FRANKLIN FINANCIAL NETWORK, INC. The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements, the audited financial statements and accompanying notes included in the Company's Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC") onMarch 16, 2020 , which includes additional information about critical accounting policies and practices and risk factors. Historical results and trends that might appear in the consolidated financial statements should not be interpreted as being indicative of future operations. Company Overview We are a financial holding company headquartered inFranklin, Tennessee . Through our wholly-owned bank subsidiary,Franklin Synergy Bank , aTennessee -chartered commercial bank and a member of theFederal Reserve System , we provide a full range of banking and related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. We operate through 15 branches in the growingWilliamson ,Rutherford andDavidson Counties and one loan production and deposit production office inWilson County , all within the Nashville MSA. As used in this report, unless the context otherwise indicates, any reference to "Franklin Financial," "our Company," "the Company," "us," "we" and "our" refers toFranklin Financial Network, Inc. together with its consolidated subsidiaries (includingFranklin Synergy Bank ), any reference to "FFN" refers toFranklin Financial Network, Inc. only and any reference to "Franklin Synergy " or the "Bank" refers to our banking subsidiary,Franklin Synergy Bank . As ofMarch 31, 2020 , we had consolidated total assets of$3,791,601 , total loans, including loans held for sale, of$2,898,450 , total deposits of$3,137,471 and total equity of$408,848 . Our principal executive office is located at722 Columbia Avenue ,Franklin, Tennessee 37064-2828, and our telephone number is (615) 236-2265. Our website is www.franklinsynergybank.com. The information contained on or accessible from our website does not constitute a part of this report and is not incorporated by reference herein. 32 -------------------------------------------------------------------------------- Table of Contents Recent Developments: Merger with FB Financial Corporation OnJanuary 21, 2020 , the Company announced a strategic merger with FB Financial Corporation that is projected to close in the third quarter of 2020. COVID-19 and the CARES Act The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company's customers operate and could impair their ability to fulfill their financial obligations to the Company. During the first quarter of 2020, theWorld Health Organization declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in theU.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company's employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company. TheUnited States Congress , the President ofthe United States , and theFederal Reserve have taken a multitude of actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law onMarch 27, 2020 as a$2.2 trillion legislative relief package. The goal of the CARES Act is to limit the impact of a potentially severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and medical providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware in this Form 10-Q.
Financial position and results of operations
Pertaining to ourMarch 31, 2020 financial condition and results of operations, COVID-19 had an impact on our allowance for loan and lease losses ("ALLL") and resulting provision for loan losses are impacted by changes in economic conditions. Should economic conditions worsen, we could experience further increases in our ALLL and record additional provision expense. The execution of the payment deferral program discussed in the following commentary assisted our ratio of past due loans to total loans. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged. Our fee income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods. Our interest income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued may need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers' ability to repay in future periods. Positively, the Company could see a near-term, non-recurring benefit to interest income due to the origination fees paid by the SBA related to PPP loans that are originated and funded by the Company. At this time, the Company is unable to project the materiality of such an impact. 33 -------------------------------------------------------------------------------- Table of Contents Capital and liquidity As ofMarch 31, 2020 , all of our capital ratios, and our subsidiary bank's capital ratios, were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from our subsidiary bank to service our debt. If our capital deteriorates such that our subsidiary bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt. We maintain access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
Asset valuation
Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As ofMarch 31, 2020 , our goodwill was not impaired. While our stock was trading above book value for most of the first quarter of 2020, at quarter-end our stock was trading below book value, and it is possible that subsequent impacts of COVID-19 could cause a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. AtMarch 31, 2020 we had goodwill of$18,176 , representing approximately 4.4% of equity.
Our processes, controls and business continuity plan
We implemented our business continuity plans in the aftermath of the earlyMarch 2020 tornadoes that severely impacted communities across Middle Tennessee and as COVID-19 was declared a global pandemic. Shortly after invoking those plans, we deployed a successful remote working strategy, provided timely communication to employees and customers, implemented protocols for employee safety, and initiated strategies for monitoring and responding to local COVID-19 impacts - including customer relief efforts. Our preparedness efforts, coupled with quick and decisive plan implementation, resulted in minimal impacts to operations as a result of COVID-19. Prior technology planning resulted in the successful deployment of the majority of our operational teams to a remote environment. Due to the nature of their functions, a portion of our employees continue to operate from physical Company locations, while effectively employing social distancing standards. As ofApril 30, 2020 , approximately 60% of the Company's 324 employees continued to work remotely. As our local communities begin to gradually lift workplace and social distancing restrictions, the Company plans to slowly bring employees back to their physical workplaces, in a conservative and methodical phased approach. To achieve implementation of the remote working strategy, during the first quarter of 2020, we did not incur significant costs to effectively provide for proper equipment to team members who were required to work remotely. We do not anticipate incurring material costs related to our continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. To prepare for potential staffing shortages resulting from an anticipated peak in COVID-19 cases, we have assessed critical team members and determined appropriate contingency and succession plans are in place to ensure continued operations. OurCOVID-19 Response Team continues to meet regularly to anticipate and respond to any future COVID-19 interruptions or developments. We do not anticipate significant challenges to our ability to maintain our systems and controls in light of the measures we have taken to prevent the spread of COVID-19. We do not currently face any material resource constraint through the implementation of our business continuity plans.
Lending operations and accommodations to borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation, we are executing a payment deferral program for our commercial lending clients that are adversely affected by the pandemic. Depending on the
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demonstrated need of the client, the Company is deferring either the full loan
payment or the principal component of the loan payment for typically 90 days. As
of April 30, 2020 , the Company has executed over 420 of these deferrals on
outstanding loan balances of approximately $644,000 . In accordance with
interagency guidance issued in March 2020 , these short-term deferrals are not
considered troubled debt restructurings.
With the passage of the PPP, administered by the SBA, we are actively
participating in assisting our customers with applications for these
SBA-guaranteed loans through the program. PPP loans have a two-year term and
earn interest at 1%. We believe that the majority of these loans will ultimately
be forgiven by the SBA in accordance with the terms of the program. As of April
30, 2020 , we have closed or approved with the SBA over 325 PPP loans
representing approximately $50,000 . It is our understanding that loans funded
through the PPP are fully guaranteed by the U.S. government. Should those
circumstances change, we could be required to establish additional allowance for
loan and lease losses through additional provision expense charged to earnings.
April 30, 2020
COVID-19 Loan Deferrals Principal Balance Number of loans
Total Loans Booked $ 644,229 422
Credit
We are working with customers directly affected by COVID-19. We are prepared to
offer short-term assistance in accordance with regulatory guidelines. As a
result of the current economic environment caused by the COVID-19 virus, we are
engaging in more frequent communication with borrowers to better understand
their situation and the challenges faced, allowing us to respond proactively as
needs and issues arise. Should economic conditions worsen, the Company could
experience further increases in its required allowance for loan and lease losses
and record additional loan loss provision expense. It is possible that our asset
quality measures could worsen at future measurement periods if the effects of
COVID-19 are prolonged.
While all industries have and will continue to experience adverse impacts as a
result of COVID-19 virus, we had exposures (on balance sheet loans and
commitments to lend) in the following loan categories considered to be "at-risk"
of significant impact as of March 31, 2020 . Our exposure to the retail industry
at March 31, 2020 equated to approximately $279,187 , or 9.8% of total loans HFI.
Our exposure to the health care industry at March 31, 2020 equated to $352,013 ,
or 12.3% of total loans HFI. We have approximately 9.6% of the loans in the
health care industry segment risk rated as substandard or worse. Our exposure to
hotels at March 31, 2020 equated to approximately $142,520 , or 5.0% of total
loans HFI, and the majority of the our hotel borrowers have historically
exhibited strong operating cash flows. Our exposure to restaurants at March 31,
2020 equated to approximately $75,452 , or 2.6% of total loans HFI. At March 31,
2020 , our exposure to the transportation and warehousing industry was $24,768 ,
or 0.9% of total loans HFI. These "at-risk" loan categories as of March 31, 2020
totaled $873,939 , or 30.6% of total loans HFI.
Commercial real estate
Commercial and Commercial real non-owner occupied real % of Total Loans
Industries industrial estate owner occupied estate Total HFI
Retail $ 6,488 $ 33,787 $ 238,912 $ 279,187 9.8 %
Healthcare - institutional 306,343 - - 306,343 10.7 %
Healthcare - non-institutional 18,666 5,702 21,302 45,670 1.6 %
Total healthcare 325,009 5,702 21,302 352,013 12.3 %
Hotels 200 - 142,320 142,520 5.0 %
Restaurants 4,437 40,762 30,253 75,452 2.6 %
Transportation and warehousing 19,492 - 5,276 24,768 0.9 %
Total $ 355,626 $ 80,250 $ 438,063 $ 873,939 30.6 %
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Transportation and
Risk Rating Retail Healthcare - Institutional Healthcare - Non-Institutional Total Healthcare Hotels Restaurants Warehousing
Pass 93.2 % 86.5 % 95.9 % 87.7 % 100.0 % 99.8 % 93.5 %
Watch 5.2 % 2.5 % 4.1 % 2.7 % - % - % 6.3 %
Special mention 0.4 % - % - % - % - % - % 0.2 %
Substandard or worse 1.2 % 11.0 % - % 9.6 % - % 0.2 % - %
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
As of March 31, 2020 , our average loan exposure is approximately $162 with the
average exposure within our largest segment, commercial real estate,
approximately $934 and the average exposure within our top 10 customers is
approximately $29,560 .
Retail operations
We are committed to assisting our customers and communities in this time of
need. As of April 30, 2020 , the Bank was utilizing four of its 15 branches per
normal operating procedures, while the other 11 branches were available to
customers on a drive-thru basis only. Further, we also continues to temporarily
reduce, suspend, or eliminate certain fees for customers eligible for relief
under regulatory guidance who have been adversely affected, and we have
temporarily suspended adverse credit bureau reporting for customers eligible for
such relief under applicable regulatory guidelines.
We continue to serve our customers through our branch and drive-thru operations,
as well as through the use of our mobile banking operations, all of which are
supported by our Customer Call Center, which has been operating under extended
hours for much of the recent crises. We have been able to conduct the vast
majority of customer business with minimal disruption to date, and our bankers
and entire customer service team are proactively and successfully managing the
volume of customer requests and issues.
The Company continues to monitor the safety of our employees, customers and
communities. At this time, our staffing is adequate to address the requests for
time off by any of our employees who are impacted by health or child care
issues.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. To prepare financial
statements in conformity with accounting principles generally accepted in the
United States of America , management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and actual
results could differ.
Our accounting policies are integral to understanding the results reported.
Accounting policies are described in Note 1 of the notes to the consolidated
financial statements (unaudited) which begins on page 9. The critical accounting
policies require judgment to ascertain the valuation of assets, liabilities,
commitments and contingencies. Management has established policies and control
procedures that are intended to ensure valuation methods are well controlled and
applied consistently from period to period. In addition, the policies and
procedures are intended to ensure that the process for changing methodologies
occurs in an appropriate manner. The following is a brief summary of the more
significant policies.
Allowance for Loan Losses (ALLL)
The ALLL is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when management believes a loan balance
has become uncollectible. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired. A loan
is impaired when, based on current information and events, it is probable that
we will be unable
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to collect all amounts due according to the contractual terms of the loan
agreement. Loans for which the terms have been modified resulting in a
concession, and for which the borrower is experiencing financial difficulties,
are considered troubled debt restructurings ("TDR" or "TDRs") and classified as
impaired.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed.
All loans classified by management as substandard or worse are individually
evaluated for impairment. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral.
TDRs are separately identified for impairment disclosures and are measured at
the present value of estimated future cash flows using the loan's effective rate
at inception. If a TDR is considered to be a collateral dependent loan, the loan
is reported, net, at the fair value of the collateral. For TDRs that
subsequently default, we determine the amount of reserve in accordance with the
accounting policy for the ALLL.
The general component covers non-impaired loans and is based on historical loss
experience adjusted for current factors. The historical loss experience is
determined by portfolio segment and is based on a combination of the Bank's loss
history and loss history from the Bank's peer group over the past three years.
This actual loss experience is supplemented with other qualitative factors based
on the risks present for each portfolio segment. These economic factors include
consideration of the following: levels of and trends in delinquencies and
impaired loans; levels of and trends in charge-offs and recoveries; trends in
volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management and other
relevant staff; national and local economic trends and conditions; industry
conditions; and effects of changes in credit concentrations.
Status of New Accounting Standard for Allowance for Credit Losses
On January 1, 2020 , ASU 2016-13 Financial Instruments - Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, became effective
for the Company which replaces the existing incurred loss impairment methodology
for loans that are collectively evaluated for impairment with a methodology that
reflects management's best estimate of lifetime expected credit losses and
requires consideration of reasonable and supportable economic forecasts to
develop a lifetime credit loss estimate. Topic 326 requires additional
qualitative and quantitative disclosure to allow users to better understand the
credit risk within the portfolio and the methodologies for determining the ACL.
The CECL standard also simplifies the accounting model for purchased credit
impaired loans. Additionally, Topic 326 requires expected credit losses on AFS
debt securities be recorded as an ACL. For certain types of debt securities,
such as U.S. Treasuries and other securities with government guarantees,
entities may expect zero credit losses.
In accordance with Section 4014 of the CARES Act that was signed into law on
March 27, 2020 , we deferred implementation of CECL and thus elected to continue
to utilize the ILM to calculate loan loss reserves in the first quarter 2020.
The temporary deferral of CECL will remain effective until the earlier of the
termination of the national emergency declaration concerning the COVID-19
pandemic or December 31, 2020 , with an effective retrospective implementation
date of January 1, 2020 . There is increased uncertainty on the local, regional,
and national economy as a result of local and state stay-at-home orders, as well
as relief measures provided at a national, state, and local level. We have taken
actions to mitigate the impact on credit losses including permitting short-term
payment deferrals to current customers, as well as actively participating in the
SBA's PPP. These conditions significantly impact management's determination of a
reasonable and supportable forecast, an essential requirement in the calculation
of expected credit losses under CECL methodology. We believes that the deferral
will provide time to better assess the impact of the COVID-19 pandemic on the
expected lifetime credit losses.
Our CECL implementation efforts will remain in process in order to adequately
comply with the provisions of CECL once the deferral period ceases. Management
will continue to measure and monitor the estimated impacts of CECL adoption
through continued parallel testing of model simulations based on our portfolio
composition and current expectations of future economic conditions.
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Prior to the CARES Act being signed and our decision to delay the implementation of CECL, we were completing our CECL implementation plan, under the direction of our Chief Financial Officer,Chief Credit Officer , Chief Operating Officer, and Controller. The working group also included individuals from various functional areas including credit, risk management, accounting and information technology, among others. Our implementation plan included assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; Board approval of a CECL Policy; and system configuration, among other things. Additionally, a third-party vendor remains under contract to assist us in the implementation of CECL.
We are unable as of the date of this report to provide an estimate of our
allowance for loan losses under the CECL model as of
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COMPARISON OF RESULTS OF OPERATIONS FOR
THE THREE MONTHS ENDED MARCH 31, 2019 and 2019
(Dollar Amounts in Thousands)Overview
We incurred a net loss available to common shareholders of$1,148 for the three months endedMarch 31, 2020 compared to a net income of$2,901 for the three months endedMarch 31, 2019 , a decrease of$4,049 . The decrease was primarily related to a loan loss provision of$13,022 for the quarter. Net Interest Income/Margin Net interest income consists of interest income generated by earning-assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income remained consistent for the three months endedMarch 31, 2020 with a total of$27,464 compared to$27,420 for the same period in 2019, a$44 increase. The net interest margin for the first quarter of 2020 was 3.02%, compared to 2.80% in the same period in 2019, an increase of 22 basis points, which was primarily driven by the 2019 balance sheet rotation and optimization strategies that have focused on the reduction in non-core assets and liabilities. Tax-equivalent interest income was$42,143 for the first quarter of 2020, when compared to$48,058 for the same period last year, a 12.3% decrease. The yield on average interest earning assets, adjusted for tax equivalent yield, decreased 27 basis points to 4.55% from 4.82% when comparing the three months endedMarch 31, 2020 to the same period during 2019. For the three months endedMarch 31, 2020 , the tax equivalent yield on loans held for investment was 5.21%, compared to 5.61% during the same period in 2019. The primary driver for the decrease in yields on loans was the decrease in market interest rates when compared to the same quarter in the previous year. Interest-earning assets averaged$3,726,844 and$4,044,231 during the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$317,387 , or 7.8%. This decrease was due to the strategically planned asset rotation and decrease in the total investment securities. Average investment securities decreased$480,923 , or 43.7%, and average loans held for investment increased$69,762 , or 2.5% when comparing the three months endedMarch 31, 2020 with the same period in 2019. Interest-bearing liabilities averaged$3,076,269 and$3,493,260 and during the three months endedMarch 31, 2020 and 2019, respectively, a decrease of$416,991 , or 11.9%. Total average money market deposits increased$248,245 , or 25.0%, and average time deposits decreased$447,372 , or 38.4% for the three months endedMarch 31, 2020 , as compared to the same period during 2019. Average FHLB advances decreased$230,425 when comparing the three months endedMarch 31, 2020 with the same period in 2019 with the organic growth in the loan portfolio. For the three months endedMarch 31, 2020 and 2019, the cost of average interest-bearing liabilities decreased 48 basis points to 1.85% from 2.33%. Total non-interest deposits averaged$333,883 , an increase of$42,707 , or 14.7%, during the three months endedMarch 31, 2020 , compared to the same period during 2019. The tables below summarize average balances, annualized yields and rates, cost of funds, and the analysis of changes in interest income and interest expense for the three months endedMarch 31, 2020 and 2019: 39
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Average Balances-Yields & Rates (7)
(Dollars are in thousands)
Three Months Ended
2020 2019
Average Average
Average Interest Yield / Average Interest Yield /
Balance Inc / Exp Rate Balance Inc / Exp Rate
ASSETS:
Loans(1)(6) $ 2,834,437 $ 36,707 5.21 % $ 2,764,675 $ 38,238 5.61 %
Loans held for sale 36,668 379 4.16 9,438 115 4.94
Securities:
Taxable 399,135 2,424 2.44 919,549 6,394 2.82
Tax-exempt(6) 221,190 1,872 3.40 181,699 1,990 4.44
Restricted equity securities 24,824 162 2.62 22,082 332 6.10
Certificates of deposit at
other financial institutions 3,426 20 2.35 3,592 20 2.26
Federal funds sold and
other(2) 207,164 579 1.12 143,196 969 2.74
TOTAL INTEREST EARNING ASSETS $ 3,726,844 $ 42,143 4.55 % $ 4,044,231 $ 48,058 4.82 %
Allowance for loan and lease
losses (45,100) (24,054)
All other assets 198,380 200,078
TOTAL ASSETS $ 3,880,124 $ 4,220,255
LIABILITIES & EQUITY
Deposits:
Interest checking $ 877,751 $ 3,400 1.56 % $ 857,096 $ 4,420 2.09 %
Money market 1,241,087 4,930 1.60 992,842 5,979 2.44
Savings 40,055 27 0.27 40,609 28 0.28
Time deposits 718,294 3,889 2.18 1,165,666 6,563 2.28
Federal Home Loan Bank
advances and other (8) 137,319 801 2.35 367,744 1,959 2.16
Federal funds purchased and
other(3) 2,876 14 1.96 10,594 72 2.76
Subordinated notes 58,887 1,082 7.39 58,709 1,082 7.47
TOTAL INTEREST BEARING
LIABILITIES $ 3,076,269 $ 14,143 1.85 % $ 3,493,260 $ 20,103 2.33 %
Demand deposits 333,883 291,176
Other liabilities 53,454 58,703
Total equity 416,518 377,116
TOTAL LIABILITIES AND EQUITY $ 3,880,124 $ 4,220,255
NET INTEREST SPREAD(4) 2.70 % 2.49 %
NET INTEREST INCOME $ 28,000 $ 27,955
NET INTEREST MARGIN(5) 3.02 % 2.80 %
(1)Loan balances include loans held in the Bank's portfolio and are net of
deferred origination fees and costs. Non-accrual loans are included in total
loan balances.
(2)Includes federal funds sold and interest-bearing deposits at the Federal
Reserve Bank , the Federal Home Loan Bank and other financial institutions.
(3)Includes repurchase agreements.
(4)Represents the average rate earned on interest-earning assets minus the
average rate paid on interest-bearing liabilities.
(5)Represents net interest income (annualized) divided by total average earning
assets.
(6)Interest income and rates include the effects of tax-equivalent adjustments
to adjust tax-exempt interest income on tax-exempt loans and investment
securities to a fully taxable basis.
(7)Average balances are average daily balances.
(8)Includes finance lease.
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Analysis of Changes in Interest Income and ExpensesNet change three months ended
March
31, 2020 versus
Volume Rate Net Change
INTEREST INCOME
Loans $ 802 $ (2,333) $ (1,531)
Loans held for sale 349 (85) 264
Securities
Taxable (3,600) (370) (3,970)
Tax-exempt 381 (499) (118)
Restricted equity securities 40 (211) (171)
Certificates of deposit at other financial institutions (1) 1 -
Federal funds sold and other 426 (816) (390)
TOTAL INTEREST INCOME $ (1,603) $ (4,313) $ (5,916)
INTEREST EXPENSE
Deposits
Interest checking $ 103 $ (1,123) $ (1,020)
Money market accounts 1,438 (2,487) (1,049)
Savings - (1) (1)
Time deposits (2,489) (185) (2,674)
Federal Home Loan Bank advances (1,220) 62 (1,158)
Federal funds purchased and other(1) (52) (6) (58)
Subordinated notes - - -
TOTAL INTEREST EXPENSE $ (2,220) $ (3,740) $ (5,960)
NET INTEREST INCOME $ 617 $ (573) $ 44
(1) Includes finance lease.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to
establish an ALLL that, in management's evaluation, should be adequate to
provide coverage for the probable losses incurred in the loan portfolio. The
allowance is increased by the provision for loan losses and is decreased by
charge-offs, net of recoveries on prior loan charge-offs.
The provision for loan losses was $13,022 and $5,055 for the three months ended
March 31, 2020 and 2019, respectively. Management determined the need to record
an additional loan loss provision of $6,600 to provide specific reserves for one
banking relationship, which was on nonaccrual status and was included in a
portion of our classified assets, in our Healthcare and Corporate loan
portfolios, as of December 31, 2019 . Our determination to record this additional
provision was primarily the result of certain developments and circumstances
regarding the collectability of this relationship that arose during the first
quarter of 2020, and these developments were amplified by various macroeconomic
factors. The balance of this banking relationship was fully charged-off as of
March 31, 2020 . The remainder of the loan loss provision for the three months
ended March 31, 2020 was attributable to a combination of loan growth and
increased quantitative loss factors, as well as an increase in qualitative risk
factors due to COVID-19.
Non-Interest Income
Non-interest income for the three months ended March 31, 2020 was $5,893
compared to $3,486 for the same periods in 2019. The $2,407 increase was
primarily the result of strong mortgage banking revenue, driven by the lower
interest rates present during the quarter.
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The following is a summary of the components of non-interest income (in
thousands):
Three Months Ended $ %
March 31, Increase Increase
2020 2019 (Decrease) (Decrease)
Service charges on deposit accounts
$ 18 24.3 % Other service charges and fees 897 757 140 18.5 % Mortgage banking revenue 2,685 1,672 1,013 60.6 % Wealth management 814 627 187 29.8 % Gain on sale or call of securities 1,396 149 1,247 NM Net loss on sale of loans (416) (217) (199) 91.7 % Net gain on sale of foreclosed assets 2 4 (2) (50.0) % Other 423 420 3 0.7 % Total non-interest income$ 5,893 $ 3,486 $ 2,407 69.0 % Mortgage banking revenue increased$1,013 , or 60.6% for the three months endedMarch 31, 2020 , compared to the same period in 2019. The increase was due to the volume of mortgage loans originated, the sales related to those loans and more favorable market rates in 2020, which resulted in favorable fair value adjustments on mortgage derivatives. TheFederal Reserve increased rates 100 basis points in 2018 but then decreased rates 75 basis points during the third and fourth quarters of 2019 and then decreased rates by an additional 150 basis points in the first quarter of 2020, resulting in a current target rate range of zero to 25 basis points. Gain (loss) on sale or call of securities increased$1,247 for the three months endedMarch 31, 2020 , when compared with the same periods in 2019. The increase was due to the Company's election to sell certain securities to take advantage of the market conditions that existed during that period, at which time, management elected to sell certain of its securities as part of its balance sheet management initiatives. Net loss on sale of loans was$416 , an increase of$199 during the period endedMarch 31, 2020 , when compared with the same periods in 2019. The loss for the three months endedMarch 31, 2020 was attributed to sales of SNC relationships during the first quarter of 2020. Non-Interest Expense Non-interest expense remained relatively consistent for the three months endedMarch 31, 2020 at$22,421 compared to$22,616 for the same period in 2019. The increases and decreases were the result of the following components listed in the table below (in thousands): Three Months Ended $ % March 31, Increase Increase 2020 2019 (Decrease) (Decrease) Salaries and employee benefits$ 12,580 $ 14,743 $ (2,163) (14.7) % Occupancy and equipment 3,086 3,113 (27) (0.9) % FDIC assessment expense 450 990 (540) (54.5) % Marketing 245 319 (74) (23.2) % Professional fees 3,068 923 2,145 232.4 % Amortization of core deposit intangible 94 145 (51) (35.2) % Other 2,898 2,383 515 21.6 % Total non-interest expense$ 22,421 $ 22,616 $ (195) (0.9) % Salaries and employee benefits decreased$2,163 , or 14.7%, respectively, while professional fees increased$2,145 , or 232.4% when comparing the three months endedMarch 31, 2020 with the same period in 2019. Theses variations are attributable to employee-related adjustments occurring due to our pending strategic merger with FB Financial Corporation projected to close in third quarter 2020. 42 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense We recognized income tax benefit for the three months endedMarch 31, 2020 of$938 compared to income tax expense of$334 for the three months endedMarch 31, 2019 . Our quarter-to-date income tax benefit for the period endedMarch 31, 2020 reflects an effective income tax rate of 45.0% which is an increase compared to 10.3% for the same period in 2019. The primary drivers are from pre-tax income decreasing$5,321 compared to the same quarter in 2019 as a result of recognizing$7,967 more in provision for loan losses when compared to the same period in 2019. COMPARISON OF BALANCE SHEETS ATMarch 31, 2020 andDecember 31, 2019 Overview Our total assets decreased by$104,561 , or a 10.8% annualized rate, fromDecember 31, 2019 toMarch 31, 2020 . The decrease in total assets has primarily been the result of the continued balance sheet rotation and optimization strategies and the planned sales of investment securities during the twelve months betweenMarch 31, 2020 andMarch 31, 2019 , and a planned offset by organic growth in the loan portfolio. Loans Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and therefore generates the largest portion of revenues. For purposes of the discussion in this section, the term "loans" refers to loans, excluding loans held for sale, unless otherwise noted. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, atMarch 31, 2020 andDecember 31, 2019 were$2,855,768 and$2,812,444 , respectively, an increase of$43,324 or 6.2% annualized. As a percentage of total assets, total loans, net of deferred fees, atMarch 31, 2020 andDecember 31, 2019 were 75.3% and 72.2%, respectively. Growth in the loan portfolio is primarily due to increased market penetration within our local markets. The table below provides a summary of the loan portfolio composition for the periods noted. March 31, 2020 December 31, 2019 % of Total % of Total Types of Loans Amount Loans Amount Loans Total loans Real estate: Construction and land development$ 627,178 21.9 %$ 591,541 21.0 % Commercial 997,958 34.9 % 993,912 35.3 % Residential 648,586 22.7 % 643,601 22.9 % Commercial and industrial 581,598 20.3 % 582,641 20.7 % Consumer and other 4,454 0.2 % 4,769 0.2 % Total gross loans 2,859,774 100.0 % 2,816,464 100.0 % Less: deferred loan fees, net (4,006) (4,020) Total loans, net of deferred loan fees 2,855,768 2,812,444 Less: allowance for loan losses (38,403) (45,436) Total loans, net allowance for loan losses$ 2,817,365 $ 2,767,008 This net loan growth for the first quarter of 2020 occurred in spite of the$31,132 linked-quarter reduction in the SNC portfolio to a balance of$105,526 , representing a 54.0% year-over-year and 91.6% annualized linked-quarter decrease. This is the lowest SNC balance held by the Company during the last six quarters, representing 3.7% of loans HFI, which is almost half of the Company's concentration of 9.3% of loans HFI at the peak of the SNC portfolio atDecember 31, 2018 . Non-SNC loan growth in the first quarter was$74,456 , representing annualized growth of 11.1% from the fourth quarter of 2019. The Company estimates approximately$32,000 of the loan growth was due to increased customer line of credit utilization, which was predominantly from commercial and industrial loan customers. Of the$738,189 unused lines of credit atMarch 31, 2020 , the Company estimates approximately$273,300 , or approximately 37%, are available to be drawn by customers without further approval by the Bank. 43 -------------------------------------------------------------------------------- Table of Contents Real estate loans comprised 79.5% of the loan portfolio atMarch 31, 2020 . The largest portion of the real estate segments as ofMarch 31, 2020 , was commercial real estate loans, which totaled 43.9% of real estate loans. Commercial real estate loans totaled$997,958 atMarch 31, 2020 , and comprised 34.9% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and other properties. Construction and land development loans totaled$627,178 atMarch 31, 2020 , and comprised 27.6% of total real estate loans and 21.9% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development. This portfolio has remained steady in absolute dollar terms since 2017, representing a lower corresponding portion of the loan portfolio. The residential real estate classification primarily includes 1-4 family residential loans which are typically conventional first-lien home mortgages, not including loans held-for-sale in the secondary market, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled$648,586 and comprised 28.5% of real estate loans and 22.7% of total loans atMarch 31, 2020 . Commercial and industrial loans totaled$581,598 atMarch 31, 2020 . Loans in this classification comprised 20.3% of total loans atMarch 31, 2020 . The commercial and industrial classification consists of commercial loans to small-to-medium sized businesses, shared national credits, and commercial healthcare loans. The tables below provide a summary of the Corporate and Healthcare portfolios for the periods noted: Corporate and Healthcare March 31, December 31, September 30, June 30, March 31, QoQ YoY portfolios(1) 2020 2019 2019 2019 2019 Change* Change Corporate$ 102,370 $ 139,840 $ 133,386 $ 170,125 $ 174,731 (107.8 %) (41.4 %) Portion SNC 36,011 59,339 58,544 112,756 122,452 (158.1 %) (70.6 %) Portion not SNC 66,359 80,501 74,842 57,369 52,279 (70.7 %) 26.9 % Healthcare 306,343 289,703 273,106 329,818 320,611 23.1 % (4.5 %) SNC 69,515 77,319 85,932 118,460 107,156 (40.6 %) (35.1 %) Non-SNC 236,828 212,384 187,174 211,358 213,455 46.3 % 10.9 % Total institutional$ 408,713 $ 429,543 $ 406,492 $ 499,943 $ 495,342 (19.5 %) (17.5 %) Commercial and industrial(1) 579,751 580,696 576,018 666,025 635,673 (0.7 %) (8.8 %) Percent of institutional within commercial and industrial 70 % 74 % 71 % 75 % 78 % Total SNC$ 105,526 $ 136,658 $ 144,476 $ 231,216 $ 229,608 (91.6 %) (54.0 %) Percent of total loans HFI 3.7 % 4.9 % 5.2 % 8.0 % 8.1 %
*Annualized
(1) Loan balances are net of deferred loan fees and costs.
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March 31, December 31, September 30, June 30, March 31,
Institutional loans asset quality 2020 2019 2019 2019 2019
Corporate loans $ 102,370 $ 139,840 $ 133,386 $ 170,125 $ 174,731
Loans classified as criticized or
worse - 17,608 17,598 - -
Loans criticized or worse as % of
corporate loans - % 12.6 % 13.2 % - % - %
Loans requiring specific reserve $ -
- $ - $ - Specific reserve - 13,894 - - - Specific reserve as % impaired corporate loans - % 78.9 % - % - % - %
Net (charge-offs) recoveries
- $ - $ -
Healthcare loans$ 306,343 $ 289,703 $ 273,106 $ 329,818 $ 320,611 Loans classified as criticized or worse 33,735 21,517 21,554 20,699 27,750 Loans criticized or worse as a % of healthcare loans 11.0 % 7.4 % 7.9 % 6.3 % 8.7 % Loans requiring specific reserve$ 6,592 $ 6,667 $ -$ 2,193 $ 9,177 Specific reserve 6,544 6,667 - 2,193 3,455 Specific reserve as % of impaired healthcare loans 99.3 % 100.0 %
- % 100.0 % 37.6 %
Net (charge-offs) recoveries $ - $ -
Total institutional$ 408,713 $ 429,543 $
406,492
The repayment of loans is a source of additional liquidity for the Company. The
following table sets forth the loans maturing within specific intervals at
Loan Maturity Schedule
March 31, 2020
Over one
One year year to five Over five
or less years years Total
Real estate:
Construction and land development $ 270,141 $ 197,995 $ 159,042 $ 627,178
Commercial 29,757 316,958 651,243 997,958
Residential 38,853 168,438 441,295 648,586
Commercial and industrial 70,535 424,807 86,256 581,598
Consumer and other 2,660 1,551 243 4,454
Total $ 411,946 $ 1,109,749 $ 1,338,079 $ 2,859,774
Fixed interest rate $ 119,827 $ 450,630 $ 448,928 $ 1,019,385
Variable interest rate 292,119 659,119 889,151 1,840,389
Total $ 411,946 $ 1,109,749 $ 1,338,079 $ 2,859,774
The information presented in the above table is based upon the contractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is subject to
review and credit approval, as well as modification of terms upon their
maturity. Consequently, management believes this treatment presents fairly the
maturity structure of the loan portfolio.
Allowance for Loan Losses (ALLL)
The Company maintains an ALLL that management believes is adequate to absorb the
probable incurred losses inherent in the Company's loan portfolio. The allowance
is increased by provisions for loan losses charged to earnings and is decreased
by loan charge-offs net of recoveries of prior period loan charge-offs. The
level of the allowance is determined on a quarterly
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basis, although management is engaged in monitoring the adequacy of the
allowance on a more frequent basis. In estimating the allowance balance, the
following factors are considered:
•past loan experience;
•the nature and volume of the portfolio;
•risks known about specific borrowers;
•underlying estimated values of collateral securing loans;
•current and anticipated economic conditions; and
•other factors which may affect the allowance for probable incurred losses.
The ALLL consists of two primary components: (1) a specific component which
relates to loans that are individually classified as impaired; and (2) a general
component which covers non-impaired loans and is based on historical loss
experience adjusted for current factors. The historical loss experience is
determined by portfolio segment and is based on a combination of the Company's
loss history and loss history from peer group data over the past three years.
This actual loss experience is supplemented with other economic factors based on
the risks present for each portfolio segment.
The following loan portfolio segments have been identified: (1) Construction and
land development loans; (2) Commercial real estate loans; (3) Residential real
estate loans; (4) Commercial and industrial loans; and (5) Consumer and other
loans. Management evaluates the risks associated with these segments based upon
specific characteristics associated with the loan segments. These risk
characteristics include, but are not limited to, the value of the underlying
collateral, adverse economic conditions and the borrower's cash flow. While the
total allowance consists of a specific portion and a general portion, both
portions of the allowance are available to provide for probable incurred loan
losses in the entire portfolio.
In the table below, the components, as discussed above, of the ALLL are shown at
March 31, 2020 and December 31, 2019 .
March 31, 2020 December 31, 2019 Increase (Decrease)
ALLL to % ALLL to %
HFI Loan ALLL Total Loans HFI Loan ALLL Total Loans Loan ALLL
Balance(1) Balance HFI Balance(1) Balance HFI Balance Balance
Non impaired loans $ 2,780,458 $ 31,587 1.14 % $ 2,730,684 $ 24,588 0.90 % $ 49,774 $ 6,999 24 bps
Acquired loans (2) 51,882 56 0.11 % 58,745 77 0.13 % (6,863) (21) (2) bps
Impaired loans 27,434 6,760 24.64 % 27,035 20,771 76.83 % 399 (14,011) (5,219) bps
Total loans $ 2,859,774 $ 38,403 1.34 % $ 2,816,464 $ 45,436 1.61 % $ 43,310 $ (7,033) (27) bps
(1) HFI loan balance is before net deferred loan fees and costs.
(2) Acquired loans are performing loans recorded at estimated fair value at the acquisition date. Based on the analysis performed by management as of
AtMarch 31, 2020 , the ALLL was$38,403 , compared to$45,436 atDecember 31, 2019 . The ALLL as a percentage of total loans HFI was 1.34% atMarch 31, 2020 and 1.61% atDecember 31, 2019 . As ofMarch 31, 2020 , the Company's total non-performing assets ("NPAs") were 0.72% of assets, or$27,434 , a decrease of approximately$255 fromDecember 31, 2019 . The NPA/ALLL coverage ratio was 1.40 atMarch 31, 2020 , a decrease of 24 basis points from the 1.64 coverage present atDecember 31, 2019 . Criticized and Classified Assets were$53,125 atMarch 31, 2020 , representing 1.86% of loans HFI, consistent with 1.86% of loans HFI atDecember 31, 2019 . Potential problem loans, which are not included in nonperforming assets, amounted to$20,260 , or 0.71% of total loans held for investment atMarch 31, 2020 , compared to$22,228 , or 0.79% of total loans held for investment atDecember 31, 2019 . Potential problem loans represent those loans where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is for substandard loans, which are still accruing interest and excluding the impact of substandard nonaccrual loans. 46
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The table below sets forth the activity in the ALLL for the periods presented.
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019 Beginning balance $ 45,436 $ 23,451 Loans charged-off: Residential real estate 8 15 Commercial & industrial 20,501 568 Consumer & other 21 70 Total loans charged-off 20,530 653 Recoveries on loans previously charged-off: Residential real estate 1 2 Commercial & industrial 468 - Consumer & other 6 2 Total loan recoveries 475 4 Net charge-offs (20,055) (649) Provision for loan losses charged to expense 13,022 5,055 Total allowance at end of period $ 38,403 $ 27,857 Total loans, gross, at end of period(1)$ 2,859,774 $ 2,810,905 Average gross loans(1)$ 2,838,437 $ 2,764,675 Allowance to total loans 1.34 % 0.99 % Net charge-offs (recoveries) to average loans, annualized 2.84 % 0.10 %
(1)Loan balances exclude loans held for sale
While no portion of the allowance is in any way restricted to any individual
loan or group of loans, and the entire allowance is available to absorb losses
from any and all loans, the following table summarizes the allocation of ALLL by
loan category and loans in each category as a percentage of total loans, for the
periods presented.
March 31, 2020 December 31, 2019
% of % of
Loan Segment to Loan Segment to
Amount Total Loans Amount Total Loans
Real estate loans:
Construction and land development $ 6,417 21.9 % $ 4,847 21.0 %
Commercial 9,018 34.9 8,113 35.3
Residential 4,767 22.7 4,462 22.8
Total real estate 20,202 79.5 17,422 79.1
Commercial and industrial 18,146 20.3 27,957 20.7
Consumer and other 55 0.2 57 0.2
$ 38,403 100.0 % $ 45,436 100.0 %
Nonperforming Assets
Non-performing loans consist of non-accrual loans and loans that are past due 90
days or more and still accruing interest. Non-performing assets consist of
non-performing loans plus foreclosed real estate. Loans are placed on
non-accrual status when they are past due 90 days and/or management believes the
borrower's financial condition, after giving consideration to economic
conditions and collection efforts, is such that collection of interest is
doubtful. When a loan is placed on non-accrual status, interest accruals cease,
and uncollected interest is reversed and charged against current income. The
interest on these loans is accounted for on the cash-basis, or cost-recovery
method, until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
The primary component of non-performing loans is non-accrual loans, which as of
March 31, 2020 totaled $27,434 . At March 31, 2020 , there were no loans past due
greater than 90 days and still accruing interest which is the other component of
non-performing loans. Loans past due greater than 90 days are placed on
non-accrual status, unless they are both well-secured and in the process of
collection.
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The table below summarizes non-performing loans and assets for the periods
presented.
March 31, December 31,
2020 2019
Non-accrual loans $ 27,434 $ 27,035
Past due loans 90 days or more and still accruing interest - 654
Total non-performing loans 27,434 27,689
Foreclosed real estate and repossessed assets - -
Total non-performing assets 27,434 27,689
Total non-performing loans as a percentage of total loans 0.96 % 0.98 %
Total non-performing assets as a percentage of total assets 0.72 % 0.71 %
Allowance for loan losses as a percentage of non-performing loans 140 %
164 %
As of March 31, 2020 , there were 30 loans on non-accrual status. The amount and
number are further delineated by loan segment and number of loans in the table
below.
Number of
Percentage of TotalNon-Accrual Non-Accrual
Total Amount Loans Loans
Commercial real estate $ 3,460 12.6 % 1
Residential real estate 3,255 11.9 11
Commercial & industrial 20,719 75.5 18
Total non-accrual loans $ 27,434 100.0 % 30
Investment Securities and Other Earning Assets
The investment securities portfolio is intended to provide the Company with
adequate liquidity and a source of stable income. The portfolio is structured
with minimal credit exposure to the Company and consists of securities
classified as AFS. All AFS securities are carried at fair value and may be used
for liquidity purposes should management deem it to be in the Company's best
interest. Securities AFS, consisting primarily of mortgage-backed securities,
totaled $543,225 at March 31, 2020 , compared to $652,132 at December 31, 2019 , a
decrease of $108,907 , or 16.7%. The decrease in AFS securities was primarily
attributed to security sales during the three months ended March 31, 2020 .
There were no HTM securities at March 31, 2020 , or December 31, 2019 .
The Company also had other investments of $24,844 and $24,802 at March 31, 2020
and December 31, 2019 , respectively, primarily consisting of capital stock in
the Federal Reserve and the Federal Home Loan Bank required as members of the
Federal Reserve Bank System ("FRB") and the Federal Home Loan Bank System
("FHLB"). The FHLB and FRB investments are "restricted" in that they can only be
sold back to the respective institutions or another member institution at par,
and are thus, not liquid, have no ready market or quoted market value, and are
carried at cost.
Bank Premises and Equipment
Bank premises and equipment totaled $48,470 at March 31, 2020 compared to
$12,141 at December 31, 2019 , an increase of $36,329 , due to the purchase of the
properties at Columbia Avenue and 120 9th Avenue locations in Franklin,
Tennessee, therefore ending the lease agreements by the Company on February 5,
2020 .
Deposits
At March 31, 2020 , total deposits were $3,137,471 , a decrease of $70,113 , or
8.8% annualized, compared to $3,207,584 at December 31, 2019 . Included in the
Company's funding strategy are brokered deposits, public funds deposits and
reciprocal deposits. Total brokered deposits decreased $97,866 , or 62.3%
annualized, to $534,375 at March 31, 2020 , when compared with $632,241 at
December 31, 2019 , which reflects the Company's strategy to reduce its
dependence on non-core funding. Public funds deposits decreased $58,734 , or
61.1% annualized, to $328,169 at March 31, 2020 when compared with $386,903 at
December 31, 2019 due to the Company's strategy to redirect some of the
Company's local government customers into the reciprocal account relationships,
thereby decreasing the Company's requirements to collateralize those public
funds deposits. As a result, reciprocal deposits increased $67,099 , or 56.0%
annualized, to $548,840 at March 31, 2020 , compared to $481,741 at December 31,
2019 .
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Time deposits, excluding brokered deposits and public funds, as of March 31,
2020 , amounted to $384,178 , compared to $399,258 as of December 31, 2019 , a
decrease of $15,080 , or 15.2% annualized.
The following table shows time deposits in denominations of $100 or more based
on time remaining until maturity:
March 31,
2020
Three months or less $ 70,103
Three through six months 57,377
Six through twelve months 82,817
Over twelve months 119,611
Total $ 329,908
Federal Funds Purchased and Repurchase Agreements
The Company had no federal funds purchased from correspondent banks or
repurchase agreements as of March 31, 2020 , and December 31, 2019 .
Federal Home Loan Bank Advances
The Company has established a line of credit with the FHLB of Cincinnati which
is secured by a blanket pledge of 1-4 family residential mortgages and home
equity lines of credit. At March 31, 2020 and at December 31, 2019 advances
totaled $135,000 and $155,000 , respectively, and the scheduled maturities and
interest rates of these advances were as follows:
Weighted
Scheduled Maturities Amount Average Rates
2020 $ 135,000 1.13 %
Subordinated Notes
At March 31, 2020 , the Company's subordinated notes, net of issuance costs,
totaled $58,916 compared with $58,872 at December 31, 2019 . For more information
related to the subordinated notes and the related issuance costs, please see
Note 12 of the consolidated financial statements.
Liquidity
Liquidity is defined as the ability to meet anticipated customer demands for
funds under credit commitments and deposit withdrawals at a reasonable cost and
on a timely basis.
Liquidity risk involves the risk of being unable to fund assets with the
appropriate duration and rate-based liabilities, as well as the risk of not
being able to meet unexpected cash needs. Liquidity planning and management are
necessary to ensure the ability to fund operations cost-effectively and to meet
current and future potential obligations such as loan commitments, lease
obligations, and unexpected deposit outflows. In this process, management
focuses on both assets and liabilities and on the manner in which they combine
to provide adequate liquidity to meet the Company's needs. Our source of funds
to pay interest on our March 2016 Subordinated Notes and June 2016 Subordinated
Notes is generally in the form of a dividend from the Bank to the Company, or
those payments may be serviced from cash balances held by the Company. The
Bank's ability to pay a dividend may be restricted due to regulatory
requirements as well as the Bank's future earnings and capital needs.
Funds are available from a number of basic banking activity sources including
the core deposit base, the repayment and maturity of loans, payments of
principal and interest as well as sales of investments classified as AFS, and
sales of brokered deposits. As of March 31, 2020 , $543,225 of the investment
securities portfolio was classified as AFS and is reported at fair value on the
consolidated balance sheet. Approximately $287,371 of the total $543,225
investment securities portfolio on hand at March 31, 2020 , was pledged to secure
public deposits and repurchase agreements. Other funding sources available
include repurchase agreements, federal funds purchased, and borrowings from the
Federal Home Loan Bank and the Federal Reserve Bank .
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Equity
As of March 31, 2020 , the Company's equity was $408,848 , as compared with
$410,426 as of December 31, 2019 . The $1,578 decrease in equity was mainly
driven by the Company's net loss of $1,148 and dividends paid of $893 in the
three months ended March 31, 2020 .
On January 23, 2019 , our board of directors announced they had authorized a
share repurchase program for up to $30,000 of our outstanding common stock. The
repurchase program expired on January 23, 2020 , and no additional shares were
purchased after December 31, 2019 .
Effects on Inflation and Changing Prices
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact on the
performance of a financial institution than the effects of general levels of
inflation. Although interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services, increases in
inflation generally have resulted in increased interest rates. In addition,
inflation affects financial institutions' increased cost of goods and services
purchased, the cost of salaries and benefits, occupancy expense, and similar
items. Inflation and related increases in interest rates generally decrease the
market value of investments and loans held and may adversely affect liquidity,
earnings, and shareholders' equity. Commercial and other loan originations and
refinancing tend to slow as interest rates increase, and can reduce the
Company's earnings from such activities.
Off Balance Sheet Arrangements
The Company generally does not have any off-balance sheet arrangements other
than unused lines of credit, outstanding standby letters of credit, and
outstanding mortgage loan commitments to customers in the ordinary course of
business. At March 31, 2020 , the Company had unused lines of credit of $738,189 ,
outstanding standby letters of credit of $53,263 , and outstanding mortgage loan
commitments of $156,421 .
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial data included in our selected historical consolidated
financial information are not measures of financial performance recognized by
GAAP. Our management uses these non-GAAP financial measures in its analysis of
our performance:
•"Common equity" is defined as total shareholders' equity at end of period less
the liquidation preference value of the preferred stock;
•"Tangible common equity" is common equity less goodwill and other intangible
assets;
•"Tangible book value per share" is defined as tangible common equity divided by
total common shares outstanding. This measure is important to investors
interested in changes from period-to-period in book value per share exclusive of
changes in intangible assets; and
•"Return on Average Tangible Common Equity" is defined as net income available
to common shareholders divided by average tangible common shareholders' equity.
We believe these non-GAAP financial measures provide useful information to
management and investors that is supplementary to our financial condition,
results of operations and cash flows computed in accordance with GAAP; however,
we acknowledge that our non-GAAP financial measures have a number of
limitations. As such, you should not view these disclosures as a substitute for
results determined in accordance with GAAP, and they are not necessarily
comparable to non-GAAP financial measures that other companies use.
The following reconciliation table provides a more detailed analysis of these
non-GAAP financial measures:
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