The following discussion should be read in conjunction with our Form 10-K, filed
with the Securities and Exchange Commission on February 24, 2022, which includes
the audited financial statements for the year ended December 31, 2021. Unless
the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refer
to Home BancShares, Inc. on a consolidated basis.
General
We are a bank holding company headquartered in Conway, Arkansas, offering a
broad array of financial services through our wholly-owned bank subsidiary,
Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of
March 31, 2022, we had, on a consolidated basis, total assets of $18.62 billion,
loans receivable, net of $10.05 billion, total deposits of $14.58 billion, and
stockholders’ equity of $2.69 billion.
We generate most of our revenue from interest on loans and investments, service
charges, and mortgage banking income. Deposits and Federal Home Loan Bank
(“FHLB”) and other borrowed funds are our primary source of funding. Our largest
expenses are interest on our funding sources, salaries and related employee
benefits and occupancy and equipment. We measure our performance by calculating
our return on average common equity, return on average assets and net interest
margin. We also measure our performance by our efficiency ratio, which is
calculated by dividing non-interest expense less amortization of core deposit
intangibles by the sum of net interest income on a tax equivalent basis and
non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure
and is calculated by dividing non-interest expense less amortization of core
deposit intangibles by the sum of net interest income on a tax equivalent basis
and non-interest income excluding adjustments such as merger and acquisition
expenses and/or certain gains, losses and other non-interest income and
expenses.
Table 1: Key Financial Measures
As of or for the Three Months Ended
March 31,
2022 2021
(Dollars
in thousands, except per share
data)
Total assets $ 18,617,995 $ 17,240,241
Loans receivable 10,052,714 10,778,493
Allowance for credit losses 234,768 242,932
Total deposits 14,580,934 13,512,594
Total stockholders’ equity 2,686,703 2,645,204
Net income 64,892 91,602
Basic earnings per share 0.40 0.55
Diluted earnings per share 0.40 0.55
Book value per share 16.41 16.02
Tangible book value per share (non-GAAP)(1) 10.32 9.95
Annualized net interest margin – FTE 3.21% 4.02%
Efficiency ratio 46.15 36.60
Efficiency ratio, as adjusted (non-GAAP)(2) 47.33 40.68
Annualized return on average assets 1.43 2.22
Annualized return on average common equity 9.58 14.15
(1)See Table 19 for the non-GAAP tabular reconciliation.
(2)See Table 23 for the non-GAAP tabular reconciliation.
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Results of Operations for the Three Months Ended March 31, 2022 and 2021
Our net income decreased $26.7 million, or 29.2%, to $64.9 million for the
three-month period ended March 31, 2022, from $91.6 million for the same period
in 2021. On a diluted earnings per share basis, our earnings were $0.40 per
share for the three-month period ended March 31, 2022 compared to $0.55 per
share for the three-month period ended March 31, 2021. During the three-month
periods ended March 31, 2022 and March 31, 2021, the Company did not record any
provision for credit losses. The markets in which we operate have begun to
experience significant economic uncertainty primarily related to inflationary
concerns, continuing supply chain issues and the potential impacts of
international unrest. However, the Company determined that an additional
provision for credit losses was not necessary as the current level of the
allowance for credit losses was considered adequate as of March 31, 2022. The
Company recorded a $2.1 million adjustment for the increase in fair value of
marketable securities, $3.3 million recovery on historic losses for a single
borrower and $863,000 in merger and acquisition expenses.
Total interest income decreased by $17.7 million, or 10.9%, non-interest expense
increased by $4.0 million, or 5.5%, and non-interest income decreased by $14.6
million, or 32.3%. This was partially offset by an $808,000, or 5.5%, decrease
in total interest expense. The decrease in interest income was due to a $21.5
million decrease in loan interest income, which was partially offset by a $2.5
million increase in investment income and a $1.3 million increase in interest
income on deposits at other banks. The increase in non-interest expense was due
to a $1.5 million, or 3.5%, increase in salaries and employee benefits, a $1.2
million, or 19.9%, increase in data processing expense, a $863,000 increase in
merger and acquisition expense, and a $599,000, or 3.8%, increase in other
operating expenses. The decrease in non-interest income was primarily due to a
$7.9 million, or 91.9%, decrease in dividends from FHLB, FRB, FNBB and other, a
$4.3 million, or 52.1%, decrease in mortgage lending income, a $3.7 million, or
63.2%, decrease in fair value adjustment for marketable securities which was
partially offset by a $1.1 million, or 22.8%, increase in service charges on
deposit accounts. The decrease in interest expense was primarily due to a $2.8
million, or 36.5%, decrease in interest on deposits, which was partially offset
by a $2.1 million, or 43.5%, increase in interest on subordinated debentures
resulting from the completion of the new subordinated debt issue in January
2022. Income tax expense decreased by $8.9 million, or 30.7%, during the quarter
due to a decrease in net income.
Our net interest margin decreased from 4.02% for the three-month period ended
March 31, 2021 to 3.21% for the three-month period ended March 31, 2022. The
yield on interest earning assets was 3.55% and 4.41% for the three months ended
March 31, 2022 and 2021, respectively, as average interest earning assets
increased from $15.12 billion to $16.77 billion. The increase in average earning
assets is primarily the result of a $1.89 billion increase in average
interest-bearing balances due from banks and an $851.9 million increase in
average investment securities. This was partially offset by the $1.09 billion
decrease in average loans receivable. Average PPP loan balances were $78.0
million for the three months ended March 31, 2022, compared to $633.8 million
for the three months ended March 31, 2021. These loans bear interest at 1.00%
plus the accretion of the deferred origination fee. Including deferred fees, we
recognized total interest income of $2.2 million on PPP loans for the three
months ended March 31, 2022 compared to $11.9 million for the three months ended
March 31, 2021. The PPP loans were accretive to the net interest margin by 4
basis points for the three months ended March 31, 2022 compared to 16 basis
points for the three months ended March 31, 2021. As of March 31, 2022, the
Company had $1.6 million in remaining unamortized PPP fees. The market has
continued to experience significant amounts of excess liquidity, and the Company
completed an underwritten public offering of $300.0 million in aggregate
principal of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032
during January 2022. As a result, we had an increase of $1.89 billion in average
interest-bearing cash balances for the three months ended March 31, 2022
compared to the three months ended March 31, 2021. The excess liquidity was
dilutive to the net interest margin by 34 basis points, and the additional
liquidity resulting from the subordinated debt issuance was dilutive to the net
interest margin by 5 basis points. In addition, the increase in interest expense
for the subordinated debentures was dilutive to the net interest margin by 5
basis points. For the three months ended March 31, 2022 and 2021, we recognized
$3.1 million and $5.5 million, respectively, in total net accretion for acquired
loans and deposits. The reduction in accretion was dilutive to the net interest
margin by 6 basis points. We recognized $1.4 million in event interest income
for the three months ended March 31, 2022 compared to $1.1 million for the three
months ended March 31, 2021. This increased the net interest margin by 1 basis
point.
Our efficiency ratio was 46.15% for the three months ended March 31, 2022,
compared to 36.60% for the same period in 2021. For the first quarter of 2022,
our efficiency ratio, as adjusted (non-GAAP), was 47.33%, compared to 40.68%
reported for the first quarter of 2021. (See Table 23 for the non-GAAP tabular
reconciliation).
Our annualized return on average assets was 1.43% for the three months ended
March 31, 2022, compared to 2.22% for the same period in 2021. Our annualized
return on average common equity was 9.58% and 14.15% for both the three months
ended March 31, 2022, and 2021.
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Financial Condition as of and for the Period Ended March 31, 2022 and
December 31, 2021
Our total assets as of March 31, 2022 increased $565.9 million to $18.62 billion
from the $18.05 billion reported as of December 31, 2021. Cash and cash
equivalents decreased $30.9 million, for the three months ended March 31, 2022.
Our loan portfolio balance increased to $10.05 billion as of March 31, 2022 from
$9.84 billion at December 31, 2021. The increase in loans was primarily due to
the acquisition of $242.2 million in marine loans from LendingClub Bank during
the first quarter of 2022, as well as $27.6 million in organic loan growth,
partially offset by $53.2 million of PPP loan decline. Total deposits increased
$320.4 million to $14.58 billion as of March 31, 2022 from $14.26 billion as of
December 31, 2021. Stockholders’ equity decreased $79.0 million to $2.69 billion
as of March 31, 2022, compared to $2.77 billion as of December 31, 2021. The
$79.0 million decrease in stockholders’ equity is primarily associated with the
$115.0 million in other comprehensive loss for the three months ended March 31,
2022, $27.0 million of shareholder dividends paid and stock repurchases of $4.1
million in 2022, partially offset by $64.9 million in net income for the three
months ended March 31, 2022.
Our non-performing loans were $44.7 million, or 0.44% of total loans as of
March 31, 2022, compared to $50.2 million, or 0.51% of total loans as of
December 31, 2021. The allowance for credit losses as a percentage of
non-performing loans increased to 525.50% as of March 31, 2022, from 471.61% as
of December 31, 2021. Non-performing loans from our Arkansas franchise were
$13.2 million at March 31, 2022 compared to $13.9 million as of December 31,
2021. Non-performing loans from our Florida franchise were $24.8 million at
March 31, 2022 compared to $26.8 million as of December 31, 2021. Non-performing
loans from our Alabama franchise were $480,000 at March 31, 2022 compared to
$470,000 as of December 31, 2021. Non-performing loans from our Shore Premier
Finance (“SPF”) franchise were $1.4 million at March 31, 2022 compared to $1.5
million as of December 31, 2021. Non-performing loans from our Centennial
Commercial Finance Group (“CFG”) franchise were $4.8 million at March 31, 2022
compared to $7.5 million as of December 31, 2021.
As of March 31, 2022, our non-performing assets decreased to $45.8 million, or
0.25% of total assets, from $51.8 million, or 0.29% of total assets, as of
December 31, 2021. Non-performing assets from our Arkansas franchise were $13.2
million at March 31, 2022 compared to $14.4 million as of December 31, 2021.
Non-performing assets from our Florida franchise were $25.9 million at March 31,
2022 compared to $27.9 million as of December 31, 2021. Non-performing assets
from our Alabama franchise were $480,000 at March 31, 2022 compared to $470,000
as of December 31, 2021. Non-performing assets from our SPF franchise were $1.4
million at March 31, 2022 compared to $1.5 million as of December 31, 2021.
Non-performing assets from our CFG franchise were $4.8 million at March 31, 2022
compared to $7.5 million as of December 31, 2021.
The $4.8 million balance of non-accrual loans for our Centennial CFG market
consists of one loan that is assessed for credit risk by the Federal Reserve
under the Shared National Credit Program. The decision to place this loan on
non-accrual status was made by the Federal Reserve and not the Company. The loan
that makes up the total balance is still current on both principal and interest.
However, all interest payments are currently being applied to the principal
balance. Because the Federal Reserve required us to place this loan on
non-accrual status, we have reversed any interest that had accrued subsequent to
the non-accrual date designated by the Federal Reserve.
Critical Accounting Policies and Estimates
Overview. We prepare our consolidated financial statements based on the
selection of certain accounting policies, generally accepted accounting
principles and customary practices in the banking industry. These policies, in
certain areas, require us to make significant estimates and assumptions. Our
accounting policies are described in detail in the notes to our consolidated
financial statements included as part of this document.
We consider a policy critical if (i) the accounting estimate requires
assumptions about matters that are highly uncertain at the time of the
accounting estimate; and (ii) different estimates that could reasonably have
been used in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material impact
on our financial statements. Using these criteria, we believe that the
accounting policies most critical to us are those associated with our lending
practices, including revenue recognition and the accounting for the allowance
for credit losses, foreclosed assets, investments, intangible assets, income
taxes and stock options.
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Revenue Recognition. Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers (“ASC Topic 606”), establishes principles
for reporting information about the nature, amount, timing and uncertainty of
revenue and cash flows arising from the entity’s contracts to provide goods or
services to customers. The core principle requires an entity to recognize
revenue to depict the transfer of goods or services to customers in an amount
that reflects the consideration that it expects to be entitled to receive in
exchange for those goods or services recognized as performance obligations are
satisfied. The majority of our revenue-generating transactions are not subject
to ASC Topic 606, including revenue generated from financial instruments, such
as our loans, letters of credit and investment securities, as these activities
are subject to other GAAP discussed elsewhere within our disclosures.
Descriptions of our revenue-generating activities that are within the scope of
ASC Topic 606, which are presented in our income statements as components of
non-interest income are as follows:
•Service charges on deposit accounts – These represent general service fees for
monthly account maintenance and activity or transaction-based fees and consist
of transaction-based revenue, time-based revenue (service period), item-based
revenue or some other individual attribute-based revenue. Revenue is recognized
when our performance obligation is completed which is generally monthly for
account maintenance services or when a transaction has been completed (such as a
wire transfer). Payment for such performance obligations are generally received
at the time the performance obligations are satisfied.
•Other service charges and fees – These represent credit card interchange fees
and Centennial CFG loan fees. The interchange fees are recorded in the period
the performance obligation is satisfied which is generally the cash basis based
on agreed upon contracts. Centennial CFG loan fees are based on loan or other
negotiated agreements with customers and are accounted for under ASC Topic 310.
Interchange fees were $3.9 million and $3.8 million for the three months ended
March 31, 2022 and 2021, respectively. Centennial CFG loan fees were $1.8
million and $2.0 million for the three months ended March 31, 2022 and 2021,
respectively.
Investments – Available-for-sale. Securities available-for-sale are reported at
fair value with unrealized holding gains and losses reported as a separate
component of stockholders’ equity and other comprehensive income (loss), net of
taxes. Securities that are held as available-for-sale are used as a part of our
asset/liability management strategy. Securities that may be sold in response to
interest rate changes, changes in prepayment risk, the need to increase
regulatory capital, and other similar factors are classified as
available-for-sale. The Company evaluates all securities quarterly to determine
if any securities in a loss position require a provision for credit losses in
accordance with ASC 326, Measurement of Credit Losses on Financial Instruments
(“CECL”). The Company first assesses whether it intends to sell or is more
likely than not that the Company will be required to sell the security before
recovery of its amortized cost basis. If either of the criteria regarding intent
or requirement to sell is met, the security’s amortized cost basis is written
down to fair value through income. For securities that do not meet this
criteria, the Company evaluates whether the decline in fair value has resulted
from credit losses or other factors. In making this assessment, the Company
considers the extent to which fair value is less than amortized cost, and
changes to the rating of the security by a rating agency, and adverse conditions
specifically related to the security, among other factors. If this assessment
indicates that a credit loss exists, the present value of cash flows expected to
be collected from the security are compared to the amortized cost basis of the
security. If the present value of cash flows expected to be collected is less
than the amortized cost basis, a credit loss exists and an allowance for credit
losses is recorded for the credit loss, limited by the amount that the fair
value is less than the amortized cost basis. Any impairment that has not been
recorded through an allowance for credit losses is recognized in other
comprehensive income. Changes in the allowance for credit losses are recorded as
provision for (or reversal of) credit loss expense. Losses are charged against
the allowance when management believes the uncollectability of a security is
confirmed or when either of the criteria regarding intent or requirement to sell
is met.
Investments – Held-to-Maturity. Securities held-to-maturity, which include any
security for which we have the positive intent and ability to hold until
maturity, are reported at historical cost adjusted for amortization of premiums
and accretion of discounts. Premiums and discounts are amortized/accreted to the
call date to interest income using the constant effective yield method over the
estimated life of the security. The Company measures expected credit losses on
HTM securities on a collective basis by major security type, with each type
sharing similar risk characteristics. The estimate of expected credit losses
considers historical credit loss information that is adjusted for current
conditions and reasonable and supportable forecasts. The Company has made the
election to exclude accrued interest receivable on HTM securities from the
estimate of credit losses and report accrued interest separately on the
consolidated balance sheets.
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Loans Receivable and Allowance for Credit Losses. Loans receivable that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at their outstanding principal balance
adjusted for any charge-offs, deferred fees or costs on originated loans.
Interest income on loans is accrued over the term of the loans based on the
principal balance outstanding. Loan origination fees and direct origination
costs are capitalized and recognized as adjustments to yield on the related
loans.
The allowance for credit losses on loans receivable is a valuation account that
is deducted from the loans’ amortized cost basis to present the net amount
expected to be collected on the loans. Loans are charged off against the
allowance when management believes the uncollectability of a loan balance is
confirmed. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. Historical credit loss experience
provides the basis for the estimation of expected credit losses. Adjustments to
historical loss information are made for differences in current loan-specific
risk characteristics such as differences in underwriting standards, portfolio
mix, delinquency level, or term as well as for changes in environmental
conditions, such as changes in the national unemployment rate, gross domestic
product, rental vacancy rate, housing price index and national retail sales
index.
The allowance for credit losses is measured based on call report segment as
these types of loans exhibit similar risk characteristics. The identified loan
segments are as follows:
•1-4 family construction
•All other construction
•1-4 family revolving home equity lines of credit (“HELOC”) & junior liens
•1-4 family senior liens
•Multifamily
•Owner occupied commercial real estate
•Non-owner occupied commercial real estate
•Commercial & industrial, agricultural, non-depository financial institutions,
purchase/carry securities, other
•Consumer auto
•Other consumer
•Other consumer – SPF
The allowance for credit losses for each segment is measured through the use of
the discounted cash flow method. Loans that do not share risk characteristics
are evaluated on an individual basis. Loans evaluated individually are not also
included in the collective evaluation. For those loans that are classified as
impaired, an allowance is established when the discounted cash flows, collateral
value or observable market price of the impaired loan is lower than the carrying
value of that loan. For loans that are not considered to be collateral
dependent, an allowance is recorded based on the loss rate for the respective
pool within the collective evaluation if a specific reserve is not recorded.
Expected credit losses are estimated over the contractual term of the loans,
adjusted for expected prepayments when appropriate. The contractual term
excludes expected extensions, renewals, and modifications unless either of the
following applies:
•Management has a reasonable expectation at the reporting date that troubled
debt restructuring will be executed with an individual borrower.
•The extension or renewal options are included in the original or modified
contract at the reporting date and are not unconditionally cancellable by the
Company.
Management qualitatively adjusts model results for risk factors that are not
considered within our modeling processes but are nonetheless relevant in
assessing the expected credit losses within our loan pools. These qualitative
factors (“Q-Factor”) and other qualitative adjustments may increase or decrease
management’s estimate of expected credit losses by a calculated percentage or
amount based upon the estimated level of risk. The various risks that may be
considered in making Q-Factor and other qualitative adjustments include, among
other things, the impact of (i) changes in lending policies, procedures and
strategies; (ii) changes in nature and volume of the portfolio; (iii) staff
experience; (iv) changes in volume and trends in classified loans, delinquencies
and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral
values; (vii) external factors such as competition, legal and regulatory
environment; (viii) changes in the quality of the loan review system and (ix)
economic conditions.
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Loans considered impaired, according to ASC 326, are loans for which, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
aggregate amount of impairment of loans is utilized in evaluating the adequacy
of the allowance for credit losses and amount of provisions thereto. Losses on
impaired loans are charged against the allowance for credit losses when in the
process of collection, it appears likely that such losses will be realized. The
accrual of interest on impaired loans is discontinued when, in management’s
opinion the collection of interest is doubtful or generally when loans are 90
days or more past due. When accrual of interest is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received in excess of principal due. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Loans are placed on non-accrual status when management believes that the
borrower’s financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of interest
is doubtful, or generally when loans are 90 days or more past due. Loans are
charged against the allowance for credit losses when management believes that
the collectability of the principal is unlikely. Accrued interest related to
non-accrual loans is generally charged against the allowance for credit losses
when accrued in prior years and reversed from interest income if accrued in the
current year. Interest income on non-accrual loans may be recognized to the
extent cash payments are received, although the majority of payments received
are usually applied to principal. Non-accrual loans are generally returned to
accrual status when principal and interest payments are less than 90 days past
due, the customer has made required payments for at least six months, and we
reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under
FASB 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. In accordance with ASC 326, the Company
records both a discount and an allowance for credit losses on acquired loans.
All purchased loans are recorded at fair value in accordance with the fair value
methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair
value estimates associated with the loans include estimates related to expected
prepayments and the amount and timing of undiscounted expected principal,
interest and other cash flows.
Purchased loans that have experienced more than insignificant credit
deterioration since origination are purchase credit deteriorated (“PCD”) loans.
An allowance for credit losses is determined using the same methodology as other
loans. The initial allowance for credit losses determined on a collective basis
is allocated to individual loans. The sum of the loan’s purchase price and
allowance for credit losses becomes its initial amortized cost basis. The
difference between the initial amortized cost basis and the par value of the
loan is a non-credit discount or premium, which is amortized into interest
income over the life of the loan. Subsequent changes to the allowance for credit
losses are recorded through the provision for credit losses.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company
estimates expected credit losses over the contractual period in which the
Company is exposed to credit risk via a contractual obligation to extend credit
unless that obligation is unconditionally cancellable by the Company. The
allowance for credit losses on off-balance sheet credit exposures is adjusted as
a provision for credit loss. The estimate includes consideration of the
likelihood that funding will occur and an estimate of expected credit losses on
commitments expected to be funded over its estimated life.
Foreclosed Assets Held for Sale. Real estate and personal properties acquired
through or in lieu of loan foreclosure are to be sold and are initially recorded
at fair value at the date of foreclosure, establishing a new cost basis.
Valuations are periodically performed by management, and the real estate and
personal properties are carried at fair value less costs to sell. Gains and
losses from the sale of other real estate and personal properties are recorded
in non-interest income, and expenses used to maintain the properties are
included in non-interest expenses.
Intangible Assets. Intangible assets consist of goodwill and core deposit
intangibles. Goodwill represents the excess purchase price over the fair value
of net assets acquired in business acquisitions. The core deposit intangible
represents the excess intangible value of acquired deposit customer
relationships as determined by valuation specialists. The core deposit
intangibles are being amortized over 48 to 121 months on a straight-line basis.
Goodwill is not amortized but rather is evaluated for impairment on at least an
annual basis. We perform an annual impairment test of goodwill and core deposit
intangibles as required by FASB ASC 350, Intangibles – Goodwill and Other, in
the fourth quarter or more often if events and circumstances indicate there may
be an impairment.
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Income Taxes. We account for income taxes in accordance with income tax
accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance
results in two components of income tax expense: current and deferred. Current
income tax expense reflects taxes to be paid or refunded for the current period
by applying the provisions of the enacted tax law to the taxable income or
excess of deductions over revenues. We determine deferred income taxes using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is based on the tax effects of the differences between the
book and tax basis of assets and liabilities, and enacted changes in tax rates
and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and
liabilities between periods. Deferred tax assets are recognized if it is more
likely than not, based on the technical merits, that the tax position will be
realized or sustained upon examination. The term “more likely than not” means a
likelihood of more than 50 percent; the terms “examined” and “upon examination”
also include resolution of the related appeals or litigation processes, if any.
A tax position that meets the more-likely-than-not recognition threshold is
initially and subsequently measured as the largest amount of tax benefit that
has a greater than 50 percent likelihood of being realized upon settlement with
a taxing authority that has full knowledge of all relevant information. The
determination of whether or not a tax position has met the more-likely-than-not
recognition threshold considers the facts, circumstances and information
available at the reporting date and is subject to the management’s judgment.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of evidence available, it is more likely than not that some portion or all of a
deferred tax asset will not be realized.
Both we and our subsidiary file consolidated tax returns. Our subsidiary
provides for income taxes on a separate return basis, and remits to us amounts
determined to be currently payable.
Stock Compensation. In accordance with FASB ASC 718, Compensation – Stock
Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the
fair value of each option award is estimated on the date of grant. We recognize
compensation expense for the grant-date fair value of the option award over the
vesting period of the award.
Acquisitions
Acquisition of Marine Portfolio
On February 4, 2022, the Company completed the purchase of the performing marine
loan portfolio of Utah-based LendingClub Bank (“LendingClub”). Under the terms
of the purchase agreement with LendingClub, the Company acquired yacht loans
totaling approximately $242.2 million. This portfolio of loans is housed within
the Company’s Shore Premier Finance division, which is responsible for servicing
the acquired loan portfolio and originating new loan production.
Acquisition of Happy Bancshares, Inc.
Effective April 1, 2022, pursuant to an Agreement and Plan of Merger, dated as
of September 15, 2021, as amended on October 18, 2021 and further amended on
November 8, 2021 (the “Merger Agreement”) among the Company, Centennial, the
Company’s acquisition subsidiary, HOMB Acquisition Sub III, Inc. (“Acquisition
Sub”), Happy Bancshares, Inc. (“Happy”), and its wholly-owned bank subsidiary,
Happy State Bank (“HSB”), Acquisition Sub merged with and into Happy and Happy
merged with and into the Company, with the Company as the surviving entity
(collectively, the “Merger”). HSB also merged with and into Centennial, with
Centennial as the surviving entity.
Under the terms of the Merger Agreement, the Company issued approximately
42.4 million shares of its common stock valued at approximately $958.8 million
as of April 1, 2022. In addition, the holders of stock appreciation rights of
Happy received approximately $3.1 million in cash in cancellation of their stock
appreciation rights immediately before the Merger, for a total transaction value
of approximately $961.9 million.
For further discussion of the acquisition, see Note 22 to the Condensed Notes to
Consolidated Financial Statements.
We will continue evaluating all types of potential bank acquisitions, which may
include FDIC-assisted acquisitions as opportunities arise, to determine what is
in the best interest of our Company. Our goal in making these decisions is to
maximize the return to our investors.
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Branches
As opportunities arise, we will continue to open new (commonly referred to as de
novo) branches in our current markets and in other attractive market areas.
As of March 31, 2022, we had 160 branch locations. There were 76 branches in
Arkansas, 78 branches in Florida, five branches in Alabama and one branch in New
York City.
With the completion of the acquisition of Happy as of April 1, 2022, the Company
now operates 62 branches in Texas.
Results of Operations
For the three months ended March 31, 2022 and 2021
Our net income decreased $26.7 million, or 29.2%, to $64.9 million for the
three-month period ended March 31, 2022, from $91.6 million for the same period
in 2021. On a diluted earnings per share basis, our earnings were $0.40 per
share for the three-month period ended March 31, 2022 compared to $0.55 per
share for the three-month period ended March 31, 2021. During the three-month
periods ended March 31, 2022 and March 31, 2021, the Company did not record any
provision for credit losses. The markets in which we operate have begun to
experience significant economic uncertainty primarily related to inflationary
concerns, continuing supply chain issues and the potential impacts of
international unrest. However, the Company determined that an additional
provision for credit losses was not necessary as the current level of the
allowance for credit losses was considered adequate as of March 31, 2022. The
Company recorded a $2.1 million adjustment for the increase in fair value of
marketable securities, $3.3 million recovery on historic losses for a single
borrower and $863,000 in merger and acquisition expenses.
Net Interest Income
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 affecting the
level of net interest income include the volume of earning assets and
interest-bearing liabilities, yields earned on loans and investments, rates paid
on deposits and other borrowings, 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 (26.135% for 2022 and 25.74% for
2021).
The Federal Reserve Board sets various benchmark rates, including the Federal
Funds rate, and thereby influences the general market rates of interest,
including the deposit and loan rates offered by financial institutions. In 2020,
the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in
effect throughout all of 2021. On March 16, 2022, the target rate was increased
to 0.25% to 0.50%. Presently, the Federal Reserve has indicated they are
anticipating multiple rate increases for 2022.
Our net interest margin decreased from 4.02% for the three-month period ended
March 31, 2021 to 3.21% for the three-month period ended March 31, 2022. The
yield on interest earning assets was 3.55% and 4.41% for the three months ended
March 31, 2022 and 2021, respectively, as average interest earning assets
increased from $15.12 billion to $16.77 billion. The increase in average earning
assets is primarily the result of a $1.89 billion increase in average
interest-bearing balances due from banks and an $851.9 million increase in
average investment securities. This was partially offset by the $1.09 billion
decrease in average loans receivable. Average PPP loan balances were $78.0
million for the three months ended March 31, 2022, compared to $633.8 million
for the three months ended March 31, 2021. These loans bear interest at 1.00%
plus the accretion of the deferred origination fee. Including deferred fees, we
recognized total interest income of $2.2 million on PPP loans for the three
months ended March 31, 2022 compared to $11.9 million for the three months ended
March 31, 2021. The PPP loans were accretive to the net interest margin by 4
basis points for the three months ended March 31, 2022 compared to 16 basis
points for the three months ended March 31, 2021. As of March 31, 2022, the
Company had $1.6 million in remaining unamortized PPP fees. The market has
continued to experience significant amounts of excess liquidity, and the Company
completed an underwritten public offering of $300.0 million in aggregate
principal of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032
during January 2022. As a result, we had an increase of $1.89 billion in average
interest-bearing cash balances for the three months ended March 31, 2022
compared to the three months ended March 31, 2021. The excess liquidity was
dilutive to the net interest margin by 34 basis points, and the additional
liquidity resulting from the subordinated debt issuance was dilutive to the net
interest margin by 5 basis points. In addition, the increase in interest expense
for the subordinated debentures was dilutive to the net interest margin by 5
basis points. For the three months ended March 31, 2022 and 2021, we recognized
$3.1 million and $5.5 million,
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respectively, in total net accretion for acquired loans and deposits. The
reduction in accretion was dilutive to the net interest margin by 6 basis
points. We recognized $1.4 million in event interest income for the three months
ended March 31, 2022 compared to $1.1 million for the three months ended
March 31, 2021. This increased the net interest margin by 1 basis point.
Net interest income on a fully taxable equivalent basis decreased $17.0 million,
or 11.4%, to $132.9 million for the three-month period ended March 31, 2022,
from $149.9 million for the same period in 2021. This decrease in net interest
income for the three-month period ended March 31, 2022 was the result of a $17.8
million decrease in interest income, partially offset by an $808,000 decrease in
interest expense, on a fully taxable equivalent basis. The $17.8 million
decrease in interest income was primarily the result of higher levels of
interest earning assets at lower yields. Although our interest earning assets
increased, our average loan balances decreased by $1.09 billion while average
interest-bearing balances due from banks increased by $1.89 billion. The lower
yield on earning assets resulted in a decrease in interest income of
approximately $7.3 million, and the change in composition of earning assets at
lower yields resulted in a decrease in interest income of approximately $10.5
million. The lower yield was primarily driven by the decrease in income on loans
of $21.5 million, which was partially offset by an increase in income on
investment securities of $2.4 million and a $1.3 million increase in income on
interest-bearing balances due from banks. The $808,000 decrease in interest
expense is primarily the result of interest-bearing liabilities repricing in a
decreasing interest rate environment, which reduced interest expense by $3.4
million, partially offset by a $2.6 million increase in interest expense
resulting from a change in the composition of average interest bearing
liabilities. The decrease in interest expense was primarily driven by a $2.8
million decrease in interest expense on deposits, which was partially offset by
a $2.1 million increase in interest expense on subordinated debentures resulting
from the Company’s issuance of $300.0 million in aggregate principal of its
3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 during January 2022.
Tables 2 and 3 reflect an analysis of net interest income on a fully taxable
equivalent basis for the three months ended March 31, 2022 and 2021, as well as
changes in fully taxable equivalent net interest margin for the three months
ended March 31, 2022 compared to the same period in 2021.
Table 2: Analysis of Net Interest Income
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Interest income $ 144,903 $ 162,651
Fully taxable equivalent adjustment 1,738 1,821
Interest income – fully taxable equivalent 146,641 164,472
Interest expense 13,755 14,563
Net interest income – fully taxable equivalent $ 132,886 $ 149,909
Yield on earning assets – fully taxable equivalent 3.55 % 4.41 %
Cost of interest-bearing liabilities 0.49 0.56
Net interest spread – fully taxable equivalent 3.06 3.85
Net interest margin – fully taxable equivalent 3.21 4.02
Table 3: Changes in Fully Taxable Equivalent Net Interest Margin
Three Months Ended
March 31,
2022 vs. 2021
(In thousands)
Decrease in interest income due to change in earning assets $ (10,536)
Decrease in interest income due to change in earning asset yields (7,295)
Increase in interest expense due to change in interest-bearing liabilities
(2,577)
Decrease in interest expense due to change in interest rates paid on
interest-bearing liabilities
3,385
Decrease in net interest income
$ (17,023)
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Table 4 shows, for each major category of earning assets and interest-bearing
liabilities, the average amount outstanding, the interest income or expense on
that amount and the average rate earned or expensed for the three months ended
March 31, 2022 and 2021, respectively. 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.
Non-accrual loans were included in average loans for the purpose of calculating
the rate earned on total loans.
Table 4: Average Balance Sheets and Net Interest Income Analysis
Three Months Ended March 31,
2022 2021
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from
banks $ 3,497,894 $ 1,673 0.19 % $ 1,610,463 $ 410 0.10 %
Federal funds sold 1,751 1 0.23 119 – –
Investment securities – taxable 2,486,401 9,080 1.48 1,637,061 6,253 1.55
Investment securities –
non-taxable 850,722 6,284 3.00 848,158 6,700 3.20
Loans receivable 9,937,993 129,603 5.29 11,023,139 151,109 5.56
Total interest-earning assets 16,774,761 146,641 3.55 % 15,118,940 164,472 4.41 %
Non-earning assets 1,618,314 1,599,950
Total assets $ 18,393,075 $ 16,718,890
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing
transaction
accounts $ 9,363,793 $ 3,873 0.17 % $ 8,338,791 4,716 0.23 %
Time deposits 854,593 1,021 0.48 1,209,431 2,989 1.00
Total interest-bearing deposits 10,218,386 4,894 0.19 9,548,222 7,705 0.33
Securities sold under agreement to
repurchase 137,565 108 0.32 159,697 190 0.48
FHLB and other borrowed funds 400,000 1,875 1.90 400,000 1,875 1.90
Subordinated debentures 611,888 6,878 4.56 370,421 4,793 5.25
Total interest-bearing liabilities 11,367,839 13,755 0.49 % 10,478,340 14,563 0.56
%
Non-interest-bearing liabilities
Non-interest-bearing deposits 4,155,894 3,480,050
Other liabilities 121,362 134,882
Total liabilities 15,645,095 14,093,272
Stockholders’ equity 2,747,980 2,625,618
Total liabilities and
stockholders’
equity $ 18,393,075 $ 16,718,890
Net interest spread 3.06 % 3.85
%
Net interest income and margin $ 132,886 3.21 % $ 149,909 4.02 %
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Table 5 shows changes in interest income and interest expense resulting from
changes in volume and changes in interest rates for the three months ended
March 31, 2022 compared to the same period in 2021, on a fully taxable basis.
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 5: Volume/Rate Analysis
Three
Months Ended March 31, 2022 over 2021
Volume Yield/Rate Total
(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks $ 722 $ 541 $ 1,263
Federal funds sold – 1 1
Investment securities – taxable 3,113 (286) 2,827
Investment securities – non-taxable 20 (436) (416)
Loans receivable (14,391) (7,115) (21,506)
Total interest income (10,536) (7,295) (17,831)
Interest expense:
Interest-bearing transaction and savings deposits 531 (1,374) (843)
Time deposits (713) (1,255) (1,968)
Federal funds purchased – – –
Securities sold under agreement to repurchase (24) (58) (82)
FHLB borrowed funds – – –
Subordinated debentures 2,783 (698) 2,085
Total interest expense 2,577 (3,385) (808)
Increase (decrease) in net interest income $ (13,113)
$ (3,910) $ (17,023)
Provision for Credit Losses
The measurement of expected credit losses under the CECL methodology is
applicable to financial assets measured at amortized cost, including loan
receivables and held-to-maturity debt securities. It also applies to off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby
letters of credits, financial guarantees, and other similar instruments) and net
investments in leases recognized by a lessor in accordance with Topic 842 on
leases. ASC 326 requires enhanced disclosures related to the significant
estimates and judgments used in estimating credit losses as well as the credit
quality and underwriting standards of a company’s portfolio. In addition, ASC
326 requires credit losses to be presented as an allowance rather than as a
write-down on available for sale debt securities management does not intend to
sell or believes that it is more likely than not, they will be required to sell.
Loans. Management estimates the allowance balance using relevant available
information, from internal and external sources, relating to past events,
current conditions, and reasonable and supportable forecasts. Historical credit
loss experience provides the basis for the estimation of expected credit losses.
Adjustments to historical loss information are made for differences in current
loan-specific risk characteristics such as differences in underwriting
standards, portfolio mix, delinquency level, or term as well as for changes in
environmental conditions, such as changes in the national unemployment rate,
gross domestic product, rental vacancy rate, housing price index and national
retail sales index.
Acquired loans. In accordance with ASC 326, the Company records both a discount
and an allowance for credit losses on acquired loans. This is commonly referred
to as “double accounting.”
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The allowance for credit losses is measured based on call report segment as
these types of loans exhibit similar risk characteristics. The identified loan
segments are as follows:
•1-4 family construction
•All other construction
•1-4 family revolving HELOC & junior liens
•1-4 family senior liens
•Multifamily
•Owner occupied commercial real estate
•Non-owner occupied commercial real estate
•Commercial & industrial, agricultural, non-depository financial institutions,
purchase/carry securities, other
•Consumer auto
•Other consumer
•Other consumer – SPF
The allowance for credit losses for each segment is measured through the use of
the discounted cash flow method. Loans that do not share risk characteristics
are evaluated on an individual basis. Loans evaluated individually are not also
included in the collective evaluation. For those loans that are classified as
impaired, an allowance is established when the discounted cash flows, collateral
value or observable market price of the impaired loan is lower than the carrying
value of that loan.
During the three-month periods ended March 31, 2022 and March 31, 2021, the
Company did not record any provision for credit losses. The markets in which we
operate have begun to experience significant economic uncertainty primarily
related to inflationary concerns, continuing supply chain issues and the
potential impacts of international unrest. However, the Company determined that
an additional provision for credit losses was not necessary as the current level
of the allowance for credit losses was considered adequate as of March 31, 2022.
Net charge-offs to average total loans was 0.08% for the three months ended
March 31, 2022 compared to 0.09% for the three months ended March 31, 2021.
Investments – Available-for-sale: The Company evaluates all securities quarterly
to determine if any securities in a loss position require a provision for credit
losses in accordance with ASC 326, Measurement of Credit Losses on Financial
Instruments. The Company first assesses whether it intends to sell or is more
likely than not that the Company will be required to sell the security before
recovery of its amortized cost basis. If either of the criteria regarding intent
or requirement to sell is met, the security’s amortized cost basis is written
down to fair value through income. For securities that do not meet this
criteria, the Company evaluates whether the decline in fair value has resulted
from credit losses or other factors. In making this assessment, the Company
considers the extent to which fair value is less than amortized cost, and
changes to the rating of the security by a rating agency, and adverse conditions
specifically related to the security, among other factors. If this assessment
indicates that a credit loss exists, the present value of cash flows expected to
be collected from the security are compared to the amortized cost basis of the
security. If the present value of cash flows expected to be collected is less
than the amortized cost basis, a credit loss exists and an allowance for credit
losses is recorded for the credit loss, limited by the amount that the fair
value is less than the amortized cost basis. Any impairment that has not been
recorded through an allowance for credit losses is recognized in other
comprehensive income. Changes in the allowance for credit losses are recorded as
provision for (or reversal of) credit loss expense. Losses are charged against
the allowance when management believes the uncollectability of a security is
confirmed or when either of the criteria regarding intent or requirement to sell
is met.
During the three-month periods ended March 31, 2022 and March 31, 2021, the
Company did not record any provision for credit losses on available-for-sale
securities. At March 31, 2022, the Company determine the allowance for credit
losses of $842,000, resulting from economic uncertainties was adequate for the
investment portfolio. No additional provision for credit losses was considered
necessary for the portfolio.
Investments – Held-to-Maturity. The Company measures expected credit losses on
HTM securities on a collective basis by major security type, with each type
sharing similar risk characteristics. The estimate of expected credit losses
considers historical credit loss information that is adjusted for current
conditions and reasonable and supportable forecasts. The Company has made the
election to exclude accrued interest receivable on HTM securities from the
estimate of credit losses and report accrued interest separately on the
consolidated balance sheets.
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During the three months ended March 31, 2022, the Company purchased
$500.0 million of U.S. Treasury Securities with an initial book value of
$498.9 million. These investments are classified as held-to-maturity, and mature
within one year. As of March 31, 2022, the amortized cost of these securities
was $499.3 million. Management has determined that recording a provision for
credit losses on these investments was not necessary due to the inherent low
risk of U.S. Treasury Securities and the short-term maturities of these
investments. As of March 31, 2021, the Company did not hold any held-to-maturity
securities.
Non-Interest Income
Total non-interest income was $30.7 million for the three months ended March 31,
2022, compared to $45.3 million for the same period in 2021. Our recurring
non-interest income includes service charges on deposit accounts, other service
charges and fees, trust fees, mortgage lending income, insurance commissions,
increase in cash value of life insurance, fair value adjustment for marketable
securities and dividends.
Table 6 measures the various components of our non-interest income for the three
months ended March 31, 2022 and 2021, respectively, as well as changes for the
three months ended March 31, 2022 compared to the same period in 2021.
Table 6: Non-Interest Income
Three Months Ended March 31, 2021 Change
2022 2021 from 2020
(Dollars in thousands)
Service charges on deposit accounts $ 6,140 $ 5,002 $ 1,138 22.8 %
Other service charges and fees 7,733 7,608 125 1.6
Trust fees 574 522 52 10.0
Mortgage lending income 3,916 8,167 (4,251) (52.1)
Insurance commissions 480 492 (12) (2.4)
Increase in cash value of life insurance 492 502 (10) (2.0)
Dividends from FHLB, FRB, FNBB & other 698 8,609 (7,911) (91.9)
Gain on sale of SBA loans 95 – 95 100.0
Gain (loss) on sale of branches, equipment and other
assets, net 16 (29) 45 155.2
Gain on OREO, net 478 401 77 19.2
Gain on securities, net – 219 (219) (100.0)
Fair value adjustment for marketable securities 2,125 5,782 (3,657) (63.2)
Other income 7,922 8,001 (79) (1.0)
Total non-interest income $ 30,669 $ 45,276 $ (14,607) (32.3) %
Non-interest income decreased $14.6 million, or 32.3%, to $30.7 million for the
three months ended March 31, 2022 from $45.3 million for the same period in
2021. The primary factors that resulted in this decrease were the reduction in
dividends from FHLB, FRB, FNBB & other as well as the lower level of mortgage
lending income. Other factors were changes related to service charges on deposit
accounts and fair value adjustment for marketable securities.
Additional details for the three months ended March 31, 2022 on some of the more
significant changes are as follows:
•The $1.1 million increase in service charges on deposit accounts is primarily
related to an increase in overdraft fees resulting from increased economic
activity.
•The $4.3 million decrease in mortgage lending income is primarily due to a
decrease in volume of secondary market loans from the high volume of loans
during 2021.
•The $7.9 million decrease for dividends from FHLB, FRB, FNBB & other is
primarily due to a decrease in special dividends from equity investments.
•The $3.7 million decrease in the fair value adjustment for marketable
securities is due to a reduction in the increase of the fair market values of
marketable securities held by the Company.
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Non-Interest Expense
Non-interest expense primarily consists of salaries and employee benefits,
occupancy and equipment, data processing, and other expenses such as
advertising, merger and acquisition expenses, amortization of intangibles,
electronic banking expense, FDIC and state assessment, insurance, legal and
accounting fees and other professional fees.
Table 7 below sets forth a summary of non-interest expense for the three months
ended March 31, 2022 and 2021, as well as changes for the three months ended
March 31, 2022 compared to the same period in 2021.
Table 7: Non-Interest Expense
Three Months Ended March 31, 2022 Change
2022 2021 from 2021
(Dollars in thousands)
Salaries and employee benefits $ 43,551 $ 42,059 $ 1,492 3.5 %
Occupancy and equipment 9,144 9,237 (93) (1.0)
Data processing expense 7,039 5,870 1,169 19.9
Merger and acquisition expenses 863 – 863 100.0
Other operating expenses:
Advertising 1,266 1,046 220 21.0
Amortization of intangibles 1,421 1,421 – –
Electronic banking expense 2,538 2,238 300 13.4
Directors’ fees 404 383 21 5.5
Due from bank service charges 270 249 21 8.4
FDIC and state assessment 1,668 1,363 305 22.4
Insurance 770 781 (11) (1.4)
Legal and accounting 797 846 (49) (5.8)
Other professional fees 1,609 1,613 (4) (0.2)
Operating supplies 754 487 267 54.8
Postage 306 338 (32) (9.5)
Telephone 337 346 (9) (2.6)
Other expense 4,159 4,589 (430) (9.4)
Total non-interest expense $ 76,896 $ 72,866 $ 4,030 5.5 %
Non-interest expense increased $4.0 million, or 5.5%, to $76.9 million for the
three months ended March 31, 2022 from $72.9 million for the same period in
2021. The primary factors that resulted in this increase were the changes
related to salaries and employee benefits, data processing expense and merger
and acquisition expense.
Additional details for the three months ended March 31, 2022 on some of the more
significant changes are as follows:
•The $1.5 million increase in salaries and employee benefits expense is
primarily due to increased salary expenses related to the normal increased cost
of doing business.
•The $1.2 million increase in data processing expense is primarily related to
the normal increased cost of doing business such as the increase in software,
licensing, core processing expense, telecommunication services, internet banking
and cash management expense and mobile banking expenses.
•The $863,000 increase in merger and acquisition expense is related to costs
associated with the acquisition of Happy Bancshares, Inc.
Income Taxes
Income tax expense decreased $8.9 million, or 30.7%, to $20.0 million for the
three-month period ended March 31, 2022, from $28.9 million for the same period
in 2021. The effective income tax rate was 23.59% for the three month period
ended March 31, 2022, compared to 23.98% for the same period in 2021.
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Financial Condition as of and for the Period Ended March 31, 2022 and
December 31, 2021
Our total assets as of March 31, 2022 increased $565.9 million to $18.62 billion
from the $18.05 billion reported as of December 31, 2021. Cash and cash
equivalents decreased $30.9 million, for the three months ended March 31, 2022.
Our loan portfolio balance increased to $10.05 billion as of March 31, 2022 from
$9.84 billion at December 31, 2021. The increase in loans was primarily due to
the acquisition of $242.2 million in marine loans from LendingClub Bank during
the first quarter of 2022, as well as $27.6 million in organic loan growth,
partially offset by $53.2 million of PPP loan decline. Total deposits increased
$320.4 million to $14.58 billion as of March 31, 2022 from $14.26 billion as of
December 31, 2021. Stockholders’ equity decreased $79.0 million to $2.69 billion
as of March 31, 2022, compared to $2.77 billion as of December 31, 2021. The
$79.0 million decrease in stockholders’ equity is primarily associated with the
$115.0 million in other comprehensive loss for the three months ended March 31,
2022, $27.0 million of shareholder dividends paid and stock repurchases of $4.1
million in 2022, partially offset by $64.9 million in net income for the three
months ended March 31, 2022.
Loan Portfolio
Loans Receivable
Our loan portfolio averaged $9.94 billion and $11.02 billion during the three
months ended March 31, 2022 and 2021, respectively. Loans receivable were $10.05
billion and $9.84 billion as of March 31, 2022 and December 31, 2021,
respectively.
From December 31, 2021 to March 31, 2022, the Company experienced an increase of
approximately $216.6 million in loans. The increase in loans was primarily due
to the acquisition of $242.2 million in marine loans from LendingClub Bank
during the first quarter of 2022, as well as $27.6 million in organic loan
growth, partially offset by $53.2 million of PPP loan decline. The $27.6 million
in organic loan growth included $225.6 million in loan growth for Centennial
CFG, while the remaining footprint experienced $198.0 million in loan decline
during the first three months of 2022. As of March 31, 2022, the Company had
$59.6 million of PPP loans.
The most significant components of the loan portfolio were commercial real
estate, residential real estate, consumer and commercial and industrial loans.
These loans are generally secured by residential or commercial real estate or
business or personal property. Although these loans are primarily originated
within our franchises in Arkansas, Florida, South Alabama and Centennial CFG,
the property securing these loans may not physically be located within our
market areas of Arkansas, Florida, Alabama and New York. Loans receivable were
approximately $3.02 billion, $3.56 billion, $217.6 million, $1.11 billion and
$2.15 billion as of March 31, 2022 in Arkansas, Florida, Alabama, SPF and
Centennial CFG, respectively.
As of March 31, 2022, we had approximately $308.3 million of construction land
development loans which were collateralized by land. This consisted of
approximately $46.4 million for raw land and approximately $261.9 million for
land with commercial and or residential lots.
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Table 8 presents our loans receivable balances by category as of March 31, 2022
and December 31, 2021.
Table 8: Loans Receivable
March 31, 2022 December 31, 2021
(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential $ 3,810,383 $ 3,889,284
Construction/land development 1,856,096
1,850,050
Agricultural 142,920
130,674
Residential real estate loans:
Residential 1-4 family 1,223,890
1,274,953
Multifamily residential 248,650
280,837
Total real estate 7,281,939 7,425,798
Consumer 1,059,342 825,519
Commercial and industrial 1,510,205 1,386,747
Agricultural 48,095 43,920
Other 153,133 154,105
Total loans receivable $ 10,052,714 $
9,836,089
Commercial Real Estate Loans. We originate non-farm and non-residential loans
(primarily secured by commercial real estate), construction/land development
loans, and agricultural loans, which are generally secured by real estate
located in our market areas. Our commercial mortgage loans are generally
collateralized by first liens on real estate and amortized (where defined) over
a 15 to 30-year period with balloon payments due at the end of one to five
years. These loans are generally underwritten by assessing cash flow (debt
service coverage), primary and secondary source of repayment, the financial
strength of any guarantor, the strength of the tenant (if any), the borrower’s
liquidity and leverage, management experience, ownership structure, economic
conditions and industry specific trends and collateral. Generally, we will loan
up to 85% of the value of improved property, 65% of the value of raw land and
75% of the value of land to be acquired and developed. A first lien on the
property and assignment of lease is required if the collateral is rental
property, with second lien positions considered on a case-by-case basis.
As of March 31, 2022, commercial real estate loans totaled $5.81 billion, or
57.8%, of loans receivable, as compared to $5.87 billion, or 59.7%, of loans
receivable, as of December 31, 2021. Commercial real estate loans originated in
our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $2.00
billion, $2.27 billion, $97.5 million, zero and $1.44 billion at March 31, 2022,
respectively.
Residential Real Estate Loans. We originate one to four family, residential
mortgage loans generally secured by property located in our primary market
areas. Approximately 35.9% and 52.2% of our residential mortgage loans consist
of owner occupied 1-4 family properties and non-owner occupied 1-4 family
properties (rental), respectively, as of March 31, 2022, with the remaining
11.9% relating to condos and mobile homes. Residential real estate loans
generally have a loan-to-value ratio of up to 90%. These loans are underwritten
by giving consideration to the borrower’s ability to pay, stability of
employment or source of income, debt-to-income ratio, credit history and
loan-to-value ratio.
As of March 31, 2022, residential real estate loans totaled $1.47 billion, or
14.6%, of loans receivable, compared to $1.56 billion, or 15.8%, of loans
receivable, as of December 31, 2021. Residential real estate loans originated in
our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $404.2
million, $884.3 million, $57.4 million, zero and $126.6 million at March 31,
2022, respectively.
Consumer Loans. Our consumer loans are composed of secured and unsecured loans
originated by our bank, the primary portion of which consists of loans to
finance USCG registered high-end sail and power boats within our SPF division.
The performance of consumer loans will be affected by the local and regional
economies as well as the rates of personal bankruptcies, job loss, divorce and
other individual-specific characteristics.
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As of March 31, 2022, consumer loans totaled $1.06 billion, or 10.5%, of loans
receivable, compared to $825.5 million, or 8.4%, of loans receivable, as of
December 31, 2021. Consumer loans originated in our Arkansas, Florida, Alabama,
SPF and Centennial CFG markets were $19.6 million, $7.8 million, $710,000, $1.03
billion and zero at March 31, 2022, respectively.
Commercial and Industrial Loans. Commercial and industrial loans are made for a
variety of business purposes, including working capital, inventory, equipment
and capital expansion. The terms for commercial loans are generally one to seven
years. Commercial loan applications must be supported by current financial
information on the borrower and, where appropriate, by adequate collateral.
Commercial loans are generally underwritten by addressing cash flow (debt
service coverage), primary and secondary sources of repayment, the financial
strength of any guarantor, the borrower’s liquidity and leverage, management
experience, ownership structure, economic conditions and industry specific
trends and collateral. The loan to value ratio depends on the type of
collateral. Generally, accounts receivable are financed at between 50% and 80%
of accounts receivable less than 60 days past due. Inventory financing will
range between 50% and 80% (with no work in process) depending on the borrower
and nature of inventory. We require a first lien position for those loans.
As of March 31, 2022, commercial and industrial loans totaled $1.51 billion, or
15.0%, of loans receivable, compared to $1.39 billion, or 14.1%, of loans
receivable, as of December 31, 2021. Commercial and industrial loans originated
in our Arkansas, Florida, Alabama, SPF and Centennial CFG markets were $470.1
million, $328.5 million, $52.1 million, $78.2 million and $581.3 million at
March 31, 2022, respectively.
Non-Performing Assets
We classify our problem loans into three categories: past due loans, special
mention loans and classified loans (accruing and non-accruing).
When management determines that a loan is no longer performing, and that
collection of interest appears doubtful, the loan is placed on non-accrual
status. Loans that are 90 days past due are placed on non-accrual status unless
they are adequately secured and there is reasonable assurance of full collection
of both principal and interest. Our management closely monitors all loans that
are contractually 90 days past due, treated as “special mention” or otherwise
classified or on non-accrual status.
Purchased loans that have experienced more than insignificant credit
deterioration since origination are purchase credit deteriorated (“PCD”) loans.
An allowance for credit losses is determined using the same methodology as other
loans. The initial allowance for credit losses determined on a collective basis
is allocated to individual loans. The sum of the loan’s purchase price and
allowance for credit losses becomes its initial amortized cost basis. The
difference between the initial amortized cost basis and the par value of the
loan is a non-credit discount or premium, which is amortized into interest
income over the life of the loan. Subsequent changes to the allowance for credit
losses are recorded through the provision for credit losses. The Company held
approximately $439,000 and $448,000 in PCD loans, as of March 31, 2022 and
December 31, 2021, respectively.
Table 9 sets forth information with respect to our non-performing assets as of
March 31, 2022 and December 31, 2021. As of these dates, all non-performing
restructured loans are included in non-accrual loans.
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Table 9: Non-performing Assets
As of March 31, As of December 31,
2022 2021
(Dollars in thousands)
Non-accrual loans $ 44,629 $ 47,158
Loans past due 90 days or more (principal or interest payments) 46 3,035
Total non-performing loans 44,675 50,193
Other non-performing assets
Foreclosed assets held for sale, net 1,144 1,630
Other non-performing assets – –
Total other non-performing assets 1,144 1,630
Total non-performing assets $ 45,819 $ 51,823
Allowance for credit losses to non-accrual loans 526.04 % 501.96 %
Allowance for credit losses to non-performing loans 525.50 471.61
Non-accrual loans to total loans 0.44 0.48
Non-performing loans to total loans 0.44 0.51
Non-performing assets to total assets 0.25 0.29
Our non-performing loans are comprised of non-accrual loans and accruing loans
that are contractually past due 90 days. Our bank subsidiary recognizes income
principally on the accrual basis of accounting. When loans are classified as
non-accrual, the accrued interest is charged off and no further interest is
accrued, unless the credit characteristics of the loan improve. 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.
Total non-performing loans were $44.7 million and $50.2 million as of March 31,
2022 and December 31, 2021, respectively. Non-performing loans at March 31, 2022
were $13.2 million, $24.8 million, $480,000, $1.4 million and $4.8 million in
the Arkansas, Florida, Alabama, SPF and Centennial CFG markets, respectively.
The $4.8 million balance of non-accrual loans for our Centennial CFG market
consists of one loan that is assessed for credit risk by the Federal Reserve
under the Shared National Credit Program. The decision to place this loan on
non-accrual status was made by the Federal Reserve and not the Company. The loan
that makes up the total balance is still current on both principal and interest.
However, all interest payments are currently being applied to the principal
balance. Because the Federal Reserve required us to place this loan on
non-accrual status, we have reversed any interest that had accrued subsequent to
the non-accrual date designated by the Federal Reserve.
Troubled debt restructurings (“TDRs”) generally occur when a borrower is
experiencing, or is expected to experience, financial difficulties in the near
term. As a result, we will work with the borrower to prevent further
difficulties, and ultimately to improve the likelihood of recovery on the loan.
In those circumstances it may be beneficial to restructure the terms of a loan
and work with the borrower for the benefit of both parties, versus forcing the
property into foreclosure and having to dispose of it in an unfavorable and
depressed real estate market. When we have modified the terms of a loan, we
usually either reduce the monthly payment and/or interest rate for generally
about three to twelve months. For our TDRs that accrue interest at the time the
loan is restructured, it would be a rare exception to have charged-off any
portion of the loan. As of March 31, 2022, we had $6.1 million of restructured
loans that are in compliance with the modified terms and are not reported as
past due or non-accrual in Table 9. Our Florida market contains $3.6 million and
our Arkansas market contains $2.5 million of these restructured loans.
A loan modification that might not otherwise be considered may be granted
resulting in classification as a TDR. These loans can involve loans remaining on
non-accrual, moving to non-accrual, or continuing on an accrual status,
depending on the individual facts and circumstances of the borrower. Generally,
a non-accrual loan that is restructured remains on non-accrual for a period of
nine months to demonstrate that the borrower can meet the restructured terms.
However, performance prior to the restructuring, or significant events that
coincide with the restructuring, are considered in assessing whether the
borrower can pay under the new terms and may result in the loan being returned
to an accrual status after a shorter performance period. If the borrower’s
ability to meet the revised payment schedule is not reasonably assured, the loan
will remain in a non-accrual status.
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The majority of the Bank’s loan modifications relates to commercial lending and
involves reducing the interest rate, changing from a principal and interest
payment to interest-only, lengthening the amortization period, or a combination
of some or all of the three. In addition, it is common for the Bank to seek
additional collateral or guarantor support when modifying a loan. At March 31,
2022 and December 31, 2021, the amount of TDRs was $6.9 million and $7.5
million, respectively. As of March 31, 2022 and December 31, 2021, 88.6% and
85.7%, respectively, of all restructured loans were performing to the terms of
the restructure.
Total foreclosed assets held for sale were $1.1 million as of March 31, 2022,
compared to $1.6 million as of December 31, 2021 for a decrease of $486,000. The
foreclosed assets held for sale as of March 31, 2022 are comprised of $8,000 of
assets located in Arkansas, $1.14 million located in Florida, and zero from
Alabama, SPF and Centennial CFG.
Table 10 shows the summary of foreclosed assets held for sale as of March 31,
2022 and December 31, 2021.
Table 10: Foreclosed Assets Held For Sale
As of March 31, As of December
2022 31, 2021
(In thousands)
Commercial real estate loans
Non-farm/non-residential $ 275 $ 536
Construction/land development 609 834
Agricultural – –
Residential real estate loans
Residential 1-4 family 260 260
Multifamily residential – –
Total foreclosed assets held for sale
$ 1,144 $ 1,630
A loan is considered impaired when it is probable that we will not receive all
amounts due according to the contracted terms of the loans. Impaired loans
include non-performing loans (loans past due 90 days or more and non-accrual
loans), criticized and/or classified loans with a specific allocation, loans
categorized as TDRs and certain other loans identified by management that are
still performing (loans included in multiple categories are only included once).
As of March 31, 2022 and December 31, 2021, impaired loans were $321.5 million
and $331.5 million, respectively. The amortized cost balance for loans with a
specific allocation decreased from $284.0 million to $276.8 million, and the
specific allocation for impaired loans decreased by approximately $1.4 million
for the period ended March 31, 2022 compared to the period ended December 31,
2021. The Company is continuing to monitor these impaired loans and will adjust
the discount as necessary. As of March 31, 2022, our Arkansas, Florida, Alabama,
SPF and Centennial CFG markets accounted for approximately $174.6 million,
$140.2 million, $480,000, $1.4 million and $4.8 million of the impaired loans,
respectively.
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Past Due and Non-Accrual Loans
Table 11 shows the summary of non-accrual loans as of March 31, 2022 and
December 31, 2021:
Table 11: Total Non-Accrual Loans
As of March 31, 2022 As of December 31, 2021
(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential $ 11,477 $ 11,923
Construction/land development 1,042 1,445
Agricultural 367 897
Residential real estate loans
Residential 1-4 family 18,167 16,198
Multifamily residential 156 156
Total real estate 31,209 30,619
Consumer 1,400 1,648
Commercial and industrial 11,104 13,875
Agricultural & other 916 1,016
Total non-accrual loans $ 44,629 $ 47,158
If non-accrual loans had been accruing interest in accordance with the original
terms of their respective agreements, interest income of approximately $407,000
and $904,000, respectively, would have been recorded for the three-month periods
ended March 31, 2022 and 2021.
Table 12 shows the summary of accruing past due loans 90 days or more as of
March 31, 2022 and December 31, 2021:
Table 12: Loans Accruing Past Due 90 Days or More
As of December
As of March 31, 2022 31, 2021
(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential $ – $ 2,225
Construction/land development – –
Agricultural – –
Residential real estate loans
Residential 1-4 family 46 701
Multifamily residential – –
Total real estate 46 2,926
Consumer – 2
Commercial and industrial – 107
Other – –
Total loans accruing past due 90 days or more $ 46 $ 3,035
Our ratio of total loans accruing past due 90 days or more and non-accrual loans
to total loans was 0.44% and 0.51% at March 31, 2022 and December 31, 2021,
respectively.
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Allowance for Credit Losses
Overview. The allowance for credit losses on loans receivable is a valuation
account that is deducted from the loans’ amortized cost basis to present the net
amount expected to be collected on the loans. Loans are charged off against the
allowance when management believes the uncollectability of a loan balance is
confirmed. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off.
The Company uses the discounted cash flow (“DCF”) method to estimate expected
losses for all of Company’s loan pools. These pools are as follows: construction
& land development; other commercial real estate; residential real estate;
commercial & industrial; and consumer & other. The loan portfolio pools were
selected in order to generally align with the loan categories specified in the
quarterly call reports required to be filed with the Federal Financial
Institutions Examination Council. For each of these loan pools, the Company
generates cash flow projections at the instrument level wherein payment
expectations are adjusted for estimated prepayment speed, curtailments, time to
recovery, probability of default, and loss given default. The modeling of
expected prepayment speeds, curtailment rates, and time to recovery are based on
historical internal data. The Company uses regression analysis of historical
internal and peer data to determine suitable loss drivers to utilize when
modeling lifetime probability of default and loss given default. This analysis
also determines how expected probability of default and loss given default will
react to forecasted levels of the loss drivers.
For all DCF models, management has determined that four quarters represents a
reasonable and supportable forecast period and reverts to a historical loss rate
over four quarters on a straight-line basis. Management leverages economic
projections from a reputable and independent third party to inform its loss
driver forecasts over the four-quarter forecast period. Other internal and
external indicators of economic forecasts are also considered by management when
developing the forecast metrics.
Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. Historical credit loss experience
provides the basis for the estimation of expected credit losses. Adjustments to
historical loss information are made for differences in current loan-specific
risk characteristics such as differences in underwriting standards, portfolio
mix, delinquency level, or term as well as for changes in environmental
conditions, such as changes in the national unemployment rate, gross domestic
product, rental vacancy rate, housing price index and national retail sales
index.
The combination of adjustments for credit expectations (default and loss) and
time expectations prepayment, curtailment, and time to recovery) produces an
expected cash flow stream at the instrument level. Instrument effective yield is
calculated, net of the impacts of prepayment assumptions, and the instrument
expected cash flows are then discounted at that effective yield to produce an
instrument-level net present value of expected cash flows (“NPV”). An allowance
for credit loss is established for the difference between the instrument’s NPV
and amortized cost basis.
The allowance for credit losses is measured based on call report segment as
these types of loans exhibit similar risk characteristics. The allowance for
credit losses for each segment is measured through the use of the discounted
cash flow method. Loans that do not share risk characteristics are evaluated on
an individual basis. Loans evaluated individually are not also included in the
collective evaluation. For those loans that are classified as impaired, an
allowance is established when the discounted cash flows, collateral value or
observable market price of the impaired loan is lower than the carrying value of
that loan.
Expected credit losses are estimated over the contractual term of the loans,
adjusted for expected prepayments when appropriate. The contractual term
excludes expected extensions, renewals and modifications unless Management has a
reasonable expectation at the reporting date that troubled debt restructuring
will be executed with an individual borrower or
the extension or renewal options are included in the original or modified
contract at the reporting date and are not unconditionally cancellable by the
Company.
Management qualitatively adjusts model results for risk factors that are not
considered within our modeling processes but are nonetheless relevant in
assessing the expected credit losses within our loan pools. These Q-Factors and
other qualitative adjustments may increase or decrease management’s estimate of
expected credit losses by a calculated percentage or amount based upon the
estimated level of risk. The various risks that may be considered in making
Q-Factor and other qualitative adjustments include, among other things, the
impact of (i) changes in lending policies, procedures and strategies; (ii)
changes in nature and volume of the portfolio; (iii) staff experience; (iv)
changes in volume and trends in classified loans, delinquencies and nonaccruals;
(v) concentration risk; (vi) trends in underlying collateral values; (vii)
external factors such as competition, legal and regulatory environment; (viii)
changes in the quality of the loan review system and (ix) economic conditions.
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Loans considered impaired, according to ASC 326, are loans for which, based on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. The
aggregate amount of impairment of loans is utilized in evaluating the adequacy
of the allowance for credit losses and amount of provisions thereto. Losses on
impaired loans are charged against the allowance for credit losses when in the
process of collection, it appears likely that such losses will be realized. The
accrual of interest on impaired loans is discontinued when, in management’s
opinion the collection of interest is doubtful or generally when loans are 90
days or more past due. When accrual of interest is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received in excess of principal due. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Loans are placed on non-accrual status when management believes that the
borrower’s financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of interest
is doubtful, or generally when loans are 90 days or more past due. Loans are
charged against the allowance for credit losses when management believes that
the collectability of the principal is unlikely. Accrued interest related to
non-accrual loans is generally charged against the allowance for credit losses
when accrued in prior years and reversed from interest income if accrued in the
current year. Interest income on non-accrual loans may be recognized to the
extent cash payments are received, although the majority of payments received
are usually applied to principal. Non-accrual loans are generally returned to
accrual status when principal and interest payments are less than 90 days past
due, the customer has made required payments for at least six months, and we
reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under
FASB 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. In accordance with ASC 326, the Company
records both a discount and an allowance for credit losses on acquired loans.
All purchased loans are recorded at fair value in accordance with the fair value
methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair
value estimates associated with the loans include estimates related to expected
prepayments and the amount and timing of undiscounted expected principal,
interest and other cash flows.
Purchased loans that have experienced more than insignificant credit
deterioration since origination are PCD loans. An allowance for credit losses is
determined using the same methodology as other loans. The initial allowance for
credit losses determined on a collective basis is allocated to individual loans.
The sum of the loan’s purchase price and allowance for credit losses becomes its
initial amortized cost basis. The difference between the initial amortized cost
basis and the par value of the loan is a non-credit discount or premium, which
is amortized into interest income over the life of the loan. Subsequent changes
to the allowance for credit losses are recorded through the provision for credit
losses.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company
estimates expected credit losses over the contractual period in which the
Company is exposed to credit risk via a contractual obligation to extend credit
unless that obligation is unconditionally cancellable by the Company. The
allowance for credit losses on off-balance sheet credit exposures is adjusted as
a provision for credit loss expense. The estimate includes consideration of the
likelihood that funding will occur and an estimate of expected credit losses on
commitments expected to be funded over its estimated life.
Specific Allocations. As a general rule, if a specific allocation is warranted,
it is the result of an analysis of a previously classified credit or
relationship. Typically, when it becomes evident through the payment history or
a financial statement review that a loan or relationship is no longer supported
by the cash flows of the asset and/or borrower and has become collateral
dependent, we will use appraisals or other collateral analysis to determine if
collateral impairment has occurred. The amount or likelihood of loss on this
credit may not yet be evident, so a charge-off would not be prudent. However, if
the analysis indicates that an impairment has occurred, then a specific
allocation will be determined for this loan. If our existing appraisal is
outdated or the collateral has been subject to significant market changes, we
will obtain a new appraisal for this impairment analysis. The majority of our
impaired loans are collateral dependent at the present time, so third-party
appraisals were used to determine the necessary impairment for these loans. Cash
flow available to service debt was used for the other impaired loans. This
analysis is performed each quarter in connection with the preparation of the
analysis of the adequacy of the allowance for credit losses, and if necessary,
adjustments are made to the specific allocation provided for a particular loan.
For collateral dependent loans, we do not consider an appraisal outdated simply
due to the passage of time. However, if an appraisal is older than 13 months and
if market or other conditions have deteriorated and we believe that the current
market value of the property is not within approximately 20% of the appraised
value, we will consider the appraisal outdated and order either a new appraisal
or an internal validation report for the impairment analysis. The recognition of
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any provision or related charge-off on a collateral dependent loan is either
through annual credit analysis or, many times, when the relationship becomes
delinquent. If the borrower is not current, we will update our credit and cash
flow analysis to determine the borrower’s repayment ability. If we determine
this ability does not exist and it appears that the collection of the entire
principal and interest is not likely, then the loan could be placed on
non-accrual status. In any case, loans are classified as non-accrual no later
than 105 days past due. If the loan requires a quarterly impairment analysis,
this analysis is completed in conjunction with the completion of the analysis of
the adequacy of the allowance for credit losses. Any exposure identified through
the impairment analysis is shown as a specific reserve on the individual
impairment. If it is determined that a new appraisal or internal validation
report is required, it is ordered and will be taken into consideration during
completion of the next impairment analysis.
In estimating the net realizable value of the collateral, management may deem it
appropriate to discount the appraisal based on the applicable circumstances. In
such case, the amount charged off may result in loan principal outstanding being
below fair value as presented in the appraisal.
Between the receipt of the original appraisal and the updated appraisal, we
monitor the loan’s repayment history. If the loan is $3.0 million or greater or
the total loan relationship is $5.0 million or greater, our policy requires an
annual credit review. For these loans, our policy requires financial statements
from the borrowers and guarantors at least annually. In addition, we calculate
the global repayment ability of the borrower/guarantors at least annually on
these loans.
As a general rule, when it becomes evident that the full principal and accrued
interest of a loan may not be collected, or by law at 105 days past due, we will
reflect that loan as non-performing. It will remain non-performing until it
performs in a manner that it is reasonable to expect that we will collect the
full principal and accrued interest.
When the amount or likelihood of a loss on a loan has been determined, a
charge-off should be taken in the period it is determined. If a partial
charge-off occurs, the quarterly impairment analysis will determine if the loan
is still impaired, and thus continues to require a specific allocation.
The Company had $321.5 million and $331.5 million in collateral-dependent
impaired loans for the periods ended March 31, 2022 and December 31, 2021,
respectively.
Loans Collectively Evaluated for Impairment. Loans receivable collectively
evaluated for impairment increased by approximately $213.1 million from $9.54
billion at December 31, 2021 to $9.75 billion at March 31, 2022. The percentage
of the allowance for credit losses allocated to loans receivable collectively
evaluated for impairment to the total loans collectively evaluated for
impairment was 1.89% and 1.94% at March 31, 2022 and December 31, 2021,
respectively.
Charge-offs and Recoveries. Total charge-offs decreased to $2.3 million for the
three months ended March 31, 2022, compared to $3.0 million for the same period
in 2021. Total recoveries were $364,000 and $506,000 for the three months ended
March 31, 2022 and 2021, respectively. For the three months ended March 31,
2022, net charge-offs were $268,000 for Arkansas, $1.2 million for Florida,
$1,000 for Alabama, $458,000 for SPF and zero for Centennial CFG. These equal a
net charge-off position of $1.9 million.
We have not charged off an amount less than what was determined to be the fair
value of the collateral as presented in the appraisal, less estimated costs to
sell (for collateral dependent loans), for any period presented. Loans partially
charged-off are placed on non-accrual status until it is proven that the
borrower’s repayment ability with respect to the remaining principal balance can
be reasonably assured. This is usually established over a period of 6-12 months
of timely payment performance.
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Table 13 shows the allowance for credit losses, charge-offs and recoveries as of
and for the three months ended March 31, 2022 and 2021.
Table 13: Analysis of Allowance for Credit Losses
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Balance, beginning of year $ 236,714 $ 245,473
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential – 19
Construction/land development – –
Agricultural – –
Residential real estate loans:
Residential 1-4 family 250 226
Multifamily residential – –
Total real estate 250 245
Consumer 63 67
Commercial and industrial 1,416 2,279
Agricultural – –
Other 581 456
Total loans charged off 2,310 3,047
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential 26 14
Construction/land development 15 22
Agricultural – –
Residential real estate loans:
Residential 1-4 family 26 62
Multifamily residential – –
Total real estate 67 98
Consumer 11 46
Commercial and industrial 109 76
Agricultural – –
Other 177 286
Total recoveries 364 506
Net loans charged off 1,946 2,541
Provision for credit loss – loans – –
Balance, March 31 $ 234,768 $ 242,932
Net charge-offs to average loans receivable 0.08 % 0.09 %
Allowance for credit losses to total loans 2.34 2.25
Allowance for credit losses to net charge-offs 2,974.72 2,357.38
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Table 14 presents the allocation of allowance for credit losses as of March 31,
2022 and December 31, 2021.
Table 14: Allocation of Allowance for Credit Losses
As of March 31, 2022 As of December 31, 2021
Allowance % of Allowance % of
Amount loans(1) Amount loans(1)
(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non- residential $ 95,322 37.9 % $ 86,910 39.5 %
Construction/land development 26,349 18.5 28,415 18.8
Agricultural residential real estate loans 554 1.4 308 1.3
Residential real estate loans:
Residential 1-4 family 34,732 12.2 45,364 13.0
Multifamily residential 2,379 2.5 3,094 2.9
Total real estate 159,336 72.5 164,091 75.5
Consumer 20,690 10.5 16,612 8.4
Commercial and industrial 52,326 15.0 52,910 14.1
Agricultural 166 0.5 152 0.4
Other 2,250 1.5 2,949 1.6
Total $ 234,768 100.0 % $ 236,714 100.0 %
(1)Percentage of loans in each category to total loans receivable.
Investment Securities
Our securities portfolio is the second largest component of earning assets and
provides a significant source of revenue. Securities within the portfolio are
classified as held-to-maturity, available-for-sale, or trading based on the
intent and objective of the investment and the ability to hold to maturity. Fair
values of securities are based on quoted market prices where available. If
quoted market prices are not available, estimated fair values are based on
quoted market prices of comparable securities. The estimated effective duration
of our securities portfolio was 3.7 years as of March 31, 2022.
Securities held-to-maturity, which include any security for which we have the
positive intent and ability to hold until maturity, are reported at historical
cost adjusted for amortization of premiums and accretion of discounts. Premiums
and discounts are amortized/accreted to the call date to interest income using
the constant effective yield method over the estimated life of the security. As
of March 31, 2022, we had $499.3 million of held-to-maturity securities. Of the
$499.3 million of held-to-maturity securities as of March 31, 2022, all were
invested in U.S. Government-sponsored enterprises.
Securities available-for-sale are reported at fair value with unrealized holding
gains and losses reported as a separate component of stockholders’ equity as
other comprehensive income. Securities that may be sold in response to interest
rate changes, changes in prepayment risk, the need to increase regulatory
capital, and other similar factors are classified as available-for-sale.
Available-for-sale securities were $2.96 billion and $3.12 billion as March 31,
2022 and December 31, 2021, respectively.
As of March 31, 2022, $1.41 billion, or 47.7%, of our available-for-sale
securities were invested in mortgage-backed securities, compared to $1.54
billion, or 49.3%, of our available-for-sale securities as of December 31, 2021.
To reduce our income tax burden, $928.9 million, or 31.4%, of our
available-for-sale securities portfolio as of March 31, 2022, were primarily
invested in tax-exempt obligations of state and political subdivisions, compared
to $997.0 million, or 32.0%, of our available-for-sale securities as of
December 31, 2021. We had $410.8 million, or 13.9%, invested in obligations of
U.S. Government-sponsored enterprises as of March 31, 2022, compared to $433.0
million, or 13.9%, of our available-for-sale securities as of December 31, 2021.
Also, we had approximately $207.1 million, or 7.0%, invested in other securities
as of March 31, 2022, compared to $151.9 million, or 4.9% of our
available-for-sale securities as of December 31, 2021.
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The Company evaluates all securities quarterly to determine if any securities in
a loss position require a provision for credit losses in accordance with ASC
326, Measurement of Credit Losses on Financial Instruments. The Company first
assesses whether it intends to sell or is more likely than not that the Company
will be required to sell the security before recovery of its amortized cost
basis. If either of the criteria regarding intent or requirement to sell is met,
the security’s amortized cost basis is written down to fair value through
income. For securities that do not meet this criteria, the Company evaluates
whether the decline in fair value has resulted from credit losses or other
factors. In making this assessment, the Company considers the extent to which
fair value is less than amortized cost, changes to the rating of the security by
a rating agency, and adverse conditions specifically related to the security,
among other factors. If this assessment indicates that a credit loss exists, the
present value of cash flows expected to be collected from the security are
compared to the amortized cost basis of the security. If the present value of
cash flows expected to be collected is less than the amortized cost basis, a
credit loss exists and an allowance for credit losses is recorded for the credit
loss, limited by the amount that the fair value is less than the amortized cost
basis. Any impairment that has been recorded through an allowance for credit
losses is recognized in other comprehensive income. Changes in the allowance for
credit losses are recorded as provision for (or reversal of) credit loss
expense. Losses are charged against the allowance when management believes the
uncollectability of a security is confirmed or when either of the criteria
regarding intent or requirement to sell is met.
Management has determined that recording a provision for credit losses on the
Company’s held-to-maturity investments was not necessary due to the inherent low
risk of the U.S. Treasury Securities, which comprise the entire balance of the
held-to-maturity U.S. Government-sponsored enterprises investments, as well as
the short-term maturities of these investments.
At March 31, 2022, the Company determined that the allowance for credit losses
of $842,000, resulting from economic uncertainty, was adequate for the
available-for-sale investment portfolio. No additional provision for credit
losses was considered necessary for the portfolio.
See Note 3 “Investment Securities” in the Condensed Notes to Consolidated
Financial Statements for the carrying value and fair value of investment
securities.
Deposits
Our deposits averaged $14.37 billion and $13.03 billion for the three months
ended March 31, 2022 and March 31, 2021, respectively. Total deposits were
$14.58 billion as of March 31, 2022, and $14.26 billion as of December 31, 2021.
Deposits are our primary source of funds. We offer a variety of products
designed to attract and retain deposit customers. Those products consist of
checking accounts, regular savings deposits, NOW accounts, money market accounts
and certificates of deposit. Deposits are gathered from individuals,
partnerships and corporations in our market areas. In addition, we obtain
deposits from state and local entities and, to a lesser extent, U.S. Government
and other depository institutions.
Our policy also permits the acceptance of brokered deposits. From time to time,
when appropriate in order to fund strong loan demand, we accept brokered time
deposits, generally in denominations of less than $250,000, from a regional
brokerage firm, and other national brokerage networks. We also participate in
the One-Way Buy Insured Cash Sweep (“ICS”) service and similar services, which
provide for one-way buy transactions among banks for the purpose of purchasing
cost-effective floating-rate funding without collateralization or stock purchase
requirements. Management believes these sources represent a reliable and
cost-efficient alternative funding source for the Company. However, to the
extent that our condition or reputation deteriorates, or to the extent that
there are significant changes in market interest rates which we do not elect to
match, we may experience an outflow of brokered deposits. In that event we would
be required to obtain alternate sources for funding.
Table 15 reflects the classification of the brokered deposits as of March 31,
2022 and December 31, 2021.
Table 15: Brokered Deposits
December 31,
March 31, 2022 2021
(In thousands)
Time Deposits $ – $ –
CDARS – –
Insured Cash Sweep and Other Transaction Accounts 625,721 625,704
Total Brokered Deposits $ 625,721 $ 625,704
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The interest rates paid are competitively priced for each particular deposit
product and structured to meet our funding requirements. We will continue to
manage interest expense through deposit pricing. We may allow higher rate
deposits to run off during periods of limited loan demand. We believe that
additional funds can be attracted, and deposit growth can be realized through
deposit pricing if we experience increased loan demand or other liquidity needs.
The Federal Reserve Board sets various benchmark rates, including the Federal
Funds rate, and thereby influences the general market rates of interest,
including the deposit and loan rates offered by financial institutions. In 2020,
the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in
effect throughout all of 2021. On March 16, 2022, the target rate was increased
to 0.25% to 0.50%. Presently, the Federal Reserve has indicated they are
anticipating multiple rate increases for 2022.
Table 16 reflects the classification of the average deposits and the average
rate paid on each deposit category, which are in excess of 10 percent of average
total deposits, for the three months ended March 31, 2022 and 2021.
Table 16: Average Deposit Balances and Rates
Three Months Ended March 31,
2022 2021
Average Average Average Average
Amount Rate Paid Amount Rate Paid
(Dollars in thousands)
Non-interest-bearing transaction accounts $ 4,155,894 – % $ 3,480,050 – %
Interest-bearing transaction accounts 8,389,038 0.18 7,547,556 0.25
Savings deposits 974,755 0.06 791,235 0.07
Time deposits:
$100,000 or more 518,864 0.60 834,628 1.17
Other time deposits 335,729 0.31 374,803 0.62
Total $ 14,374,280 0.14 % $ 13,028,272 0.24 %
Securities Sold Under Agreements to Repurchase
We enter into short-term purchases of securities under agreements to resell
(resale agreements) and sales of securities under agreements to repurchase
(repurchase agreements) of substantially identical securities. The amounts
advanced under resale agreements and the amounts borrowed under repurchase
agreements are carried on the balance sheet at the amount advanced. Interest
incurred on repurchase agreements is reported as interest expense. Securities
sold under agreements to repurchase increased $10.3 million, or 7.3%, from
$140.9 million as of December 31, 2021 to $151.2 million as of March 31, 2022.
FHLB and Other Borrowed Funds
The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were
$400.0 million at both March 31, 2022 and December 31, 2021. The Company had no
other borrowed funds as of March 31, 2022 or December 31, 2021. At March 31,
2022 and December 31, 2021, all of the outstanding balances were classified as
long-term advances. The FHLB advances mature in 2033 with fixed interest rates
ranging from 1.76% to 2.26%. Expected maturities could differ from contractual
maturities because FHLB may have the right to call or the Company may have the
right to prepay certain obligations.
Subordinated Debentures
Subordinated debentures, which consist of subordinated debt securities and
guaranteed payments on trust preferred securities, were $667.9 million and
$371.1 million as of March 31, 2022 and December 31, 2021, respectively.
The Company holds trust preferred securities with a face amount of $73.3 million
which are currently callable without penalty based on the terms of the specific
agreements. The trust preferred securities are tax-advantaged issues that
qualify for Tier 1 capital treatment subject to certain limitations. However,
now that the Company has exceeded $15 billion in assets, the Tier 1 treatment of
the Company’s outstanding trust preferred securities will be eliminated because
of the completion of the acquisition of Happy Bancshares, but these securities
will still be treated as Tier 2 capital. Distributions on these securities are
included in interest expense. Each of the trusts is a statutory business trust
organized for the sole purpose of issuing trust securities and investing the
proceeds in the Company’s subordinated debentures, the sole asset of
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each trust. The trust preferred securities of each trust represent preferred
beneficial interests in the assets of the respective trusts and are subject to
mandatory redemption upon payment of the subordinated debentures held by the
trust. The Company wholly owns the common securities of each trust. Each trust’s
ability to pay amounts due on the trust preferred securities is solely dependent
upon the Company making payment on the related subordinated debentures. The
Company’s obligations under the subordinated securities and other relevant trust
agreements, in aggregate, constitute a full and unconditional guarantee by the
Company of each respective trust’s obligations under the trust securities issued
by each respective trust. The Company has received approval from the Federal
Reserve to redeem all of the trust preferred securities.
On January 18, 2022, the Company completed an underwritten public offering of
$300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating
Rate Subordinated Notes due 2032 (the “2032 Notes”) for net proceeds, after
underwriting discounts and issuance costs of approximately $296.4 million. The
2032 Notes are unsecured, subordinated debt obligations of the Company and will
mature on January 30, 2032. From and including the date of issuance to, but
excluding January 30, 2027 or the date of earlier redemption, the 2032 Notes
will bear interest at an initial rate of 3.125% per annum, payable in arrears on
January 30 and July 30 of each year. From and including January 30, 2027 to, but
excluding the maturity date or earlier redemption, the 2032 Notes will bear
interest at a floating rate equal to the Benchmark rate (which is expected to be
Three-Month Term SOFR), each as defined in and subject to the provisions of the
applicable supplemental indenture for the 2032 Notes, plus 182 basis points,
payable quarterly in arrears on January 30, April 30, July 30, and October 30 of
each year, commencing on April 30, 2027.
The Company may, beginning with the interest payment date of January 30, 2027,
and on any interest payment date thereafter, redeem the 2032 Notes, in whole or
in part, subject to prior approval of the Federal Reserve if then required, at a
redemption price equal to 100% of the principal amount of the 2032 Notes to be
redeemed plus accrued and unpaid interest to but excluding the date of
redemption. The Company may also redeem the 2032 Notes at any time, including
prior to January 30, 2027, at the Company’s option, in whole but not in part,
subject to prior approval of the Federal Reserve if then required, if certain
events occur that could impact the Company’s ability to deduct interest payable
on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032
Notes from being recognized as Tier 2 capital for regulatory capital purposes,
or if the Company is required to register as an investment company under the
Investment Company Act of 1940, as amended. In each case, the redemption would
be at a redemption price equal to 100% of the principal amount of the 2032 Notes
plus any accrued and unpaid interest to, but excluding, the redemption date.
On April 3, 2017, the Company completed an underwritten public offering of
$300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating
Rate Subordinated Notes due 2027 (the “2027 Notes”) for net proceeds, after
underwriting discounts and issuance costs, of approximately $297.0 million. The
2027 Notes are unsecured, subordinated debt obligations and mature on April 15,
2027. From and including the date of issuance to, but excluding April 15, 2022,
the 2027 Notes bear interest at an initial rate of 5.625% per annum. From and
including April 15, 2022 to, but excluding the maturity date or earlier
redemption, the 2027 Notes bear interest at a floating rate equal to three-month
LIBOR as calculated on each applicable date of determination plus a spread of
3.575%; provided, however, that in the event three-month LIBOR is less than
zero, then three-month LIBOR shall be deemed to be zero.
On April 15, 2022, the Company completed the payoff of its $300.0 million in
aggregate principal amount of the 2027 Notes. Each 2027 Note was redeemed
pursuant to the terms of the Subordinated Indenture, as supplemented by the
First Supplemental Indenture, each dated as of April 3, 2017, between the
Company and U.S. Bank Trust Company, National Association, the Trustee for the
2027 Notes, at the redemption price of 100% of its principal amount, plus
accrued and unpaid interest to, but excluding, the Redemption Date.
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Stockholders’ Equity
Stockholders’ equity decreased $79.0 million to $2.69 billion as of March 31,
2022, compared to $2.77 billion as of December 31, 2021. The $79.0 million
decrease in stockholders’ equity is primarily associated with the $115.0 million
in other comprehensive loss for the three months ended March 31, 2022, $27.0
million of shareholder dividends paid and stock repurchases of $4.1 million in
2022, partially offset by $64.9 million in net income for the three months ended
March 31, 2022. The annualized decrease in stockholders’ equity for the first
three months of 2022 was 11.6%. As of March 31, 2022 and December 31, 2021, our
equity to asset ratio was 14.43% and 15.32%, respectively. Book value per share
was $16.41 as of March 31, 2022, compared to $16.90 as of December 31, 2021, an
11.8% annualized decrease.
Common Stock Cash Dividends. We declared cash dividends on our common stock of
$0.165 and $0.14 per share for the three months ended March 31, 2022 and 2021,
respectively. The common stock dividend payout ratio for the three months ended
March 31, 2022 and 2021 was 41.7% and 25.3%, respectively. On April 21, 2022,
the Board of Directors declared a regular $0.165 per share quarterly cash
dividend payable June 8, 2022, to shareholders of record May 18, 2022.
Stock Repurchase Program. On January 22, 2021, the Company’s Board of Directors
authorized the repurchase of up to an additional 20,000,000 shares of its common
stock under the previously approved stock repurchase program. We repurchased a
total of 180,000 shares with a weighted-average stock price of $22.69 per share
during the first three months of 2022. The remaining balance available for
repurchase was 21,910,665 shares at March 31, 2022.
Liquidity and Capital Adequacy Requirements
Risk-Based Capital. We, as well as our bank subsidiary, are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
other discretionary actions by regulators that, if enforced, 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 as to components, risk weightings and
other factors.
In July 2013, the Federal Reserve Board and the other federal bank regulatory
agencies issued a final rule to revise their risk-based and leverage capital
requirements and their method for calculating risk-weighted assets to make them
consistent with the agreements that were reached by the Basel Committee on
Banking Supervision in “Basel III: A Global Regulatory Framework for More
Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank
Act (“Basel III”). Basel III applies to all depository institutions, bank
holding companies with total consolidated assets of $500 million or more, and
savings and loan holding companies. Basel III became effective for the Company
and its bank subsidiary on January 1, 2015. The capital conservation buffer
requirement began being phased in beginning January 1, 2016 at the 0.625% level
and increased by 0.625% on each subsequent January 1, until it reached 2.5% on
January 1, 2019 when the phase-in period ended, and the full capital
conservation buffer requirement became effective.
Basel III permanently grandfathers trust preferred securities and other
non-qualifying capital instruments that were issued and outstanding as of May
19, 2010 in the Tier 1 capital of bank holding companies with total consolidated
assets of less than $15 billion as of December 31, 2009. The rule phases out of
Tier 1 capital these non-qualifying capital instruments issued before May 19,
2010 by all other bank holding companies. Because our total consolidated assets
were less than $15 billion as of December 31, 2009, our outstanding trust
preferred securities continue to be treated as Tier 1 capital. However, now that
the Company has exceeded $15 billion in assets, the Tier 1 treatment of the
Company’s outstanding trust preferred securities will be eliminated because of
the completion of the acquisition of Happy Bancshares, but these securities will
still be treated as Tier 2 capital.
Basel III amended the prompt corrective action rules to incorporate a “common
equity Tier 1 capital” requirement and to raise the capital requirements for
certain capital categories. In order to be adequately capitalized for purposes
of the prompt corrective action rules, a banking organization will be required
to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4%
“Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an
8% “total risk-based capital” ratio.
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 and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to
average assets. Management believes that, as of March 31, 2022 and December 31,
2021, we met all regulatory capital adequacy requirements to which we were
subject.
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On January 18, 2022, the Company completed an underwritten public offering of
$300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating
Rate Subordinated Notes due 2032 (the “2032 Notes”). The 2032 Notes are
unsecured, subordinated debt obligations of the Company and will mature on
January 30, 2032. The Company may, beginning with the interest payment date of
January 30, 2027, and on any interest payment date thereafter, redeem the 2032
Notes, in whole or in part, subject to prior approval of the Federal Reserve if
then required, at a redemption price equal to 100% of the principal amount of
the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding
the date of redemption. The Company may also redeem the 2032 Notes at any time,
including prior to January 30, 2027, at the Company’s option, in whole but not
in part, subject to prior approval of the Federal Reserve if then required, if
certain events occur that could impact the Company’s ability to deduct interest
payable on the 2032 Notes for U.S. federal income tax purposes or preclude the
2032 Notes from being recognized as Tier 2 capital for regulatory capital
purposes, or if the Company is required to register as an investment company
under the Investment Company Act of 1940, as amended. In each case, the
redemption would be at a redemption price equal to 100% of the principal amount
of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the
redemption date.
On April 3, 2017, the Company completed an underwritten public offering of
$300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating
Rate Subordinated Notes due 2027 (the “2027 Notes”). The 2027 Notes are
unsecured, subordinated debt obligations and mature on April 15, 2027. On April
15, 2022, the Company completed the payoff of its $300.0 million in aggregate
principal amount of the 2027 Notes. Each 2027 Note was redeemed pursuant to the
terms of the Subordinated Indenture, as supplemented by the First Supplemental
Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank
Trust Company, National Association, the Trustee for the 2027 Notes, at the
redemption price of 100% of its principal amount, plus accrued and unpaid
interest to, but excluding, the Redemption Date.
On December 21, 2018, the federal banking agencies issued a joint final rule to
revise their regulatory capital rules to permit bank holding companies and banks
to phase-in, for regulatory capital purposes, the day-one impact of the new CECL
accounting rule on retained earnings over a period of three years. As part of
its response to the impact of COVID-19, on March 27, 2020, the federal banking
regulatory agencies issued an interim final rule that provided the option to
temporarily delay certain effects of CECL on regulatory capital for two years,
followed by a three-year transition period. The interim final rule allows bank
holding companies and banks to delay for two years 100% of the day-one impact of
adopting CECL and 25% of the cumulative change in the reported allowance for
credit losses since adopting CECL. The Company has elected to adopt the interim
final rule, which is reflected in the risk-based capital ratios presented below.
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Table 17 presents our risk-based capital ratios on a consolidated basis as of
March 31, 2022 and December 31, 2021.
Table 17: Risk-Based Capital
As of March 31, As of December
2022 31, 2021
(Dollars in thousands)
Tier 1 capital
Stockholders’ equity $ 2,686,703 $ 2,765,721
ASC 326 transitional period adjustment 24,369 55,143
Goodwill and core deposit intangibles, net (996,184) (997,605)
Unrealized (gain) loss on available-for-sale securities 104,557 (10,462)
Total common equity Tier 1 capital 1,819,445 1,812,797
Qualifying trust preferred securities 71,305 71,270
Total Tier 1 capital 1,890,750 1,884,067
Tier 2 capital
Allowance for credit losses 234,768 236,714
ASC 326 transitional period adjustment (24,369) (55,143)
Disallowed allowance for credit losses (limited to 1.25% of risk
weighted assets)
(56,444) (33,514)
Qualifying allowance for credit losses 153,955 148,057
Qualifying subordinated notes 596,563 299,824
Total Tier 2 capital 750,518 447,881
Total risk-based capital $ 2,641,268 $ 2,331,948
Average total assets for leverage ratio $ 17,443,200 $ 16,960,683
Risk weighted assets $ 12,239,536 $ 11,793,539
Ratios at end of period
Common equity Tier 1 capital 14.87 % 15.37 %
Leverage ratio 10.84 11.11
Tier 1 risk-based capital 15.45 15.98
Total risk-based capital 21.58 19.77
Minimum guidelines – Basel III
Common equity Tier 1 capital 7.00 % 7.00 %
Leverage ratio 4.00 4.00
Tier 1 risk-based capital 8.50 8.50
Total risk-based capital 10.50 10.50
Well-capitalized guidelines
Common equity Tier 1 capital 6.50 % 6.50 %
Leverage ratio 5.00 5.00
Tier 1 risk-based capital 8.00 8.00
Total risk-based capital 10.00 10.00
As of the most recent notification from regulatory agencies, our bank subsidiary
was “well-capitalized” under the regulatory framework for prompt corrective
action. To be categorized as “well-capitalized,” we, as well as our banking
subsidiary, must maintain minimum common equity Tier 1 capital, leverage, Tier 1
risk-based capital, and total risk-based capital ratios as set forth in the
table. There are no conditions or events since that notification that we believe
have changed the bank subsidiary’s category.
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Non-GAAP Financial Measurements
Our accounting and reporting policies conform to generally accepted accounting
principles in the United States (“GAAP”) and the prevailing practices in the
banking industry. However, this report contains financial information determined
by methods other than in accordance with GAAP, including earnings, as adjusted;
diluted earnings per common share, as adjusted; tangible book value per share;
return on average assets, excluding intangible amortization; return on average
assets, as adjusted; return on average common equity, as adjusted; return on
average tangible equity, excluding intangible amortization; return on average
tangible equity, as adjusted; tangible equity to tangible assets; and efficiency
ratio, as adjusted.
We believe these non-GAAP measures and ratios, when taken together with the
corresponding GAAP measures and ratios, provide meaningful supplemental
information regarding our performance. We believe investors benefit from
referring to these non-GAAP measures and ratios in assessing our operating
results and related trends, and when planning and forecasting future periods.
However, these non-GAAP measures and ratios should be considered in addition to,
and not as a substitute for or preferable to, ratios prepared in accordance with
GAAP.
The tables below present non-GAAP reconciliations of earnings, as adjusted, and
diluted earnings per share, as adjusted as well as the non-GAAP computations of
tangible book value per share; return on average assets, excluding intangible
amortization; return on average assets, as adjusted; return on average common
equity, as adjusted; return on average tangible equity excluding intangible
amortization; return on average tangible equity, as adjusted; tangible equity to
tangible assets; and efficiency ratio, as adjusted. The items used in these
calculations are included in financial results presented in accordance with
GAAP.
Earnings, as adjusted, and diluted earnings per common share, as adjusted, are
meaningful non-GAAP financial measures for management, as they exclude certain
items such as merger expenses and/or certain gains and losses. Management
believes the exclusion of these items in expressing earnings provides a
meaningful foundation for period-to-period and company-to-company comparisons,
which management believes will aid both investors and analysts in analyzing our
financial measures and predicting future performance. These non-GAAP financial
measures are also used by management to assess the performance of our business,
because management does not consider these items to be relevant to ongoing
financial performance.
In Table 18 below, we have provided a reconciliation of the non-GAAP calculation
of the financial measure for the periods indicated.
Table 18: Earnings, As Adjusted
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
GAAP net income available to common shareholders (A) $ 64,892 $ 91,602
Adjustments:
Fair value adjustment for marketable securities (2,125) (5,782)
Gain on securities – (219)
Recoveries on historic losses (3,288) (5,107)
Special dividend from equity investment – (8,073)
Merger and acquisition expenses 863 –
Total adjustments (4,550) (19,181)
Tax-effect of adjustments(1) (1,220) (4,937)
Total adjustments after-tax (3,330) (14,244)
Earnings, as adjusted (C) $ 61,562 $ 77,358
Average diluted shares outstanding (D) 164,196 165,446
GAAP diluted earnings per share: A/D $ 0.40 $ 0.55
Adjustments after-tax: B/D (0.03) (0.08)
Diluted earnings per common share excluding adjustments: C/D $
0.37 $ 0.47
(1) Blended statutory rate of 26.135% for 2022 and 25.74% for 2021
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We had $996.6 million, $998.1 million, and $1.00 billion total goodwill, core
deposit intangibles and other intangible assets as of March 31, 2022,
December 31, 2021 and March 31, 2021, respectively. Because of our level of
intangible assets and related amortization expenses, management believes
tangible book value per share, return on average assets excluding intangible
amortization, return on average tangible equity, return on average tangible
equity excluding intangible amortization, and tangible equity to tangible assets
are useful in evaluating our company. Management also believes return on average
assets, as adjusted, return on average equity, as adjusted, and return on
average tangible equity, as adjusted, are meaningful non-GAAP financial
measures, as they exclude items such as certain non-interest income and expenses
that management believes are not indicative of our primary business operating
results. These calculations, which are similar to the GAAP calculations of book
value per share, return on average assets, return on average equity, and equity
to assets, are presented in Tables 19 through 22, respectively.
Table 19: Tangible Book Value Per Share
As of March 31, As of December
2022 31, 2021
(In thousands, except per share data)
Book value per share: A/B $ 16.41 $ 16.90
Tangible book value per share: (A-C-D)/B 10.32 10.80
(A) Total equity $ 2,686,703 $ 2,765,721
(B) Shares outstanding 163,758 163,699
(C) Goodwill 973,025 973,025
(D) Core deposit and other intangibles 23,624 25,045
Table 20: Return on Average Assets
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Return on average assets: A/D 1.43 % 2.22 %
Return on average assets excluding intangible amortization:
(A+B)/(D-E)
1.54 2.39
Return on average assets excluding fair value adjustment for
marketable securities, gain on securities, recoveries on
historic losses, special dividend from equity investment and
merger and acquisition expenses: (ROA, as adjusted) (A+C)/D
1.36 1.88
(A) Net income $ 64,892 $ 91,602
Intangible amortization after-tax 1,049 1,055
(B) Earnings excluding intangible amortization $ 65,941 $ 92,657
(C) Adjustments after-tax $ (3,330) $ (14,244)
(D) Average assets 18,393,075 16,718,890
(E) Average goodwill, core deposits and other intangible assets 997,338
1,003,011
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Table 21: Return on Average Equity
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Return on average equity: A/D 9.58 % 14.15 %
Return on average common equity excluding fair value adjustment
for marketable securities, gain on securities, recoveries on
historic losses, special dividend from equity investment and
merger and acquisition expenses: (ROE, as adjusted) (A+C)/D
9.09 11.95
Return on average tangible equity excluding intangible
amortization: B/(D-E)
15.28 23.16
Return on average tangible common equity excluding fair value
adjustment for
marketable securities, gain on securities, recoveries on
historic losses, special
dividend from equity investment and merger and acquisition
expenses:
(ROTCE, as adjusted) (A+C)/(D-E) 14.26 19.33
(A) Net income $ 64,892 $ 91,602
(B) Earnings excluding intangible amortization 65,941 92,657
(C) Adjustments after-tax (3,330) (14,244)
(D) Average equity 2,747,980 2,625,618
(E) Average goodwill, core deposits and other intangible assets 997,338 1,003,011
Table 22: Tangible Equity to Tangible Assets
As of March 31, As of December
2022 31, 2021
(Dollars in thousands)
Equity to assets: B/A 14.43 % 15.32 %
Tangible equity to tangible assets: (B-C-D)/(A-C-D) 9.59 10.36
(A) Total assets $ 18,617,995 $ 18,052,138
(B) Total equity 2,686,703 2,765,721
(C) Goodwill 973,025 973,025
(D) Core deposit and other intangibles 23,624 25,045
The efficiency ratio is a standard measure used in the banking industry and is
calculated by dividing non-interest expense less amortization of core deposit
intangibles by the sum of net interest income on a tax equivalent basis and
non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP
measure for management, as it excludes certain items and is calculated by
dividing non-interest expense less amortization of core deposit intangibles by
the sum of net interest income on a tax equivalent basis and non-interest income
excluding items such as merger expenses and/or certain gains, losses and other
non-interest income and expenses. In Table 23 below, we have provided a
reconciliation of the non-GAAP calculation of the financial measure for the
periods indicated.
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Table 23: Efficiency Ratio, As Adjusted
Three Months Ended
March 31,
2022 2021
(Dollars in thousands)
Net interest income (A) $ 131,148 $ 148,088
Non-interest income (B) 30,669 45,276
Non-interest expense (C) 76,896 72,866
FTE Adjustment (D) 1,738 1,821
Amortization of intangibles (E) 1,421 1,421
Adjustments:
Non-interest income:
Fair value adjustment for marketable securities $ 2,125 $ 5,782
Special dividend from equity investment – 8,073
Gain on OREO, net 478 401
Gain (loss) on branches, equipment and other assets, net 16 (29)
Gain on securities, net – 219
Recoveries on historic losses 3,288 5,107
Total non-interest income adjustments (F) $ 5,907 $ 19,553
Non-interest expense:
Merger and acquisition expenses $
863 $ –
Total non-core non-interest expense (G) $ 863 $ –
Efficiency ratio (reported): ((C-E)/(A+B+D)) 46.15 % 36.60 %
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F)) 47.33 40.68
Recently Issued Accounting Pronouncements
See Note 21 in the Condensed Notes to Consolidated Financial Statements for a
discussion of certain recently issued and recently adopted accounting
pronouncements.
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