,976 0.00% $ 2,487,522 0.00% $ 2,320,160 0.00%
Interest bearing demand 592,133 0.26% 544,056 0.19% 589,918 0.21% 548,906 0.21%
Money market accounts 1,674,240 0.26% 1,535,361 0.25% 1,619,744 0.24% 1,491,591 0.27%
Savings accounts 792,090 0.18% 723,654 0.15% 786,655 0.15% 706,160 0.16%
Time deposits 799,759 0.55% 903,935 0.75% 804,110 0.53% 936,088 0.86%
Total average deposits $ 6,415,508 0.18% $ 6,129,982 0.21% $ 6,287,949 0.17% $ 6,002,905 0.24%
Provision for credit losses
The provision for credit losses represents the amount of expense that is necessary to bring the ACL to a level that we deem appropriate to absorb estimated lifetime losses inherent in the loan portfolio as of the balance sheet date. The determination of the ACL, and the resultant provision for credit losses, is subjective and involves significant estimates and assumptions. The allowance for credit losses totaled 1.15% of total loans atSeptember 30, 2022 , compared to the allowance for credit losses of 1.11% atSeptember 30, 2021 . 71
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The Company recorded credit loss provision expense of$12.7 million during the three months endedSeptember 30, 2022 , which included a provision expense of$12.5 million for funded loans and a provision expense of$0.2 million for unfunded loan commitments. During the nine months endedSeptember 30, 2022 , the Company recorded credit loss provision expense of$14.9 million , which included a provision expense of$14.5 million for funded loans and a provision expense of$0.4 million for unfunded loan commitments. The provision expense was driven by record loan growth, higher reserve requirements from changes in the CECL model's underlying macro-economic forecast and$5.4 million of Day 1 reserve requirements for the acquired RCB portfolio. The Company recorded$0.3 million of provision expense for funded loans and$0.3 million of provision release for unfunded loan commitment reserves, during the three months endedSeptember 30, 2021 , as the impact of net loan growth was offset by strong asset quality and an improved outlook in the CECL model's underlying economic forecast. The Company recorded total provision release of$9.4 million for the nine months endedSeptember 30, 2021 , which included a provision release of$9.6 million for funded loans and a provision expense of$0.2 million for unfunded loan commitments, driven by strong asset quality and an improved outlook in the CECL model's underlying economic forecast.
Non-interest income
The table below details the components of non-interest income for the periods
presented:
For the three months ended For the nine months ended
September 30, September 30, Three months Nine months
Increase (decrease) Increase (decrease)
2022 2021 2022 2021 Amount % Change Amount % Change Service charges
$ 4,326 $ 3,947 $ 11,992
4,681 4,530 13,345 13,217 151 3.3 % 128 1.0 %
Mortgage banking income 4,474 16,615 21,088 52,973 (12,141) (73.1)% (31,885) (60.2)% Bank-owned life insurance income
573 558 1,645 1,659 15 2.7 % (14) (0.8)%
Other non-interest income 2,527 1,708 3,554
4,705 819 48.0 % (1,151) (24.5)%
OREO-related income 1 - 6 35 1 100.0 % (29) (82.9)%
Banking center
consolidation-related
income 776 1,164 1,544
3,571 (388) (33.3)% (2,027) (56.8)%
Total non-interest income
Non-interest income totaled$17.4 million for the three months endedSeptember 30, 2022 , compared to$28.5 million for the three months endedSeptember 30, 2021 . The decrease in mortgage banking income was driven by lower mortgage activity due to higher interest rates on mortgage loans and competition driving tighter gain on sale margins. Service charges and bank card fees increased a combined$0.4 million during the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , due to changes in consumer behavior. Other non-interest income increased$0.8 million due to higher derivative fee income and unrealized gains on equity method investments, partially offset by market adjustments on company-owned life insurance. Non-interest income totaled$53.2 million for the nine months endedSeptember 30, 2022 , compared to$87.1 million for the nine months endedSeptember 30, 2021 . The decrease in mortgage banking income was driven by lower mortgage activity due to higher interest rates on mortgage loans and competition driving tighter gain on sale margins. Other non-interest income decreased$1.2 million primarily due to market adjustments on company-owned life insurance and lower unrealized gains on equity method investments. Service charges and bank card fees increased a combined$1.1 million during the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , due to changes in consumer behavior. 72 Table of Contents Non-interest expense The table below details the components of non-interest expense for the periods presented: For the three months ended For the nine months ended September 30, September 30, Three months Nine months Increase (decrease) Increase (decrease) 2022 2021 2022 2021 Amount % Change Amount % Change Salaries and benefits$ 30,540 $ 32,556 $ 88,652 $ 97,518 $ (2,016) (6.2)%$ (8,866) (9.1)% Occupancy and equipment 8,026 6,469 21,087 19,150 1,557 24.1 % 1,937 10.1 % Telecommunications and data processing 2,899 2,282 7,733 6,934 617 27.0 % 799 11.5 % Marketing and business development 979 582 2,326 1,604 397 68.2 % 722 45.0 % FDIC deposit insurance 508 475 1,476 1,375 33 6.9 % 101 7.3 % Bank card expenses 1,409 1,457 4,075 3,931 (48) (3.3)% 144 3.7 % Professional fees 5,810 3,251 8,110 4,642 2,559 78.7 % 3,468 74.7 % Other non-interest expense 3,547 2,828 9,264 7,652 719 25.4 % 1,612 21.1 % Problem asset workout 215 1,119 522 1,851 (904) (80.8)% (1,329) (71.8)% (Gain) loss on OREO sales, net (378) - (648) 192 (378) (100.0)% (840) >(100.0)% Core deposit intangible asset amortization 383 295 975 887 88 29.8 % 88 9.9 % Banking center consolidation-related expense - - - 1,589 - - (1,589) (100.0)% Total non-interest expense$ 53,938 $ 51,314 $ 143,572 $ 147,325 $ 2,624 5.1 %$ (3,753) (2.5)% During the three and nine months endedSeptember 30, 2022 , non-interest expense increased$2.6 million , or 5.1%, and decreased$3.8 million , or 2.5%, respectively, compared to the three and nine months endedSeptember 30, 2021 . Salaries and benefits decreased primarily due to lower mortgage banking-related compensation. The three months endedSeptember 30, 2022 included$7.0 million of non-recurring acquisition-related expenses with$4.6 million included in professional fees,$0.8 million included in salaries and benefits,$0.6 million included in telecommunications and data processing,$0.5 million included in occupancy and equipment,$0.3 million included in other non-interest expense and$0.2 million included in marketing and business development. The nine months endedSeptember 30, 2022 included$8.3 million of non-recurring acquisition-related expenses with$5.7 million included in professional fees,$0.8 million included in salaries and benefits,$0.6 million in telecommunications and data processing,$0.5 million in occupancy and equipment,$0.5 million included in other non-interest expense and$0.2 million in marketing and business development.
Income taxes
Income tax expense totaled$4.0 million and$12.0 million for the three and nine months endedSeptember 30, 2022 , respectively. Income tax expense for the three and nine months endedSeptember 30, 2021 was$5.0 million and$16.1 million , respectively. The effective tax rate for the three and nine months endedSeptember 30, 2022 was 20.1% and 18.0%, respectively, compared to 20.0% and 18.5% for the same periods in the prior year. The effective tax rate is lower than the federal statutory rate primarily due to interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax income. Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our 2021 Annual Report on Form 10-K .
Liquidity and Capital Resources
Liquidity
Liquidity is monitored and managed to ensure that sufficient funds are available
to operate our business and pay our obligations to depositors and other
creditors, while providing ample available funds for opportunistic and strategic
investments. Management believes that the Company's excess cash, borrowing
capacity and access to sufficient sources of capital are adequate to meet its
short-term and long-term liquidity needs in the foreseeable future. Our primary
sources of funds are deposits, securities sold under agreements to repurchase,
prepayments and maturities of loans and investment securities, the sale of
investment securities, and funds provided from operations. We anticipate having
access to other third party funding sources, including the ability to raise
funds through the issuance of shares of our common stock or other equity or
equity-related securities, incurrence of debt, and federal funds purchased, that
may also be a source of liquidity. We anticipate that these sources of liquidity
will provide adequate funding and
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liquidity for at least a 12-month period, and we may utilize any combination of these funding sources for long-term liquidity needs if deemed prudent.
On-balance sheet liquidity is represented by our cash and cash equivalents and unencumbered investment securities, and is detailed in the table below as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, 2022 December 31, 2021 Cash and due from banks $ 255,458 $ 845,195 Interest bearing bank deposits 749 500 Unencumbered investment securities, at fair value 597,535 781,166 Total $ 853,742 $ 1,626,861
Total on-balance sheet liquidity decreased$773.1 million atSeptember 30, 2022 , compared toDecember 31, 2021 . The decrease was due to$183.6 million lower unencumbered available-for-sale and held-to-maturity securities balances and lower cash and due from banks of$589.5 million . At present, financing activities primarily consist of changes in deposits and repurchase agreements, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As ofSeptember 30, 2022 ,$521.7 million of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions, and our consumer banking strategy focusing on lower cost transaction accounts, our strategy is to replace a portion of those maturing time deposits with transaction deposits and market-rate time deposits. During 2021, the Company entered into a subordinated note purchase agreement maturing onNovember 15, 2031 . The Company is using the net proceeds from the sale of the note for general corporate purposes. AtSeptember 30, 2022 , the balance on the note, net of issuance costs totaling$0.4 million , totaled$39.6 million . Through our relationship with the FHLB, the Bank may pledge qualifying loans and investment securities allowing us to obtain additional liquidity through FHLB advances and lines of credit. There were no investment securities pledged atSeptember 30, 2022 orDecember 31, 2021 . The Bank had loans pledged as collateral for FHLB advances of$1.7 billion atSeptember 30, 2022 and$1.3 billion atDecember 31, 2021 . FHLB advances, lines of credit and other short-term borrowing availability totaled$1.0 billion atSeptember 30, 2022 . The Bank can obtain additional liquidity through the FHLB facility, if required, and also has access to federal funds lines of credit with correspondent banks. Currently, the Company does not have any advances from the FHLB. Our primary uses of funds are loan fundings, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses, and share repurchases. For additional information regarding our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying consolidated financial statements. Exclusive from the investing activities related to acquisitions, our primary investing activities are loan fundings and pay-offs and paydowns of loans and purchases and sales of investment securities. AtSeptember 30, 2022 , pledgeable investment securities represented a significant source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled$1.3 billion atSeptember 30, 2022 , inclusive of pre-tax net unrealized losses of$115.2 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had$97.3 million of pre-tax net unrealized losses atSeptember 30, 2022 . The gross unrealized gains and losses are detailed in note 4 of our consolidated financial statements. As ofSeptember 30, 2022 , our investment securities portfolio consisted primarily of MBS, all of which were issued or guaranteed byU.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base.
Capital
Under the Basel III requirements, atSeptember 30, 2022 , the Company and the Bank met all capital adequacy requirements and the Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on regulatory capital, see note 10 in our consolidated
financial statements.
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Our shareholders' equity is impacted by earnings, changes in unrealized gains
and losses on securities, net of tax, stock-based compensation activity, share
repurchases, shares issued in connection with acquisitions and the payment of
dividends.
The Board of Directors has from time to time authorized multiple programs to
repurchase shares of the Company's common stock either in open market or in
privately negotiated transactions in accordance with applicable regulations of
the SEC . On February 24, 2021 , the Company's Board of Directors authorized a
program to repurchase up to $75.0 million of the Company's stock. The remaining
authorization under the program as of September 30, 2022 was $38.6 million .
On November 8, 2022 , our Board of Directors declared a quarterly dividend of
$0.25 per common share, payable on December 15, 2022 to shareholders of record
at the close of business on November 25, 2022 .
Asset/Liability Management and Interest Rate Risk
Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows. The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee with direction from the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and utilize various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income. Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity atSeptember 30, 2022 . AtSeptember 30, 2022 , our asset sensitivity decreased for a rising rate environment as a result of the balance sheet mix. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 and 200 basis point decrease in interest rates on net interest income based on the interest rate risk model atSeptember 30, 2022 at the respective dates: Hypothetical shift in interest % change in projected net interest income rates (in bps) September 30, 2022 December 31, 2021 200 5.40% 11.12% 100 2.79% 5.37% (100) (5.81)% - (200) (12.96)% - Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates. 75 Table of Contents
As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of longer duration loans. The strategy with respect to liabilities has been to continue to emphasize transaction deposit growth, particularly non-interest or low interest bearing non-maturing deposit accounts while building long-term client relationships. Non-maturing deposit accounts totaled 87.7% of total deposits atSeptember 30, 2022 , compared to 86.5% atDecember 31, 2021 . We currently have no brokered time deposits.
Impact of Inflation and Changing Prices
The primary impact of inflation on our operations is reflected in increasing operating costs and non-interest expense. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than do changes in the general rate of inflation and changes in prices. Interest rate changes do not necessarily move in the same direction, nor have the same magnitude, as changes in the prices of goods and services. Although not as critical to the banking industry as many other industries, inflationary factors may have some impact on our ability to grow, total assets, earnings and capital levels. While we plan to continue our disciplined approach to expense management, an inflationary environment may cause wage pressures and general increases in our cost of doing business, which may increase our non-interest expense. Off-Balance Sheet Activities In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As ofSeptember 30, 2022 andDecember 31, 2021 , we had loan commitments totaling$1.4 billion and$992.5 million , respectively, and standby letters of credit that totaled$6.2 million and$7.3 million , respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.
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