UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35654
NATIONAL BANK HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
27-0563799
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
7800 East Orchard Road, Suite 300, Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone, including area code: (303) 892-8715
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
Class A Common Stock
NBHC
NYSE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
⌧
Accelerated filer
◻
Non-accelerated filer
Smaller reporting company
☐
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 2, 2021, the registrant had outstanding 30,800,985 shares of Class A voting common stock, each with $0.01 par value per share, excluding 153,690 shares of restricted Class A common stock issued but not yet vested.
Page
Part I. Financial Information
Item 1.
Financial Statements (Unaudited)
5
Consolidated Statements of Financial Condition as of June 30, 2021 and December 31, 2020
Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020
6
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020
7
Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2021 and 2020
8
Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020
9
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
38
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
66
Item 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
67
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
68
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,” “target,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, liquidity, results of operations, business strategy and growth prospects.
Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements and, therefore, you are cautioned not to place undue reliance on such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
● our ability to execute our business strategy, as well as changes in our business strategy or development plans;
● business and economic conditions generally and in the financial services industry;
● effects of any potential government shutdowns;
● economic, market, operational, liquidity, credit and interest rate risks associated with our business;
● effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
● changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions;
● effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations;
● changes in the economy or supply-demand imbalances affecting local real estate values;
● changes in consumer spending, borrowings and savings habits;
● with respect to our mortgage business, our inability to negotiate our fees with Fannie Mae, Freddie Mac, Ginnie Mae or other investors for the purchase of our loans, our obligation to indemnify purchasers or to repurchase the related loans if the loans fail to meet certain criteria, or higher rate of delinquencies and defaults as a result of the geographic concentration of our servicing portfolio;
● our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions, consolidations or other expansion opportunities on attractive terms, or at all;
● our ability to integrate acquisitions or consolidations and to achieve synergies, operating efficiencies and/or other expected benefits within expected time-frames, or at all, or within expected cost projections, and to preserve the goodwill of acquired financial institutions;
● our ability to realize the anticipated benefits from enhancements or updates to our core operating systems from time to time without significant change in our client service or risk to our control environment;
● our dependence on information technology and telecommunications systems of third-party service providers and the risk of system failures, interruptions or breaches of security, including those that could result in disclosure or misuse of confidential or proprietary client or other information;
● our ability to achieve organic loan and deposit growth and the composition of such growth;
● changes in sources and uses of funds, including loans, deposits and borrowings;
3
● increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other things, lower returns;
● continued consolidation in the financial services industry;
● our ability to maintain or increase market share and control expenses;
● the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
● the trading price of shares of the Company's stock;
● the effects of tax legislation, including the potential of future increases to prevailing tax rates, or challenges to our
position;
● our ability to realize deferred tax assets or the need for a valuation allowance, or the effects of changes in tax laws on our deferred tax assets;
● costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, changes in regulation that affect the fees that we charge, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquiries; and changes in regulations that apply to us as a Colorado state-chartered bank;
● technological changes;
● the timely development and acceptance of new products and services, including in the digital technology space, and perceived overall value of these products and services by our clients;
● changes in our management personnel and our continued ability to attract, hire and retain qualified personnel;
● ability to implement and/or improve operational management and other internal risk controls and processes and our reporting system and procedures;
● regulatory limitations on dividends from our bank subsidiary;
● changes in estimates of future credit reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
● widespread natural and other disasters, dislocations, political instability, pandemics, acts of war or terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically;
● adverse effects due to the novel Coronavirus Disease 2019 (“COVID-19”) on the Company and its clients, counterparties, employees and third-party service providers, and the adverse impacts on our business, financial position, results of operations and prospects;
● a cyber-security incident, data breach or a failure of a key information technology system;
● impact of reputational risk on such matters as business generation and retention;
● other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission; and
● our success at managing the risks involved in the foregoing items.
Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.
4
PART I: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
(In thousands, except share and per share data)
June 30, 2021
December 31, 2020
ASSETS
Cash and due from banks
$
1,003,993
605,065
Interest bearing bank deposits
500
Cash and cash equivalents
1,004,493
605,565
Investment securities available-for-sale (at fair value)
605,798
661,955
Investment securities held-to-maturity (fair value of $687,145 and $381,691 at June 30, 2021 and December 31, 2020, respectively)
687,635
376,615
Non-marketable securities
14,741
16,493
Loans
4,300,757
4,353,726
Allowance for credit losses
(49,030)
(59,777)
Loans, net
4,251,727
4,293,949
Loans held for sale
134,805
247,813
Other real estate owned
5,124
4,730
Premises and equipment, net
95,019
106,982
Goodwill
115,027
Intangible assets, net
22,360
17,928
Other assets
199,399
212,893
Total assets
7,136,128
6,659,950
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits
2,437,328
2,111,045
Interest bearing demand deposits
555,865
514,286
Savings and money market
2,240,359
2,064,769
Time deposits
924,501
986,132
Total deposits
6,158,053
5,676,232
Securities sold under agreements to repurchase
22,957
22,897
Other liabilities
103,252
140,130
Total liabilities
6,284,262
5,839,259
Shareholders’ equity:
Common stock, par value $0.01 per share: 400,000,000 shares authorized; 51,487,907 and 51,487,907 shares issued; 30,800,985 and 30,634,291 shares outstanding at June 30, 2021 and December 31, 2020, respectively
515
Additional paid-in capital
1,011,200
1,011,362
Retained earnings
260,821
223,175
Treasury stock of 20,535,572 and 20,686,986 shares at June 30, 2021 and December 31, 2020, respectively, at cost
(422,365)
(424,127)
Accumulated other comprehensive income, net of tax
1,695
9,766
Total shareholders’ equity
851,866
820,691
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated interim financial statements.
Consolidated Statements of Operations (Unaudited)
For the three months ended
For the six months ended
June 30,
2021
2020
Interest and dividend income:
Interest and fees on loans
43,892
49,171
88,830
102,698
Interest and dividends on investment securities
4,121
4,250
8,021
8,881
Dividends on non-marketable securities
209
310
419
724
Interest on interest-bearing bank deposits
228
13
393
109
Total interest and dividend income
48,450
53,744
97,663
112,412
Interest expense:
Interest on deposits
3,576
6,087
7,563
13,413
Interest on borrowings
329
11
1,324
Total interest expense
3,582
6,416
7,574
14,737
Net interest income before provision for loan losses
44,868
47,328
90,089
97,675
Provision (release) expense for loan losses
(5,850)
10,271
(9,425)
16,430
Net interest income after provision for loan losses
50,718
37,057
99,514
81,245
Non-interest income:
Service charges
3,568
3,094
7,042
7,220
Bank card fees
4,614
3,654
8,687
7,167
Mortgage banking income
13,979
30,630
36,358
44,303
Bank-owned life insurance income
553
589
1,101
1,179
Other non-interest income
2,552
870
5,404
2,472
OREO-related income
—
35
28
Total non-interest income
25,266
38,837
58,627
62,369
Non-interest expense:
Salaries and benefits
31,439
36,457
64,962
69,637
Occupancy and equipment
6,131
7,078
12,681
13,976
Telecommunications and data processing
2,315
2,255
4,652
4,520
Marketing and business development
570
600
1,022
1,296
FDIC deposit insurance
456
411
900
335
Bank card expenses
1,330
1,033
2,474
2,059
Professional fees
649
759
1,391
1,368
Other non-interest expense
2,348
2,479
4,824
5,569
Problem asset workout
294
629
732
1,277
Loss on OREO sales, net
221
55
192
94
Core deposit intangible asset amortization
296
592
Banking center consolidation-related expense
1,708
1,589
Total non-interest expense
46,343
53,760
96,011
102,431
Income before income taxes
29,641
22,134
62,130
41,183
Income tax expense
5,441
4,429
11,118
7,654
Net income
24,200
17,705
51,012
33,529
Earnings per share—basic
0.78
0.57
1.65
1.08
Earnings per share—diluted
0.77
1.63
Weighted average number of common shares outstanding:
Basic
30,947,206
30,731,758
30,888,062
30,944,617
Diluted
31,226,351
30,857,606
31,182,584
31,128,084
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Other comprehensive income (loss), net of tax:
Securities available-for-sale:
Net unrealized gains (losses) arising during the period, net of tax expense of $423 and $9 for the three months ended June 30, 2021 and 2020, respectively; and net of tax benefit (expense) of $2,409 and ($3,311) for the six months ended June 30, 2021 and 2020, respectively
1,361
30
(7,757)
10,551
Less: amortization of net unrealized holding gains to income, net of tax benefit of $47 and $64 for the three months ended June 30, 2021 and 2020, respectively; and net of tax benefit of $98 and $131 for the six months ended June 30, 2021 and 2020, respectively
(151)
(202)
(314)
(418)
Other comprehensive income (loss)
1,210
(172)
(8,071)
10,133
Comprehensive income
25,410
17,533
42,941
43,662
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
For the three months ended June 30,
Accumulated
Additional
other
Common
paid-in
Retained
Treasury
comprehensive
stock
capital
earnings
(loss) income, net
Total
Balance, March 31, 2020
1,009,478
168,984
(427,890)
12,367
763,454
Stock-based compensation
1,616
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $621, net
(2,321)
2,837
516
Cash dividends declared ($0.20 per share)
(6,152)
Other comprehensive loss
Balance, June 30, 2020
1,008,773
180,537
(425,053)
12,195
776,967
Balance, March 31, 2021
1,010,798
243,446
(423,254)
485
831,990
1,353
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,654, net
(951)
889
(62)
Cash dividends declared ($0.22 per share)
(6,825)
Other comprehensive income
Balance, June 30, 2021
For the six months ended June 30,
income (loss), net
Balance, December 31, 2019
1,009,223
164,082
(408,962)
2,062
766,920
Cumulative effect adjustment(1)
(4,623)
2,839
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $1,035, net
(3,289)
3,385
96
Repurchase of 734,117 shares
(19,476)
Cash dividends declared ($0.40 per share)
(12,451)
Balance, December 31, 2020
2,483
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $3,187, net
(2,645)
1,762
(883)
Cash dividends declared ($0.43 per share)
(13,366)
(1)
Related to the adoption of Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.
Consolidated Statements of Cash Flows (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision (release) expense for mortgage loan repurchases
(102)
320
Depreciation and amortization
7,692
7,600
Change in current income tax receivable
(3,563)
1,852
Change in deferred income taxes
2,710
1,059
Net excess tax (benefit) expense from stock-based compensation
(392)
128
Discount accretion, net of premium amortization on securities
2,570
1,208
Loan accretion
(3,179)
(6,821)
Gain on sale of mortgages, net
(33,326)
(43,315)
Origination of loans held for sale, net of repayments
(1,064,145)
(984,452)
Proceeds from sales of loans held for sale
1,213,796
941,153
(1,101)
(1,179)
Loss on the sale of other real estate owned, net
Originations of mortgage serving rights
(5,949)
(3,189)
(Recovery) impairment of mortgage servicing rights
(707)
1,102
Impairment on other real estate owned
26
Impairment on fixed assets related to banking center consolidations
1,552
1,631
Gain on sale of fixed assets
(2,315)
(55)
Operating lease payments
(2,620)
(2,778)
Change in other assets
11,503
(27,474)
Change in other liabilities
(36,524)
46,964
Net cash provided by (used in) operating activities
130,162
(13,328)
Cash flows from investing activities:
Purchase of FHLB stock
(3)
(437)
Proceeds from redemption of FHLB stock
1,755
Proceeds from maturities of investment securities held-to-maturity
64,762
34,150
Proceeds from maturities of investment securities available-for-sale
131,113
110,102
Purchase of investment securities held-to-maturity
(377,687)
(67,361)
Purchase of investment securities available-for-sale
(86,199)
(69,571)
Net decrease (increase) in loans
52,462
(379,420)
Sales (purchases) of premises and equipment, net
9,102
(3,515)
Proceeds from sales of other real estate owned
936
1,835
Net cash used in investing activities
(203,759)
(374,217)
Cash flows from financing activities:
Net increase in deposits
481,821
676,757
Net increase (decrease) in repurchase agreements and other short-term borrowings
60
(32,431)
Advances from FHLB
947,431
FHLB repayments
(1,140,106)
Issuance of stock under purchase and equity compensation plans
(2,424)
(936)
Proceeds from exercise of stock options
1,506
1,006
Payment of dividends
(13,438)
(12,505)
Repurchase of common stock
Net cash provided by financing activities
467,525
419,740
Increase in cash, cash equivalents and restricted cash(1)
393,928
32,195
Cash, cash equivalents and restricted cash at beginning of the year(1)
615,565
120,190
Cash, cash equivalents and restricted cash at end of period(1)
1,009,493
152,385
Supplemental disclosure of cash flow information during the period:
Cash paid for interest
9,581
15,535
Net tax payment
9,464
7,923
Supplemental schedule of non-cash activities:
Loans transferred to other real estate owned at fair value
1,522
1,146
Increase (decrease) in loans purchased but not settled
2,000
(16,351)
Loans transferred from loans held for sale to loans
3,317
798
Included in restricted cash at June 30, 2021 and 2020 is $5.0 million and $10.0 million, respectively, held in escrow for certain potential liabilities the Company is indemnified for pursuant to the Peoples merger agreement. The restricted cash is included in other assets in the Company’s consolidated statements of financial condition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 Basis of Presentation
National Bank Holdings Corporation ("NBHC" or the "Company") is a bank holding company that was incorporated in the State of Delaware in 2009. The Company is headquartered in Denver, Colorado, and its primary operations are conducted through its wholly owned subsidiary, NBH Bank (the "Bank"), a Colorado state-chartered bank and a member of the Federal Reserve System. The Company provides a variety of banking products to both commercial and consumer clients through a network of 82 banking centers, as of June 30, 2021, located primarily in Colorado and the greater Kansas City region, and through online and mobile banking products and services.
The accompanying interim unaudited consolidated financial statements serve to update the National Bank Holdings Corporation Annual Report on Form 10-K for the year ended December 31, 2020 and include the accounts of the Company and its wholly owned subsidiary, NBH Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and, where applicable, with general practices in the banking industry or guidelines prescribed by bank regulatory agencies. However, they may not include all information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods and accordingly should be read in conjunction with the financial information contained in the Company's most recent Form 10-K. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results presented. All such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years' amounts are made whenever necessary to conform to current period presentation. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the full year or any other interim period. All amounts are in thousands, except share data, or as otherwise noted.
While general economic conditions have been improving, the COVID-19 pandemic caused substantial disruption to the communities we serve and has changed the way we live and work. The length of the pandemic, the impact of new variants of the virus, the efficacy and public acceptance of vaccines and other treatment for COVID-19, and the potential for reinstitution of government measures to curb the spread of the virus and address the resulting economic effects have already had, and are likely to continue to have, a significant impact to the financial condition and operations of the Company.
GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment and available information. Management has made significant estimates in certain areas, such as the fair values of financial instruments, contingent liabilities and the allowance for credit losses (“ACL”). Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.
The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in note 2 of the audited financial statements and notes for the year ended December 31, 2020 and are contained in the Company's Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2020.
Note 2 Recent Accounting Pronouncements
The Company has not adopted any recent accounting pronouncements in addition to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Note 3 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities. These investment securities totaled $1.3 billion at June 30, 2021 and included $0.6 billion of available-for-sale securities and $0.7 billion of held-to-maturity securities. At December 31, 2020, investment securities totaled $1.0 billion and included $0.6 billion of available-for-sale securities and $0.4 billion of held-to-maturity securities.
Available-for-sale
Available-for-sale securities are summarized as follows as of the dates indicated:
Amortized
Gross
cost
unrealized gains
unrealized losses
Fair value
Mortgage-backed securities:
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises
217,026
2,182
(2,977)
216,231
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises
384,751
5,809
(3,988)
386,572
Municipal securities
362
371
Corporate debt
155
2,155
Other securities
469
Total investment securities available-for-sale
604,608
8,155
(6,965)
193,424
2,952
(42)
196,334
454,345
8,778
(344)
462,779
375
(2)
1,998
650,600
11,743
(388)
During the six months ended June 30, 2021 and 2020, purchases of available-for-sale securities totaled $86.2 million and $69.6 million, respectively. Maturities and paydowns of available-for-sale securities during the six months ended June 30, 2021 and 2020 totaled $131.1 million and $110.1 million, respectively. There were no sales of available-for-sale securities during the six months ended June 30, 2021 or 2020.
At June 30, 2021 and December 31, 2020, the Company’s available-for-sale investment portfolio was primarily comprised of mortgage-backed securities backed by government sponsored enterprises collateral such as Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) and the government owned agency Government National Mortgage Association (“GNMA”).
The tables below summarize the available-for-sale securities with unrealized losses as of the dates shown, along with the length of the impairment period:
Less than 12 months
12 months or more
Fair
Unrealized
value
losses
157,105
131,255
(3,978)
2,274
(10)
133,529
288,360
(6,955)
290,634
26,878
1
26,879
95,888
(328)
2,138
(16)
98,026
124,764
(372)
2,139
126,903
Management evaluated all of the available-for-sale securities in an unrealized loss position at June 30, 2021 and December 31, 2020. The portfolio included 29 securities, which were in an unrealized loss position at June 30, 2021, compared to 22 securities at December 31, 2020. The unrealized losses in the Company's investment portfolio at June 30, 2021 were caused by changes in interest rates. The Company has no intention to sell these securities and believes it will not be required to sell the securities before the recovery of their amortized cost. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.
Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the Federal Reserve Bank (“FRB”), if needed. The fair value of available-for-sale investment securities pledged as collateral totaled $404.9 million and $385.8 million at June 30, 2021 and at December 31, 2020, respectively. The Bank may also pledge available-for-sale investment securities as collateral for Federal Home Loan Bank (“FHLB”) advances. No securities were pledged for this purpose at June 30, 2021 or December 31, 2020.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. As of June 30, 2021, municipal securities with an amortized cost and fair value of $0.1 million were due in one year or less and municipal securities with an amortized cost and fair value of $0.3 million were due between one to five years. Corporate debt securities with an amortized cost and fair value of $2.0 million were due after five years through ten years. Other securities with an amortized cost and fair value of $0.5 million as of June 30, 2021, have no stated contractual maturity date.
As of June 30, 2021 and December 31, 2020, accrued interest receivable (“AIR”) from available-for-sale investment securities totaled $0.9 million and $1.1 million, respectively, and was included within other assets on the statements of financial condition.
12
Held-to-maturity
Held-to-maturity investment securities are summarized as follows as of the dates indicated:
unrealized
gains
337,831
3,629
(3,419)
338,041
349,804
638
(1,338)
349,104
Total investment securities held-to-maturity
4,267
(4,757)
687,145
306,187
4,940
(197)
310,930
70,428
396
(63)
70,761
5,336
(260)
381,691
During the six months ended June 30, 2021 and 2020, purchases of held-to-maturity securities totaled $377.7 million and $67.4 million, respectively. Maturities and paydowns of held-to-maturity securities totaled $64.8 million and $34.2 million during the six months ended June 30, 2021 and 2020, respectively.
The held-to-maturity portfolio included 34 securities which were in an unrealized loss position as of June 30, 2021, compared to nine securities at December 31, 2020. The tables below summarize the held-to-maturity securities with unrealized losses as of the dates shown, along with the length of the impairment period:
231,551
147,039
378,590
53,453
19,554
73,007
The Company does not measure expected credit losses on a financial asset, or group of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell any held-to-maturity securities and believes it will not be required to sell any held-to-maturity securities before the recovery of their amortized cost.
Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase and to secure borrowing capacity at the FRB, if needed. The carrying value of held-to-maturity investment securities pledged as collateral totaled $147.0 million and $140.6 million at June 30, 2021 and December 31, 2020, respectively. The Bank may also pledge held-to-maturity investment securities as collateral for FHLB advances. No held-to-maturity investment securities were pledged for this purpose at June 30, 2021 or December 31, 2020.
Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments.
As of June 30, 2021 and December 31, 2020, AIR from held-to-maturity investment securities totaled $1.0 million and $0.7 million, respectively, and was included within other assets on the statements of financial condition.
Note 4 Loans
The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions. The tables below show the loan portfolio composition including carrying value by segment as of the dates shown. The carrying value of loans is net of discounts, fees, costs and fair value marks of $15.8 million and $16.2 million as of June 30, 2021 and December 31, 2020, respectively. Included in commercial loans are fully-guaranteed loans originated as part of the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) of which $129.6 million and $176.1 million, net of fees and costs, were outstanding at June 30, 2021 and December 31, 2020, respectively.
Total loans
% of total
Commercial
2,981,926
69.4%
Commercial real estate non-owner occupied
637,620
14.8%
Residential real estate
662,929
15.4%
Consumer
18,282
0.4%
100.0%
14
3,044,065
70.0%
631,996
14.5%
658,659
15.1%
19,006
Information about delinquent and non-accrual loans is shown in the following tables at June 30, 2021 and December 31, 2020:
Greater
30-89 days
than 90 days
Total past
past due and
Non-accrual
due and
accruing
loans
non-accrual
Current
Commercial:
Commercial and industrial
1,319
361
2,269
3,949
1,398,150
1,402,099
Municipal and non-profit
861,099
Owner occupied commercial real estate
377
6,650
7,027
512,694
519,721
Food and agribusiness
177
76
253
198,754
199,007
Total commercial
1,873
8,995
11,229
2,970,697
Commercial real estate non-owner occupied:
Construction
72,608
Acquisition/development
2
21,838
21,840
Multifamily
98,014
Non-owner occupied
245
132
444,781
445,158
Total commercial real estate
134
379
637,241
Residential real estate:
Senior lien
195
161
4,260
4,616
596,481
601,097
Junior lien
21
506
61,326
61,832
Total residential real estate
216
4,745
5,122
657,807
16
18,266
2,098
767
13,881
16,746
4,284,011
170
6,312
6,482
1,440,256
1,446,738
870,791
5,450
510,789
516,239
146
422
568
209,729
210,297
316
12,184
12,500
3,031,565
91,125
24,665
24,671
1,523
67,233
68,756
135
447,309
447,444
1,664
630,332
527
160
5,820
6,507
577,764
584,271
95
709
804
73,584
74,388
622
6,529
7,311
651,348
42
18,964
968
162
20,387
21,517
4,332,209
15
Non-accrual loans
with a related
with no related
allowance for
credit loss
4,803
1,847
7,148
3,546
714
4,031
11,320
2,561
6,080
232
2,698
2,752
88
334
8,866
3,318
141
4,158
1,662
4,867
13,884
6,503
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Non-accrual loans include non-accrual loans and troubled debt restructurings (“TDRs”) on non-accrual status. There was no interest income recognized from non-accrual loans during the three or six months ended June 30, 2021 or 2020.
The Company’s internal risk rating system uses a series of grades, which reflect our assessment of the credit quality of loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”. For a description of the general characteristics of the risk grades, refer to note 2 Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2020 Annual Report on Form 10-K.
The amortized cost basis for all loans as determined by the Company’s internal risk rating system and year of origination is shown in the following tables as of June 30, 2021 and December 31, 2020:
Revolving
Origination year
amortized
converted
2019
2018
2017
Prior
cost basis
to term
Commercial and industrial:
Pass
291,810
187,178
193,434
157,743
76,346
23,665
430,813
5,928
1,366,917
Special mention
2,163
6,085
4,182
5,973
2,260
20,663
Substandard
205
338
835
11,288
723
675
14,085
Doubtful
79
131
29
434
Total commercial and industrial
292,015
187,199
195,935
164,742
92,011
30,492
433,777
Municipal and non-profit:
58,209
90,275
85,838
120,463
152,649
350,024
3,641
Total municipal and non-profit
Owner occupied commercial real estate:
48,904
93,663
104,223
78,789
47,001
103,023
165
478,478
1,744
12,085
1,469
16,542
31,840
1,193
1,729
236
3,400
8,405
389
574
998
Total owner occupied commercial real estate
95,245
108,270
92,721
48,706
123,000
Food and agribusiness:
7,758
27,464
7,773
17,668
5,930
28,307
102,986
197,898
219
271
619
890
Total food and agribusiness
6,201
29,145
406,886
400,183
397,816
395,594
299,567
532,661
543,114
6,105
Construction:
3,965
7,058
57,375
226
3,984
Total construction
Acquisition/development:
1,887
386
1,925
1,830
8,096
7,638
51
21,813
27
Total acquisition/development
7,665
Multifamily:
1,488
29,660
11,678
16,261
204
38,310
97,601
413
Total multifamily
38,723
25,552
60,076
88,050
18,697
98,020
120,940
3,483
414,818
5,742
5,748
9,866
3,970
100
25,426
750
4,164
4,914
Total non-owner occupied
93,792
25,195
107,886
129,074
3,583
Total commercial real estate non-owner occupied
32,892
97,180
164,770
43,286
116,412
175,462
7,567
129,600
119,075
51,646
28,401
35,867
210,099
20,266
507
595,461
476
196
796
19
308
3,841
5,160
Total senior lien
119,271
52,442
28,420
36,175
214,416
401
3,470
2,239
1,406
4,295
45,961
198
60,922
343
364
20
108
102
223
546
Total junior lien
409
2,972
3,578
2,305
1,508
4,539
46,304
217
130,009
122,243
56,020
30,725
37,683
218,955
66,570
4,600
6,748
2,219
1,037
697
2,683
36
18,273
Total consumer
1,038
705
574,387
626,354
620,825
470,643
453,915
927,783
619,934
6,916
17
2016
372,041
212,388
189,753
93,822
15,145
17,662
499,283
991
1,401,085
1,445
7,381
4,845
5,810
729
2,329
1,478
24,017
23
1,238
925
11,885
56
4,840
1,341
20,308
34
809
1,328
372,064
215,071
198,093
111,008
21,011
24,040
502,982
2,469
131,961
91,911
125,247
156,275
124,269
238,453
2,675
100,791
107,558
90,398
53,131
32,648
87,758
1,401
473,685
1,581
2,236
2,714
544
3,254
19,341
29,670
1,988
6,211
251
93
3,802
12,345
511
539
102,372
112,293
99,323
53,926
35,995
110,929
28,139
9,198
20,242
7,198
9,556
28,330
106,007
126
208,796
222
302
977
1,279
7,500
29,529
634,536
428,473
442,905
328,709
190,831
402,951
613,065
2,595
15,841
49,658
17,349
4,072
2,006
1,807
90,733
392
16,233
3,762
1,997
1,947
8,373
4,559
3,694
24,343
287
41
8,407
3,988
29,738
13,670
137
212
18,050
4,990
66,797
436
6,949
51,445
92,225
25,362
86,975
26,613
118,144
3,083
643
404,490
70
5,458
5,841
22,737
3,662
37,868
779
3,937
370
5,086
51,515
97,683
31,982
109,712
30,550
122,176
3,183
101,248
163,008
51,415
122,403
53,159
133,113
5,200
2,450
129,551
76,504
36,493
47,887
88,358
173,091
24,884
218
576,986
463
818
1,232
550
4,107
6,822
129,646
77,322
36,513
49,119
88,908
177,661
3,479
4,217
2,553
1,775
1,226
3,760
55,860
365
73,235
341
112
101
59
791
4,329
2,654
1,952
1,281
4,068
56,201
424
133,125
81,651
39,167
51,071
90,189
181,729
81,085
642
9,777
3,348
1,674
489
623
2,700
18,959
37
47
1,711
331
631
878,686
676,480
535,198
502,672
334,510
718,424
702,050
5,706
18
Loans evaluated individually
We evaluate loans individually when they no longer share risk characteristics with pooled loans. These loans include loans on non-accrual status, loans in bankruptcy, and TDRs described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted expected cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral-dependent loans.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Management individually evaluates collateral-dependent loans with an amortized cost basis of $250 thousand or more and includes collateral-dependent loans less than $250 thousand within the general allowance population. The amortized cost basis of collateral-dependent loans over $250 thousand was as follows at June 30, 2021 and December 31, 2020:
Total amortized
Real property
Business assets
3,956
1,910
5,866
Owner-occupied commercial real estate
4,667
284
4,951
Total Commercial
8,623
2,194
10,817
Commercial real estate non owner-occupied
1,272
1,970
11,865
14,059
7,579
3,005
10,584
3,701
3,985
11,614
3,289
14,903
1,573
3,096
2,021
16,731
20,020
Loan modifications and troubled debt restructurings
The Company’s policy is to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include restructuring a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Additionally, if a borrower’s repayment obligation has been discharged by a court, and that debt has not been reaffirmed by the borrower, regardless of past due status, the loan is considered to be a TDR.
The CARES Act afforded financial institutions the option to modify loans within certain parameters in response to the COVID-19 pandemic without requiring the modifications to be classified as TDRs under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan payments. The Company modified 13 loans totaling $4.6 million during the six months ended June 30, 2021 and 463 loans totaling $492.4 million during the six months ended June 30, 2020, due to the effects of the
COVID-19 pandemic, that were not classified as TDRs. Modified loans that remained on a payment deferral plan at June 30, 2021 totaled $108.6 million, or 2.5% of the total loan portfolio. Of those loans, principal payment deferrals totaled $102.3 million and full payment deferrals totaled $6.3 million. At June 30, 2021, 0.9% of loan modifications related to COVID-19 were a subsequent modification. All COVID-19 modified loans were classified as performing as of June 30, 2021. At December 31, 2020, modified loans that remained on a payment deferral plan totaled $173.6 million, or 4.0% of the total loan portfolio, of which 26.2% were a subsequent modification.
During the three months ended June 30, 2021, the Company restructured no loans to facilitate repayment that are considered TDRs. During the six months ended June 30, 2021, the Company restructured three loans with an amortized cost basis of $1.6 million to facilitate repayment that are considered TDRs. Loan modifications were a reduction of the principal payment, a reduction in interest rate, or an extension of term. The tables below provide additional information related to accruing TDRs at June 30, 2021 and December 31, 2020:
Average year-to-date
Unpaid
Unfunded commitments
amortized cost basis
principal balance
to fund TDRs
6,809
7,393
7,215
150
2,075
2,120
3,417
2,960
2,994
3,784
11,844
12,507
14,416
185
9,387
9,544
9,978
2,400
2,351
4,105
2,121
2,185
2,922
13,945
14,117
17,042
The following table summarizes the Company’s carrying value of non-accrual TDRs as of June 30, 2021 and December 31, 2020:
2,623
3,397
123
1,644
1,896
3,156
Total non-accruing TDRs
4,642
8,197
Accrual of interest is resumed on loans that were previously on non-accrual only after the loan has performed sufficiently for a period of time. The Company had two TDRs totaling $49 thousand that were modified within the past 12 months and had defaulted on their restructured terms during the six months ended June 30, 2021. During the six months ended June 30, 2020, the Company had two TDRs totaling $0.4 million that were modified within the past 12 months and had defaulted on their restructured terms. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on principal or interest. The allowance for credit losses related to TDRs on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status, which are not classified as TDRs.
Note 5 Allowance for Credit Losses
The tables below detail the Company’s allowance for credit losses as of the dates shown:
Three months ended June 30, 2021
Non-owner
occupied
commercial
Residential
real estate
Beginning balance
28,085
15,054
11,546
372
55,057
Charge-offs
(781)
(144)
(925)
Recoveries
33
Provision expense (release) for loan losses
(3,867)
(2,732)
91
(5,300)
Ending balance
28,640
11,187
8,851
352
49,030
Six months ended June 30, 2021
30,376
17,448
11,492
461
59,777
(942)
(22)
(263)
(1,227)
257
44
73
380
(1,051)
(6,267)
(2,663)
81
(9,900)
Three months ended June 30, 2020
30,557
9,278
10,696
425
50,956
(694)
(12)
(146)
(852)
172
49
Provision expense for loan losses
3,107
3,036
3,826
156
10,125
33,142
12,314
14,525
484
60,465
Six months ended June 30, 2020
30,442
4,850
3,468
304
39,064
(1,299)
1,666
5,314
5,836
(912)
(40)
(397)
(1,349)
263
97
4,648
5,798
5,763
325
16,534
In evaluating the loan portfolio for an appropriate ACL level, excluding loans evaluated individually, loans were grouped into segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio was further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of developing the underlying data used within the discounted cash flow model including, but not limited to, prepayment and recovery rates as well as loss rates tied to macro-economic conditions within management’s reasonable and supportable forecast. The ACL also includes subjective adjustments based upon qualitative risk factors including asset quality, loss trends, lending management, portfolio growth and loan review/internal audit results.
Net charge-offs on loans during the three and six months ended June 30, 2021 were $0.7 million and $0.8 million, respectively. The Company recorded total provision release of $5.9 million for the three months ended June 30, 2021, which included a provision release of $5.3 million for funded loans and a provision release of $0.6 million for unfunded loan commitments. During the six months ended June 30, 2021, the Company recorded total provision release of $9.4 million, which included a provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan commitments. Provision release was driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast.
Net charge-offs on loans during the three and six months ended June 30, 2020 were $0.6 million and $1.0 million, respectively. The Company recorded total provision expense of $10.3 million for the three months ended June 30, 2020, which included a provision expense of $10.1 million for funded loans and a provision expense of $0.2 million for unfunded loan commitments. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for funded loans and a provision release of $0.1 million for unfunded loan commitments. Provision expense was recorded to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19 and to support non-PPP originated loan growth.
The Company has elected to exclude AIR from the allowance for credit losses calculation. As of June 30, 2021 and December 31, 2020, AIR from loans totaled $15.0 million and $16.7 million, respectively.
Note 6 Other Real Estate Owned
A summary of the activity in other real estate owned (“OREO”) during the six months ended June 30, 2021 and 2020 is as follows:
7,300
Transfers from loan portfolio, at fair value
Impairments
(26)
Sales
(1,128)
(1,929)
6,491
During the six months ended June 30, 2021 and 2020, the Company sold OREO properties with net book balances of $1.1 million and $1.9 million, respectively. Sales of OREO properties resulted in net OREO losses of $0.2 million and $0.2 million, which were included in the consolidated statements of operations for the three and six months ended June 30, 2021, respectively. Net OREO losses of $0.1 million and $0.1 million were included in the consolidated statements of operations for the three and six months ended June 30, 2020, respectively.
Note 7 Goodwill and Intangible Assets
Goodwill and core deposit intangible
In connection with our acquisitions, the Company recorded goodwill of $115.0 million. Goodwill is measured as the excess of the fair value of consideration paid over the fair value of net assets acquired. No goodwill impairment was recorded during the three or six months ended June 30, 2021 or the year ended December 31, 2020.
The gross carrying amount of the core deposit intangibles and the associated accumulated amortization at June 30, 2021 and December 31, 2020, are presented as follows:
Net
carrying
amount
amortization
Core deposit intangible
48,834
(41,877)
6,957
(41,286)
7,548
The Company is amortizing the core deposit intangibles from acquisitions on a straight-line basis over 7-10 years from the date of the respective acquisition, which represents the expected useful life of the assets. The Company recognized core deposit intangible
22
amortization expense of $0.3 million and $0.6 million during the three and six months ended June 30, 2021, respectively. During the three and six months ended June 30, 2020, the Company recognized core deposit intangible amortization expense of $0.3 million and $0.6 million, respectively.
The following table shows the estimated future amortization expense for the core deposit intangibles as of June 30, 2021:
Years ending December 31,
Amount
For the six months ending December 31, 2021
For the year ending December 31, 2022
1,127
For the year ending December 31, 2023
1,048
For the year ending December 31, 2024
For the year ending December 31, 2025
Mortgage servicing rights
Mortgage servicing rights (“MSRs”) represent rights to service loans originated by the Company and sold to government-sponsored enterprises including FHLMC, FNMA, GNMA and FHLB and are included in intangible assets in the consolidated statements of financial condition. Mortgage loans serviced for others were $1.9 billion and $0.6 billion at June 30, 2021 and 2020, respectively.
Below are the changes in the MSRs for the periods presented:
10,380
2,630
Originations
5,949
3,189
Recovery (impairment)
707
(1,102)
Amortization
(1,632)
(682)
15,404
4,035
Fair value of mortgage servicing rights
18,685
4,173
The fair value of MSRs was determined based upon a discounted cash flow analysis. The cash flow analysis included assumptions for discount rates and prepayment speeds. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from 11.4% to 18.7% for the June 30, 2021 valuation. Discount rates ranged from 9.5% to 10.5%, and the constant prepayment speed ranged from 18.3% to 21.3% for the June 30, 2020 valuation. Included in mortgage banking income in the consolidated statements of operations was servicing income of $1.1 million and $2.1 million for the three and six months ended June 30, 2021, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2020, respectively.
MSRs are evaluated and impairment is recognized to the extent fair value is less than the carrying amount. The Company evaluates impairment by stratifying MSRs based on the predominant risk characteristics of the underlying loans, including loan type and loan term. The Company is amortizing the MSRs in proportion to and over the period of the estimated net servicing income of the underlying loans.
The following table shows the estimated future amortization expense for the MSRs as of June 30, 2021:
955
1,793
1,381
1,212
Note 8 Borrowings
The Company enters into repurchase agreements to facilitate the needs of its clients. As of June 30, 2021 and December 31, 2020, the Company sold securities under agreements to repurchase totaling $23.0 million and $22.9 million, respectively. The Company pledged mortgage-backed securities with a fair value of approximately $26.1 million and $27.7 million as of June 30, 2021 and December 31,
2020, respectively, for these agreements. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. As of June 30, 2021 and December 31, 2020, the Company had $3.1 million and $4.8 million, respectively, of excess collateral pledged for repurchase agreements.
As a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $0.9 billion at June 30, 2021. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At June 30, 2021 and December 31, 2020, the Bank had no outstanding borrowings from the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at June 30, 2021 or December 31, 2020. Loans pledged were $1.3 billion and $1.2 billion at June 30, 2021 and December 31, 2020, respectively. There was no interest expense related to FHLB advances and other short-term borrowings for the three and six months ended June 30, 2021, compared to $0.3 million and $1.2 million during the three and six months ended June 30, 2020, respectively.
Note 9 Regulatory Capital
As a bank holding company, the Company is subject to regulatory capital adequacy requirements implemented by the Federal Reserve. The federal banking agencies have risk based capital adequacy regulations intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations. Under these regulations, assets are assigned to one of several risk categories, and nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by a risk adjustment percentage for the category.
Under the Basel III requirements, at June 30, 2021 and December 31, 2020, the Company and the Bank met all capital requirements. The Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as detailed in the tables below:
Required to be
well capitalized under
considered
prompt corrective
adequately
Actual
action provisions
capitalized
Ratio
Tier 1 leverage ratio:
Consolidated
10.6%
733,666
N/A
4.0%
277,579
NBH Bank
9.0%
624,289
5.0%
346,699
277,359
Common equity tier 1 risk based capital:
15.3%
7.0%
335,348
13.1%
6.5%
310,925
334,842
Tier 1 risk based capital ratio:
8.5%
407,208
8.0%
382,677
406,594
Total risk based capital ratio:
16.3%
779,207
10.5%
503,021
14.0%
669,829
10.0%
478,346
502,263
24
10.7%
696,311
260,370
9.2%
600,622
325,447
260,358
14.7%
331,632
12.7%
307,631
331,295
402,696
378,623
402,287
15.8%
749,899
497,448
13.8%
654,209
473,279
496,943
Note 10 Revenue from Contracts with Clients
Revenue is recognized when obligations under the terms of a contract with clients are satisfied. Below is the detail of the Company’s revenue from contracts with clients.
Service charges and other fees
Service charge fees are primarily comprised of monthly service fees, check orders and other deposit account related fees. Other fees include revenue from processing wire transfers, bill pay service, cashier’s checks and other services. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account-related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to clients’ accounts.
Bank card fees are primarily comprised of debit card income, ATM fees, merchant services income and other fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Merchant services income mainly represents fees charged to merchants to process their debit card transactions. The Company’s performance obligation for bank card fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Gain on OREO sales, net
Gain on OREO sales, net is recognized when the Company meets its performance obligation to transfer title to the buyer. The gain or loss is measured as the excess of the proceeds received compared to the OREO carrying value. Sales proceeds are received in cash at the time of transfer.
25
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, and non-interest expense in-scope of Topic 606 for the three and six months ended June 30, 2021 and 2020:
Non-interest income
In-scope of Topic 606:
4,415
3,543
8,367
8,208
Non-interest income (in-scope of Topic 606)
9,029
7,197
17,054
15,375
Non-interest income (out-of-scope of Topic 606)
16,237
31,640
41,573
46,994
Non-interest expense
(221)
(192)
(94)
Total revenue in-scope of Topic 606
8,808
7,142
16,862
15,281
Contract acquisition costs
The Company utilizes the practical expedient which allows entities to expense immediately contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company has not capitalized any contract acquisition costs.
Note 11 Stock-based Compensation and Benefits
The Company provides stock-based compensation in accordance with shareholder-approved plans and is authorized to issue awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, other stock-based awards, or any combination thereof to eligible persons.
Stock options
The Company issues stock options, which are primarily time-vesting with 1/3 vesting on each of the first, second and third anniversary of the date of grant or date of hire.
The expense associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing model. The outstanding option awards vest or have vested on a graded basis over 1-4 years of continuous service and have 10-year contractual terms.
The following table summarizes stock option activity for the six months ended June 30, 2021:
Weighted
average
remaining
contractual
Aggregate
exercise
term in
intrinsic
Options
price
years
Outstanding at December 31, 2020
768,129
26.35
6.91
5,224
Granted
80,615
40.16
Exercised
(72,497)
27.61
Forfeited
(24,853)
27.47
Outstanding at June 30, 2021
751,394
27.68
6.86
7,759
Options exercisable at June 30, 2021
494,874
26.33
5.85
5,675
Options vested and expected to vest
724,144
27.52
6.77
7,568
Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $0.5 million and $0.6 million for the three and six months ended June 30, 2021, respectively, and $0.5 million and $0.7 million for the three and six
months ended June 30, 2020, respectively. At June 30, 2021, there was $0.6 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted average period of 2.4 years.
Restricted stock awards
The Company issues primarily time-based restricted stock awards that vest over a range of a 1-3 year period. Restricted stock with time-based vesting was valued at the fair value of the shares on the date of grant as they are assumed to be held beyond the vesting period.
Performance stock units
The Company grants performance stock units which represent initial target awards and do not reflect potential increases or decreases resulting from the final performance results, which are to be determined at the end of the three-year performance period (vesting date). The actual number of shares to be awarded at the end of the performance period will range from 0% - 150% of the initial target awards. For awards granted prior to 2020, 60% of the award is based on the Company’s cumulative earnings per share (EPS target) during the performance period, and 40% of the award is based on the Company’s cumulative total shareholder return (TSR target), or TSR, during the performance period. On the vesting date, the Company’s TSR will be compared to the respective TSRs of the companies comprising the KBW Regional Index at the grant date to determine the shares awarded. The fair value of the EPS target portion of the award was determined based on the closing stock price of the Company’s common stock on the grant date. The fair value of the TSR target portion of the award was determined using a Monte Carlo Simulation at the grant date.
In establishing the PSU components during 2021 and 2020, the Compensation Committee determined the EPS target portion of the award would not be an effective metric in light of economic uncertainty surrounding COVID-19. Consequently, the Compensation Committee granted an award based upon a relative return on tangible assets (“ROTA”). Annually, the Company’s ROTA will be compared to the respective ROTA of companies comprising the KBW Regional Index. At the end of the measurement period, the Company’s ranking will be averaged to determine the shares awarded. The fair value of the ROTA award was determined based on the closing stock price of the Company’s common stock on the grant date.
The weighted-average grant date fair value per unit for the ROTA target portion and the TSR target portion granted during 2021 was $40.16 and $33.11, respectively. The initial weighted-average performance price for the TSR target portion granted during 2021 was $33.04. During the six months ended June 30, 2021, the Company awarded an additional 30,024 units due to final performance results related to performance stock units granted in 2018.
The following table summarizes restricted stock and performance stock unit activity during the six months ended June 30, 2021:
Restricted
average grant-
Performance
stock shares
date fair value
stock units
Unvested at December 31, 2020
166,630
27.42
184,837
29.21
81,481
40.07
52,526
37.01
Adjustment due to performance
30,024
30.38
Vested
(77,679)
28.56
(90,016)
(19,082)
29.20
(16,977)
28.96
Unvested at June 30, 2021
151,350
33.42
160,394
31.36
As of June 30, 2021, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance stock units totaled $3.6 million and $3.3 million, respectively, and is expected to be recognized over a weighted average period of approximately 2.3 years and 2.1 years, respectively. Expense related to non-vested restricted stock awards totaled $0.6 million and $1.2 million during the three and six months ended June 30, 2021, respectively, and $0.7 million and $1.2 million during the three and six months ended June 30, 2020, respectively. Expense related to non-vested performance stock units totaled $0.2 million and $0.7 million during the three and six months ended June 30, 2021, respectively, and $0.4 million and $0.9 million during the three and six months ended June 30, 2020, respectively. Expense related to non-vested restricted stock awards and units is a component of salaries and benefits in the Company’s consolidated statements of operations.
Employee stock purchase plan
The 2014 Employee Stock Purchase Plan (“ESPP”) is intended to be a qualified plan within the meaning of Section 423 of the Internal Revenue Code of 1986 and allows eligible employees to purchase shares of common stock through payroll deductions up to a limit of $25,000 per calendar year and 2,000 shares per offering period. The price an employee pays for shares is 90.0% of the fair market value of Company common stock on the last day of the offering period. The offering periods are the six-month periods commencing on March 1 and September 1 of each year and ending on August 31 and February 28 (or February 29 in the case of a leap year) of each year. There are no vesting or other restrictions on the stock purchased by employees under the ESPP. Under the ESPP, the total number of shares of common stock reserved for issuance totaled 400,000 shares, of which 293,905 was available for issuance at June 30, 2021.
Under the ESPP, employees purchased 8,971 shares and 8,890 shares during the six months ended June 30, 2021 and 2020, respectively.
Note 12 Common Stock
The Company had 30,800,985 and 30,634,291 shares of Class A common stock outstanding at June 30, 2021 and December 31, 2020, respectively. Additionally, the Company had 151,350 and 166,630 shares outstanding at June 30, 2021 and December 31, 2020, respectively, of restricted Class A common stock issued but not yet vested under the 2014 Omnibus Incentive Plan that are not included in shares outstanding until such time that they are vested; however, these shares do have voting and certain dividend rights during the vesting period.
On February 24, 2021, the Company’s Board of Directors authorized a new program to repurchase up to $75.0 million of the Company’s stock from time to time in either the open market or through privately negotiated transactions. The new program of $75.0 million replaces the previously authorized $50.0 million stock repurchase program announced in February 2020 in its entirety. The remaining authorization under the new program as of June 30, 2021 was $75.0 million.
Note 13 Earnings Per Share
The Company calculates earnings per share under the two-class method, as certain non-vested share awards contain non-forfeitable rights to dividends. As such, these awards are considered securities that participate in the earnings of the Company. Non-vested shares are discussed further in note 11.
The Company had 30,800,985 and 30,569,011 shares of Class A common stock outstanding as of June 30, 2021 and 2020, respectively, exclusive of issued non-vested restricted shares. Certain stock options and non-vested restricted shares are potentially dilutive securities, but are not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive for the three and six months ended June 30, 2021 and 2020.
The following table illustrates the computation of basic and diluted earnings per share for the three and six months ended June 30, 2021 and 2020:
June 30, 2020
Less: income allocated to participating securities
(33)
(37)
(67)
(61)
Income allocated to common shareholders
24,167
50,945
33,468
Weighted average shares outstanding for basic earnings per common share
Dilutive effect of equity awards
279,145
125,848
294,522
183,467
Weighted average shares outstanding for diluted earnings per common share
Basic earnings per share
Diluted earnings per share
The Company had 751,394 and 825,031 outstanding stock options to purchase common stock at weighted average exercise prices of $27.68 and $26.11 per share at June 30, 2021 and 2020, respectively, which have time-vesting criteria, and as such, any dilution is
derived only for the time frame in which the vesting criteria had been met and where the inclusion of those stock options is dilutive. The Company had 311,744 and 335,560 unvested restricted shares and performance stock units issued as of June 30, 2021 and 2020, respectively, which have performance, market and/or time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those restricted shares and units is dilutive.
Note 14 Derivatives
Risk management objective of using derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company has established policies that neither carrying value nor fair value at risk should exceed established guidelines. The Company has designed strategies to confine these risks within the established limits and identify appropriate trade-offs in the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its clients. Currently, the Company employs certain interest rate swaps that are designated as fair value hedges as well as economic hedges. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
Fair values of derivative instruments on the balance sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of financial condition as of June 30, 2021 and December 31, 2020. Information about the valuation methods used to measure fair value is provided in note 16.
Asset derivatives fair value
Liability derivatives fair value
Balance Sheet
December 31,
location
Location
Derivatives designated as hedging instruments:
Interest rate products
21,670
38,884
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments:
11,640
18,149
11,661
18,176
Interest rate lock commitments
2,950
7,001
414
298
Forward contracts
63
301
2,622
Total derivatives not designated as hedging instruments
14,653
25,150
12,376
21,096
Fair value hedges
Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2021, the Company had interest rate swaps with a notional amount of $339.2 million, which were designated as fair value hedges of interest rate risk. As of December 31, 2020, the Company had interest rate swaps with a notional amount of $387.1 million that were designated as fair value hedges. These interest rate swaps were associated with $339.3 million and $389.9 million of the Company’s fixed-rate loans as of June 30, 2021 and December 31, 2020, respectively, before a gain of $26.7 million and $40.1 million from the fair value hedge adjustment in the carrying amount, included in loans receivable on the statements of financial condition as of June 30, 2021 and December 31, 2020.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.
Non-designated hedges
Derivatives not designated as hedges are not speculative and consist of interest rate swaps with commercial banking clients that facilitate their respective risk management strategies. Interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the client swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2021, the Company had matched interest rate swap transactions with an aggregate notional amount of $414.2 million related to this program. As of December 31, 2020, the Company had matched interest rate swap transactions with an aggregate notional amount of $456.0 million.
As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the clients have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Fair value changes of certain loans under interest rate lock commitments are hedged with forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in non-interest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying assets. The fair value of the underlying assets is impacted by current interest rates, remaining origination fees, costs of production to be incurred and the probability that the interest rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Company does not expect any counterparty to any MBS contract to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Company fails to deliver the loans subject to interest rate risk lock commitments, it will still be obligated to “pair off” MBS to the counterparty. Should this be required, the Company could incur significant costs in acquiring replacement loans and such costs could have an adverse effect on the consolidated financial statements.
The fair value of the mortgage banking derivative is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.
The Company had interest rate lock commitments with a notional value of $182.0 million and forward contracts with a notional value of $244.4 million at June 30, 2021. At December 31, 2020, the Company had interest rate lock commitments with a notional value of $258.8 million and forward contracts with a notional value of $375.3 million.
Effect of derivative instruments on the consolidated statements of operations
The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three and six months ended June 30, 2021 and 2020:
Location of gain (loss)
Amount of (loss) gain recognized in income on derivatives
Derivatives in fair value
recognized in income on
hedging relationships
derivatives
(28,100)
31,037
(7,228)
(3,733)
Amount of gain (loss) recognized in income on hedged items
Hedged items
hedged items
23,726
(31,654)
5,157
2,124
Amount of gain (loss) recognized in income on derivatives
Derivatives not designated
as hedging instruments
(50)
(73)
(1,029)
3,428
(5,101)
10,931
(3,698)
3,617
2,384
(2,090)
(4,723)
6,995
(2,707)
8,768
Credit-risk-related contingent features
The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness for reasons other than an error or omission of an administrative or operational nature, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty has the right to terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of June 30, 2021, the termination value of derivatives in a net liability position related to these agreements was $34.6 million, which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and, as of June 30, 2021, the Company had posted $36.8 million in eligible collateral. If the Company had breached any of these provisions at June 30, 2021, it could have been required to settle its obligations under the agreements at the termination value.
Note 15 Commitments and Contingencies
In the normal course of business, the Company enters into various off-balance sheet commitments to help meet the financing needs of clients. These financial instruments include commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. The same credit policies are applied to these commitments as the loans on the consolidated statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these commitments, offset by any additional collateral pledged, represents the Company’s potential credit loss exposure.
31
Total unfunded commitments at June 30, 2021 and December 31, 2020 were as follows:
Commitments to fund loans
455,362
311,237
Unfunded commitments under lines of credit
539,580
537,325
Commercial and standby letters of credit
9,162
7,320
Total unfunded commitments
1,004,104
855,882
Commitments to fund loans—Commitments to fund loans are legally binding agreements to lend to clients in accordance with predetermined contractual provisions providing there have been no violations of any conditions specified in the contract. These commitments are generally at variable interest rates and are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments are not necessarily representative of future credit exposure or cash requirements, as commitments often expire without being drawn upon.
Unfunded commitments under lines of credit—In the ordinary course of business, the Company extends revolving credit to its clients. These arrangements may require the payment of a fee.
Commercial and standby letters of credit—As a provider of financial services, the Company routinely issues commercial and standby letters of credit, which may be financial standby letters of credit or performance standby letters of credit. These are various forms of “back-up” commitments to guarantee the performance of a client to a third party. While these arrangements represent a potential cash outlay for the Company, the majority of these letters of credit will expire without being drawn upon. Letters of credit are subject to the same underwriting and credit approval process as traditional loans, and as such, many of them have various forms of collateral securing the commitment, which may include real estate, personal property, receivables or marketable securities.
Contingencies
Mortgage loans sold to investors may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company established a reserve liability for expected losses related to these representations and warranties based upon management’s evaluation of actual and historic loss history, delinquency trends in the portfolio and economic conditions. Charges against the reserve during the three and six months ended June 30, 2021 and 2020 were driven by early payoffs and repurchases. The repurchase reserve is included in other liabilities on the consolidated statements of financial condition.
The following table summarizes mortgage repurchase reserve activity for the periods presented:
2,620
2,790
2,741
2,589
Provision (released from) charged to operating expense, net
(106)
(116)
(241)
(184)
2,398
2,725
In the ordinary course of business, the Company and the Bank may be subject to litigation. Based upon the available information and advice from the Company’s legal counsel, management does not believe that any potential, threatened or pending litigation to which it is a party will have a material adverse effect on the Company’s liquidity, financial condition or results of operations.
32
Note 16 Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels are defined as follows:
Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. While third-party price indications may be available in those cases, limited trading activity can challenge the observability of those inputs.
Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfer occurs. During the six months ended June 30, 2021 and 2020, there were no transfers of financial instruments between the hierarchy levels.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the valuation hierarchy:
Fair Value of Financial Instruments Measured on a Recurring Basis
Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as level 1. At June 30, 2021 and December 31, 2020, the Company did not hold any level 1 securities. When quoted market prices in active markets for identical assets or liabilities are not available, quoted prices of securities with similar characteristics, discounted cash flows or other pricing characteristics are used to estimate fair values and the securities are then classified as level 2.
Loans held for sale—The Company has elected to record loans originated and intended for sale in the secondary market at estimated fair value. The portfolio consists primarily of fixed rate residential mortgage loans that are sold within 45 days. The Company estimates fair value based on quoted market prices for similar loans in the secondary market and are classified as level 2.
Interest rate swap derivatives—The Company's derivative instruments are limited to interest rate swaps that may be accounted for as fair value hedges or non-designated hedges. The fair values of the swaps incorporate credit valuation adjustments in order to appropriately reflect nonperformance risk in the fair value measurements. The credit valuation adjustment is the dollar amount of the fair value adjustment related to credit risk and utilizes a probability weighted calculation to quantify the potential loss over the life of the trade. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the respective counterparties’ credit spreads to the exposure offset by marketable collateral posted, if any. Certain derivative transactions are executed with counterparties who are large
financial institutions ("dealers"). International Swaps and Derivative Association Master Agreements ("ISDA") and Credit Support Annexes ("CSA") are employed for all contracts with dealers. These contracts contain bilateral collateral arrangements. The fair value inputs of these financial instruments are determined using discounted cash flow analysis through the use of third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk, and are classified as level 2.
Mortgage banking derivatives—The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an average 87.6% estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.
The tables below present the financial instruments measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 on the consolidated statements of financial condition utilizing the hierarchy structure described above:
Level 1
Level 2
Level 3
Assets:
Investment securities available-for-sale:
314
Interest rate swap derivatives
11,682
Mortgage banking derivatives
3,013
Total assets at fair value
751,759
754,772
33,331
715
Total liabilities at fair value
34,046
318
927,391
934,392
57,060
2,920
59,980
The table below details the changes in level 3 financial instruments during the six months ended June 30, 2021:
Mortgage banking
derivatives, net
Balance at December 31, 2020
4,081
Gain included in earnings, net
(2,717)
Fees and costs included in earnings, net
934
Balance at June 30, 2021
2,298
Fair Value of Financial Instruments Measured on a Non-recurring Basis
Certain assets may be recorded at fair value on a non-recurring basis as conditions warrant. These non-recurring fair value measurements typically result from the application of lower of cost or fair value accounting or a write-down occurring during the period.
Individually evaluated loans—The Company records individually evaluated loans based on the fair value of the collateral when it is probable that the Company will be unable to collect all contractual amounts due in accordance with the terms of the loan agreement. The Company relies on third-party appraisals and internal assessments, utilizing a discount rate in the range of 0% - 26% with a weighted average discount rate of 9.2%, in determining the estimated fair values of these loans. The inputs used to determine the fair values of loans are considered level 3 inputs in the fair value hierarchy. At June 30, 2021, the Company recorded a specific reserve of $1.4 million related to seven loans with a carrying balance of $5.7 million. At June 30, 2020, the Company recorded a specific reserve of $1.3 million related to six loans with a carrying balance of $4.4 million.
OREO—OREO is recorded at the fair value of the collateral less estimated selling costs using a range of 6% to 10% with a weighted average discount rate of 8.5%. The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a new basis. The Company recognized no OREO impairment during the six months ended June 30, 2021 and $26 thousand of OREO impairment during the six months ended June 30, 2020 in its consolidated statements of operations. The fair values of OREO are derived from third-party price opinions or appraisals that generally use an income approach or a market value approach. If reasonable comparable appraisals are not available, the Company may use internally developed models to determine fair values. The inputs used to determine the fair value of OREO properties are considered level 3 inputs in the fair value hierarchy.
Mortgage servicing rights—MSRs represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates ranging from 9.5% to 10.5% with a weighted average rate of 9.5% at June 30, 2021 and prepayment speed assumption ranges of 11.4% to 18.7% with a weighted average rate of 11.7% at June 30, 2021. The weighted average MSRs are
subject to impairment testing. The carrying values of these MSRs are reviewed quarterly for impairment based upon the calculation of fair value. For purposes of measuring impairment, the MSRs are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance and the adjustment is included in mortgage banking income on the consolidated statements of operations. There was $0.7 million of recovery on MSRs during the six months ended June 30, 2021, compared to $1.1 million of impairment during the six months ended June 30, 2020. The inputs used to determine the fair values of MSRs are considered level 3 inputs in the fair value hierarchy.
Premises and equipment—During the first quarter of 2021, the Company approved plans to consolidate seven banking centers. Premises and equipment held-for-sale are written down to estimated fair value less costs to sell in the period in which the held-for-sale criteria are met. Fair value is estimated in a process that considers current local commercial real estate market conditions, the judgment of the sales agent and often involves obtaining third-party appraisals from certified real estate appraisers. These fair value measurements are classified as level 3. Unobservable inputs to these measurements, which include estimates and judgments often used in conjunction with appraisals, are not readily quantifiable. As of June 30, 2021, the Company recognized $1.6 million of impairment in its consolidated statements of operations related to premises and equipment classified as held-for-sale totaling $6.0 million.
The Company may be required to record fair value adjustments on other available-for-sale and municipal securities valued at par on a non-recurring basis.
The tables below provide information regarding the assets recorded at fair value on a non-recurring basis during the six months ended June 30, 2021 and 2020:
Losses from fair value changes
Individually evaluated loans
20,807
1,227
Premises and equipment
6,032
26,839
2,779
33,075
1,349
8,024
45,134
4,082
The Company did not record any liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2021.
Note 17 Fair Value of Financial Instruments
The fair value of a financial instrument is the amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is determined based upon quoted market prices to the extent possible; however, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques that may be significantly impacted by the assumptions used, including the discount rate and estimates of future cash flows. Changes in any of these assumptions could significantly affect the fair value estimates. The fair value of the financial instruments listed below does not reflect a premium or discount that could result from offering all of the Company’s holdings of financial instruments at one time, nor does it reflect the underlying value of the Company, as ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are based on the exit price concept within ASC Topic 825 and applied to this disclosure on a prospective basis. Considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.
The fair value of financial instruments at June 30, 2021 and December 31, 2020 are set forth below:
Level in fair value
measurement
Carrying
Estimated
hierarchy
fair value
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale
Municipal securities available-for-sale
57
Other available-for-sale securities
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity
Loans receivable
4,384,071
4,511,357
Accrued interest receivable
17,156
18,795
LIABILITIES
Deposit transaction accounts
5,233,552
4,690,100
928,221
993,070
Accrued interest payable
4,755
6,762
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and six months ended June 30, 2021, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2020, 2019 and 2018. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” located elsewhere in this quarterly report and in Item 1A“Risk Factors” in the annual report on Form 10-K, referenced above, and should be read herewith.
All amounts are in thousands, except share and per share data, or as otherwise noted.
Overview
Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We also believe that our established presence in our core markets of Colorado, the greater Kansas City region, Texas, Utah and New Mexico, positions us well for growth opportunities. As of June 30, 2021, we had $7.1 billion in assets, $4.3 billion in loans, $6.2 billion in deposits and $0.9 billion in equity.
Operating Highlights and Key Challenges
Profitability and returns
●
Net income totaled $51.0 million, or $1.63 per diluted share, for the six months ended June 30, 2021, compared to net income of $33.5 million, or $1.08 per diluted share, for the same period in the prior year.
The return on average tangible assets was 1.53% for the six months ended June 30, 2021, compared to 1.14% for the same period in the prior year.
The return on average tangible common equity was 14.29% for the six months ended June 30, 2021, compared to 10.38% for the same period in the prior year.
Strategic execution
Excluding PPP loans, loan originations during the three months ended June 30, 2021 more than doubled the first quarter of 2021 loan originations, increasing $189.0 million, or 109.2%.
Completed the previously announced plans to consolidate seven banking centers during 2021 as part of our continued focus on improving operating efficiencies and investing in digital solutions for our clients. Banking center consolidation-related expense of $1.6 million was recorded to non-interest expense during the six months ended June 30, 2021.
Maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most industry sector concentrations at 5% or less of total loans, and all concentration levels remain well below our self-imposed limits.
We continue to carefully monitor our entire loan portfolio and have no industry exposure exceeding 5% of total loans for industries highly impacted by COVID-19, such as restaurants, retailers, hospital/medical, multifamily, oil and gas, hotels and lodging.
Loan portfolio
Total loans ended the quarter at $4.3 billion and decreased $53.0 million, or 2.5% annualized, since December 31, 2020. Excluding PPP loans, total loans decreased by $6.5 million, or 0.3% annualized.
Total loan originations during the three months ended June 30, 2021 were $362.1 million. New loan originations over the trailing 12 months totaled $1.1 billion, led by commercial loan originations of $649.3 million, including PPP loan originations of $121.3 million.
COVID-related loan modifications are handled individually on a relationship basis. As of June 30, 2021, $108.6 million, or 2.5%, of total loans were on a COVID-related modification plan.
Credit quality
Allowance for credit losses totaled 1.14% of total loans at June 30, 2021, compared to 1.37% at December 31, 2020. Excluding PPP loans, the ACL totaled 1.18% of total loans at June 30, 2021, compared to 1.43% at December 31, 2020.
The Company recorded total provision release of $9.4 million for the six months ended June 30, 2021, which included a provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan commitments, driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for funded loans and a provision release of $0.1 million for unfunded loan commitments, driven by deteriorating economic conditions caused by the impact of COVID-19.
Net charge-offs to average total loans for the six months ended June 30, 2021 totaled 0.04%, annualized, compared to 0.06% for the full year ended December 31, 2020.
Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs) improved to 0.32% of total loans, compared to 0.47% at December 31, 2020. Non-performing assets to total loans and OREO improved to 0.44% at June 30, 2021, compared to 0.58% at December 31, 2020. Excluding PPP loans, non-performing loans to total loans were 0.33%, and non-performing assets to total loans and OREO were 0.46% at June 30, 2021.
Client deposit funded balance sheet
Average transaction deposits for the six months ended June 30, 2021 totaled $5.0 billion, increasing 28.0%, compared to $3.9 billion for the same period in the prior year.
Average total deposits totaled $5.9 billion during the six months ended June 30, 2021, increasing 20.0%, compared to $4.9 billion for the same period in the prior year.
The mix of transaction deposits to total deposits improved to 85.0% at June 30, 2021, compared to 82.6% at December 31, 2020.
Cost of deposits totaled 0.26% during the six months ended June 30, 2021, decreasing 19 basis points from December 31, 2020.
Revenues
Fully taxable equivalent (“FTE”) net interest income totaled $92.6 million during the six months ended June 30, 2021 and decreased $7.6 million, or 7.6%, compared to the same period in the prior year primarily due to interest rate actions taken by the Federal Reserve during 2020 and lower non-PPP originated loan balances.
The FTE net interest margin narrowed 70 basis points to 2.92% for the six months ended June 30, 2021, as compared to the same period in the prior year due to lower earning asset yields. The yield on earning assets decreased 100 basis points, led by the remix of assets into lower-yielding cash balances and an 18 basis point decrease in the originated loan portfolio yields. The cost of funds decreased 20 basis points to 0.26% for the six months ended June 30, 2021.
Non-interest income totaled $58.6 million during the six months ended June 30, 2021, decreasing $3.7 million, or 6.0%, from the six months ended June 30, 2020, primarily driven by a decrease in mortgage banking income.
Expenses
Non-interest expense totaled $96.0 million during the six months ended June 30, 2021, representing a decrease of $6.4 million, or 6.3%, compared to the six months ended June 30, 2020, driven by lower mortgage-related compensation as well as the Company’s strategic efforts to improve operating efficiency.
Income tax expense totaled $11.1 million during the six months ended June 30, 2021, compared to $7.7 million during the six months ended June 30, 2020 driven by 2021’s higher pre-tax income during the first six months. The effective tax rate for the six months ended June 30, 2021 was 18.5%, adjusted for stock compensation activity, compared to 19.0% for the full year 2020.
39
Strong capital position
Capital ratios continue to be strong as our capital position remains in excess of federal bank regulatory thresholds. As of June 30, 2021, our consolidated tier 1 leverage ratio was 10.57%, and our common equity tier 1 and consolidated tier 1 risk based capital ratios were both 15.31%.
The Bank maintains ample liquidity with access to $2.6 billion in readily available funds.
At June 30, 2021, common book value per share was $27.66. The tangible common book value per share increased $0.92 to $24.01 at June 30, 2021 compared to December 31, 2020, primarily due to earnings, net of dividends paid and lower accumulated other comprehensive income.
Key Challenges
There are a number of significant challenges confronting us and our industry. We face continual challenges implementing our business strategy, including growing the assets, particularly loans, and deposits of our business amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive environment. Prevailing interest rates began decreasing in mid-2019, remain low and are expected to remain near zero for the foreseeable future as a result of interest rate actions taken by the Federal Reserve.
The COVID-19 pandemic has caused disruption and is likely to continue to present challenges to our business. We continue to remain committed to ensuring our associates, clients and communities are receiving the support they need. Our banking centers are fully operational, and we continue to leverage our digital banking platform with our clients. Our teams have been working diligently to support our clients who are experiencing financial hardship due to COVID-19 through participation in the SBA’s Paycheck Protection Program, including assistance with PPP loan forgiveness applications, and loan modifications, as needed. While access to vaccines in the United States has increased, the efficacy and public acceptance of those vaccines, the impact of the new variants of the virus, and the length of time that the government-mandated measures must remain in place or potentially be reinstituted to address COVID-19 are unknown. The pandemic has had a significantly negative impact to the U.S. labor market, consumer spending and business operations, and it is not clear to what degree new outbreaks of COVID-19 cases will have further negative impact.
Our markets have historically outperformed the national averages on many key indicators; however, the economic impact from the COVID-19 pandemic has caused economic strain nationally and across all of our markets. We are encouraged by the positive signs of economic recovery we are seeing throughout our markets. We are focused on growing our loan portfolio while taking a careful approach to extending new credit and adhering to our established underwriting standards and self-imposed concentration limits. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio.
As of June 30, 2021, the Company had low exposure to industries highly impacted by the COVID-19 pandemic. Within the commercial loan segment, restaurants were 5.4%, retailers 3.1%, hospital/medical 5.9% and oil and gas 0.7% of total loans. Within the commercial real estate non-owner occupied loan segment, hotel and lodging was 4.4%, multifamily 2.3% and retail 1.2% of total loans. The Company had no direct exposure to other industries and loan types more highly impacted by the pandemic including aviation, cruise lines, energy services, auto manufacturing/dealer floor plans, hedge funds, convention centers, credit cards, malls and taxi/ride share businesses. Furthermore, the Company had no consumer credit card, indirect auto or car leasing exposure.
The agriculture industry continues to be impacted by volatility in commodity prices as well as supply chain issues driven by the COVID-19 pandemic. Our food and agribusiness portfolio is only 4.6% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 0.9% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.
The extraordinary government measures enacted during the COVID-19 pandemic have generated unprecedented levels of economic stimulus funding and produced high levels of cash liquidity within the banking industry. Our cash balances total $1.0 billion as of June 30, 2021 and have increased $398.9 million from December 31, 2020 and $862.1 million from June 30, 2020. Future growth in our interest income will ultimately be dependent on our ability to deploy the excess cash liquidity into high-quality originated loans and other high-quality earning assets such as investment securities. Investment securities totaled $1.3 billion as of June 30, 2021 and increased $253.1 million, or 24.0%, compared to December 31, 2020. As of June 30, 2021, our loans outstanding totaled $4.3 billion,
40
decreasing $53.0 million, or 1.2%, compared to December 31, 2020 due largely to a decrease in PPP loans totaling $46.5 million as a result of PPP loan forgiveness. During the six months ended June 30, 2021, our weighted average rate on new loans funded at the time of origination was 3.27%, compared to the weighted average yield of our originated loan portfolio of 3.97% (FTE). Our net interest income has been impacted by interest rate actions taken by the Federal Reserve in response to the COVID-19 pandemic, and our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions.
Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including FinTechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges and expand our offerings in digital technology where appropriate. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.
Performance Overview
In evaluating our consolidated statements of financial condition and results of operations financial statement line items, we evaluate and manage our performance based on key earnings indicators, balance sheet ratios, asset quality metrics and regulatory capital ratios, among others. The table below presents some of the primary performance indicators that we use to analyze our business on a regular basis for the periods indicated:
Key Ratios(1)
As of and for the three months ended
As of and for the six months ended
Return on average assets
1.38%
1.63%
1.13%
1.49%
1.11%
Return on average tangible assets(2)
1.41%
1.67%
1.16%
1.53%
1.14%
Return on average equity
11.51%
13.27%
9.23%
12.26%
8.72%
Return on average tangible common equity(2)
13.41%
15.55%
10.98%
14.29%
10.38%
Loan to deposit ratio (end of period)
69.84%
76.70%
88.34%
Non-interest bearing deposits to total deposits (end of period)
39.58%
37.19%
27.76%
Net interest margin(3)
2.74%
3.16%
3.30%
2.84%
3.53%
Net interest margin FTE(2)(3)(4)
2.82%
3.24%
3.39%
2.92%
3.62%
Interest rate spread FTE(4)(5)
2.66%
3.05%
3.19%
2.75%
3.40%
Yield on earning assets(6)
2.96%
3.47%
3.75%
3.08%
4.06%
Yield on earning assets FTE(2)(4)(6)
3.04%
3.55%
3.84%
4.16%
Cost of interest bearing liabilities
0.38%
0.50%
0.65%
0.41%
0.76%
Cost of deposits
0.24%
0.33%
0.47%
0.26%
0.55%
Non-interest income to total revenue FTE(4)
35.38%
40.11%
44.40%
38.76%
38.35%
Non-interest expense to average assets
2.63%
2.90%
3.42%
2.80%
3.38%
Efficiency ratio
65.66%
58.76%
62.05%
64.16%
63.63%
Efficiency ratio FTE(2)(4)
64.48%
57.87%
61.13%
63.08%
62.63%
Total Loans Asset Quality Data(7)(8)(9)
Non-performing loans to total loans
0.32%
0.42%
Non-performing loans to total loans excluding PPP loans
0.49%
0.45%
Non-performing assets to total loans and OREO
0.44%
0.58%
Non-performing assets to total loans and OREO excluding PPP loans
0.46%
0.60%
Allowance for credit losses to total loans
1.37%
1.26%
Allowance for credit losses to total loans excluding PPP loans
1.18%
1.43%
1.36%
Allowance for credit losses to non-performing loans
353.22%
293.21%
302.34%
Net charge-offs to average loans
0.07%
0.11%
0.05%
0.04%
Ratios are annualized.
Ratio represents non-GAAP financial measure. See non-GAAP reconciliations below.
Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average interest earning assets.
(4)
Presented on an FTE basis using the statutory rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,279, $1,260 and $1,301 for the three months ended June 30, 2021, December 31, 2020 and June 30, 2020, respectively. The taxable equivalent adjustments included above are $2,547 and $2,568 for the six months ended June 30, 2021 and June 30, 2020, respectively.
(5)
Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average cost of interest bearing liabilities.
(6)
Interest earning assets include assets that earn interest/accretion or dividends. Any market value adjustments on investment securities are excluded from interest earning assets.
(7)
Non-performing loans consist of non-accruing loans and restructured loans on non-accrual.
(8)
Non-performing assets include non-performing loans and OREO.
(9)
Total loans are net of unearned discounts and fees.
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “tangible assets,” “return on average tangible assets,” “return on average tangible common equity,” “tangible common book value,” “tangible common book value per share,” “tangible common equity,” “tangible common equity to tangible assets,” and “fully taxable equivalent” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenses or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on an FTE basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.
These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.
A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows:
Tangible Common Book Value Ratios
Less: goodwill and core deposit intangible assets, net
(121,983)
(122,575)
(123,166)
Add: deferred tax liability related to goodwill
9,612
9,155
8,698
Tangible common equity (non-GAAP)
739,495
707,271
662,499
6,385,431
Tangible assets (non-GAAP)
7,023,757
6,546,530
6,270,963
Tangible common equity to tangible assets calculations:
Total shareholders' equity to total assets
11.94%
12.32%
12.17%
Less: impact of goodwill and core deposit intangible assets, net
(1.41)%
(1.52)%
(1.61)%
Tangible common equity to tangible assets (non-GAAP)
10.53%
10.80%
10.56%
Tangible common book value per share calculations:
Divided by: ending shares outstanding
30,800,985
30,634,291
30,569,011
Tangible common book value per share (non-GAAP)
24.01
23.09
21.67
Tangible common book value per share, excluding accumulated other comprehensive income calculations:
(1,695)
(9,766)
(12,195)
Tangible common book value, excluding accumulated other comprehensive income, net of tax (non-GAAP)
737,800
697,505
650,304
Tangible common book value per share, excluding accumulated other comprehensive income, net of tax (non-GAAP)
23.95
22.77
21.27
43
Return on Average Tangible Assets and Return on Average Tangible Equity
27,169
Add: impact of core deposit intangible amortization expense, after tax
227
455
454
Net income adjusted for impact of core deposit intangible amortization expense, after tax
24,428
27,397
17,932
51,467
33,983
Average assets
7,056,894
6,635,490
6,318,596
6,907,022
6,090,724
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill
(112,552)
(113,594)
(114,631)
(112,698)
(114,779)
Average tangible assets (non-GAAP)
6,944,342
6,521,896
6,203,965
6,794,324
5,975,945
Average shareholders' equity
843,116
814,483
771,593
838,930
772,986
Average tangible common equity (non-GAAP)
730,564
700,889
656,962
726,232
658,207
Return on average tangible assets (non-GAAP)
Return on average tangible common equity (non-GAAP)
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
Interest income
53,288
Add: impact of taxable equivalent adjustment
1,260
1,301
2,547
2,568
Interest income FTE (non-GAAP)
49,729
54,548
55,045
100,210
114,980
Net interest income
48,556
Net interest income FTE (non-GAAP)
46,147
49,816
48,629
92,636
100,243
Average earning assets
6,561,588
6,108,513
5,766,672
6,400,651
5,562,538
Yield on earning assets
Yield on earning assets FTE (non-GAAP)
Net interest margin
Net interest margin FTE (non-GAAP)
Efficiency Ratio
Net interest income, FTE (non-GAAP)
33,357
48,425
Less: core deposit intangible asset amortization
(296)
(592)
Non-interest expense, adjusted for core deposit intangible asset amortization
46,047
48,129
53,464
95,419
101,839
Efficiency ratio FTE (non-GAAP)
Application of Critical Accounting Policies
We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the determination of the ACL. See additional discussion of our ACL policy in note 2 – Summary of Significant Accounting Policies in our audited consolidated financial statements in our 2020 Annual Report on Form 10-K.
Future Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 was effective upon issuance and can be adopted during any interim period through December 31, 2022. It provides optional expedients and guidance for applying generally accepted accounting principles to contract modifications and hedging relationships, if certain criteria are met, that reference the London Inter-Bank Offered Rate (“LIBOR”) or any other reference rate that is expected to be discontinued. The Company is evaluating the impact from ASU 2020-04, and any related updates, and does not expect the adoption of ASU 2020-04 to have a material impact on its financial statements.
Financial Condition
Total assets were $7.1 billion at June 30, 2021, compared to $6.7 billion at December 31, 2020, an increase of $476.2 million, or 7.1%. Cash and cash equivalents increased $398.9 million, or 65.9%, from December 31, 2020, and investment securities increased $253.1 million, or 24.0%. Total loans as of June 30, 2021 decreased $53.0 million, or 1.2%, and included a decrease in PPP loans of $46.5 million, or 26.4%, compared to December 31, 2020. The allowance for credit losses decreased $10.7 million to $49.0 million at June 30, 2021.
During the six months ended June 30, 2021, lower cost demand, savings, and money market deposits ("transaction deposits") increased $543.5 million, or 23.4% annualized, compared to December 31, 2020, as we received cash inflows from economic stimulus and continued developing full banking relationships with our clients. Our clients used their core operating accounts for PPP funds and economic stimulus checks, which aided the strong deposit growth. In addition to providing excess cash liquidity, the increase in transaction deposits provided low-cost funding utilized to fund PPP loans.
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Investment securities
Total investment securities available-for-sale decreased 8.5% during the six months ended June 30, 2021 to $0.6 billion. Purchases of available-for-sale securities during the six months ended June 30, 2021 and 2020 totaled $86.2 million and $69.6 million, respectively. Paydowns and maturities totaled $131.1 million and $110.1 million during the six months ended June 30, 2021 and 2020, respectively.
Our available-for-sale investment securities portfolio is summarized as follows as of the dates indicated:
Percent of
portfolio
yield
35.6%
29.6%
63.8%
1.58%
69.9%
1.45%
0.1%
3.45%
3.46%
5.81%
0.3%
5.83%
0.00%
1.54%
1.44%
As of June 30, 2021 and December 31, 2020, nearly all the available-for-sale investment portfolio was backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate FHLMC, FNMA and GNMA securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 4.5 years and 2.7 years at June 30, 2021 and December 31, 2020, respectively. This estimate is based on assumptions and actual results may differ. At June 30, 2021 and December 31, 2020, the duration of the total available-for-sale investment portfolio was 3.6 years and 2.6 years, respectively.
At June 30, 2021 and December 31, 2020, adjustable rate securities comprised 2.2% and 2.3%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 1.79% per annum and 2.00% per annum at June 30, 2021 and December 31, 2020, respectively.
The available-for-sale investment portfolio included $8.2 million and $11.7 million of unrealized gains and $7.0 million and $0.4 million of unrealized losses at June 30, 2021 and December 31, 2020, respectively. We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.
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Held-to-maturity investment securities increased 82.6% during the six months ended June 30, 2021 to $0.7 billion. Purchases during the six months ended June 30, 2021 and 2020 totaled $377.7 million and $67.4 million, respectively. Paydowns and maturities totaled $64.8 million and $34.2 million during the six months ended June 30, 2021 and 2020, respectively.
49.1%
1.57%
81.3%
1.39%
50.9%
1.24%
18.7%
1.40%
1.21%
The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities.
The fair value of the held-to-maturity investment portfolio included $4.3 million and $5.3 million of unrealized gains and $4.8 million and $0.3 million of unrealized losses at June 30, 2021 and December 31, 2020, respectively.
The Company does not measure expected credit losses on a financial asset, or group of financial assets, in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Management evaluated held-to-maturity securities noting they are backed by loans guaranteed by either U.S. government agencies or U.S. government sponsored entities, and management believes that default is highly unlikely given this governmental backing and long history without credit losses. Additionally, management notes that yields on which the portfolio generally trades are based upon market views of prepayment and liquidity risk and not credit risk. The Company has no intention to sell the securities and believes it will not be required to sell the securities before the recovery of their amortized cost.
Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of June 30, 2021 and December 31, 2020 was 4.0 years and 2.4 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 3.8 years and 2.4 years as of June 30, 2021 and December 31, 2020, respectively.
Loans overview
At June 30, 2021, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our six acquisitions to date.
The table below shows the loan portfolio composition at the respective dates:
June 30, 2021 vs.
% Change
Originated:
1,253,745
1,248,530
860,740
870,410
(1.1)%
479,286
464,417
3.2%
195,095
205,189
(4.9)%
PPP loans(1)
129,643
176,106
(26.4)%
2,918,509
2,964,652
(1.6)%
570,252
542,642
5.1%
600,124
581,555
17,942
18,581
(3.4)%
Total originated
4,106,827
4,107,430
(0.0)%
Acquired:
18,710
22,102
(15.3)%
359
381
(5.8)%
40,435
51,821
(22.0)%
3,913
5,108
(23.4)%
63,417
79,412
(20.1)%
67,368
89,354
(24.6)%
62,805
77,105
(18.5)%
340
(20.0)%
Total acquired
193,930
246,296
(21.3)%
(1.2)%
PPP loan balances are net of fees and costs and include principal totaling $134,632 and $179,531 as of June 30, 2021 and December 31, 2020, respectively.
The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. Our loan portfolio decreased $53.0 million, or 2.5% annualized, from December 31, 2020. Excluding PPP loans, total loans decreased by $6.5 million, or 0.3% annualized. During the three months ended June 30, 2021, loan originations totaled $362.1 million, led by commercial loan originations of $247.3 million. Excluding PPP loans, loan originations in the second quarter of 2021 more than doubled loan originations in the first quarter of 2021, increasing $189.0 million, or 109.2%. Originations during the six months ended June 30, 2021 totaled $656.3 million, including $121.1 million of PPP loan originations. PPP loans forgiven totaled $203.8 million during the six months ended June 30, 2021.
Our commercial and industrial loan portfolio is comprised of diverse industry segments. At June 30, 2021, these segments included finance and financial services, primarily lender finance loans, of $164.9 million, hospital/medical loans of $255.7 million, manufacturing-related loans of $106.1 million, and a variety of smaller subcategories of commercial and industrial loans. Food and agribusiness loans, which are well-diversified across food production, crop and livestock types, totaled $199.0 million and were 25.5% of the Company’s risk based capital. Crop and livestock loans represent 0.9% of total loans.
Non-owner occupied CRE loans were 81.8% of the Company’s risk based capital, or 14.8% of total loans, and no specific property type comprised more than 5.0% of total loans. The Company maintains very little exposure to retail properties. Total exposure to retailers as well as non-owner occupied retail properties totaled 4.3% of total loans. Multi-family loans totaled $99.1 million, or 2.3% of total loans as of June 30, 2021.
New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan originations totaled $1.1 billion over the past 12 months, led by commercial loan originations of $649.3 million, which included PPP loan originations of $121.3 million. Originations are defined as closed-end funded
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loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of originations to better approximate the impact of originations on loans outstanding and ultimately net interest income.
The following table represents new loan originations for the periods presented:
Second quarter
First quarter
Fourth quarter
Third quarter
147,030
23,390
96,625
11,354
(8,726)
25,131
7,999
25,348
6,083
49,679
48,225
27,093
36,085
23,758
22,078
26,956
(10,104)
19,191
13,876
(10,480)
PPP loans
121,141
122
358,798
247,342
169,519
177,249
55,193
411,349
58,532
49,195
52,018
24,937
18,992
53,962
74,145
41,355
49,786
29,024
2,267
1,858
2,980
2,206
362,103
294,212
272,480
132,896
461,571
Included in originations are net fundings (paydowns) under revolving lines of credit of $59,520, ($26,395), $50,982, ($27,899), and ($55,826) as of the second and first quarters of 2021 and the fourth, third and second quarters of 2020, respectively.
The tables below show the contractual maturities of our total loans for the dates indicated:
Due within
Due after 1 but
Due after
1 year
within 5 years
5 years
135,959
937,015
199,482
1,272,456
29,701
162,436
668,962
33,960
158,159
327,602
86,234
93,532
19,241
8,133
121,510
293,987
1,472,652
1,215,287
113,941
389,514
134,165
9,406
32,659
620,864
5,142
10,075
3,065
422,476
1,904,900
1,973,381
109,586
927,881
233,165
1,270,632
42,222
164,994
663,575
24,510
177,311
314,418
80,691
105,815
23,791
257,009
1,552,107
1,234,949
72,486
426,291
133,219
18,569
36,747
603,343
5,167
10,886
2,953
353,231
2,026,031
1,974,464
The stated interest rate (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of total loans with maturities over one year is as follows at the dates indicated:
Fixed
Variable
Balance
average rate
340,680
4.55%
795,818
3.29%
1,136,498
3.67%
Municipal and non-profit(1)
806,468
3.52%
24,930
831,398
3.50%
279,641
4.77%
206,120
3.72%
485,761
4.46%
45,800
5.10%
66,973
3.96%
112,773
4.42%
1.00%
1,594,099
3.85%
1,093,841
2,687,940
241,484
4.44%
282,195
523,679
3.92%
339,809
313,714
653,523
10,632
4.70%
2,508
3.59%
13,140
4.48%
Total loans with > 1 year maturity
2,186,024
3.86%
1,692,258
3.54%
3,878,282
320,745
4.68%
840,301
3.11%
1,161,046
803,350
25,219
2.83%
828,569
261,406
4.82%
230,323
3.88%
491,729
4.51%
57,360
5.02%
72,246
129,606
4.27%
1,618,967
3.79%
1,168,089
2,787,056
3.58%
253,879
4.65%
305,631
559,510
3.98%
298,759
3.60%
341,332
4.14%
640,091
3.89%
11,384
4.92%
2,455
13,839
4.66%
2,182,989
1,817,507
4,000,496
3.68%
Included in municipal and non-profit fixed rate loans are loans totaling $339,182 and $387,105 that have been swapped to variable rates at current market pricing at June 30, 2021 and December 31, 2020, respectively. Included in the municipal and non-profit segment are tax exempt loans totaling $727,979 and $711,582 with a weighted average rate of 3.34% and 3.33% at June 30, 2021 and December 31, 2020, respectively.
Asset quality
Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.
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Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution for the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below.
In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered TDRs in accordance with ASC 310-40. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ACL and any subsequent declines in carrying value charged to impairments on OREO.
Non-performing assets and past due loans
Non-performing assets consist of non-accrual loans, TDRs on non-accrual and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and six months ended June 30, 2021 was $0.2 million and $0.5 million, respectively, and $0.3 million and $0.6 million during the three and six months ended June 30, 2020, respectively.
Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of collection.
The following table sets forth the non-performing assets and past due loans as of the dates presented:
Non-accrual loans:
Non-accrual loans, excluding restructured loans
9,239
12,190
Restructured loans on non-accrual
Non-performing loans
OREO
Other repossessed assets
Total non-performing assets
19,005
25,134
Loans 30-89 days past due and still accruing interest
Loans 90 days or more past due and still accruing interest
Total past due and non-accrual loans
Accruing restructured loans
Total 90 days past due and still accruing interest and non-accrual loans to total loans
0.34%
Total non-performing assets to total loans and OREO
Total non-performing assets to total loans and OREO, excluding PPP loans
ACL to non-performing loans
During the six months ended June 30, 2021, total non-performing loans decreased $6.5 million, or 31.9%, from December 31, 2020.
Loans 30-89 days past due and still accruing interest were 0.05% and 0.02% of total loans at June 30, 2021 and December 31, 2020, respectively. Loans 90 days or more past due and still accruing interest were 0.02% and 0.01% of total loans at June 30, 2021 and December 31, 2020, respectively.
The Company continues to monitor the operating status and trends of our clients to enable us to quickly detect credit deterioration and take action where needed. The CARES Act afforded financial institutions the option to modify loans within certain parameters in response to the COVID-19 pandemic without requiring the modifications to be classified as TDRs under ASC Topic 310 if the borrower has been adversely impacted by COVID-19 and was current on their loan payments. The Company modified 13 loans totaling $4.6 million during the six months ended June 30, 2021 and 463 loans totaling $492.4 million during the six months ended June 30, 2020, due to the effects of the COVID-19 pandemic, that were not classified as TDRs. Modified loans that remained on a payment deferral plan at June 30, 2021 totaled $108.6 million, or 2.5% of the total loan portfolio. Of those loans, principal payment deferrals totaled $102.3 million and full payment deferrals totaled $6.3 million. At June 30, 2021, 0.9% of loan modifications related to COVID-19 were a subsequent modification. All COVID-19 modified loans were classified as performing as of June 30, 2021. At December 31, 2020, modified loans that remained on a payment deferral plan totaled $173.6 million, or 4.0% of the total loan portfolio, of which 26.2% were a subsequent modification.
The following table sets forth COVID-19 loan modifications currently on a deferral plan as of the date presented:
Loans outstanding
Loans modified
Modification type
Percentage of
3-month
4 to 6-month
7 to 12-month
3 to 6-month full
6 to 12-month full
loan portfolio
loan segment
interest only
payment deferral
2,852,283
66.4%
6,141
0.2%
3,132
3,009
102,302
16.0%
206
0.0%
Total excluding PPP loans
4,171,114
97.0%
108,649
2.6%
3,170
3.0%
2.5%
2,867,959
66.0%
44,655
1.6%
40,097
3,909
126,423
20.0%
2,495
356
158
1,693
288
4,177,620
96.0%
173,577
4.2%
166,678
2,342
4,197
The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. On January 1, 2020, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments which replaced the incurred loss methodology for recognizing credit losses with a CECL model. The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing delays. The model incorporates forecasts of certain national macro-economic factors, including unemployment rates, home price index (“HPI”), retail sales and gross domestic product (“GDP”), which drive correlated loss rates. The determination and application of the ACL accounting policy involves judgments, estimates and uncertainties that are subject to change. For periods beyond the reasonable and supportable forecast period, we revert to historical long-term average loss rates on a straight-line basis.
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We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary loan segments within the ACL model that are further stratified into 11 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following are the loan classes within each of the four primary loan segments:
commercial real estate
Acquisition and development
Loans on non-accrual, in bankruptcy and TDRs with a balance greater than $250,000 are excluded from the pooled analysis and are evaluated individually. If management determines that foreclosure is probable, expected credit losses are evaluated based on the criteria listed below, adjusted for selling costs as appropriate. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:
the borrower's resources, ability, and willingness to repay in accordance with the terms of the loan agreement;
the likelihood of receiving financial support from any guarantors;
the adequacy and present value of future cash flows, less disposal costs, of any collateral; and
the impact current economic conditions may have on the borrower's financial condition and liquidity or the value of the collateral.
The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.
Net charge-offs on loans during the three and six months ended June 30, 2021 were $0.7 million and $0.8 million, respectively. The Company recorded total provision release of $5.9 million for the three months ended June 30, 2021, which included a provision release of $5.3 million for funded loans and a provision release of $0.6 million for unfunded loan commitments. During the six months ended June 30, 2021, the Company recorded total provision release of $9.4 million, which included a provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan commitments. Provision release was driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. Specific reserves on loans totaled $1.4 million at June 30, 2021.
Net charge-offs on loans during the three and six months ended June 30, 2020 were $0.6 million and $1.0 million, respectively. The Company recorded total provision expense of $10.3 million for the three months ended June 30, 2020, which included a provision expense of $10.1 million for funded loans and a provision expense of $0.2 million for unfunded loan commitments. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for funded loans and a provision release of $0.1 million for unfunded loan commitments. Provision expense was recorded to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19 and to support non-PPP originated loan growth. Specific reserves on loans totaled $1.3 million at June 30, 2020.
The Company has elected to exclude AIR from the ACL calculation. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income. As of June 30, 2021 and December 31, 2020, AIR from loans totaled $15.0 million and $16.7 million, respectively.
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Total ACL
After considering the above mentioned factors, we believe that the ACL of $49.0 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at June 30, 2021. However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively affect the Company's results of operations, liquidity or financial condition.
The following schedules present, by class stratification, the changes in the ACL during the periods listed:
Beginning allowance for credit losses
Charge-offs:
Total charge-offs
Net charge-offs
(727)
(616)
Ending allowance for credit losses
Ratio of annualized net charge-offs to average total loans during the period
Average total loans outstanding during the period
4,312,128
4,794,466
Average total loans outstanding excluding, PPP loans during the period
4,112,172
4,512,010
(847)
(969)
Ratio of ACL to total loans outstanding at period end
Ratio of ACL to total loans outstanding, excluding PPP loans at period end
Ratio of ACL to total non-performing loans at period end
4,782,383
4,294,900
4,603,393
Average total loans outstanding, excluding PPP loans during the period
4,105,571
4,462,165
19,999
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The following tables present the allocation of the ACL and the percentage of the total amount of loans in each loan category listed as of the dates presented:
ACL as a %
% of total loans
Related ACL
of total ACL
58.4%
22.8%
18.1%
0.7%
PPP loans are fully guaranteed by the SBA.
50.8%
29.2%
19.2%
0.8%
Deposits
Deposits from banking clients serve as a primary funding source for our banking operations, and our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a low-cost funding source for our loans, but also provide a foundation for the client relationships that are critical to future loan growth. The following table presents information regarding our deposit composition at June 30, 2021 and December 31, 2020:
Increase (decrease)
39.6%
37.1%
326,283
15.5%
9.1%
41,579
8.1%
Savings accounts
717,453
11.7%
646,829
11.4%
70,624
10.9%
Money market accounts
1,522,906
24.7%
1,417,940
25.0%
104,966
7.4%
Total transaction deposits
85.0%
82.6%
543,452
11.6%
Time deposits < $250,000
768,858
12.5%
820,229
(51,371)
(6.3)%
Time deposits > $250,000
155,643
165,903
2.9%
(10,260)
(6.2)%
Total time deposits
15.0%
17.4%
(61,631)
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $250,000 as of June 30, 2021:
Three months or less
38,749
Over 3 months through 6 months
29,594
Over 6 months through 12 months
40,837
Thereafter
46,463
Total time deposits > $250,000
At June 30, 2021 and December 31, 2020, time deposits that were scheduled to mature within 12 months totaled $677.2 million and $659.5 million, respectively. Of the time deposits scheduled to mature within 12 months at June 30, 2021, $109.2 million were in denominations of $250,000 or more, and $568.0 million were in denominations less than $250,000.
Other borrowings
As of June 30, 2021 and December 31, 2020, the Bank sold securities under agreements to repurchase totaling $23.0 million and $22.9 million, respectively. In addition, as a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $0.9 billion at June 30, 2021. The Bank may utilize its FHLB line of credit as a funding mechanism for originated loans and loans held for sale. At June 30, 2021 and December 31, 2020, the Bank had no outstanding borrowings from the FHLB. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at June 30, 2021 or December 31, 2020. Loans pledged were $1.3 billion and $1.2 billion at June 30, 2021 and December 31, 2020, respectively. There was no interest expense related to FHLB advances and other short-term borrowings for the three and six months ended June 30, 2021, compared to $0.3 million and $1.2 million during the three and six months ended June 30, 2020, respectively.
Results of Operations
Our net income depends largely on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan losses and non-interest income, such as service charges, bank card income, swap fee income, and gain on sale of mortgages. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, occupancy costs, telecommunications data processing expense and intangible asset amortization. Any expenses related to the resolution of problem assets are also included in non-interest expense.
Overview of results of operations
We recorded net income of $24.2 million and $51.0 million, or $0.77 and $1.63 per diluted share, during the three and six months ended June 30, 2021, respectively.
During the three and six months ended June 30, 2020, we recorded net income of $17.7 million and $33.5 million, or $0.57 and $1.08 per diluted share, respectively.
We regularly review net interest income metrics to provide us with indicators of how the various components of net interest income are performing. We regularly review: (i) our loan mix and the yield on loans; (ii) the investment portfolio and the related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast periods.
The table below presents the components of net interest income on a FTE basis for the three months ended June 30, 2021 and 2020. The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale and loans.
Averagebalance
Interest
Averagerate
Interest earning assets:
Originated loans FTE(1)(2)(3)
4,077,142
40,036
3.94%
4,432,725
42,440
Acquired loans
211,126
3,923
7.45%
312,723
6,722
8.65%
159,068
1,213
3.06%
157,887
1,310
3.34%
Investment securities available-for-sale
638,039
2,397
1.50%
607,132
3,050
2.01%
Investment securities held-to-maturity
572,534
1,723
1.20%
189,360
1,201
2.54%
15,079
5.54%
30,087
4.12%
Interest earning deposits and securities purchased under agreements to resell
888,600
0.10%
36,758
0.13%
Total interest earning assets FTE(2)
78,148
76,041
472,142
532,867
(54,984)
(56,984)
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits
2,789,681
1,572
0.23%
2,719,433
1,951
0.29%
937,579
2,004
0.86%
1,048,772
4,136
1.59%
19,891
0.12%
23,485
0.31%
Federal Home Loan Bank advances
163,263
311
0.77%
Total interest bearing liabilities
3,747,151
3,954,953
Demand deposits
2,368,810
1,436,671
97,817
155,379
6,213,778
5,547,003
Shareholders' equity
Total liabilities and shareholders' equity
Net interest income FTE(2)
Interest rate spread FTE(2)
Net interest earning assets
2,814,437
1,811,719
Net interest margin FTE(2)
Average transaction deposits
5,158,491
4,156,104
Average total deposits
6,096,070
5,204,876
Ratio of average interest earning assets to average interest bearing liabilities
175.11%
145.81%
Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,279 and $1,301 for the three months ended June 30, 2021 and 2020, respectively.
Loan fees included in interest income totaled $4,695 and $2,611 for the three months ended June 30, 2021 and 2020, respectively.
Net interest income totaled $44.9 million and $47.3 million during the three months ended June 30, 2021 and 2020, respectively. The yield on earning assets decreased 80 basis points, driven by the remix of assets into lower-yielding cash balances and interest rate actions taken by the Federal Reserve during 2020. During the three months ended June 30, 2021, the cost of funds decreased 25 basis points, compared to the three months ended June 30, 2020.
Average loans comprised $4.3 billion, or 65.4%, of total average interest earning assets during the three months ended June 30, 2021, compared to $4.7 billion, or 82.3%, during the three months ended June 30, 2020. The decrease in average loan balances was
primarily driven by our careful approach to extending new credit, a focus on managing credit risk and yield and a decrease in PPP loan balances. Average PPP loans for the three months ended June 30, 2021 decreased $82.5 million, or 29.2%, to $200.0 million, compared to the three months ended June 30, 2020.
Average investment securities comprised 18.4% and 13.8% of total interest earning assets during the three months ended June 30, 2021 and 2020, respectively. The increase in the investment portfolio was driven by strategic decisions to deploy a portion of the excess liquidity into investment securities.
Average balances of interest bearing liabilities decreased $207.8 million during the three months ended June 30, 2021, compared to the three months ended June 30, 2020. The decrease was driven by strong non-interest bearing deposit inflows, which were utilized, in part, to pay off our outstanding FHLB advances in 2020. Average FHLB advances decreased $163.3 million, and time deposits decreased $111.2 million between the two periods. Those decreases were partially offset by an increase in average interest-bearing transaction deposits of $70.2 million. The cost of deposits decreased 23 basis points to 0.24% during the three months ended June 30, 2021, compared to 0.47% during the three months ended June 30, 2020.
58
The table below presents the components of net interest income on a fully taxable equivalent basis for the six months ended June 30, 2021 and 2020:
Average
balance
rate
4,041,268
79,596
3.97%
4,237,946
87,419
4.15%
224,722
9,051
8.12%
328,165
15,601
9.56%
195,094
2,730
130,411
2,246
662,250
4,882
1.47%
617,027
6,445
2.09%
497,245
3,139
189,211
2,436
2.57%
15,446
5.43%
29,920
4.84%
764,626
29,858
0.73%
79,692
75,412
483,617
503,669
(56,938)
(50,895)
2,717,983
3,224
2,608,281
4,839
0.37%
952,431
4,339
0.92%
1,052,732
8,574
1.64%
20,630
34,192
115
0.68%
191,308
1,209
1.27%
3,691,044
3,886,513
2,267,900
1,286,972
109,148
144,253
6,068,092
5,317,738
Stockholders' equity
2,709,607
1,676,025
4,985,883
3,895,253
5,938,314
4,947,985
173.41%
143.12%
Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $2,547 and $2,568 for the six months ended June 30, 2021 and 2020, respectively.
Loan fees included in interest income totaled $9,238 and $4,434 for the six months ended June 30, 2021 and 2020, respectively.
Net interest income totaled $90.1 million and $97.7 million during the six months ended June 30, 2021 and 2020, respectively. The yield on earnings assets decreased 100 basis points, led by the remix of assets into lower-yielding cash balances, an 18 basis point decrease in the originated portfolio yields due to interest rate actions taken by the Federal Reserve during 2020. During the six months ended June 30, 2021, the cost of funds decreased 31 basis points, compared to the six months ended June 30, 2020.
Average loans comprised $4.3 billion, or 66.6%, of total average interest earning assets during the six months ended June 30, 2021, compared to $4.6 billion, or 82.1%, of total average interest earning assets during the six months ended June 30, 2020. The $300.1 million decrease in average loan balances was primarily driven by lower PPP loan balances and the Company’s careful approach to extending new credit and focus on managing credit risk and yield. Year-to-date loan originations through June 30, 2021 totaled $656.3 million, including $121.1 million of PPP loan originations.
Average investment securities comprised 18.1% and 14.5% of total interest earning assets during the six months ended June 30, 2021 and 2020, respectively. The increase in the investment portfolio was driven by strategic decisions to deploy a portion of excess liquidity into investment securities.
Average balances of interest bearing liabilities decreased $195.5 million during the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The decrease was driven by strong non-interest bearing deposit inflows, which were utilized, in part, to pay off our outstanding FHLB advances in 2020. Average FHLB advances decreased $191.3 million, and time deposits decreased $100.3 million between the two periods. Those decreases were partially offset by an increase in average interest-bearing transaction deposits of $109.7 million. The cost of deposits decreased 29 basis points to 0.26% during the six months ended June 30, 2021, compared to 0.55% during the six months ended June 30, 2020.
The following table summarizes the changes in net interest income on an FTE basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020:
compared to
Increase (decrease) due to
Volume
Rate
Interest income:
(3,492)
1,088
(2,404)
(3,874)
(3,949)
(7,823)
(1,888)
(911)
(2,799)
(4,166)
(2,384)
(6,550)
(97)
905
(421)
116
(769)
(653)
333
(1,896)
(1,563)
1,153
(631)
522
1,945
(1,242)
703
(208)
107
(101)
(393)
(305)
378
Total interest income
(4,091)
(1,225)
(5,316)
(4,872)
(9,898)
(14,770)
(419)
(379)
130
(1,745)
(1,615)
(238)
(1,894)
(2,132)
(457)
(3,778)
(4,235)
(11)
(104)
(311)
(1,209)
(199)
(2,635)
(2,834)
(334)
(6,829)
(7,163)
Net change in net interest income
(3,892)
1,410
(2,482)
(4,538)
(3,069)
(7,607)
Presented on an FTE basis using the statutory tax rate of 21% for all periods presented. The taxable equivalent adjustments included above are $1,279 and $1,301 for the three months ended June 30, 2021 and 2020, respectively. The taxable equivalent adjustments included above are $2,547 and $2,568 for the six months ended June 30, 2021 and 2020, respectively.
Loan fees included in interest income totaled $4,695 and $2,611 for the three months ended June 30, 2021 and 2020, respectively. Loan fees included in interest income totaled $9,238 and $4,434 for the six months ended June 30, 2021 and 2020, respectively.
Below is a breakdown of average deposits and the average rates paid during the periods indicated:
paid
Non-interest bearing demand
Interest bearing demand
560,591
0.21%
923,721
0.27%
551,371
0.22%
832,602
0.25%
1,509,395
1,212,620
0.35%
1,469,344
0.28%
1,211,220
719,695
0.16%
583,092
0.19%
697,268
0.17%
564,459
Total average deposits
Provision for loan losses
The provision for loan losses represents the amount of expense that is necessary to bring the ACL to a level that we deem appropriate to absorb estimated lifetime losses inherent in the loan portfolio as of the balance sheet date. The determination of the ACL, and the resultant provision for loan losses, is subjective and involves significant estimates and assumptions.
The Company recorded $5.3 million of provision release for funded loans and $0.6 million of provision release for unfunded loan commitment reserves, during the three months ended June 30, 2021 driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. During the three months ended June 30, 2020, provision for loan loss expense of $10.3
61
million, including a $0.1 million provision expense for unfunded loan commitment reserves, was recorded under the CECL model to provide coverage for the impact of deterioration in the macro-economic environment as a result of COVID-19.
The Company recorded total provision release of $9.4 million for the six months ended June 30, 2021, which included a provision release of $9.9 million for funded loans and a provision expense of $0.5 million for unfunded loan commitments, driven by strong asset quality and an improved outlook in the CECL model’s underlying economic forecast. During the six months ended June 30, 2020, the Company recorded total provision expense of $16.4 million, which included a provision expense of $16.5 million for funded loans and a provision release of $0.1 million for unfunded loan commitments, to provide coverage for the impact of deteriorating economic conditions as a result of COVID-19 and to support non-PPP originated loan growth. The allowance for credit losses totaled 1.14% of total loans at June 30, 2021, compared to the allowance for credit losses of 1.26% at June 30, 2020. Excluding PPP loans, the allowance for credit losses totaled 1.18% and 1.36% of total loans at June 30, 2021 and 2020, respectively.
The table below details the components of non-interest income for the periods presented:
Three months
Six months
474
15.3 %
(178)
(2.5)%
960
26.3 %
1,520
21.2 %
(16,651)
(54.4)%
(7,945)
(17.9)%
(36)
(6.1)%
(78)
(6.6)%
1,682
193.3 %
2,932
118.6 %
25.0 %
(13,571)
(34.9)%
(3,742)
(6.0)%
Non-interest income totaled $25.3 million and $58.6 million for the three and six months ended June 30, 2021, respectively, compared to $38.8 million and $62.4 million for the three and six months ended June 30, 2020, respectively. During the three and six months ended June 30, 2021, mortgage banking income decreased $16.7 million and $7.9 million, respectively, compared to the same periods in the prior year due to lower refinance activity. Service charges and bank card fees increased a combined $1.4 million and $1.3 million during the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year, due to changes in consumer behavior. Other non-interest income increased $1.7 million and $2.9 million during the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year largely due to $0.8 million and $2.4 million of gains on fixed assets sales from the banking center consolidations.
62
The table below details the components of non-interest expense for the periods presented:
(5,018)
(13.8)%
(4,675)
(6.7)%
(947)
(13.4)%
(1,295)
(9.3)%
2.7 %
2.9 %
(30)
(5.0)%
(274)
(21.1)%
10.9 %
565
168.7 %
297
28.8 %
415
20.2 %
(110)
(14.5)%
1.7 %
(131)
(5.3)%
(745)
(335)
(53.3)%
(545)
(42.7)%
166
301.8 %
98
104.3 %
0.0 %
(1,414)
(82.8)%
(119)
(7.0)%
(7,417)
(6,420)
During the three and six months ended June 30, 2021, non-interest expense decreased $7.4 million, or 13.8%, and $6.4 million, or 6.3%, respectively, compared to the three and six months ended June 30, 2020. The decrease was primarily driven by lower mortgage-related compensation as well as the Company’s strategic efforts to improve operating efficiency. Salaries and benefits decreased $5.0 million and $4.7 million during the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020 largely due to lower mortgage banking related compensation. Occupancy and equipment decreased $0.9 million and $1.3 million, during the three and six months ended June 30, 2021, largely due to efficiencies gained from the completion of the previously announced banking center consolidations. Banking center consolidation-related expense decreased $1.4 million and $0.1 million during the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020. Problem asset workout expenses decreased $0.3 million and $0.5 million.
During the three and six months ended June 30, 2020, non-interest expense increased $7.3 million, or 15.7%, and $11.6 million, or 12.8%, respectively. The increase in 2020 was primarily driven by higher mortgage banking commissions included in salaries and benefits, banking center consolidation expense and higher gains on OREO sales during the prior period.
Income taxes
Income tax expense was $5.4 million and $11.1 million for the three and six months ended June 30, 2021, respectively. Income tax expense for the three and six months ended June 30, 2020 was $4.4 million and $7.7 million, respectively. The effective tax rate for the three and six months ended June 30, 2021 was 18.4% and 17.9%, respectively, compared to 20.0% and 18.6% for the same periods in the prior year. Income tax expense included $0.2 million and $0.4 million of benefit from stock compensation activity during the three and six months ended June 30, 2021, respectively. Income tax expense included $0.1 million and $0.1 million of expense from stock compensation activity during the three and six months ended June 30, 2020, respectively. Adjusting for stock compensation activity, the effective tax rate for the three and six months ended June 30, 2021 was 19.1% and 18.5%, compared to 19.6% and 18.3% for the same periods in the prior year. The effective tax rate is lower than the federal statutory rate primarily due to interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax income.
Additional information regarding income taxes can be found in note 19 of our audited consolidated financial statements in our 2020 Annual Report on Form 10-K.
Liquidity and Capital Resources
Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay our obligations to depositors and other creditors, while providing ample available funds for opportunistic and strategic investments. On-balance sheet
liquidity is represented by our cash and cash equivalents, and unencumbered investment securities, and is detailed in the table below as of June 30, 2021 and December 31, 2020:
Unencumbered investment securities, at fair value
739,190
513,945
1,743,683
1,119,510
Total on-balance sheet liquidity increased $624.2 million at June 30, 2021, compared to December 31, 2020. The increase was due to $225.2 million in unencumbered available-for-sale and held-to-maturity securities balances and higher cash and due from banks of $398.9 million.
Through our relationship with the FHLB, we have pledged qualifying loans and investment securities allowing us to obtain additional liquidity through FHLB advances and lines of credit. The Bank may pledge investment securities and loans as collateral for FHLB advances. There were no investment securities pledged at June 30, 2021 or December 31, 2020. The Bank had loans pledged as collateral for FHLB advances of $1.3 billion and $1.2 billion at June 30, 2021 and December 31, 2020, respectively. FHLB advances, lines of credit and other short-term borrowing availability totaled $0.9 billion at June 30, 2021. The Bank can obtain additional liquidity through the FHLB facility, if required, and also has access to the Paycheck Protection Program Liquidity Facility (“PPPLF”) and federal funds lines of credit with correspondent banks.
Our primary sources of funds are deposits, securities sold under agreements to repurchase, prepayments and maturities of loans and investment securities, the sale of investment securities and funds provided from operations. We anticipate having access to other third-party funding sources, including the ability to raise funds through the issuance of shares of our common stock or other equity or equity-related securities, incurrence of debt and federal funds purchased, that may also be a source of liquidity. We anticipate that these sources of liquidity will provide adequate funding and liquidity for at least a 12-month period.
Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses and share repurchases. For additional information regarding our operating, investing and financing cash flows, see our consolidated statements of cash flows in the accompanying unaudited consolidated financial statements.
Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and paydowns of loans and purchases and sales of investment securities. At June 30, 2021, pledgeable investment securities represented a significant source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled $1.3 billion at June 30, 2021, inclusive of pre-tax net unrealized gains of $1.2 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $0.5 million of pre-tax net unrealized losses at June 30, 2021. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of June 30, 2021, our investment securities portfolio consisted primarily of mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base.
At present, financing activities primarily consist of changes in deposits and repurchase agreements, and advances from the FHLB, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As of June 30, 2021, $677.2 million of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions and our consumer banking strategy focusing on both lower cost transaction accounts and term deposits, our strategy is to replace a portion of those maturing time deposits with transaction deposits and market-rate time deposits.
Under the Basel III requirements, at June 30, 2021, the Company and the Bank met all capital adequacy requirements and the Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on regulatory capital, see note 9 in our consolidated financial statements.
Our shareholders' equity is impacted by earnings, changes in unrealized gains and losses on securities, net of tax, stock-based compensation activity, share repurchases and the payment of dividends.
64
The Board of Directors has from time to time authorized multiple programs to repurchase shares of the Company’s common stock either in open market or in privately negotiated transactions in accordance with applicable regulations of the SEC. On February 24, 2021, the Company’s Board of Directors authorized a new program to repurchase up to $75.0 million of the Company’s stock which replaces the previously authorized $50.0 million stock repurchase program announced in February 2020 in its entirety. The remaining authorization under the new program as of June 30, 2021 was $75.0 million.
On August 4, 2021, our Board of Directors declared a quarterly dividend of $0.22 per common share, payable on September 15, 2021 to shareholders of record at the close of business on August 27, 2021.
Asset/Liability Management and Interest Rate Risk
Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows.
The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and utilize various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at June 30, 2021. During the six months ended June 30, 2021, our asset sensitivity decreased slightly for a rising rate environment as a result of the balance sheet mix. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase at June 30, 2021 and December 31, 2020 and a 25 basis point decrease in interest rates on net interest income based on the interest rate risk model at June 30, 2021:
Hypothetical
shift in interest
% change in projected net interest income
rates (in bps)
200
12.09%
14.22%
5.96%
7.46%
(25)
(0.23)%
(0.46)%
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.
65
As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of longer duration loans. The strategy with respect to liabilities has been to continue to emphasize transaction account growth, particularly non-interest or low interest bearing non-maturing deposit accounts while building long-term client relationships. Non-maturing deposit accounts totaled 85.0% of total deposits at June 30, 2021, compared to 82.6% at December 31, 2020. We currently have no brokered time deposits.
Off-Balance Sheet Activities
In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As of June 30, 2021 and December 31, 2020, we had loan commitments totaling $994.9 million and $848.6 million, respectively, and standby letters of credit that totaled $9.2 million and $7.3 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of June 30, 2021. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.
During the most recently completed fiscal quarter, there were no changes made in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
Item 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A: Risk Factors in our Annual Report on Form 10-K for the year ended December 31 2020.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Maximum
Total number of
approximate dollar
shares purchased
value of shares
as part of publicly
that may yet be
Total number
Average price
announced plans
purchased under the
Period
of shares purchased
paid per share
or programs
plans or programs (2)
April 1 - April 30, 2021(1)
23,560
40.54
75,000,000
May 1 - May 31, 2021(1)
5,529
39.70
June 1 - June 30, 2021(1)
29,089
40.38
These shares represent shares purchased other than through publicly announced plans and were purchased pursuant to the Company’s stock incentive plans. Pursuant to the plans, shares were purchased from plan participants at the then current market value in satisfaction of stock option exercise prices, settlements of restricted stock and tax withholdings.
On February 24, 2021, the Company’s Board of Directors authorized a new program to repurchase up to $75.0 million of common stock. Under this authorization, $75.0 million remained available for purchase at June 30, 2021. The new program replaces the previously authorized $50.0 million stock repurchase program announced in February 2020 in its entirety.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
3.1
Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)
3.2
Second Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, filed November 7, 2014)
31.1
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
National Bank Holdings Corporation
By
/s/ Aldis Birkans
Aldis Birkans
Chief Financial Officer
(principal financial officer)
Date: August 4, 2021
69