SIMMONS FIRST NATIONAL CORPORATION OVERVIEW
Our net income for the three months endedSeptember 30, 2020 was$65.9 million , or$0.60 diluted earnings per share, a decrease of$15.9 million and of$0.24 , respectively, compared to the third quarter of 2019. Included in both third quarter 2020 and 2019 results were non-core items related to our acquisitions, early retirement programs and branch right sizing initiatives. Excluding all non-core items, core earnings for the three months endedSeptember 30, 2020 were$68.3 million , or$0.63 core diluted earnings per share, compared to$84.0 million , or$0.87 core diluted earnings per share for the three months endedSeptember 30, 2019 . Net income for the first nine months of 2020 was$201.9 million , or$1.83 diluted earnings per share, compared to$185.1 million , or$1.94 diluted earnings per share, for the same period in 2019. In addition to the non-core items related to acquisitions, early retirement programs and branch right sizing initiatives, gains associated with theTexas Branch Sale and theColorado Branch Sale were included in the results for the first nine months of 2020. Excluding the non-core items, year-to-date core earnings were$202.3 million , an increase of$3.8 million compared to the same period in prior year. Core diluted earnings per share for the first nine months of 2020 were$1.83 compared to$2.08 for the same period in 2019. We completed the acquisition ofThe Landrum Company , including its wholly-owned bank subsidiary,Landmark Bank , inOctober 2019 . The systems conversion ofLandmark Bank was completed duringFebruary 2020 . See Note 2, Acquisitions, in the accompanying Condensed Notes to Consolidated Financial Statements for additional information related to this acquisition. OnFebruary 28, 2020 , we completed theTexas Branch Sale of fiveSimmons Bank locations inAustin ,San Antonio andTilden, Texas . Additionally, onMay 18, 2020 we completed theColorado Branch Sale of fourSimmons Bank locations inDenver ,Englewood ,Highlands Ranch andLone Tree, Colorado . We recognized a combined gain on sale of$8.1 million on theTexas Branches andColorado Branches. Early in 2020, we offered qualifying associates an early retirement option resulting in$2.8 million of non-core expense during the first nine months of 2020. We expect ongoing net annualized savings of approximately$2.9 million from this program. We continuously evaluate our branch network as part of our analysis of our profitability of our operations and the efficiency with which we deliver banking services to our markets, including, among other things, changes in customer traffic and preferences. As a result of this ongoing evaluation, we closed 11 branch locations duringJune 2020 , with estimated net annual cost savings of approximately$2.4 million related to these locations. We closed an additional 23 branch locations onOctober 9, 2020 , with an expected net annual cost savings of approximately$6.7 million . We added over 38,000 new digital banking users since the end ofFebruary 2020 throughJune 30, 2020 . Digital users continue to grow in the third quarter of 2020, adding over 15,000 additional users, a 7% increase. InMarch 2020 , for the first time, we had more weekly transactions using digital channels than at the branches, and our mobile deposit usage has seen an increase of 75% since the end of February. DuringMay 2020 , we completed the conversion of all consumer customers to our new online platform. All consumer customers are now on the same online and mobile platforms, including acquired institutions. InSeptember 2020 , we completed the development of new credit card functionality which allows mobile and online banking to display credit card balances, line of credit utilization, recent transactions and minimum payment details, all with real-time information. Stockholders' equity as ofSeptember 30, 2020 was$2.9 billion , book value per share was$26.98 and tangible book value per share was$16.07 . Our ratio of common stockholders' equity to total assets was 13.72% and the ratio of tangible common stockholders' equity to tangible assets was 8.65% atSeptember 30, 2020 . The Company's Tier 1 leverage ratio of 9.05%, as well as our other regulatory capital ratios, remain significantly above the "well capitalized" levels (see Table 13 in the Capital section of this Item). Total loans were$14.02 billion atSeptember 30, 2020 , compared to$14.61 billion atJune 30, 2020 and$13.00 billion atSeptember 30, 2019 . The increase from prior year is primarily due to the Landrum acquisition. Sequentially, total loans decreased$589.5 million from the second quarter of 2020. During 2020, we had$970.5 million in loan originations under the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). See the COVID-19 Impact section below for additional information.
At
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In our discussion and analysis of our financial condition and results of
operation in this Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," we provide certain financial information
determined by methods other than in accordance with US GAAP. We believe the
presentation of non-GAAP financial measures provides a meaningful basis for
period-to-period and company-to-company comparisons, which we believe will
assist investors and analysts in analyzing the core financial measures of the
Company and predicting future performance. See the GAAP Reconciliation of
Non-GAAP Measures section below for additional discussion and reconciliations of
non-GAAP measures.
COVID-19 Impact
The coronavirus (COVID-19) pandemic has placed significant health, economic and other major pressure on the communities we serve,the United States and the entire world. InMarch 2020 ,Congress passed the CARES Act, which was designed to provide comprehensive relief to individuals and businesses following the unprecedented impact of the COVID-19 pandemic. Additionally, we have been actively managing our response to the continuing COVID-19 pandemic and have implemented a number of procedures in response to the pandemic to support the safety and well being of our employees, customers and shareholders. Some of the implemented procedures include: •Addressing the safety of the Company's branch network, following local, state, and federal guidelines; •Holding regular executive and pandemic task force meetings to address issues that change rapidly; •Implementing business continuity plans to help ensure that customers have adequate access to banking services; •Providing extensions and deferrals to loan customers affected by COVID-19 provided such customers were not 30 days or more past due atDecember 31, 2019 . See further discussion in the Asset Quality section below; •Participating in both appropriations of the CARES Act PPP that provides 100% federally guaranteed loans for small businesses to cover up to 24 weeks of payroll costs and assist with mortgage interest, rent and utilities. Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions during this crisis. We have experienced meaningful shifts in consumer habits which we believe will impact our delivery of products and services as well as the retail delivery of everyday amenities. We believe that our investment in digital channels will continue to position our company for these changes. During the first quarter of 2020, we sold approximately$1.1 billion in securities to increase liquidity in response to potential customer withdrawals of deposits as well as for anticipated funding of PPP loans. As ofSeptember 30, 2020 , the Company has approximately$2.5 billion in cash and cash equivalents and is well capitalized, which management believes has allowed us to continue to approach the crisis from a position of strength. ThroughAugust 8, 2020 , when the PPP program ended to new applicants, we had originated 8,199 PPP loans with an average balance of$118,000 per loan. Approximately 93% of our PPP loans had a balance of less than$350,000 at the end of the quarter. The following table categorizes our PPP loans by outstanding balance as ofSeptember 30, 2020 : PPP Loans Number of Balance September 30, (Dollars in thousands) Loans % of Loans 2020 % of Balance Less than$50,000 5,216 63 %$ 94,401 10 %$50,000 to$350,000 2,441 30 % 304,815 31 % More than$350,000 to less than$2 million 481 6 % 357,943 37 %$2 million to$10 million 61 1 % 213,329 22 % Total 8,199 100 %$ 970,488 100 % PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios. As a result, excluding PPP loans from total assets, common equity to total assets was 14.4% and tangible common equity to tangible assets was 9.1% as ofSeptember 30, 2020 . 52 --------------------------------------------------------------------------------
We are dedicated to supporting our customers and communities throughout this
period of uncertainty. As a show of this support, since
•Donated masks, gloves and hand sanitizers to healthcare facilities, police and a community group delivering meals. •Sponsored a live streaming concert fromSimmons Bank Arena to benefit theFeeding America food banks and theHunger Relief Alliance , raising over$30,000 . •Donated over$100,000 to various community support groups throughout our footprint to be used for COVID-19 response. •Delivered food and care packages to support police, firefighters, emergency responders and healthcare workers. We believe our associates have done a commendable job of adapting to the changes that have occurred over the past eight months. We continue to operate in an uncertain environment, and we expect to continue to adjust as necessary. We have consolidated various operations to provide capacity for continued service to our customers and communities. We continue to closely monitor this pandemic and expect to make future changes to respond as this situation continues to evolve. Further economic downturns accompanying this pandemic, or a delayed economic recovery from this pandemic, could result in increased deterioration in credit quality, past due loans, loans charge offs and collateral value declines, which could cause our results of operations and financial condition to be negatively impacted.
CRITICAL ACCOUNTING POLICIES
Overview
We follow accounting and reporting policies that conform, in all material respects, to US GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. The accounting policies that we view as critical to us are those relating to estimates and judgments regarding (a) the determination of the adequacy of the allowance for credit losses, (b) acquisition accounting and valuation of loans, (c) the valuation of goodwill and the useful lives applied to intangible assets, (d) the valuation of stock-based compensation plans and (e) income taxes.
Allowance for Credit Losses
The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management's best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected loan losses and risks inherent in the loan portfolio. Our allowance for credit loss methodology includes reserve factors calculated to estimate current expected credit losses to amortized cost balances over the remaining contractual life of the portfolio, adjusted for prepayments, in accordance with ASC Topic 326-20, Financial Instruments - Credit Losses. Accordingly, the methodology is based on our reasonable and supportable economic forecasts, historical loss experience, and other qualitative adjustments. For further information see the section Allowance for Credit Losses below. Our evaluation of the allowance for credit losses is inherently subjective as it requires material estimates. The actual amounts of credit losses realized in the near term could differ from the amounts estimated in arriving at the allowance for credit losses reported in the financial statements. OnJanuary 1, 2020 , the Company adopted the new CECL methodology. See Note 1, Preparation of Interim Financial Statements, in the accompanying Condensed Notes to Consolidated Financial Statements for additional information. 53 --------------------------------------------------------------------------------
Acquisition Accounting, Loans
We account for our acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. Our historical acquisitions all occurred under previous US GAAP prior to our adoption of CECL. No allowance for loan losses related to the acquired loans was recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820. The fair value estimates associated with the loans included estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. We evaluate loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. We perform an annual goodwill impairment test, and more than annually if circumstances warrant, in accordance with ASC Topic 350, Intangibles -Goodwill and Other, as amended by ASU 2011-08 - TestingGoodwill for Impairment and ASU 2017-04 - Intangibles -Goodwill and Other. ASC Topic 350 requires that goodwill and intangible assets that have indefinite lives be reviewed for impairment annually or more frequently if certain conditions occur. Impairment losses on recorded goodwill, if any, will be recorded as operating expenses. During the first quarter of 2020, our share price began to decline as the markets inthe United States responded to the global COVID-19 pandemic. As a result of that economic decline, the effect on our share price and other factors, we performed an interim goodwill impairment qualitative assessment during the first quarter and concluded no impairment existed. During the second quarter of 2020, we performed our annual goodwill impairment test and concluded that it is more likely-than-not that the fair value of our goodwill continues to exceed its carrying value and therefore, goodwill is not impaired. Once more, we performed an interim goodwill impairment assessment during the third quarter of 2020 and concluded no impairment existed. While our goodwill impairment analysis indicated no impairment atSeptember 30, 2020 , our assessment depends on several assumptions which are dependent on market and economic conditions, and future changes in those conditions could impact our assessment in the future.
Stock-Based Compensation Plans
We have adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awarding of performance or bonus shares granted to directors, officers and other key employees. In accordance with ASC Topic 718, Compensation - Stock Compensation, the fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses various assumptions. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. For additional information, see Note 16, Stock-Based Compensation, in the accompanying Condensed Notes to Consolidated Financial Statements included elsewhere in this report.
Income Taxes
We are subject to the federal income tax laws ofthe United States , and the tax laws of the states and other jurisdictions where we conduct business. Due to the complexity of these laws, taxpayers and the taxing authorities may subject these laws to different interpretations. Management must make conclusions and estimates about the application of these innately intricate laws, related regulations, and case law. When preparing the Company's income tax returns, management attempts to make reasonable interpretations of the tax laws. Taxing authorities have the ability to challenge management's analysis of the tax law or any reinterpretation management makes in its ongoing assessment of facts and the developing case law. Management assesses the reasonableness of its effective tax rate quarterly based on its current estimate of net income and the applicable taxes expected for the full year. On a quarterly basis, management also reviews circumstances and developments in tax law affecting the reasonableness of deferred tax assets and liabilities and reserves for contingent tax liabilities. 54 --------------------------------------------------------------------------------
NET INTEREST INCOME Overview Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors that determine the level of net interest income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, the level of non-performing loans and the amount of non-interest bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate of 26.135%. Our practice is to limit exposure to interest rate movements by maintaining a significant portion of earning assets and interest bearing liabilities in short-term repricing. In the last several years, on average, approximately 40% of our loan portfolio and approximately 80% of our time deposits have repriced in one year or less. Our current interest rate sensitivity shows that approximately 51% of our loans and 85% of our time deposits will reprice in the next year.
For the three month period endedSeptember 30, 2020 , net interest income on a fully taxable equivalent basis was$156.5 million , an increase of$5.4 million , or 3.6%, over the same period in 2019. The increase in net interest income was primarily the result of a$21.0 million decrease in interest expense partially offset by a reduction in interest income of$15.7 million . The reduction in interest income primarily resulted from a decrease of$16.7 million in interest income on loans partially offset by an increase of$1.4 million in interest income on investment securities. During the third quarter of 2020, we generated$16.3 million of additional interest income due to an increase in loan volume, primarily from our Landrum acquisition completed during the fourth quarter of 2019, while a 93 basis point decline in yield resulted in a$33.0 million decrease in interest income. The loan yield for the third quarter of 2020 was 4.54% compared to 5.47% for the same period in 2019. The PPP loan yield was approximately 2.37% (including accretion of net fees), which decreased the loan yield by 16 basis points. Excluding the PPP loans, loan yield for the third quarter of 2020 was 4.70%. Included in interest income is the additional yield accretion recognized as a result of updated estimates of the cash flows of our loans acquired. Each quarter, we estimate the cash flows expected to be collected from the loans acquired, and adjustments may or may not be required. The cash flows estimate may increase or decrease based on payment histories and loss expectations of the loans. The resulting adjustment to interest income is spread on a level-yield basis over the remaining expected lives of the loans. For the three months endedSeptember 30, 2020 and 2019, interest income included$8.9 million and$9.3 million , respectively, for the yield accretion recognized on loans acquired. The$21.0 million decrease in interest expense is mostly due to the decline in our deposit account rates and our FHLB borrowing rates. Interest expense decreased$24.1 million due to the decrease in yield of 86 basis points on interest-bearing deposit accounts and$1.4 million due to the decrease in yield of 44 basis points on FHLB borrowings. These decreases were partially offset by an increase of$3.4 million related to deposit growth primarily due to the Landrum acquisition.
Net Interest Income Year-to-Date Analysis
For the nine month period endedSeptember 30, 2020 , net interest income on a fully taxable equivalent basis was$492.3 million , an increase of$52.5 million , or 11.9%, over the same period in 2019. The increase in net interest income was the result of a$13.2 million increase in interest income coupled with a$39.2 million decrease in interest expense. The increase in interest income primarily resulted from a$10.5 million increase in interest income on loans and an increase of$2.9 million in interest income on investment securities. The increase in loan volume during the first nine months of 2020 generated$77.0 million of additional interest income, primarily from our Landrum and Reliance acquisitions completed during 2019, while a 66 basis point decline in yield resulted in a$66.5 million decrease in interest income.
For the nine months ended
The
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and
Net Interest Margin
Our net interest margin on a fully tax equivalent basis decreased 61 basis points to 3.21% for the three month period endedSeptember 30, 2020 , when compared to 3.82% for the same period in 2019. Normalized for all accretion, our core net interest margin for the three months endedSeptember 30, 2020 and 2019 was 3.02% and 3.59%, respectively. For the nine month period endedSeptember 30, 2020 , our net interest margin on a fully tax equivalent basis decreased 45 basis points to 3.43% when compared to 3.88% for the same period in 2019. The decreases in the net interest margin during the three and nine months endedSeptember 30, 2020 were primarily driven by the lower interest rate environment, additional liquidity created in response to the COVID-19 pandemic, and the lower yielding PPP loans originated during the second and third quarters of 2020. The impact of these items on net interest margin for the third quarter 2020 was 30 basis points, bringing the net interest margin adjusted for PPP loans and excess liquidity to 3.51%. DuringMarch 2020 , theFederal Open Market Committee , orFOMC , of theFederal Reserve substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic and rates have continued to remain low through the third quarter of 2020. As such, our variable rate loan portfolio has repriced to a lower yield and we have worked to lower the cost of deposits. In addition, our decreased net interest margin is being driven by the decrease in our non-PPP loan portfolio and we expect continued pressure on the net interest margin for the remainder of 2020.
Net Interest Income Tables
Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine months endedSeptember 30, 2020 and 2019, respectively, as well as changes in fully taxable equivalent net interest margin for the three and nine months endedSeptember 30, 2020 versusSeptember 30, 2019 . Table 1: Analysis of Net Interest Margin (FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%) Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2020 2019 2020 2019 Interest income$ 179,725 $ 196,406 $ 580,610 $ 569,732 FTE adjustment 2,864 1,843 7,519 5,150 Interest income - FTE 182,589 198,249 588,129 574,882 Interest expense 26,115 47,142 95,836 135,045 Net interest income - FTE$ 156,474 $ 151,107 $ 492,293 $ 439,837 Yield on earning assets - FTE 3.74 % 5.02 % 4.10 % 5.07 % Cost of interest bearing liabilities 0.74 % 1.55 % 0.90 % 1.54 % Net interest spread - FTE 3.00 % 3.47 % 3.20 % 3.53 % Net interest margin - FTE 3.21 % 3.82 % 3.43 % 3.88 %
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2020 vs. 2019 2020 vs. 2019
Increase due to change in earning assets $ 22,956 $ 97,238
Decrease due to change in earning asset yields (38,616) (83,991)
Decrease due to change in interest bearing liabilities (5,016) (18,835)
Increase due to change in interest rates paid on
interest bearing liabilities 26,043 58,044
Increase in net interest income $ 5,367 $ 52,456
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-------------------------------------------------------------------------------- Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three and nine months endedSeptember 30, 2020 and 2019. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Nonaccrual loans were included in average loans for the purpose of calculating the rate earned on total loans.
Table 3: Average Balance Sheets and Net Interest Income Analysis (FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%)
Three Months Ended September 30,
2020 2019
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate (%) Balance Expense Rate (%)
ASSETS
Earning assets:
Interest bearing balances due from
banks and federal funds sold $ 2,265,233 $ 623 0.11 $ 344,761 $ 1,586 1.83
Investment securities - taxable 1,534,742 7,193 1.86 1,561,308 9,514 2.42
Investment securities - non-taxable 1,155,099 10,382 3.58 681,505 6,687 3.89
Mortgage loans held for sale 145,226 1,012 2.77 39,551 382 3.83
Loans 14,315,014 163,379 4.54 13,053,540 180,080 5.47
Total interest earning assets 19,415,314 182,589 3.74 15,680,665 198,249 5.02
Non-earning assets 2,350,007 2,039,933
Total assets $ 21,765,321 $ 17,720,598 LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing liabilities: Interest bearing transaction and savings deposits$ 8,977,886 $ 6,769 0.30$ 7,322,395 $ 21,363 1.16 Time deposits 2,998,091 9,437 1.25 3,122,422 15,573 1.98 Total interest bearing deposits 11,975,977 16,206 0.54 10,444,817 36,936 1.40 Federal funds purchased and securities sold under agreements to repurchase 386,631 335 0.34 123,883 249 0.80 Other borrowings 1,357,278 4,943 1.45 1,127,886 5,381 1.89 Subordinated debt and debentures 382,672 4,631 4.81 354,178 4,576 5.13 Total interest bearing liabilities 14,102,558 26,115 0.74 12,050,764 47,142 1.55 Non-interest bearing liabilities: Non-interest bearing deposits 4,529,782 3,012,544 Other liabilities 190,169 288,517 Total liabilities 18,822,509 15,351,825 Stockholders' equity 2,942,812 2,368,773 Total liabilities and stockholders' equity$ 21,765,321 $ 17,720,598 Net interest spread 3.00 3.47 Net interest margin$ 156,474 3.21$ 151,107 3.82 57
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Nine Months Ended September 30,
2020 2019
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate (%) Balance Expense Rate (%)
ASSETS
Earning assets:
Interest bearing balances due from
banks and federal funds sold $ 1,742,166 $ 3,667 0.28 $ 338,349 $ 4,861 1.92
Investment securities - taxable 1,832,577 27,319 1.99 1,642,335 32,538 2.65
Investment securities - non-taxable 974,748 26,888 3.68 632,780 18,730 3.96
Mortgage loans held for sale 91,889 1,961 2.85 29,852 924 4.14
Loans 14,530,938 528,294 4.86 12,531,355 517,829 5.52
Total interest earning assets 19,172,318 588,129 4.10 15,174,671 574,882 5.07
Non-earning assets 2,331,246 1,965,748
Total assets $ 21,503,564 $ 17,140,419 LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing liabilities: Interest bearing transaction and savings deposits$ 9,040,053 $ 31,926 0.47$ 7,072,363 $ 59,983 1.13 Time deposits 3,068,459 33,563 1.46 2,993,336 42,499 1.90 Total interest bearing deposits 12,108,512 65,489 0.72 10,065,699 102,482 1.36 Federal funds purchased and securities sold under agreements to repurchase 370,116 1,431 0.52 122,195 642 0.70 Other borrowings 1,357,543 14,783 1.45 1,209,511 18,393 2.03 Subordinated debt and debentures 386,129 14,133 4.89 354,088 13,528 5.11 Total interest bearing liabilities 14,222,300 95,836 0.90 11,751,493 135,045 1.54 Non-interest bearing liabilities: Non-interest bearing deposits 4,164,189 2,852,687 Other liabilities 205,942 208,397 Total liabilities 18,592,431 14,812,577 Stockholders' equity 2,911,133 2,327,842 Total liabilities and stockholders' equity$ 21,503,564 $ 17,140,419 Net interest spread 3.20 3.53 Net interest margin$ 492,293 3.43$ 439,837 3.88 58
-------------------------------------------------------------------------------- Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine month periods endedSeptember 30, 2020 , as compared to the same periods of the prior year. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.
Table 4: Volume/Rate Analysis
Three Months Ended Nine Months Ended
September 30, September 30,
2020 vs. 2019 2020 vs. 2019
(In thousands, on a fully taxable Yield/ Yield/
equivalent basis) Volume Rate Total Volume Rate Total
Increase (decrease) in:
Interest income:
Interest bearing balances due from
banks and federal funds sold $ 1,727 $ (2,690) $
(963)
(2,162) (2,321) 3,472 (8,691) (5,219)
Investment securities - non-taxable 4,299 (604) 3,695 9,510 (1,352) 8,158
Mortgage loans held for sale 764 (134) 630 1,402 (365) 1,037
Loans 16,325 (33,026) (16,701) 76,964 (66,499) 10,465
Total 22,956 (38,616) (15,660) 97,238 (83,991) 13,247
Interest expense:
Interest bearing transaction and
savings accounts 3,993 (18,587) (14,594) 13,545 (41,602) (28,057)
Time deposits (598) (5,538) (6,136) 1,043 (9,979) (8,936)
Federal funds purchased and
securities sold under agreements to
repurchase 292 (206) 86 999 (210) 789
Other borrowings 974 (1,412) (438) 2,059 (5,669) (3,610)
Subordinated notes and debentures 355 (300) 55 1,189 (584) 605
Total 5,016 (26,043) (21,027) 18,835 (58,044) (39,209)
Increase (decrease) in net interest
income $ 17,940 $ (12,573) $ 5,367 $ 78,403 $ (25,947) $ 52,456
PROVISION FOR CREDIT LOSSES
The provision for credit losses represents management's determination of the
amount necessary to be charged against the current period's earnings in order to
maintain the allowance for credit losses at a level considered appropriate in
relation to the estimated lifetime risk inherent in the loan portfolio. The
level of provision to the allowance is based on management's judgment, with
consideration given to the composition, maturity and other qualitative
characteristics of the portfolio, assessment of current economic conditions,
past due and non-performing loans and historical net credit loss experience. It
is management's practice to review the allowance on a monthly basis and, after
considering the factors previously noted, to determine the level of provision
made to the allowance.
The provision for credit losses for the three and nine month periods ended
September 30, 2020 , was $23.0 million and $68.0 million , respectively, compared
to $22.0 million and $38.3 million for the same periods ended September 30,
2019 , increases of $1.0 million and $29.7 million . The increase during the
quarter ended September 30, 2020 was primarily based on additional qualitative
adjustments specific to industries that are more adversely impacted by the
current and expected economic scenarios, such as the restaurant, retail, and
hotel industries. These adjustments are intended to account for potential
problem credits that have not materialized into any identifiable metrics or
delinquencies. We additionally updated the credit loss forecast models using
multiple Moody's economic scenarios. The updates to the credit loss forecast
models capture the possibility of a more prolonged recovery to the economies
than originally expected that affect our loan portfolio. The increase during the
nine month period ended September 30, 2020 also included an additional provision
related to problem energy credits, ultimately charged-off during the second
quarter of 2020 for a total of $32.6 million , that experienced further
deterioration beginning in first quarter of 2020 and were negatively impacted by
the sharp decline in commodity pricing. The remainder of the increase was
related to the economic impact of the COVID-19 pandemic that is incorporated in
the Company's allowance for credit losses.
59
--------------------------------------------------------------------------------NON-INTEREST INCOME
Non-interest income is principally derived from recurring fee income, which includes service charges, trust fees and debit and credit card fees. Non-interest income also includes income on the sale of mortgage and SBA loans, investment banking income, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities. Total non-interest income was$71.9 million for the three month period endedSeptember 30, 2020 , a decrease of approximately$12.8 million , or 15.1%, compared to the same period in 2019, primarily due to the gain on sale of Visa Inc. class B common stock of$42.9 million that was recognized during the third quarter of 2019. We benefited from additional gains on the sale of securities and incremental mortgage lending income, collectively$24.4 million , during the third quarter of 2020. During the third quarter of 2020, we evaluated our security portfolio and projected calls that we expected to occur over the next year and a half with large gains. As a result, we sold approximately$515.6 million of investment securities resulting in a net gain of$22.3 million during the third quarter of 2020. For the nine month period endedSeptember 30, 2020 , total non-interest income was$204.5 million , an increase of approximately$45.1 million , or 28.3%, compared to the same period in 2019. During the first nine months of 2020, we sold approximately$1.7 billion of investment securities resulting in a net gain of$54.8 million . The majority of the investment securities were sold inMarch 2020 , in response to the unfolding events of the COVID-19 pandemic, as we focused on the creation of additional liquidity and strengthening our balance sheet. We used a portion of the liquidity generated by these investment security sales to fund PPP loans originated during the second and third quarters of 2020. We plan to reinvest back into our investment portfolio when the PPP loans are repaid, subject to economic conditions and other concerns at such time. Additionally, the gains on sale from theTexas Branch Sale andColorado Branch Sales of$8.1 million , which we consider a non-core item, contributed to the increase during 2020. The increases of$9.5 million and$20.5 million in mortgage lending income in the three and nine month periods endedSeptember 30, 2020 , respectively, was a result of the current low mortgage interest rate environment as well as increased business related to our Landrum and Reliance acquisitions.
Table 5 shows non-interest income for the three and nine month periods ended
Table 5: Non-Interest Income
Three Months Ended 2020 Nine Months Ended 2020
September 30, Change from September 30, Change from
(Dollars in thousands) 2020 2019 2019 2020 2019 2019
Trust income $ 6,744 $ 6,108 $ 636 10.4% $ 21,148 $ 17,610 $ 3,538 20.1%
Service charges on deposit
accounts 10,385 10,825 (440) (4.1) 32,283 31,450 833 2.7
Other service charges and
fees 1,764 1,308 456 34.9 4,841 3,909 932 23.8
Mortgage lending income 13,971 4,509 9,462 * 31,476 10,988 20,488 186.5
SBA lending income 304 956 (652) (68.2) 845 2,348 (1,503) (64.0)
Investment banking income 557 513 44 8.6 2,005 1,491 514 34.5
Debit and credit card fees 8,850 7,059 1,791 25.4 24,760 20,369 4,391 21.6
Bank owned life insurance
income 1,591 1,302 289 22.2 4,334 3,357 977 29.1
Gain on sale of securities,
net 22,305 7,374 14,931 * 54,790 12,937 41,853 *
Gain on sale of Visa, Inc.
class B common stock - 42,860 (42,860) * - 42,860 (42,860) (100.0)
Gain on sale of banking
operations, net - - - - 8,093 - 8,093 *
Other income 5,380 1,861 3,519 189.1 19,897 12,082 7,815 64.7
Total non-interest income
(15.1)% $ 204,472 $ 159,401 $ 45,071 28.3%
_____________________________
* Not meaningful
Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period endedSeptember 30, 2020 was$27.7 million , an increase of$2.4 million from the same period in 2019. Recurring fee income for the nine month period endedSeptember 30, 2020 , was$83.0 million , an increase of$9.7 million from the nine month period endedSeptember 30, 2019 , primarily the result of the Landrum and Reliance acquisitions completed during 2019. 60 --------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and employee benefits, occupancy, equipment, foreclosure losses and other expenses necessary for our operations. Management remains committed to controlling the level of non-interest expense through the continued use of expense control measures. We utilize an extensive profit planning and reporting system involving all subsidiaries. Based on a needs assessment of the business plan for the upcoming year, monthly and annual profit plans are developed, including manpower and capital expenditure budgets. These profit plans are subject to extensive initial reviews and monitored by management monthly. Variances from the plan are reviewed monthly and, when required, management takes corrective action intended to ensure financial goals are met. We also regularly monitor staffing levels at each subsidiary to ensure productivity and overhead are in line with existing workload requirements. Non-interest expense for the three months endedSeptember 30, 2020 was$118.9 million , an increase of$12.1 million , or 11.3%, from the same period in 2019. Non-interest expense during the third quarter of 2020 included$3.7 million of pre-tax non-core items:$902,000 of merger-related costs,$2.3 million of early retirement program expenses, and$442,000 of net branch right sizing costs. Normalizing for these non-core costs, core non-interest expense for the three months endedSeptember 30, 2020 increased$11.3 million , or 10.9%, from the same period in 2019. Non-interest expense for the nine months endedSeptember 30, 2020 was$365.4 million , an increase of$46.3 million , or 14.5%, from the same period in 2019. Normalizing for the non-core costs, core non-interest expense for the nine months endedSeptember 30, 2020 increased$55.4 million , or 18.4%, from the same period in 2019. The increases during both periods were primarily due to the incremental operating expenses from the Landrum and Reliance acquisitions completed during 2019. Also, our Next Generation Banking ("NGB") technology initiative has made substantial progress and the incremental software and technology expenditures of$12.4 million during the first nine months of 2020 were primarily related to this initiative. Table 6 below shows non-interest expense for the three and nine month periods endedSeptember 30, 2020 and 2019, respectively, as well as changes in 2020 from 2019.
Table 6: Non-Interest Expense
Three Months Ended 2020 Nine Months Ended 2020
September 30, Change from September 30, Change from
(Dollars in thousands) 2020 2019 2019 2020 2019 2019
Salaries and employee
benefits $ 58,798 $ 51,888 $ 6,910 13.3% $ 183,873 $ 161,096 $ 22,777 14.1%
Early retirement program 2,346 177 2,169 * 2,839 3,464 (625) (18.0)
Occupancy expense, net 9,647 8,342 1,305 15.6 28,374 22,736 5,638 24.8
Furniture and equipment
expense 6,231 4,898 1,333 27.2 18,098 12,462 5,636 45.2
Other real estate and
foreclosure expense 602 1,125 (523) (46.5) 1,201 2,353 (1,152) (49.0)
Deposit insurance 2,244 - 2,244 * 7,557 4,550 3,007 66.1
Merger related costs 902 2,556 (1,654) (64.7) 3,800 11,548 (7,748) (67.1)
Other operating expenses:
Professional services 3,779 4,310 (531) (12.3) 13,529 12,125 1,404 11.6
Postage 1,932 1,471 461 31.3 5,937 4,642 1,295 27.9
Telephone 2,103 2,506 (403) (16.1) 6,738 5,605 1,133 20.2
Credit card expenses 5,190 4,200 990 23.6 14,154 11,822 2,332 19.7
Marketing 3,517 7,021 (3,504) (49.9) 11,430 12,514 (1,084) (8.7)
Software and technology 9,552 6,531 3,021 46.3 29,021 16,607 12,414 74.8
Operating supplies 824 493 331 67.1 2,588 1,671 917 54.9
Amortization of intangibles 3,362 2,947 415 14.1 10,144 8,535 1,609 18.9
Branch right sizing expense 442 160 282 176.3 2,401 3,092 (691) (22.4)
Other expense 7,478 8,240 (762) (9.3) 23,676 24,195 (519) (2.2)
Total non-interest expense $ 118,949 $ 106,865 $ 12,084 11.3% $ 365,360 $ 319,017 $ 46,343 14.5%
_____________________________
* Not meaningful
61
--------------------------------------------------------------------------------LOAN PORTFOLIO
Our loan portfolio averaged$14.53 billion and$12.53 billion during the first nine months of 2020 and 2019, respectively. As ofSeptember 30, 2020 , total loans were$14.02 billion , a decrease of$408.3 million fromDecember 31, 2019 . The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans). We seek to manage our credit risk by diversifying our loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral, obtaining and monitoring collateral, providing an appropriate allowance for credit losses and regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose, industry and geographic region. We seek to use diversification within the loan portfolio to reduce credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. We use the allowance for credit losses as a method to value the loan portfolio at its estimated collectible amount. Loans are regularly reviewed to facilitate the identification and monitoring of deteriorating credits. The balances of loans outstanding at the indicated dates are reflected in Table 7, according to type of loan. Table 7: Loan Portfolio September 30, December 31, (In thousands) 2020 2019 Consumer: Credit cards$ 172,880 $ 204,802 Other consumer 190,736 249,195 Total consumer 363,616 453,997 Real estate: Construction and development 1,853,360 2,248,673 Single family residential 1,997,070 2,414,753 Other commercial 6,132,823 6,358,514 Total real estate 9,983,253 11,021,940 Commercial: Commercial 2,907,798 2,451,119 Agricultural 241,687 191,525 Total commercial 3,149,485 2,642,644 Other 521,088 307,123
Total loans before allowance for credit losses
Consumer loans consist of credit card loans and other consumer loans. Consumer loans were$363.6 million atSeptember 30, 2020 , or 2.6% of total loans, compared to$454.0 million , or 3.1% of total loans atDecember 31, 2019 . The decrease in consumer loans fromDecember 31, 2019 , toSeptember 30, 2020 , was primarily due to the expected seasonal decline in our credit card portfolio. Real estate loans consist of construction and development ("C&D") loans, single-family residential loans and commercial real estate ("CRE") loans. Real estate loans were$9.98 billion atSeptember 30, 2020 , or 71.2% of total loans, compared to$11.02 billion , or 76.4%, of total loans atDecember 31, 2019 , a decrease of$1.0 billion , or 9.4%. Our C&D loans decreased by$395.3 million , or 17.6%, single family residential loans decreased by$417.7 million , or 17.3%, and CRE loans decreased by$225.7 million , or 3.5%. Real estate loans declined approximately$104.6 million due to theColorado Branch Sale . The remaining decrease was due to less activity as a result of the pandemic and our effort to manage our real estate portfolio concentration. In the near term, we expect to continue to manage our C&D and CRE portfolio concentration by developing deeper relationships with our customers. 62 -------------------------------------------------------------------------------- Commercial loans consist of non-real estate loans related to business and agricultural loans. Total commercial loans were$3.15 billion atSeptember 30, 2020 , or 22.5% of total loans, compared to$2.64 billion , or 18.3% of total loans atDecember 31, 2019 , an increase of$506.8 million , or 19.2%, that is mostly in our non-agricultural commercial loan portfolio. The$970.5 million in PPP loan originations drove the increase in commercial loans during the first nine months of 2020. Management believes that loan demand is very weak in almost every aspect of our commercial economy, which we believe we see through our lower loan pipeline. Our customers appear to be deleveraging and not taking on new risks due to the economic uncertainty stemming from the COVID-19 pandemic. We believe that trend will continue until our customers are more confident in the economy. Other loans mainly consists of mortgage warehouse lending. Mortgage volume surged during the second and third quarters of 2020 due to the low interest rate environment leading to an increase of$214.0 million in other loans primarily from mortgage warehouse lines of credit.
ASSET QUALITY
Non-performing loans are comprised of (a) nonaccrual loans, (b) loans that are contractually past due 90 days and (c) other loans for which terms have been restructured to provide a reduction or deferral of interest or principal, because of deterioration in the financial position of the borrower. The subsidiary bank recognizes income principally on the accrual basis of accounting. When loans are classified as nonaccrual, generally, the accrued interest is charged off and no further interest is accrued. Loans, excluding credit card loans, are placed on a nonaccrual basis either: (1) when there are serious doubts regarding the collectability of principal or interest, or (2) when payment of interest or principal is 90 days or more past due and either (i) not fully secured or (ii) not in the process of collection. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses. When credit card loans reach 90 days past due and there are attachable assets, the accounts are considered for litigation. Credit card loans are generally charged off when payment of interest or principal exceeds 150 days past due. The credit card recovery group pursues account holders until it is determined, on a case-by-case basis, to be uncollectible. Total non-performing assets increased$67.2 million fromDecember 31, 2019 toSeptember 30, 2020 . Nonaccrual loans increased by$74.4 million during the period and foreclosed assets held for sale and other real estate owned decreased by$6.5 million . The increase in nonaccrual loans during 2020 is primarily in our CRE loan portfolio. Approximately$31.1 million and$18.2 million related to hotel real estate and student housing accommodations, respectively, moved to nonaccrual during the first nine months of the year. The remaining increase was related to various other CRE loans and commercial loan relationships. We continue to actively pursue an exit of our energy lending portfolio, except for our customers who have a diversified relationship with us. Non-performing assets, including troubled debt restructurings ("TDRs") and acquired foreclosed assets, as a percent of total assets were 0.87% atSeptember 30, 2020 , compared to 0.57% atDecember 31, 2019 . From time to time, certain borrowers are experiencing declines in income and cash flow. As a result, these borrowers are seeking to reduce contractual cash outlays, the most prominent being debt payments. In an effort to preserve our net interest margin and earning assets, we are open to working with existing customers in order to maximize the collectability of the debt. When we restructure a loan to a borrower that is experiencing financial difficulty and grant a concession that we would not otherwise consider, a "troubled debt restructuring" results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal. Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. Our TDR balance increased to$8.6 million atSeptember 30, 2020 from$7.4 million atDecember 31, 2019 .
TDRs are individually evaluated for expected credit losses. We assess the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determine if a specific allowance for credit losses is needed.
We return TDRs to accrual status only if (1) all contractual amounts due can
reasonably be expected to be repaid within a prudent period, and (2) repayment
has been in accordance with the contract for a sustained period, typically at
least six months.
63
-------------------------------------------------------------------------------- The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made betweenMarch 1, 2020 and the earlier of (i)December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as ofDecember 31, 2019 . The Company elected to adopt these provisions of the CARES Act and is following the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by regulatory agencies. We have more than 3,900 loans totaling approximately$3.2 billion which have received a COVID-19 modification. See Note 5, Loans and Allowance for Credit Losses, in the accompanying Condensed Notes to Consolidated Financial Statements for additional information related to these loans. Of these COVID-19 loan modifications, approximately$550.8 million , or 17.4%, are commercial loan modifications that are in an internal COVID-19 status category of 4-7 as ofmid-October 2020 , further discussed below, comprised of the following industries: Table 8: Commercial COVID-19 Loan Modifications Status Category 4-7 by Industry (Dollars in thousands) Loan Balance % Hotels$ 319,991 58.1 % Restaurants - Real Estate 7,209 1.3 Restaurants - Non-Real Estate 1,897 0.4 Retail 15,836 2.9 Nursing/Extended Care 42,674 7.7 Multifamily 62,320 11.3 All Other 100,905 18.3 Total$ 550,832 100.0 %
Table 9: Commercial COVID-19 Loan Modifications Status Category 4-7
(Dollars in thousands) Loan Balance Number of Loans Internal Status Category 4$ 335,798 105 Internal Status Category 5 195,312 71 Internal Status Category 6 17,242 44 Internal Status Category 7 2,480 8 Total$ 550,832 228 As previously discussed, the COVID-19 pandemic has had an unprecedented impact on the hotel, restaurant and retail industries, causing our borrowers in those industries to require loan modifications. We expect most of the commercial COVID-19 loan modifications listed above, as illustrated in Table 9, to return to regular payments with no credit downgrade or long-term restructure. Internal COVID-19 status categories are internal status categories that we use in connection with our COVID-19 loan modification program. A description of the general characteristics of the internal COVID-19 status categories 4-7 is as follows: •Category 4 - Borrower is still in the modification period and expected to need an additional modification. Financial projections show return to original terms, but not at the end of six months. The loan remains collateralized and fully supported by the guarantor. •Category 5 - Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan. The guarantors remain engaged and cooperative. •Category 6 - Financial projections do not support return to regular payments AND collateral deterioration is likely, which would not fully support the loan. The guarantors remain engaged and cooperative. •Category 7 - Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan. The guarantors lack the capacity and are unwilling or unable to develop a new operating strategy. 64 --------------------------------------------------------------------------------
We developed these status categories for internal purposes only and they are not a substitute or a replacement for loan risk ratings used by us under US GAAP.
We continue to maintain good asset quality, compared to the industry. Strong asset quality remains a primary focus of our strategy. The allowance for credit losses as a percent of total loans was 1.77% as ofSeptember 30, 2020 . Non-performing loans equaled 1.20% of total loans. Non-performing assets were 0.85% of total assets, a 31 basis point increase fromDecember 31, 2019 . The allowance for credit losses was 148% of non-performing loans. Our annualized net charge-offs to total loans for the first nine months of 2020 was 0.43%. Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.41%. Annualized net credit card charge-offs to total credit card loans were 1.75%, compared to 1.86% during the full year 2019, and 229 basis points better than the most recently published industry average charge-off ratio as reported by theFederal Reserve for all banks.
Table 10 presents information concerning non-performing assets, including nonaccrual loans at amortized cost and foreclosed assets held for sale.
Table 10: Non-performing Assets
September 30, December 31,
(Dollars in thousands) 2020 2019
Nonaccrual loans (1) $ 167,713 $ 93,330
Loans past due 90 days or more (principal or interest payments) 174 856
Total non-performing loans 167,887 94,186
Other non-performing assets:
Foreclosed assets held for sale and other real estate owned 12,590 19,121
Other non-performing assets 1,983 1,964
Total other non-performing assets 14,573 21,085
Total non-performing assets $
182,460
Performing TDRs$ 3,379 $ 5,887 Allowance for credit losses to non-performing loans 148 % 72 % Non-performing loans to total loans 1.20 % 0.65 %
Non-performing assets (including performing TDRs) to total assets 0.87 %
0.57 %
Non-performing assets to total assets 0.85 % 0.54 %
_______________________________________
(1)Includes nonaccrual TDRs of approximately
There was no interest income on nonaccrual loans recorded for the three and nine
month periods ended
65
--------------------------------------------------------------------------------ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is a reserve established through a provision for
credit losses charged to expense which represents management's best estimate of
lifetime expected losses based on reasonable and supportable forecasts,
historical loss experience, and other qualitative considerations.
Loans with similar risk characteristics such as loan type, collateral type, and
internal risk ratings are aggregated into homogeneous segments for assessment.
Reserve factors are based on estimated probability of default and loss given
default for each segment. The estimates are determined based on economic
forecasts over the reasonable and supportable forecast period based on projected
performance of economic variables that have a statistical correlation with the
historical loss experience of the segments. For contractual periods that extend
beyond the one-year forecast period, the estimates revert to average historical
loss experiences over a one-year period on a straight-line basis.
We also include qualitative adjustments to the allowance based on factors and
considerations that have not otherwise been fully accounted for. Qualitative
adjustments include, but are not limited to:
•Changes in asset quality - Adjustments related to trending credit quality
metrics including delinquency, nonperforming loans, charge-offs, and risk
ratings that may not be fully accounted for in the reserve factor.
•Changes in the nature and volume of the portfolio - Adjustments related to
current changes in the loan portfolio that are not fully represented or
accounted for in the reserve factors.
•Changes in lending and loan monitoring policies and procedures - Adjustments
related to current changes in lending and loan monitoring procedures as well as
review of specific internal policy compliance metrics.
•Changes in the experience, ability, and depth of lending management and other
relevant staff - Adjustments to measure increasing or decreasing credit risk
related to lending and loan monitoring management.
•Changes in the value of underlying collateral of collateralized loans -
Adjustments related to improving or deterioration of the value of underlying
collateral that are not fully captured in the reserve factors.
•Changes in and the existence and effect of any concentrations of credit -
Adjustments related to credit risk of specific industries that are not fully
captured in the reserve factors.
•Changes in regional and local economic and business conditions and developments
- Adjustments related to expected and current economic conditions at a regional
or local-level that are not fully captured within our reasonable and supportable
forecast.
•Data imprecisions due to limited historical loss data - Adjustments related to
limited historical loss data that is representative of the collective loan
portfolio.
Loans that do not share similar risk characteristics are evaluated on an
individual basis. These evaluations are typically performed on loans with a
deteriorated internal risk rating or that are classified as a TDR. The allowance
for credit loss is determined based on several methods including estimating the
fair value of the underlying collateral or the present value of expected cash
flows.
66
--------------------------------------------------------------------------------
An analysis of the allowance for credit losses for loans is shown in Table 11.
Table 11: Allowance for Credit Losses (In thousands) 2020 2019 Balance, beginning of year$ 68,244 $ 56,694 Impact of CECL adoption 151,377 - Loans charged off: Credit card 3,326 3,298 Other consumer 3,062 3,582 Real estate 3,373 3,000 Commercial 40,537 22,893 Total loans charged off 50,298 32,773 Recoveries of loans previously charged off: Credit card 773 734 Other consumer 1,110 2,053 Real estate 474 355 Commercial 1,381 1,190 Total recoveries 3,738 4,332 Net loans charged off 46,560 28,441 Provision for credit losses 75,190 38,337 Balance, September 30$ 248,251 $ 66,590 Loans charged off: Credit card 1,287 Other consumer 1,425 Real estate 892 Commercial 459 Total loans charged off 4,063 Recoveries of loans previously charged off: Credit card 287 Other consumer 304 Real estate 146 Commercial 77 Total recoveries 814 Net loans charged off 3,249 Provision for credit losses 4,903 Balance, end of year$ 68,244 Provision for Credit Losses The amount of provision added to the allowance during the three and nine months endedSeptember 30, 2020 and 2019, and for the year endedDecember 31, 2019 , was based on management's judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic forecasts and conditions, past due and non-performing loans and net loss experience. It is management's practice to review the allowance on a monthly basis, and after considering the factors previously noted, to determine the level of provision made to the allowance. 67 --------------------------------------------------------------------------------
Allowance for Credit Losses Allocation
As ofSeptember 30, 2020 , the allowance for credit losses reflected an increase of approximately$180.0 million fromDecember 31, 2019 while loans decreased$408.3 million over the same nine month period. The allocation in each category within the allowance generally reflects the overall changes in the loan portfolio mix. During the first quarter of 2020, we recorded an additional allowance for credit losses for loans of approximately$151.4 million due to the adoption of CECL. The significant impact to the allowance for credit losses at the date of adoption was driven by the substantial amount of loans acquired held by the Company. We had approximately one third of total loans categorized as acquired at the adoption date with very little reserve allocated to them due to the previous incurred loss impairment methodology. As such, the amount of the CECL adoption impact was greater on the Company when compared to a non-acquisitive bank. The remaining increase in the allowance for credit losses during the first nine months of 2020 was predominately related to updated credit loss forecast models using multiple Moody's economic scenarios previously discussed in Provision for Credit Losses as well as continued economic uncertainty due to the COVID-19 pandemic. Certain industries are being more adversely impacted than others by this pandemic, such as the restaurant, retail and hotel industries, and there remains substantial uncertainty regarding how borrowers in these industries will recover. Our allowance for credit losses atSeptember 30, 2020 was at the high-end of our calculated range, although it was considered appropriate given the considerable amount of uncertainty as to the structure and timing of potential economic recovery, future of government assistance/election, and other related factors. The following table sets forth the sum of the amounts of the allowance for credit losses attributable to individual loans within each category, or loan categories in general. The table also reflects the percentage of loans in each category to the total loan portfolio for each of the periods indicated. The allowance for credit losses by loan category is determined by i) our estimated reserve factors by category including applicable qualitative adjustments and ii) any specific allowance allocations that are identified on individually evaluated loans. The amounts shown are not necessarily indicative of the actual future losses that may occur within individual categories.
Table 12: Allocation of Allowance for Credit Losses
September 30, 2020 December 31, 2019
Allowance % of Allowance % of
(Dollars in thousands) Amount loans (1) Amount loans (1)
Credit cards $ 8,600 1.2 % $ 4,051 1.4 %
Other consumer 7,175 1.4 % 1,998 1.7 %
Real estate 181,917 71.2 % 39,161 76.5 %
Commercial 49,248 22.5 % 22,863 18.3 %
Other 1,311 3.7 % 171 2.1 %
Total $ 248,251 100.0 % $ 68,244 100.0 %
_______________________________________
(1)Percentage of loans in each category to total loans.
DEPOSITS
Deposits are our primary source of funding for earning assets and are primarily developed through our network of approximately 226 financial centers as ofSeptember 30, 2020 . We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits. Our core deposits consist of all deposits excluding time deposits of$100,000 or more and brokered deposits. As ofSeptember 30, 2020 , core deposits comprised 84.9% of our total deposits. We continually monitor the funding requirements along with competitive interest rates in the markets we serve. Because of our community banking philosophy, our executives in the local markets, with oversight by the Asset Liability Committee and the Bank'sTreasury Department , establish the interest rates offered on both core and non-core deposits. This approach ensures that the interest rates being paid are competitively priced for each particular deposit product and structured to meet the funding requirements. We believe we are paying a competitive rate when compared with pricing in those markets. 68 -------------------------------------------------------------------------------- We manage our interest expense through deposit pricing. We believe that additional funds can be attracted and deposit growth can be accelerated through deposit pricing if we experience increased loan demand or other liquidity needs. We can also utilize brokered deposits as an additional source of funding to meet liquidity needs. We are continually monitoring and looking for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment. Our total deposits as ofSeptember 30, 2020 , were$16.25 billion , an increase of$137.7 million fromDecember 31, 2019 . Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled$13.4 billion atSeptember 30, 2020 , compared to$12.8 billion atDecember 31, 2019 , an increase of$612.7 million . Total time deposits decreased$475.0 million to$2.8 billion atSeptember 30, 2020 , from$3.3 billion atDecember 31, 2019 . We had$513.4 million and$1.1 billion of brokered deposits atSeptember 30, 2020 , andDecember 31, 2019 , respectively. We are managing our balance sheet and our net interest margin by continuing to eliminate several high-cost deposits related to public funds and brokered deposits.
OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES
Our total debt was$1.73 billion and$1.69 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively. The outstanding balance forSeptember 30, 2020 includes$1.3 billion in FHLB short-term advances;$9.0 million in FHLB long-term advances;$330.0 million in subordinated notes;$52.7 million of trust preferred securities and unamortized debt issuance costs; and$33.8 million of other long-term debt. The FHLB short-term advances outstanding at the end of the third quarter 2020 are FHLB Owns the Option ("FOTO") advances which are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date. Our FOTO advances outstanding atSeptember 30, 2020 have 10 to 15 year maturity dates with lockout periods that have expired and, as a result, are considered and monitored as short-term advances. We analyze the possibility of the FHLB exercising the options along with the market expected rate outcome. We assumed trust preferred securities and other subordinated debt in an aggregate principal amount, net of discounts, of$33.9 million related to the Landrum acquisition during 2019. During the second quarter of 2020, we repaid$5.9 million of other subordinated debt acquired from Landrum. InMarch 2018 , we issued$330 million in aggregate principal amount of 5.00% Fixed-to-Floating Rate Subordinated Notes ("Notes") at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred$3.6 million in debt issuance costs related to the offering. The Notes will mature onApril 1, 2028 and are subordinated in right of payment to the payment of our other existing and future senior indebtedness, including all our general creditors. The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries.
CAPITAL
Overview
AtSeptember 30, 2020 , total capital was$2.94 billion . Capital represents shareholder ownership in the Company - the book value of assets in excess of liabilities. AtSeptember 30, 2020 , our common equity to asset ratio was 13.72% compared to 14.06% at year-end 2019.
Capital Stock
OnFebruary 27, 2009 , at a special meeting, our shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock,$0.01 par value. The aggregate liquidation preference of all shares of preferred stock cannot exceed$80,000,000 . OnFebruary 12, 2019 , we filed Amended and Restated Articles of Incorporation ("February Amended Articles") with theArkansas Secretary of State. The February Amended Articles classified and designated three series of preferred stock out of our authorized preferred stock: Series A Preferred Stock, Par Value$0.01 Per Share (having 40,000 authorized shares); Series B Preferred Stock, Par Value$0.01 Per Share (having 2,000.02 authorized shares); and 7% Perpetual Convertible Preferred Stock, Par Value$0.01 Per Share, Series C (having 140 authorized shares). 69
-------------------------------------------------------------------------------- OnOctober 29, 2019 , we filed our Amended and Restated Articles of Incorporation ("October Amended Articles") with theArkansas Secretary of State. The October Amended Articles classified and designated Series D Preferred Stock, Par Value$0.01 Per Share, out of our authorized preferred stock. The October Amended Articles also canceled our 7% Perpetual Convertible Preferred Stock, Par Value$0.01 Per Share, Series C Preferred Stock, of which no shares were ever issued or outstanding. Stock Repurchase OnJuly 23, 2012 , our Board of Directors approved a stock repurchase program which authorized the repurchase of up to 1,700,000 shares of common stock ("2012 Program"). OnOctober 22, 2019 , we announced a new stock repurchase program ("Program") that replaced the 2012 Program, under which we may repurchase up to$60,000,000 of our Class A common stock currently issued and outstanding. OnMarch 5, 2020 , we announced an amendment to the Program that increased the maximum amount that may be repurchased under the Program from$60,000,000 to$180,000,000 . The Program will terminate onOctober 31, 2021 (unless terminated sooner). Under the Program, we may repurchase shares of our common stock through open market and privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the Program will be determined by management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of our common stock, corporate considerations, our working capital and investment requirements, general market and economic conditions, and legal requirements. The Program does not obligate us to repurchase any common stock and may be modified, discontinued, or suspended at any time without prior notice. We anticipate funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow. During the nine month period endedSeptember 30, 2020 , we repurchased 4,922,336 shares at an average price of$18.96 under the Program. No shares have been repurchased sinceMarch 31, 2020 . We had no stock repurchases during the first nine months of 2019. OnOctober 22, 2020 , we announced the resumption of stock repurchases under the Program.
Cash Dividends
We declared cash dividends on our common stock of$0.51 per share for the first nine months of 2020 compared to$0.48 per share for the first nine months of 2019, an increase of$0.03 , or 6%. The timing and amount of future dividends are at the discretion of our Board of Directors and will depend upon our consolidated earnings, financial condition, liquidity and capital requirements, the amount of cash dividends paid to us by our subsidiaries, applicable government regulations and policies and other factors considered relevant by our Board of Directors. Our Board of Directors anticipates that we will continue to pay quarterly dividends in amounts determined based on the factors discussed above. However, there can be no assurance that we will continue to pay dividends on our common stock at the current levels or at all.
Parent Company Liquidity
The primary liquidity needs of the Parent Company are the payment of dividends to shareholders and the funding of debt obligations and cash needs for acquisitions. The primary sources for meeting these liquidity needs are the current cash on hand at the parent company and the future dividends received fromSimmons Bank . Payment of dividends bySimmons Bank is subject to various regulatory limitations. See the Liquidity and Market Risk Management discussions of Item 3 - Quantitative and Qualitative Disclosures About Market Risk for additional information regarding the parent company's liquidity. The Company continually assesses its capital and liquidity needs and the best way to meet them, including, without limitation, through capital raising via, among other things, equity or debt offerings.
Our bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as ofSeptember 30, 2020 , we meet all capital adequacy requirements to which we are subject. 70 -------------------------------------------------------------------------------- As of the most recent notification from regulatory agencies, the bank subsidiary was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's categories.
Our risk-based capital ratios at
Table 13:
September 30, December 31,
(Dollars in thousands) 2020 2019
Tier 1 capital:
Stockholders' equity $ 2,942,241 $ 2,988,924
CECL transition provision 134,798 -
Goodwill and other intangible assets (1,167,357) (1,160,079)
Unrealized gain on available-for-sale securities, net of income taxes (41,509)
(20,891)
Total Tier 1 capital 1,868,173 1,807,954
Tier 2 capital:
Trust preferred securities and subordinated debt 382,739 388,260
Qualifying allowance for credit losses and reserve for unfunded
commitments 96,734 76,644
Total Tier 2 capital 479,473 464,904
Total risk-based capital $
2,347,646
Risk weighted assets $
14,878,932
Assets for leverage ratio $
20,652,454
Ratios at end of period: Common equity Tier 1 ratio (CET1) 12.55 % 10.92 % Tier 1 leverage ratio 9.05 % 9.59 % Tier 1 leverage ratio, excluding average PPP loans (non-GAAP)(1) 9.49 % N/A Tier 1 risk-based capital ratio 12.56 % 10.92 % Total risk-based capital ratio 15.78 % 13.73 % Minimum guidelines: Common equity Tier 1 ratio (CET1) 4.50 % 4.50 % Tier 1 leverage ratio 4.00 % 4.00 % Tier 1 risk-based capital ratio 6.00 % 6.00 % Total risk-based capital ratio 8.00 % 8.00 %
_______________________________________
(1)PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios. Tier 1 leverage ratio, excluding average PPP loans is a non-GAAP measurement.
71
--------------------------------------------------------------------------------Regulatory Capital Changes
InDecember 2018 , theFederal Reserve ,Office of the Comptroller of the Currency andFederal Deposit Insurance Corporation ("FDIC") (collectively, the "agencies") issued a final rule revising regulatory capital rules in anticipation of the adoption of ASU 2016-13 that provided an option to phase in over a three year period on a straight line basis the day-one impact of the adoption on earnings and Tier 1 capital (the "CECL Transition Provision"). InMarch 2020 and in response to the COVID-19 pandemic, the agencies issued a new regulatory capital rule revising the CECL Transition Provision to delay the estimated impact on regulatory capital stemming from the implementation of ASU 2016-13. The rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL's effect on regulatory capital, followed by a three-year transition period (the "2020 CECL Transition Provision"). The Company elected to apply the 2020 CECL Transition Provision. InJuly 2013 , the Company's primary federal regulator, theFederal Reserve , published final rules (the "Basel III Capital Rules") establishing a new comprehensive capital framework forU.S. banks. The rules implement theBasel Committee'sDecember 2010 framework known as "Basel III" for strengthening international capital standards. The Basel III Capital Rules introduced substantial revisions to the risk-based capital requirements applicable to bank holding companies and depository institutions. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules expanded the risk-weighting categories from four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% forU.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including many residential mortgages and certain commercial real estate. The final rules included a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The Basel III Capital Rules became effective for the Company and its subsidiary bank onJanuary 1, 2015 , with full compliance with all of the final rule's requirements onJanuary 1, 2019 . Prior toDecember 31, 2017 , Tier 1 capital included common equity Tier 1 capital and certain additional Tier 1 items as provided under theBasel III Capital Rules. The Tier 1 capital for the Company consisted of common equity Tier 1 capital and trust preferred securities. The Basel III Capital Rules include certain provisions that require trust preferred securities to be phased out of qualifying Tier 1 capital when assets surpass$15 billion . As ofDecember 31, 2017 , the Company exceeded$15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply and trust preferred securities are no longer included as Tier 1 capital. Trust preferred securities and qualifying subordinated debt of$382.7 million is included as Tier 2 and total capital as ofSeptember 30, 2020 .
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See the Recently Issued Accounting Standards section in Note 1, Preparation of
Interim Financial Statements, in the accompanying Condensed Notes to
Consolidated Financial Statements included elsewhere in this report for details
of recently issued accounting pronouncements and their expected impact on the
Company's ongoing financial position and results of operation.
72
--------------------------------------------------------------------------------CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report may not be based on historical facts and should be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "believe," "budget," "expect," "foresee," "anticipate," "intend," "indicate," "target," "estimate," "plan," "project," "continue," "contemplate," "positions," "prospects," "predict," or "potential," by future conditional verbs such as "will," "would," "should," "could," "might" or "may," or by variations of such words or by similar expressions. These forward-looking statements include, without limitation, those relating to the Company's future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company's stock repurchase program, acquisition strategy, balance sheet and liquidity management, NGB and other digital banking initiatives, the Company's ability to recruit and retain key employees, the benefits associated with the Company's early retirement program and branch closures, the adequacy of the allowance for credit losses, the ability of the Company to manage the impact of the COVID-19 pandemic, the effect of certain new accounting standards on the Company's financial statements (including, without limitation, the CECL methodology and its anticipated effect on the provision and allowance for credit losses), income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of future litigation, legal and regulatory limitations and compliance and competition. These forward-looking statements involve risks and uncertainties, and may not be realized due to a variety of factors, including, without limitation: changes in the Company's operating, acquisition, or expansion strategy; the effects of future economic conditions (including unemployment levels and slowdowns in economic growth), governmental monetary and fiscal policies, as well as legislative and regulatory changes; changes in real estate values; the risks of changes in interest rates and their effects on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities; changes in the securities markets generally or the price of the Company's common stock specifically; the effect of the steps the Company takes in response to COVID-19, the severity and duration of the pandemic, including whether there is a widespread resurgence in COVID-19 infections and whether the impact of the COVID-19 pandemic is exacerbated by the seasonal flu, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein; the effects of the COVID-19 pandemic on, among other things, the Company's operations, liquidity, and credit quality; developments in information technology affecting the financial industry; cyber threats, attacks or events; reliance on third parties for key services; changes in the assumptions, forecasts, models, and methodology used to calculate the impact of CECL on the Company's financial statements; possible adverse rulings, judgements, settlements and other outcomes of pending or future litigation or government actions (including litigation or actions arising from the Company's participation in and administration of programs related to the COVID-19 pandemic (including, among other things, the PPP loan program authorized by the CARES Act)); the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet; the failure of assumptions underlying the establishment of reserves for possible credit losses, fair value for loans, other real estate owned, and other cautionary statements set forth elsewhere in this report. Please also refer to the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this quarterly report and the Company's annual report on Form 10-K for the year endedDecember 31, 2019 , and related disclosures in other filings, which have been filed with theSEC and are available on theSEC's website at www.sec.gov. Many of these factors are beyond our ability to predict or control, and actual results could differ materially from those in the forward-looking statements due to these factors and others. In addition, as a result of these and other factors, our past financial performance should not be relied upon as an indication of future performance. We believe the expectations reflected in our forward-looking statements are reasonable, based on information available to us on the date hereof. However, given the described uncertainties and risks, we cannot guarantee our future performance or results of operations and you should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date hereof, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and all written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this section. 73
--------------------------------------------------------------------------------
GAAP RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The tables below present computations of core earnings (net income excluding
non-core items {gain on sale of branches, merger related costs, early retirement
program costs and the net one-time costs of branch right sizing}) (non-GAAP) and
core diluted earnings per share (non-GAAP) as well as a computation of tangible
book value per share (non-GAAP), tangible common equity to tangible assets
(non-GAAP) and the core net interest margin (non-GAAP). Non-core items are
included in financial results presented in accordance with generally accepted
accounting principles (US GAAP). The tables below also present computations of
certain figures that are exclusive of the impact of PPP loans: the ratios of
common equity to total assets and tangible common equity to tangible assets,
each adjusted for PPP loans (each non-GAAP), Tier 1 leverage ratio excluding
average PPP loans (non-GAAP), net interest income and net interest margin, each
adjusted for PPP loans and excess liquidity (each non-GAAP), and loan yield
excluding PPP loans (non-GAAP).
We believe the exclusion of these non-core items in expressing earnings and
certain other financial measures, including "core earnings," provides a
meaningful basis for period-to-period and company-to-company comparisons, which
management believes will assist investors and analysts in analyzing the core
financial measures of the Company and predicting future performance. These
non-GAAP financial measures are also used by management to assess the
performance of the Company's business because management does not consider these
non-core items to be relevant to ongoing financial performance. Management and
the Board of Directors utilize "core earnings" (non-GAAP) for the following
purposes:
• Preparation of the Company's operating budgets
• Monthly financial performance reporting
• Monthly "flash" reporting of consolidated results (management only)
• Investor presentations of Company performance
We believe the presentation of "core earnings" on a diluted per share basis,
"core diluted earnings per share" (non-GAAP) and core net interest margin
(non-GAAP), provides a meaningful basis for period-to-period and
company-to-company comparisons, which management believes will assist investors
and analysts in analyzing the core financial measures of the Company and
predicting future performance. These non-GAAP financial measures are also used
by management to assess the performance of the Company's business, because
management does not consider these non-core items to be relevant to ongoing
financial performance on a per share basis. Management and the Board of
Directors utilize "core diluted earnings per share" (non-GAAP) for the following
purposes:
• Calculation of annual performance-based incentives for certain executives
• Calculation of long-term performance-based incentives for certain executives
• Investor presentations of Company performance
We have $1.190 billion and $1.183 billion total goodwill and other intangible
assets for the periods ended September 30, 2020 and December 31, 2019 ,
respectively. Because our acquisition strategy has resulted in a high level of
intangible assets, management believes useful calculations include tangible book
value per share (non-GAAP) and tangible common equity to tangible assets
(non-GAAP).
We believe the exclusion of PPP loans or their impact, as applicable, in
expressing earnings and certain other financial measures provides a meaningful
basis for period-to-period and company-to-company comparisons because PPP loans
are 100% federally guaranteed and have very low interest rates. The Company's
non-GAAP financial measures that exclude PPP loans or their impact include the
ratios of "common equity to total assets" and "tangible common equity to
tangible assets," each adjusted for PPP loans (each non-GAAP), "Tier 1 leverage
ratio excluding average PPP loans" (non-GAAP), "core net interest income" and
"net interest margin," each adjusted for PPP loans and excess liquidity (each
non-GAAP), and "loan yield excluding PPP loans" (non-GAAP). Management believes
these non-GAAP presentations will assist investors and analysts in analyzing the
core financial measures of the Company, including the performance of the
Company's loan portfolio and the Company's regulatory capital position, and
predicting future performance. Management and the Board of Directors utilize
these non-GAAP financial measures for financial performance reporting and
investor presentations of Company performance.
We believe that presenting these non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that is applied by management and the Board of Directors.
74
--------------------------------------------------------------------------------
Non-GAAP financial measures have inherent limitations, are not required to be
uniformly applied and are not audited. To mitigate these limitations, we have
procedures in place to identify and approve each item that qualifies as non-core
to ensure that the Company's "core" results are properly reflected for
period-to-period comparisons. Although these non-GAAP financial measures are
frequently used by stakeholders in the evaluation of a company, they have
limitations as analytical tools and should not be considered in isolation or as
a substitute for analyses of results as reported under GAAP. In particular, a
measure of earnings that excludes non-core items does not represent the amount
that effectively accrues directly to stockholders (i.e., non-core items are
included in earnings and stockholders' equity). Additionally, similarly titled
non-GAAP financial measures used by other companies may not be computed in the
same or similar fashion.
See Table 14 below for the reconciliation of non-GAAP financial measures, which exclude non-core items for the periods presented.
Table 14: Reconciliation of Core Earnings (non-GAAP)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2020 2019 2020 2019
Net income available to common stockholders $ 65,885 $ 81,826 $ 201,897 $ 185,119
Non-core items:
Gain on sale of branches - - (8,093) -
Merger related costs 902 2,556 3,800 11,548
Early retirement program 2,346 177 2,839 3,464
Branch right sizing 72 160 2,031 3,092
Tax effect (1) (867) (756) (151) (4,731)
Net non-core items 2,453 2,137 426 13,373
Core earnings (non-GAAP) $ 68,338 $ 83,963 $ 202,323 $ 198,492
Diluted earnings per share(2) $ 0.60 $ 0.84 $ 1.83 $ 1.94
Non-core items:
Gain on sale of branches - - (0.07) -
Merger related costs 0.01 0.04 0.03 0.12
Early retirement program 0.02 - 0.02 0.04
Branch right sizing - - 0.02 0.03
Tax effect (1) - (0.01) - (0.05)
Net non-core items 0.03 0.03 - 0.14
Core diluted earnings per share (non-GAAP)
_______________________________________
(1)Effective tax rate of 26.135%. (2)See Note 17, Earnings Per Share, for number of shares used to determine EPS.
75
--------------------------------------------------------------------------------See Table 15 below for the reconciliation of core other income and core non-interest expense for the periods presented.
Table 15: Reconciliation of Core Other Income and Core Non-Interest Expense
(non-GAAP)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2020 2019 2020 2019
Other income $ 5,380 $ 44,721 $ 27,990 $ 54,942
Gain on sale of banking operations - - (8,093) -
Branch right sizing (370) - (370) -
Core other income (non-GAAP) $ 5,010 $ 44,721 $ 19,527 $ 54,942
Non-interest expense $ 118,949 $ 106,865 $ 365,360 $ 319,017
Non-core items:
Merger related costs (902) (2,556) (3,800) (11,548)
Early retirement program (2,346) (177) (2,839) (3,464)
Branch right sizing (442) (160) (2,401) (3,092)
Total non-core items (3,690) (2,893)
(9,040) (18,104)
Core non-interest expense (non-GAAP)
See Table 16 below for the reconciliation of tangible book value per common share.
Table 16: Reconciliation of Tangible Book Value per Common Share (non-GAAP)
September 30, December 31,
(In thousands, except per share data) 2020 2019
Total stockholders' equity $ 2,942,241 $ 2,988,924
Preferred stock (767) (767)
Total common stockholders' equity 2,941,474 2,988,157
Intangible assets:
Goodwill (1,075,305) (1,055,520)
Other intangible assets (114,460) (127,340)
Total intangibles (1,189,765) (1,182,860)
Tangible common stockholders' equity $ 1,751,709 $ 1,805,297
Shares of common stock outstanding 109,023,781 113,628,601 Book value per common share$ 26.98 $ 26.30
Tangible book value per common share (non-GAAP)
15.89
76
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See Table 17 below for the calculation of tangible common equity and the reconciliation of tangible common equity to tangible assets.
Table 17: Reconciliation of Tangible Common Equity and the Ratio of Tangible Common Equity to Tangible Assets (non-GAAP)
September 30, December 31,
(Dollars in thousands) 2020 2019
Total common stockholders' equity $ 2,941,474 $ 2,988,157
Intangible assets:
Goodwill (1,075,305) (1,055,520)
Other intangible assets (114,460) (127,340)
Total intangibles (1,189,765) (1,182,860)
Tangible common stockholders' equity $
1,751,709
Total assets$ 21,437,395 $ 21,259,143 Intangible assets: Goodwill (1,075,305) (1,055,520) Other intangible assets (114,460) (127,340) Total intangibles (1,189,765) (1,182,860) Tangible assets$ 20,247,630 $ 20,076,283 Paycheck Protection Program ("PPP") loans
(970,488)
Total assets excluding PPP loans $
20,466,907
Tangible assets excluding PPP loans $
19,277,142
Ratio of common equity to assets 13.72 % 14.06 % Ratio of tangible common equity to tangible assets (non-GAAP) 8.65 % 8.99 %
Ratio of common equity to assets excluding PPP loans (non-GAAP) 14.37 % Ratio of tangible common equity to tangible assets excluding PPP loans (non-GAAP)
9.09 %
See Table 18 below for the calculation of Tier 1 leverage ratio excluding average PPP loans for the period presented.
Table 18: Reconciliation of Tier 1 Leverage Ratio Excluding Average PPP Loans
(non-GAAP)
Three Months Ended
(Dollars in thousands) September 30, 2020
Total Tier 1 capital $ 1,868,173
Adjusted average assets for leverage ratio $ 20,652,454
Average PPP loans
(967,152)
Adjusted average assets excluding average PPP loans $
19,685,302
Tier 1 leverage ratio 9.05 %
Tier 1 leverage ratio excluding average PPP loans (non-GAAP) 9.49 %
77
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See Table 19 below for the calculation of core net interest margin and net interest margin adjusted for PPP loans and excess liquidity for the periods presented.
Table 19: Reconciliation of Core Net Interest Margin (non-GAAP)
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2020 2019 2020 2019
Net interest income $ 153,610 $ 149,264 $ 484,774 $ 434,687
FTE adjustment 2,864 1,843 7,519 5,150
Fully tax equivalent net interest income 156,474 151,107 492,293 439,837
Total accretable yield (8,948) (9,322) (32,508) (26,144)
Core net interest income $ 147,526 $
141,785
PPP loan and excess liquidity interest income (6,131) Net interest income adjusted for PPP loans and excess liquidity$ 150,343
Average earning assets - quarter-to-date
(2,359,928)
Average earning assets adjusted for PPP
loans and excess liquidity $ 17,055,386
Net interest margin 3.21 % 3.82 % 3.43 % 3.88 %
Core net interest margin (non-GAAP) 3.02 % 3.59 % 3.20 % 3.64 %
Net interest margin adjusted for PPP loans
and excess liquidity (non-GAAP) 3.51 %
See Table 20 below for the calculation of loan yield excluding PPP loans for the period presented.
Table 20: Reconciliation of Loan Yield Excluding PPP Loans (non-GAAP)
Three Months Ended
(Dollars in thousands) September 30, 2020
Loan interest income $ 163,379
PPP loan interest income (5,782)
Loan interest income excluding PPP loans $ 157,597
Average loan balance$ 14,315,014 Average PPP loan balance (967,152)
Average loan balance excluding PPP loans
Loan yield 4.54 %
Loan yield excluding PPP loans (non-GAAP) 4.70 %
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