HOME BANCSHARES, INC. (CONWAY, AR) The following discussion should be read in conjunction with our Form 10-K, filed with theSecurities and Exchange Commission onFebruary 24, 2023 , which includes the audited financial statements for the year endedDecember 31, 2022 . Unless the context requires otherwise, the terms "Company," "us," "we," and "our" refer toHome BancShares, Inc. on a consolidated basis.
General
We are a bank holding company headquartered inConway, Arkansas , offering a broad array of financial services through our wholly-owned bank subsidiary,Centennial Bank (sometimes referred to as "Centennial" or the "Bank"). As ofMarch 31, 2023 , we had, on a consolidated basis, total assets of$22.52 billion , loans receivable, net of allowance for credit losses of$14.10 billion , total deposits of$17.45 billion , and stockholders' equity of$3.63 billion . We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income.Deposits and Federal Home Loan Bank ("FHLB") and other borrowed funds are our primary sources of funding. Our largest expenses are interest on our funding sources, salaries and related employee benefits and occupancy and equipment. We measure our performance by calculating our return on average common equity, return on average assets and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding adjustments such as merger and acquisition expenses and/or certain gains, losses and other non-interest income and expenses. Table 1: Key Financial Measures As of or
for the Three Months Ended March
31,
2023 2022
(Dollarsin thousands, except per share
data)
Total assets $ 22,518,255 $ 18,617,995
Loans receivable 14,386,634 10,052,714
Allowance for credit losses (287,169) (234,768)
Total deposits 17,445,466 14,580,934
Total stockholders' equity 3,630,885 2,686,703
Net income 102,962 64,892
Basic earnings per share 0.51 0.40
Diluted earnings per share 0.51 0.40
Book value per share 17.87 16.41
Tangible book value per share (non-GAAP)(1) 10.71 10.32
Annualized net interest margin - FTE 4.37% 3.21%
Efficiency ratio 44.80 46.15
Efficiency ratio, as adjusted (non-GAAP)(2) 43.42 47.33
Return on average assets 1.84 1.43
Return on average common equity 11.70 9.58
(1)See Table 19 for the non-GAAP tabular reconciliation.
(2)See Table 23 for the non-GAAP tabular reconciliation.
54--------------------------------------------------------------------------------
Table of Contents
Results of Operations for the Three Months Ended
Our net income increased$38.1 million , or 58.7%, to$103.0 million for the three-month period endedMarch 31, 2023 , from$64.9 million for the same period in 2022. On a diluted earnings per share basis, our earnings were$0.51 per share for the three-month period endedMarch 31, 2023 compared to$0.40 per share for the three-month period endedMarch 31, 2022 . The Company recorded a$1.2 million provision for credit losses for the quarter endedMarch 31, 2023 . However, the Company determined that a provision for unfunded commitments was not necessary as ofMarch 31, 2023 as the current level was considered adequate. During the three months endedMarch 31, 2023 , the Company recorded$3.5 million in recoveries on historic losses and an$11.4 million decrease in the fair value of marketable securities. Total interest income increased by$140.0 million , or 96.6%, and non-interest income increased by$3.5 million , or 11.4%. This was partially offset by a$56.6 million , or 411.4%, increase in total interest expense and a$37.7 million , or 49.1%, increase in non-interest expense. These fluctuations are primarily due to the acquisition ofHappy Bancshares, Inc. ("Happy"), which we completed onApril 1, 2022 , and the rising rate environment. The increase in interest income resulted from a$107.6 million , or 83.1%, increase in loan interest income, a$29.5 million , or 213.7%, increase in investment income and a$3.0 million , or 180.0%, increase in interest income on deposits at other banks. The increase in non-interest income was primarily due to a$4.3 million , or 747.4%, increase in trust fees, a$4.1 million , or 53.6%, increase in other services charges and fees, a$3.9 million , or 49.6%, increase in other income, a$3.7 million , or 60.3%, increase in service charges on deposit accounts, and a$2.1 million , or 300.3%, increase in dividends from FHLB, FRB, FNBB and other. These increases were partially offset by a$13.5 million , or 636.8%, decrease in the fair value adjustment for marketable securities resulting from an$11.4 million decrease in the fair value of marketable securities, and a$1.3 million , or 34.3%, decrease in mortgage lending income. Included within other income was$3.5 million in recoveries on historic losses. The increase in interest expense was primarily due to a$54.3 million , or 1,108.9%, increase in interest on deposits and a$4.3 million , or 230.1%, increase in interest on FHLB and other borrowed funds which was partially offset by a$2.8 million , or 40.0%, decrease in interest on subordinated debentures. The increase in non-interest expense was due to a$20.9 million , or 48.1%, increase in salaries and employee benefits, a$9.9 million , or 61.0%, increase in other operating expenses, a$5.8 million , or 63.5%, increase in occupancy and equipment and a$1.9 million , or 27.4%, increase in data processing expense, partially offset by a decrease of$863,000 in merger and acquisition expenses. Income tax expense increased by$9.9 million , or 49.5%, during the quarter due to an increase in net income. Our net interest margin increased from 3.21% for the three-month period endedMarch 31, 2022 to 4.37% for the three-month period endedMarch 31, 2023 . The yield on interest earning assets was 5.79% and 3.55% for the three months endedMarch 31, 2023 and 2022, respectively, as average interest earning assets increased from$16.77 billion to$20.06 billion . The increase in average interest earning assets is primarily due to a$4.54 billion increase in average loans receivable and a$1.82 billion increase in average investment securities, largely resulting from the acquisition of Happy, partially offset by a$3.07 billion decrease in average interest-bearing balances due from banks. For the three months endedMarch 31, 2023 and 2022, we recognized$3.2 million and$3.1 million , respectively, in total net accretion for acquired loans and deposits. We recognized$2.1 million in event interest income for the three months endedMarch 31, 2023 compared to$1.4 million for the three months endedMarch 31, 2022 which increased the net interest margin by one basis point. The overall increase in the net interest margin was due to an increase in interest income due to an increase in both average earning assets at higher yields, which was partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities at higher interest rates primarily as a result of the Happy acquisition and the current rising interest rate environment. Our efficiency ratio was 44.80% for the three months endedMarch 31, 2023 , compared to 46.15% for the same period in 2022. For the first quarter of 2023, our efficiency ratio, as adjusted (non-GAAP), was 43.42%, compared to 47.33% reported for the first quarter of 2022. (See Table 23 for the non-GAAP tabular reconciliation). Our annualized return on average assets was 1.84% for the three months endedMarch 31, 2023 , compared to 1.43% for the same period in 2022. (See Table 20 for the non-GAAP tabular reconciliation). Our annualized return on average common equity was 11.70% and 9.58% for the three months endedMarch 31, 2023 , and 2022, respectively. (See Table 21 for the non-GAAP tabular reconciliation). 55
--------------------------------------------------------------------------------
Table of Contents
Financial Condition as of and for the Period Ended
Our total assets as ofMarch 31, 2023 decreased$365.3 million to$22.52 billion from$22.88 billion reported as ofDecember 31, 2022 . The decrease in total assets is primarily due to$270.8 million decrease in investment securities resulting from paydowns and maturities during the first quarter of 2023. Cash and cash equivalents decreased$36.7 million , for the three months endedMarch 31, 2023 . Our loan portfolio balance decreased to$14.39 billion as ofMarch 31, 2023 from$14.41 billion atDecember 31, 2022 . The decrease in loans was primarily due to$94.6 million of organic loan decline from ourCentennial Commercial Finance Group franchise and$2.1 million in PPP loan decline, partially offset by$73.9 million organic loan growth in our remaining footprint. Total deposits decreased$493.3 million to$17.45 billion as ofMarch 31, 2023 from$17.94 billion as ofDecember 31, 2022 . The decrease in deposits was primarily due to the runoff of deposits in the normal course of business during the first quarter of 2023 as a result of the current interest rate environment. Stockholders' equity increased$104.5 million to$3.63 billion as ofMarch 31, 2023 , compared to$3.53 billion as ofDecember 31, 2022 . The$104.5 million increase in stockholders' equity is primarily associated with the$103.0 million in net income for the three months endedMarch 31, 2023 and the$49.2 million in other comprehensive income, partially offset by the$36.6 million of shareholder dividends paid and stock repurchases of$13.5 million in 2023. Our non-performing loans were$74.0 million , or 0.51% of total loans as ofMarch 31, 2023 , compared to$60.9 million , or 0.42% of total loans as ofDecember 31, 2022 . The allowance for credit losses as a percentage of non-performing loans decreased slightly to 388.23% as ofMarch 31, 2023 , from 475.99% as ofDecember 31, 2022 . Non-performing loans from ourArkansas franchise were$11.2 million atMarch 31, 2023 compared to$8.4 million as ofDecember 31, 2022 . Non-performing loans from ourFlorida franchise were$20.0 million atMarch 31, 2023 compared to$20.5 million as ofDecember 31, 2022 . Non-performing loans from ourTexas franchise were$26.9 million atMarch 31, 2023 compared to$22.2 million as ofDecember 31, 2022 . Non-performing loans from ourAlabama franchise were$390,000 atMarch 31, 2023 compared to$404,000 as ofDecember 31, 2022 . Non-performing loans from our Shore Premier Finance ("SPF") franchise were$2.1 million atMarch 31, 2023 compared to$2.3 million as ofDecember 31, 2022 . Non-performing loans from ourCentennial Commercial Finance Group ("CFG") franchise were$13.4 million atMarch 31, 2023 compared to$7.1 million as ofDecember 31, 2022 . As ofMarch 31, 2023 , our non-performing assets increased to$74.5 million , or 0.33% of total assets, from$61.5 million , or 0.27% of total assets, as ofDecember 31, 2022 . Non-performing assets from ourArkansas franchise were$11.2 million atMarch 31, 2023 compared to$8.5 million as ofDecember 31, 2022 . Non-performing assets from ourFlorida franchise were$20.2 million atMarch 31, 2023 compared to$20.8 million as ofDecember 31, 2022 . Non-performing assets from ourTexas franchise were$27.1 million atMarch 31, 2023 compared to$22.4 million as ofDecember 31, 2022 . Non-performing assets from ourAlabama franchise were$390,000 atMarch 31, 2023 compared to$404,000 as ofDecember 31, 2022 . Non-performing assets from our SPF franchise were$2.1 million atMarch 31, 2023 compared to$2.3 million as ofDecember 31, 2022 . Non-performing assets from our CFG franchise were$13.4 million atMarch 31, 2023 compared to$7.1 million as ofDecember 31, 2022 . The$13.4 million balance of non-accrual loans for our Centennial CFG market consists of four loans that are assessed for credit risk by theFederal Reserve under the Shared National Credit Program. Due to the condition of the four loans, partial charge-offs for a total of$2.0 million were taken on these loans during the three months endedMarch 31, 2023 . The loans are not current on either principal or interest, and we have reversed any interest that had accrued subsequent to the non-accrual date designated by theFederal Reserve . Any interest payments that are received will be applied to the principal balance. 56
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
Overview. We prepare our consolidated financial statements based on the
selection of certain accounting policies, generally accepted accounting
principles and customary practices in the banking industry. These policies, in
certain areas, require us to make significant estimates and assumptions. Our
accounting policies are described in detail in the notes to our consolidated
financial statements included as part of this document.
We consider a policy critical if (i) the accounting estimate requires
assumptions about matters that are highly uncertain at the time of the
accounting estimate; and (ii) different estimates that could reasonably have
been used in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material impact
on our financial statements. Using these criteria, we believe that the
accounting policies most critical to us are those associated with our lending
practices, including revenue recognition and the accounting for the allowance
for credit losses, foreclosed assets, investments, intangible assets, income
taxes and stock options.
Credit Losses. We account for credit losses in accordance with ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments ("ASC 326"). The measurement of expected credit losses
under the CECL methodology is applicable to financial assets measured at
amortized cost, including loan receivables and held-to-maturity debt securities.
It also applies to off-balance sheet credit exposures not accounted for as
insurance (loan commitments, standby letters of credits, financial guarantees,
and other similar instruments) and net investments in leases recognized by a
lessor in accordance with Topic 842 on leases.
Investments - Available-for-sale. Securities available-for-sale ("AFS") are
reported at fair value with unrealized holding gains and losses reported as a
separate component of stockholders' equity and other comprehensive income
(loss), net of taxes. Securities that are held as available-for-sale are used as
a part of our asset/liability management strategy. Securities that may be sold
in response to interest rate changes, changes in prepayment risk, the need to
increase regulatory capital, and other similar factors are classified as
available-for-sale. The Company evaluates all securities quarterly to determine
if any securities in a loss position require a provision for credit losses in
accordance with ASC 326. The Company first assesses whether it intends to sell
or is more likely than not that the Company will be required to sell the
security before recovery of its amortized cost basis. If either of the criteria
regarding intent or requirement to sell is met, the security's amortized cost
basis is written down to fair value through income. For securities that do not
meet this criteria, the Company evaluates whether the decline in fair value has
resulted from credit losses or other factors. In making this assessment, the
Company considers the extent to which fair value is less than amortized cost,
and changes to the rating of the security by a rating agency, and adverse
conditions specifically related to the security, among other factors. If this
assessment indicates that a credit loss exists, the present value of cash flows
expected to be collected from the security are compared to the amortized cost
basis of the security. If the present value of cash flows expected to be
collected is less than the amortized cost basis, a credit loss exists and an
allowance for credit losses is recorded for the credit loss, limited by the
amount that the fair value is less than the amortized cost basis. Any impairment
that has not been recorded through an allowance for credit losses is recognized
in other comprehensive income. The Company has made the election to exclude
accrued interest receivable on AFS securities from the estimate of credit losses
and report accrued interest separately on the consolidated balance sheets.
Changes in the allowance for credit losses are recorded as provision for (or
reversal of) credit loss expense. Losses are charged against the allowance when
management believes the uncollectability of a security is confirmed or when
either of the criteria regarding intent or requirement to sell is met.
Investments - Held-to-Maturity. Debt securities held-to-maturity ("HTM"), which
include any security for which we have the positive intent and ability to hold
until maturity, are reported at historical cost adjusted for amortization of
premiums and accretion of discounts. Premiums and discounts are
amortized/accreted to the call date to interest income using the constant
effective yield method over the estimated life of the security. The Company
evaluates all securities quarterly to determine if any securities in a loss
position require a provision for credit losses in accordance with ASC 326,
Measurement of Credit Losses on Financial Instruments. The Company measures
expected credit losses on HTM securities on a collective basis by major security
type, with each type sharing similar risk characteristics. The estimate of
expected credit losses considers historical credit loss information that is
adjusted for current conditions and reasonable and supportable forecasts. The
Company has made the election to exclude accrued interest receivable on HTM
securities from the estimate of credit losses and report accrued interest
separately on the consolidated balance sheets. Changes in the allowance for
credit losses are recorded as provision for (or reversal of) credit loss
expense. Losses are charged against the allowance when management believes the
uncollectability of a security is confirmed.
Loans Receivable and Allowance for Credit Losses. Except for loans acquired
during our acquisitions, substantially all of our loans receivable are reported
at their outstanding principal balance adjusted for any charge-offs, as it is
management's intent to hold them for the foreseeable future or until maturity or
payoff, except for mortgage loans held for sale. Interest income on loans is
accrued over the term of the loans based on the principal balance outstanding.
57--------------------------------------------------------------------------------
Table of Contents
The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed and expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price indices and rental vacancy rate index.
The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:
•1-4 family construction
•All other construction
•1-4 family revolving home equity lines of credit ("HELOC") & junior liens
•1-4 family senior liens
•Multifamily
•Owner occupies commercial real estate
•Non-owner occupied commercial real estate
•Commercial & industrial, agricultural, non-depository financial institutions,
purchase/carry securities, other
•Consumer auto
•Other consumer
•Other consumer - SPF
Loans that do not share risk characteristics are evaluated on an individual
basis. For these loans, excluding assisted living loans which are evaluated
using a market price valuation methodology, where the Company has determined
that foreclosure of the collateral is probable, or where the borrower is
experiencing financial difficulty and the Company expects repayment of the loan
to be provided substantially through the operation or sale of the collateral,
the allowance for credit losses is measured based on the difference between the
fair value of the collateral, net of estimated costs to sell, and the amortized
cost basis of the loan as of the measurement date. When repayment is expected to
be from the operation of the collateral, expected credit losses are calculated
as the amount by which the amortized cost basis of the loan exceeds the present
value of expected cash flows from the operation of the collateral. The allowance
for credit losses may be zero if the fair value of the collateral at the
measurement date exceeds the amortized cost basis of the loan, net of estimated
costs to sell.
For loans individually analyzed for credit losses for which a specific reserve
has been recorded, non-accrual loans, loans past due 90 days or more and
restructured loans made to borrowers experiencing financial difficulty (which we
define as "impaired" loans), an allowance is established when the discounted
cash flows, collateral value or observable market price of the impaired loan is
lower than the carrying value of that loan. For loans that are not considered to
be collateral dependent, an allowance is recorded based on the loss rate for the
respective pool within the collective evaluation if a specific reserve is not
recorded.
Expected credit losses are estimated over the contractual term of the loans,
adjusted for expected prepayments when appropriate. The contractual term
excludes expected extensions, renewals, and modifications unless either of the
following applies:
•Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.
•The extension or renewal options are included in the original or modified
contract at the reporting date and are not unconditionally cancellable by the
Company.
58--------------------------------------------------------------------------------
Table of Contents
Management qualitatively adjusts model results for risk factors that are not
considered within our modeling processes but are nonetheless relevant in
assessing the expected credit losses within our loan pools. These qualitative
factors ("Q-Factors") and other qualitative adjustments may increase or decrease
management's estimate of expected credit losses by a calculated percentage or
amount based upon the estimated level of risk. The various risks that may be
considered in making Q-Factor and other qualitative adjustments include, among
other things, the impact of (i) changes in lending policies, procedures and
strategies; (ii) changes in nature and volume of the portfolio; (iii) staff
experience; (iv) changes in volume and trends in classified loans, delinquencies
and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral
values; (vii) external factors such as competition, legal and regulatory
environment; (viii) changes in the quality of the loan review system; and (ix)
economic conditions.
Loans are placed on non-accrual status when management believes that the
borrower's financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of interest
is doubtful, or generally when loans are 90 days or more past due. Loans are
charged against the allowance for credit losses when management believes that
the collectability of the principal is unlikely. Accrued interest related to
non-accrual loans is generally charged against the allowance for credit losses
when accrued in prior years and reversed from interest income if accrued in the
current year. Interest income on non-accrual loans may be recognized to the
extent cash payments are received, although the majority of payments received
are usually applied to principal. Non-accrual loans are generally returned to
accrual status when principal and interest payments are less than 90 days past
due, the customer has made required payments for at least six months, and we
reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under
ASC Topic 805, Business Combinations, which requires the use of the acquisition
method of accounting. All identifiable assets acquired, including loans, and
liabilities assumed are recorded at fair value. In accordance with ASC 326, the
Company records both a discount and an allowance for credit losses on acquired
loans. All purchased loans are recorded at fair value in accordance with the
fair value methodology prescribed in FASB ASC Topic 820, Fair Value
Measurements. The fair value estimates associated with the loans include
estimates related to expected prepayments and the amount and timing of
undiscounted expected principal, interest and other cash flows.
The Company has purchased loans, some of which have experienced more than
insignificant credit deterioration since origination. Purchase credit
deteriorated ("PCD") loans are recorded at the amount paid. An allowance for
credit losses is determined using the same methodology as other loans. The sum
of the loan's purchase price and allowance for credit losses becomes its initial
amortized cost basis. The difference between the initial amortized cost basis
and the par value of the loan is a noncredit discount or premium, which is
amortized into interest income over the life of the loan. Subsequent changes to
the allowance for credit losses are recorded through the provision for credit
loss.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company
estimates expected credit losses over the contractual period in which the
Company is exposed to credit risk via a contractual obligation to extend credit
unless that obligation is unconditionally cancellable by the Company. The
allowance for credit losses on off-balance sheet credit exposures is adjusted as
a provision for credit loss expense. The estimate includes consideration of the
likelihood that funding will occur and an estimate of expected credit losses on
commitments expected to be funded over its estimated life.
Intangible Assets. Intangible assets consist of goodwill and core deposit
intangibles. Goodwill represents the excess purchase price over the fair value
of net assets acquired in business acquisitions. The core deposit intangible
represents the excess intangible value of acquired deposit customer
relationships as determined by valuation specialists. The core deposit
intangibles are being amortized over 48 months to 121 months on a straight-line
basis. Goodwill is not amortized but rather is evaluated for impairment on at
least an annual basis. We perform an annual impairment test of goodwill and core
deposit intangibles as required by FASB ASC 350, Intangibles - Goodwill and
Other, in the fourth quarter or more often if events and circumstances indicate
there may be an impairment.
Income Taxes. We account for income taxes in accordance with income tax
accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance
results in two components of income tax expense: current and deferred. Current
income tax expense reflects taxes to be paid or refunded for the current period
by applying the provisions of the enacted tax law to the taxable income or
excess of deductions over revenues. We determine deferred income taxes using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is based on the tax effects of the differences between the
book and tax basis of assets and liabilities, and enacted changes in tax rates
and laws are recognized in the period in which they occur.
59--------------------------------------------------------------------------------
Table of Contents
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term "more likely than not" means a likelihood of more than 50 percent; the terms "examined" and "upon examination" also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management's judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Both we and our subsidiary file consolidated tax returns. Our subsidiary provides for income taxes on a separate return basis, and remits to us amounts determined to be currently payable.
Stock Compensation. In accordance with FASB ASC 718, Compensation - Stock Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the fair value of each option award is estimated on the date of grant. We recognize compensation expense for the grant-date fair value of the option award over the vesting period of the award. Acquisitions
Acquisition of
OnApril 1, 2022 , the Company completed the acquisition ofHappy Bancshares, Inc. ("Happy"), and mergedHappy State Bank intoCentennial Bank . The Company issued approximately 42.4 million shares of its common stock valued at approximately$958.8 million as ofApril 1, 2022 . In addition, the holders of certain Happy stock-based awards received approximately$3.7 million in cash in cancellation of such awards, for a total transaction value of approximately$962.5 million . Including the purchase accounting adjustments, as of the acquisition date, Happy had approximately$6.69 billion in total assets,$3.65 billion in loans and$5.86 billion in customer deposits. Happy formerly operated its banking business from 62 locations inTexas .
For further discussion of the acquisition, see Note 2 "Business Combinations" to the Condensed Notes to Consolidated Financial Statements.
Acquisition of Marine Portfolio
OnFebruary 4, 2022 , the Company completed the purchase of the performing marine loan portfolio ofUtah -basedLendingClub Bank ("LendingClub"). Under the terms of the purchase agreement with LendingClub, the Company acquired approximately$242.2 million of yacht loans. This portfolio of loans is housed within the Company's Shore Premier Finance division, which is responsible for servicing the acquired loan portfolio and originating new loan production. We will continue evaluating all types of potential bank acquisitions, which may includeFDIC -assisted acquisitions as opportunities arise, to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.
Branches
As opportunities arise, we will continue to open new (commonly referred to as de novo) branches in our current markets and in other attractive market areas.
As ofMarch 31, 2023 , we had 223 branch locations. There were 76 branches inArkansas , 78 branches inFlorida , 63 branches inTexas , five branches inAlabama and one branch inNew York City . 60
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
For the three months ended
Our net income increased$38.1 million , or 58.7%, to$103.0 million for the three-month period endedMarch 31, 2023 , from$64.9 million for the same period in 2022. On a diluted earnings per share basis, our earnings were$0.51 per share for the three-month period endedMarch 31, 2023 compared to$0.40 per share for the three-month period endedMarch 31, 2022 . The Company recorded a$1.2 million provision for credit losses on loans for the quarter endedMarch 31, 2023 . However, the Company determined that a provision for unfunded commitments was not necessary as ofMarch 31, 2023 as the current level was considered adequate. During the three months endedMarch 31, 2023 , the Company recorded$3.5 million in recoveries on historic losses and an$11.4 million decrease in the fair value of marketable securities.
Net Interest Income
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (24.6735% for 2023 and 26.135% for 2022). TheFederal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. TheFederal Reserve increased the target rate seven times during 2022. First, onMarch 16, 2022 , the target rate was increased to 0.25% to 0.50%. Second, onMay 4, 2022 , the target rate was increased to 0.75% to 1.00%. Third, onJune 15, 2022 , the target rate was increased to 1.50% to 1.75%. Fourth, onJuly 27, 2022 , the target rate was increased to 2.25% to 2.50%. Fifth, onSeptember 21, 2022 , the target rate was increased to 3.00% to 3.25%. Sixth, onNovember 2, 2022 , the target rate was increased to 3.75% to 4.00%. Seventh, onDecember 14, 2022 , the target rate was increased to 4.25% to 4.50%. TheFederal Reserve increased the target rate twice during the first quarter of 2023. First, onFebruary 1, 2023 , the target rate was increased to 4.50% to 4.75%, and second, onMarch 22, 2023 , the target rate was increased to 4.75% to 5.00%. Our net interest margin increased from 3.21% for the three-month period endedMarch 31, 2022 to 4.37% for the three-month period endedMarch 31, 2023 . The yield on interest earning assets was 5.79% and 3.55% for the three months endedMarch 31, 2023 and 2022, respectively, as average interest earning assets increased from$16.77 billion to$20.06 billion . The increase in average interest earning assets is primarily due to a$4.54 billion increase in average loans receivable and a$1.82 billion increase in average investment securities, largely resulting from the acquisition of Happy, partially offset by a$3.07 billion decrease in average interest-bearing balances due from banks. For the three months endedMarch 31, 2023 and 2022, we recognized$3.2 million and$3.1 million , respectively, in total net accretion for acquired loans and deposits. We recognized$2.1 million in event interest income for the three months endedMarch 31, 2023 compared to$1.4 million for the three months endedMarch 31, 2022 which increased the net interest margin by one basis point. The overall increase in the net interest margin was due to an increase in interest income due to an increase in both average earning assets at higher yields, which was partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities at higher interest rates primarily as a result of the Happy acquisition and the current rising interest rate environment. Net interest income on a fully taxable equivalent basis increased$83.3 million , or 62.7%, to$216.2 million for the three-month period endedMarch 31, 2023 , from$132.9 million for the same period in 2022. This increase in net interest income for the three-month period endedMarch 31, 2023 was the result of a$139.9 million increase in interest income, partially offset by a$56.6 million increase in interest expense, on a fully taxable equivalent basis. The$139.9 million increase in interest income was primarily the result of the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The increase in earning assets resulted in an increase in interest income of approximately$76.5 million , and the higher yield on earning assets resulted in an increase in interest income of approximately$63.5 million . The$56.6 million increase in interest expense is primarily the result of the increasing interest rate environment as well as the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022. The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately$55.2 million , and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately$1.4 million . 61
--------------------------------------------------------------------------------
Table of Contents
Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three months endedMarch 31, 2023 and 2022, as well as changes in fully taxable equivalent net interest margin for the three months endedMarch 31, 2023 compared to the same period in 2022. Table 2: Analysis of Net Interest Income
Three Months Ended
2023 2022
(Dollars in thousands)
Interest income $ 284,939 $ 144,903
Fully taxable equivalent adjustment 1,628 1,738
Interest income - fully taxable equivalent 286,567 146,641
Interest expense 70,344 13,755
Net interest income - fully taxable equivalent $ 216,223 $ 132,886
Yield on earning assets - fully taxable equivalent 5.79 % 3.55 %
Cost of interest-bearing liabilities 2.06 0.49
Net interest spread - fully taxable equivalent 3.73 3.06
Net interest margin - fully taxable equivalent 4.37 3.21
Table 3: Changes in Fully Taxable Equivalent Net Interest Margin
Three Months
Ended March 31,
2023 vs. 2022
(In thousands)
Increase in interest income due to change in earning assets $ 76,466
Increase in interest income due to change in earning asset yields 63,460
Increase in interest expense due to change in interest-bearing liabilities
(1,355)
Increase in interest expense due to change in interest rates paid on interest-bearing liabilities
(55,234)
Increase in net interest income $ 83,337
62--------------------------------------------------------------------------------
Table of Contents
Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three months endedMarch 31, 2023 and 2022, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans. Table 4: Average Balance Sheets and Net Interest Income Analysis Three Months Ended March 31, 2023 2022 Average Income / Yield / Average Income / Yield / Balance Expense Rate Balance Expense Rate (Dollars in thousands) ASSETS Earnings assets Interest-bearing balances due from banks$ 426,051 $ 4,685 4.46 %$ 3,497,894 $ 1,673 0.19 % Federal funds sold 474 6 5.13 1,751 1 0.23 Investment securities - taxable 3,867,737 35,288 3.70 2,486,401 9,080
1.48
Investment securities - non-taxable 1,289,564 9,482 2.98 850,722 6,284 3.00 Loans receivable 14,474,072 237,106 6.64 9,937,993 129,603 5.29 Total interest-earning assets 20,057,898 286,567 5.79 % 16,774,761 146,641 3.55 % Non-earning assets 2,637,957 1,618,314 Total assets$ 22,695,855 $ 18,393,075 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Interest-bearing liabilities Savings and interest-bearing transaction accounts$ 11,579,329 $ 54,857 1.92 %$ 9,363,793 3,873 0.17 % Time deposits 1,072,094 4,305 1.63 854,593 1,021 0.48 Total interest-bearing deposits 12,651,423 59,162 1.90 10,218,386 4,894 0.19 Federal funds purchased - - - - - - Securities sold under agreement to repurchase 134,934 868 2.61 137,565 108
0.32
FHLB and other borrowed funds 651,111 6,190 3.86 400,000 1,875 1.90 Subordinated debentures 440,346 4,124 3.80 611,888 6,878 4.56 Total interest-bearing liabilities 13,877,814 70,344 2.06 % 11,367,839 13,755 0.49 % Non-interest-bearing liabilities Non-interest-bearing deposits 5,043,219 4,155,894 Other liabilities 205,230 121,362 Total liabilities 19,126,263 15,645,095 Stockholders' equity 3,569,592 2,747,980 Total liabilities and stockholders' equity$ 22,695,855 $ 18,393,075 Net interest spread 3.73 % 3.06 % Net interest income and margin$ 216,223 4.37 %$ 132,886 3.21 % 63
--------------------------------------------------------------------------------
Table of Contents
Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three months endedMarch 31, 2023 compared to the same period in 2022, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume. Table 5: Volume/Rate Analysis
Three Months Ended
2023 over 2022
Yield /
Volume Rate Total
(In thousands)
(Decrease) increase in:
Interest income:
Interest-bearing balances due from banks $ (2,710) $ 5,722 $ 3,012
Federal funds sold (1) 6 5
Investment securities - taxable 7,089 19,119 26,208
Investment securities - non-taxable 3,227 (29) 3,198
Loans receivable 68,861 38,642 107,503
Total interest income 76,466 63,460 139,926
Interest expense:
Interest-bearing transaction and savings deposits 1,128 49,856 50,984
Time deposits 320 2,964 3,284
Federal funds purchased - - -
Securities sold under agreement to repurchase (2) 762 760
FHLB borrowed funds 1,636 2,679 4,315
Subordinated debentures (1,727) (1,027) (2,754)
Total interest expense 1,355 55,234 56,589
Increase (decrease) in net interest income $ 75,111 $ 8,226 $ 83,337 Provision for Credit Losses
Credit Loss Expense: During the period ended
Net charge-offs to average total loans was 0.10% for the three months ended
Loans. Management estimates the allowance balance using relevant available
information, from internal and external sources, relating to past events,
current conditions, and reasonable and supportable forecasts. Historical credit
loss experience provides the basis for the estimation of expected credit losses.
Adjustments to historical loss information are made for differences in current
loan-specific risk characteristics such as differences in underwriting
standards, portfolio mix, delinquency level, or term as well as for changes in
environmental conditions, such as changes in the national unemployment rate,
gross domestic product, national retail sales index, housing price indices and
rental vacancy rate index.
Acquired loans. In accordance with ASC 326, the Company records both a discount
and an allowance for credit losses on acquired loans. This is commonly referred
to as "double accounting" (or "double count").
64--------------------------------------------------------------------------------
Table of Contents
The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:
•1-4 family construction •All other construction •1-4 family revolving HELOC & junior liens •1-4 family senior liens •Multifamily •Owner occupied commercial real estate •Non-owner occupied commercial real estate •Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other •Consumer auto •Other consumer •Other consumer - SPF The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans evaluated individually that are considered to be collateral dependent are not included in the collective evaluation. For those loans that are classified as collateral dependent, an allowance is established when the discounted cash flows, collateral value or observable market price of the collateral dependent loan is lower than the carrying value of that loan. For loans for which a specific reserve is not recorded, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded. Investments - Available-for-sale: The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Investments - Held-to-Maturity. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed. AtMarch 31, 2023 , the Company determined that the allowance for credit losses of$842,000 was adequate for the available-for-sale investment portfolio, and the$2.0 million allowance for credit losses for the held-to-maturity portfolio was also considered adequate. No additional provision for credit losses was considered necessary for the portfolio.
Non-Interest Income
Total non-interest income was$34.2 million for the three months endedMarch 31, 2023 , compared to$30.7 million for the same period in 2022. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending income, insurance commissions, increase in cash value of life insurance, fair value adjustment for marketable securities and dividends. 65
--------------------------------------------------------------------------------
Table of Contents
Table 6 measures the various components of our non-interest income for the three
months ended
Table 6: Non-Interest Income
Three Months Ended March 31, 2023 Change
2023 2022 from 2022
(Dollars in thousands)
Service charges on deposit accounts $ 9,842 $ 6,140 $ 3,702 60.3 %
Other service charges and fees 11,875 7,733 4,142 53.6
Trust fees 4,864 574 4,290 747.4
Mortgage lending income 2,571 3,916 (1,345) (34.3)
Insurance commissions 526 480 46 9.6
Increase in cash value of life insurance 1,104 492 612 124.4
Dividends from FHLB, FRB, FNBB & other 2,794 698 2,096 300.3
Gain on sale of SBA loans 139 95 44 46.3
Gain on sale of branches, equipment and other assets,
net 7 16 (9) (56.3)
Gain on OREO, net - 478 (478) (100.0)
Gain on securities, net - - - 0.0
Fair value adjustment for marketable securities (11,408) 2,125 (13,533) (636.8)
Other income 11,850 7,922 3,928 49.6
Total non-interest income $ 34,164 $ 30,669 $ 3,495 11.4 %
Non-interest income increased $3.5 million , or 11.4%, to $34.2 million for the
three months ended March 31, 2023 from $30.7 million for the same period in
2022. The primary factors that resulted in this increase were the increases in
service charges on deposit accounts, trust fees, other service charges and fees
and other income. Other factors were changes related to increase in cash value
of life insurance and dividends from FHLB, FRB, FNBB & other, partially offset
by decreases in mortgage lending income and the fair value adjustment for
marketable securities.
Additional details for the three months ended
•The$3.7 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees and service charge fees related to the acquisition of Happy.
•The
•The
•The$1.3 million decrease in mortgage lending income is primarily related to a decrease in volume of secondary market loans from the higher volume of loans during 2022. The decrease in volume is due to the increase in interest rates.
•The
•The
•The
•The$3.9 million increase in other income is primarily due to$3.8 million of income for equity method investments and a$1.1 million increase in rental income related to the acquisition of Happy partially offset by a$1.2 million decrease in recoveries on historic losses. 66
--------------------------------------------------------------------------------
Table of Contents
Non-Interest Expense
Non-interest expense primarily consists of salaries and employee benefits,
occupancy and equipment, data processing, and other expenses such as
advertising, merger and acquisition expenses, amortization of intangibles,
electronic banking expense,
Table 7 below sets forth a summary of non-interest expense for the three months
ended
Table 7: Non-Interest Expense
Three Months Ended March 31, 2023 Change
2023 2022 from 2022
(Dollars in thousands)
Salaries and employee benefits $ 64,490 $ 43,551 $ 20,939 48.1 %
Occupancy and equipment 14,952 9,144 5,808 63.5
Data processing expense 8,968 7,039 1,929 27.4
Merger and acquisition expenses - 863 (863) (100.0)
Other operating expenses:
Advertising 2,231 1,266 965 76.2
Amortization of intangibles 2,477 1,421 1,056 74.3
Electronic banking expense 3,330 2,538 792 31.2
Directors' fees 460 404 56 13.9
Due from bank service charges 273 270 3 1.1
FDIC and state assessment 3,500 1,668 1,832 109.8
Insurance 889 770 119 15.5
Legal and accounting 1,088 797 291 36.5
Other professional fees 2,284 1,609 675 42.0
Operating supplies 738 754 (16) (2.1)
Postage 501 306 195 63.7
Telephone 528 337 191 56.7
Other expense 7,935 4,159 3,776 90.8
Total non-interest expense $ 114,644 $ 76,896 $ 37,748 49.1 %
Non-interest expense increased $37.7 million , or 49.1%, to $114.6 million for
the three months ended March 31, 2023 from $76.9 million for the same period in
2022. The primary factor that resulted in this increase was the increase in
salaries and employee benefits expense. Other factors were changes related to
occupancy and equipment, data processing expense, advertising expenses,
amortization of intangibles, electronic banking expenses, FDIC and state
assessment expense, other professional fees and other expenses partially offset
by the change in merger and acquisition expenses.
Additional details for the three months ended
•The
•The$5.8 million increase in occupancy and equipment expenses is primarily due to increases in depreciation on buildings, machinery and equipment; utility expenses; lease expense; equipment maintenance and repairs; janitorial expenses; property taxes and other occupancy expenses related to the acquisition of Happy.
•The
•The$863,000 decrease in merger and acquisition expense is due to the costs associated with the acquisition of Happy being incurred during the first and second quarters of 2022. 67
--------------------------------------------------------------------------------
Table of Contents
•The
•The
•The$792,000 million increase in electronic banking expense is due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy. •The$1.8 million increase inFDIC and state assessment expense is primarily due to a two basis-point increase in assessment rate in the first quarter of 2023 implemented on large financial institutions to increase theFDIC reserves and the acquisition of Happy.
•The
•The
Income Taxes
Income tax expense increased$9.9 million , or 49.5%, to$30.0 million for the three-month period endedMarch 31, 2023 , from$20.0 million for the same period in 2022. The effective income tax rate was 22.54% for the three months endedMarch 31, 2023 , compared to 23.59% for the same periods in 2022. The marginal tax rate was 24.6735% and 26.135% 2023 and 2022, respectively.
Financial Condition as of and for the Period Ended
Our total assets as ofMarch 31, 2023 decreased$365.3 million to$22.52 billion from$22.88 billion reported as ofDecember 31, 2022 . The decrease in total assets is primarily due to$270.8 million decrease in investment securities resulting from paydowns and maturities during the first quarter of 2023. Cash and cash equivalents decreased$36.7 million , for the three months endedMarch 31, 2023 . Our loan portfolio balance decreased to$14.39 billion as ofMarch 31, 2023 from$14.41 billion atDecember 31, 2022 . The decrease in loans was primarily due to$94.6 million of organic loan decline from ourCentennial Commercial Finance Group franchise and$2.1 million in PPP loan decline, partially offset by$73.9 million organic loan growth in our remaining footprint. Total deposits decreased$493.3 million to$17.45 billion as ofMarch 31, 2023 from$17.94 billion as ofDecember 31, 2022 . The decrease in deposits was primarily due to the runoff of deposits in the normal course of business during the first quarter of 2023 as a result of the current interest rate environment. Stockholders' equity increased$104.5 million to$3.63 billion as ofMarch 31, 2023 , compared to$3.53 billion as ofDecember 31, 2022 . The$104.5 million increase in stockholders' equity is primarily associated with the$103.0 million in net income for the three months endedMarch 31, 2023 and the$49.2 million in other comprehensive income, partially offset by the$36.6 million of shareholder dividends paid and stock repurchases of$13.5 million in 2023. Loan Portfolio Loans Receivable Our loan portfolio averaged$14.47 billion and$9.94 billion during the three months endedMarch 31, 2023 and 2022, respectively. Loans receivable were$14.39 billion and$14.41 billion as ofMarch 31, 2023 andDecember 31, 2022 , respectively. FromDecember 31, 2022 toMarch 31, 2023 , the Company experienced a decline of approximately$22.8 million in loans. The decrease in loans was primarily due$94.6 million of organic loan decline from ourCentennial Commercial Finance Group franchise and$2.1 million in PPP loan decline partially offset by$73.9 million organic loan growth in our remaining footprint. As ofMarch 31, 2023 , the Company had$5.3 million of PPP loans. The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises inArkansas ,Florida ,Texas ,Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas ofArkansas ,Florida ,Texas ,Alabama andNew York . Loans receivable were approximately$3.17 billion ,$3.90 billion ,$3.70 billion ,$165.3 million ,$1.27 billion and$2.18 billion as ofMarch 31, 2023 inArkansas ,Florida ,Texas ,Alabama , SPF and Centennial CFG, respectively. As ofMarch 31, 2023 , we had approximately$747.1 million of construction/land development loans which were collateralized by land. This consisted of approximately$81.6 million for raw land and approximately$665.5 million for land with commercial and/or residential lots. 68
--------------------------------------------------------------------------------
Table of Contents
Table 8 presents our loans receivable balances by category as ofMarch 31, 2023 andDecember 31, 2022 . Table 8: Loans ReceivableMarch 31, 2023 December 31, 2022 (In thousands) Real estate: Commercial real estate loans:
Non-farm/non-residential
Construction/land development 2,160,514 2,135,266
Agricultural 342,814 346,811
Residential real estate loans:
Residential 1-4 family 1,748,231 1,748,551
Multifamily residential 637,633
578,052
Total real estate 10,413,317 10,440,743
Consumer 1,173,325 1,149,896
Commercial and industrial 2,368,428 2,349,263
Agricultural 250,851 285,235
Other 180,713 184,343
Total loans receivable $ 14,386,634 $ 14,409,480
Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized (where defined) over a 15 to 30-year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower's liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis. As ofMarch 31, 2023 , commercial real estate loans totaled$8.03 billion , or 55.8%, of loans receivable, as compared to$8.11 billion , or 56.3%, of loans receivable, as ofDecember 31, 2022 . Commercial real estate loans originated in ourArkansas ,Florida ,Texas ,Alabama , SPF and Centennial CFG markets were$2.00 billion ,$2.45 billion ,$2.19 billion ,$74.6 million , zero and$1.32 billion atMarch 31, 2023 , respectively. Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 45.8% and 46.7% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as ofMarch 31, 2023 , with the remaining 7.5% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower's ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio. As ofMarch 31, 2023 , residential real estate loans totaled$2.39 billion , or 16.6%, of loans receivable, compared to$2.33 billion , or 16.1%, of loans receivable, as ofDecember 31, 2022 . Residential real estate loans originated in ourArkansas ,Florida ,Texas ,Alabama , SPF and Centennial CFG markets were$489.1 million ,$985.2 million ,$602.6 million ,$41.8 million , zero and$267.2 million atMarch 31, 2023 , respectively. Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats within our SPF division. The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics. 69
--------------------------------------------------------------------------------
Table of Contents
As ofMarch 31, 2023 , consumer loans totaled$1.17 billion , or 8.2%, of loans receivable, compared to$1.15 billion , or 8.0%, of loans receivable, as ofDecember 31, 2022 . Consumer loans originated in ourArkansas ,Florida ,Texas ,Alabama , SPF and Centennial CFG markets were$37.8 million ,$8.4 million ,$22.3 million ,$505,000 ,$1.10 billion and zero atMarch 31, 2023 , respectively. Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to seven years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower's liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally, accounts receivable are financed at between 50% and 80% of accounts receivable less than 60 days past due. Inventory financing will range between 50% and 80% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans. As ofMarch 31, 2023 , commercial and industrial loans totaled$2.37 billion , or 16.5%, of loans receivable, compared to$2.35 billion , or 16.3%, of loans receivable, as ofDecember 31, 2022 . Commercial and industrial loans originated in ourArkansas ,Florida ,Texas ,Alabama , SPF and Centennial CFG markets were$480.7 million ,$404.1 million ,$676.2 million ,$44.5 million ,$170.4 million and$592.6 million atMarch 31, 2023 , respectively.
Non-Performing Assets
We classify our problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing).
When management determines that a loan is no longer performing, and that
collection of interest appears doubtful, the loan is placed on non-accrual
status. Loans that are 90 days past due are placed on non-accrual status unless
they are adequately secured and there is reasonable assurance of full collection
of both principal and interest. Our management closely monitors all loans that
are contractually 90 days past due, treated as "special mention" or otherwise
classified or on non-accrual status.
Purchased loans that have experienced more than insignificant credit
deterioration since origination are purchase credit deteriorated ("PCD") loans.
An allowance for credit losses is determined using the same methodology as other
loans. The Company develops separate PCD models for each loan segment with PCD
loans not individually analyzed for credit losses. The sum of the loan's
purchase price and allowance for credit losses becomes its initial amortized
cost basis. The difference between the initial amortized cost basis and the par
value of the loan is a non-credit discount or premium, which is amortized into
interest income over the life of the loan. Subsequent changes to the allowance
for credit losses are recorded through the provision for credit losses. The
Company held approximately $136.2 million and $142.5 million in PCD loans, as of
March 31, 2023 and December 31, 2022 , respectively.
70--------------------------------------------------------------------------------
Table of Contents
Table 9 sets forth information with respect to our non-performing assets as of
Table 9: Non-performing Assets
As of March 31 , As of December
2023 31, 2022
(Dollars in thousands)
Non-accrual loans $
65,401
9,845
Total non-performing loans 73,968 60,856
Other non-performing assets
Foreclosed assets held for sale, net 425 546
Other non-performing assets 74 74
Total other non-performing assets 499 620
Total non-performing assets $ 74,467 $ 61,476
Allowance for credit losses to non-accrual loans 439.09 % 567.86 %
Allowance for credit losses to non-performing loans 388.23 475.99
Non-accrual loans to total loans 0.45 0.35
Non-performing loans to total loans 0.51 0.42
Non-performing assets to total assets 0.33 0.27
Our non-performing loans are comprised of non-accrual loans and accruing loans
that are contractually past due 90 days. Our bank subsidiary recognizes income
principally on the accrual basis of accounting. When loans are classified as
non-accrual, the accrued interest is charged off and no further interest is
accrued, unless the credit characteristics of the loan improve. If a loan is
determined by management to be uncollectible, the portion of the loan determined
to be uncollectible is then charged to the allowance for credit losses.
Total non-performing loans were $74.0 million and $60.9 million as of March 31,
2023 and December 31, 2022 , respectively. Non-performing loans at March 31, 2023
were $11.2 million , $20.0 million , $26.9 million , $390,000 , $2.1 million and
$13.4 million in the Arkansas , Florida , Texas , Alabama , SPF and Centennial CFG
markets, respectively.
The $13.4 million balance of non-accrual loans for our Centennial CFG market
consists of four loans that are assessed for credit risk by the Federal Reserve
under the Shared National Credit Program. Due to the condition of the four
loans, partial charge-offs for a total of $2.0 million were taken on these loans
during the three months ended March 31, 2023 . The loans are not current on
either principal or interest, and we have reversed any interest that had accrued
subsequent to the non-accrual date designated by the Federal Reserve . Any
interest payments that are received will be applied to the principal balance.
Debt restructuring generally occurs when a borrower is experiencing, or is
expected to experience, financial difficulties in the near term. As a result, we
will work with the borrower to prevent further difficulties, and ultimately to
improve the likelihood of recovery on the loan. In those circumstances it may be
beneficial to restructure the terms of a loan and work with the borrower for the
benefit of both parties, versus forcing the property into foreclosure and having
to dispose of it in an unfavorable and depressed real estate market. When we
have modified the terms of a loan, we usually either reduce the monthly payment
and/or interest rate for generally about three to twelve months. For our
restructured loans that accrue interest at the time the loan is restructured, it
would be a rare exception to have charged-off any portion of the loan. As of
March 31, 2023 , we had $3.3 million of restructured loans that are in compliance
with the modified terms and are not reported as past due or non-accrual. Our
Florida market contains $1.2 million and our Arkansas market contains $2.1
million of these restructured loans.
A loan modification that might not otherwise be considered may be granted. These
loans can involve loans remaining on non-accrual, moving to non-accrual, or
continuing on an accrual status, depending on the individual facts and
circumstances of the borrower. Generally, a non-accrual loan that is
restructured remains on non-accrual for a period of nine months to demonstrate
that the borrower can meet the restructured terms. However, performance prior to
the restructuring, or significant events that coincide with the restructuring,
are considered in assessing whether the borrower can pay under the new terms and
may result in the loan being returned to an accrual status after a shorter
performance period. If the borrower's ability to meet the revised payment
schedule is not reasonably assured, the loan will remain in a non-accrual
status.
71--------------------------------------------------------------------------------
Table of Contents
The majority of the Bank's restructured loans relate to real estate lending and generally involve reducing the interest rate, changing from a principal and interest payment to interest-only, lengthening the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. AtMarch 31, 2023 , the amount of restructured loans was$5.3 million . As ofMarch 31, 2023 , 61.6% of all restructured loans were performing to the terms of the restructure. Total foreclosed assets held for sale were$425,000 as ofMarch 31, 2023 , compared to$546,000 as ofDecember 31, 2022 for a decrease of$121,000 . The foreclosed assets held for sale as ofMarch 31, 2023 are comprised of zero assets located inArkansas ,$260,000 located inFlorida ,$165,000 located inTexas and zero inAlabama , SPF and Centennial CFG.
Table 10 shows the summary of foreclosed assets held for sale as of
Table 10: Foreclosed Assets Held For Sale
As of March 31, As of December
2023 31, 2022
(In thousands)
Commercial real estate loans
Non-farm/non-residential $ 118 $ 118
Construction/land development 47 47
Residential real estate loans
Residential 1-4 family 260 260
Multifamily residential - 121
Total foreclosed assets held for sale $ 425 $ 546
The Company considers a loan to be impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Loans individually analyzed for credit losses for which a specific reserve has been recorded, non-accrual loans, loans past due 90 days or more and restructured loans made to borrowers experiencing financial difficulty comprise the classification of loans which we define as "impaired" loans. As ofMarch 31, 2023 andDecember 31, 2022 , impaired loans were$195.6 million and$221.1 million , respectively. The amortized cost balance for loans with a specific allocation decreased from$168.6 million to$126.5 million , and the specific allocation for impaired loans decreased by approximately$8.1 million for the period endedMarch 31, 2023 compared to the period endedDecember 31, 2022 . As ofMarch 31, 2023 , ourArkansas ,Florida ,Texas ,Alabama , SPF and Centennial CFG markets accounted for approximately$24.7 million ,$124.3 million ,$30.6 million ,$390,000 ,$2.1 million and$13.4 million of the impaired loans, respectively. 72
--------------------------------------------------------------------------------
Table of Contents
Past Due and Non-Accrual Loans
Table 11 shows the summary of non-accrual loans as ofMarch 31, 2023 andDecember 31, 2022 : Table 11: Total Non-Accrual Loans As of March 31, 2023 As of December 31, 2022 (In thousands) Real estate: Commercial real estate loans Non-farm/non-residential $ 14,002 $ 12,219 Construction/land development 4,555 1,977 Agricultural 463 278 Residential real estate loans Residential 1-4 family 18,319 18,083 Total real estate 37,339 32,557 Consumer 2,733 2,842 Commercial and industrial 24,123 14,920 Agricultural & other 1,206 692 Total non-accrual loans $ 65,401 $ 51,011 If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately$1.4 million and$407,000 , respectively, would have been recorded for the three-month periods endedMarch 31, 2023 and 2022. The interest income recognized on non-accrual loans for the three months endedMarch 31, 2023 and 2022 was considered immaterial.
Table 12 shows the summary of accruing past due loans 90 days or more as of
Table 12: Loans Accruing Past Due 90 Days or More
As of March 31, As of December
2023 31, 2022
(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential $ 3,046 $ 1,844
Construction/land development 6 31
Residential real estate loans
Residential 1-4 family 367 1,374
Total real estate 3,419 3,249
Consumer 23 35
Commercial and industrial 4,884 6,300
Other 241 261
Total loans accruing past due 90 days or more
Our ratio of total loans accruing past due 90 days or more and non-accrual loans
to total loans was 0.51% and 0.42% at
73--------------------------------------------------------------------------------
Table of Contents
Allowance for Credit Losses
Overview. The allowance for credit losses on loans receivable is a valuation
account that is deducted from the loan's amortized cost basis to present the net
amount expected to be collected on the loans. Loans are charged off against the
allowance when management believes the uncollectability of a loan balance is
confirmed. Expected recoveries do not exceed the aggregate of amounts previously
charged-off and expected to be charged-off.
The Company uses the discounted cash flow ("DCF") method to estimate expected
losses for all of the Company's loan pools. These pools are as follows:
construction & land development; other commercial real estate; residential real
estate; commercial & industrial; and consumer & other. The loan portfolio pools
were selected in order to generally align with the loan categories specified in
the quarterly call reports required to be filed with the Federal Financial
Institutions Examination Council . For each of these loan pools, the Company
generates cash flow projections at the instrument level wherein payment
expectations are adjusted for estimated prepayment speed, curtailments, time to
recovery, probability of default, and loss given default. The modeling of
expected prepayment speeds, curtailment rates, and time to recovery are based on
historical internal data. The Company uses regression analysis of historical
internal and peer data to determine suitable loss drivers to utilize when
modeling lifetime probability of default and loss given default. This analysis
also determines how expected probability of default and loss given default will
react to forecasted levels of the loss drivers.
For all DCF models, management has determined that four quarters represents a
reasonable and supportable forecast period and reverts to a historical loss rate
over four quarters on a straight-line basis. Management leverages economic
projections from a reputable and independent third party to inform its loss
driver forecasts over the four-quarter forecast period. Other internal and
external indicators of economic forecasts are also considered by management when
developing the forecast metrics.
Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. Historical credit loss experience
provides the basis for the estimation of expected credit losses. Adjustments to
historical loss information are made for differences in current loan-specific
risk characteristics such as differences in underwriting standards, portfolio
mix, delinquency level, or term as well as for changes in environmental
conditions, such as changes in the national unemployment rate, gross domestic
product, national retail sales index, housing price indices and rental vacancy
rate index.
The combination of adjustments for credit expectations (default and loss) and
time expectations prepayment, curtailment, and time to recovery) produces an
expected cash flow stream at the instrument level. Instrument effective yield is
calculated, net of the impacts of prepayment assumptions, and the instrument
expected cash flows are then discounted at that effective yield to produce an
instrument-level net present value of expected cash flows ("NPV"). An allowance
for credit loss is established for the difference between the instrument's NPV
and amortized cost basis.
The allowance for credit losses is measured based on call report segment as
these types of loans exhibit similar risk characteristics. The allowance for
credit losses for each segment is measured through the use of the discounted
cash flow method. Loans that do not share risk characteristics are evaluated on
an individual basis. For these loans, excluding assisted living loans which are
evaluated using a market price valuation methodology, where the Company has
determined that foreclosure of the collateral is probable, or where the borrower
is experiencing financial difficulty and the Company expects repayment of the
loan to be provided substantially through the operation or sale of the
collateral, the allowance for credit losses is measured based on the difference
between the fair value of the collateral, net of estimated costs to sell, and
the amortized cost basis of the loan as of the measurement date. When repayment
is expected to be from the operation of the collateral, expected credit losses
are calculated as the amount by which the amortized cost basis of the loan
exceeds the present value of expected cash flows from the operation of the
collateral. The allowance for credit losses may be zero if the fair value of the
collateral at the measurement date exceeds the amortized cost basis of the loan,
net of estimated costs to sell.
For loans individually analyzed for credit losses for which a specific reserve
has been recorded, non-accrual loans, loans past due 90 days or more and
restructured loans made to borrowers experiencing financial difficulty (which we
define as "impaired" loans), an allowance is established when the discounted
cash flows, collateral value or observable market price of the impaired loan is
lower than the carrying value of that loan. For loans that are not considered to
be collateral dependent, an allowance is recorded based on the loss rate for the
respective pool within the collective evaluation if a specific reserve is not
recorded.
74--------------------------------------------------------------------------------
Table of Contents
Expected credit losses are estimated over the contractual term of the loans,
adjusted for expected prepayments when appropriate. The contractual term
excludes expected extensions, renewals and modifications unless either of the
following applies:
•Management has a reasonable expectation at the reporting date that troubled
debt restructuring will be executed with an individual borrower.
•The extension or renewal options are included in the original or modified
contract at the reporting date and are not unconditionally cancellable by the
Company.
Management qualitatively adjusts model results for risk factors ("Q-Factors")
that are not considered within our modeling processes but are nonetheless
relevant in assessing the expected credit losses within our loan pools. These
Q-Factors and other qualitative adjustments may increase or decrease
management's estimate of expected credit losses by a calculated percentage or
amount based upon the estimated level of risk. The various risks that may be
considered in making Q-Factor and other qualitative adjustments include, among
other things, the impact of (i) changes in lending policies, procedures and
strategies; (ii) changes in nature and volume of the portfolio; (iii) staff
experience; (iv) changes in volume and trends in classified loans, delinquencies
and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral
values; (vii) external factors such as competition, legal and regulatory
environment; (viii) changes in the quality of the loan review system; and (ix)
economic conditions.
Loans are placed on non-accrual status when management believes that the
borrower's financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of interest
is doubtful, or generally when loans are 90 days or more past due. Loans are
charged against the allowance for credit losses when management believes that
the collectability of the principal is unlikely. Accrued interest related to
non-accrual loans is generally charged against the allowance for credit losses
when accrued in prior years and reversed from interest income if accrued in the
current year. Interest income on non-accrual loans may be recognized to the
extent cash payments are received, although the majority of payments received
are usually applied to principal. Non-accrual loans are generally returned to
accrual status when principal and interest payments are less than 90 days past
due, the customer has made required payments for at least six months, and we
reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under
FASB ASC Topic 805, Business Combinations, which requires the use of the
acquisition method of accounting. All identifiable assets acquired, including
loans, are recorded at fair value. In accordance with ASC 326, the Company
records both a discount and an allowance for credit losses on acquired loans.
All purchased loans are recorded at fair value in accordance with the fair value
methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair
value estimates associated with the loans include estimates related to expected
prepayments and the amount and timing of undiscounted expected principal,
interest and other cash flows.
Purchased loans that have experienced more than insignificant credit
deterioration since origination are PCD loans. An allowance for credit losses is
determined using the same methodology as other loans. The Company develops
separate PCD models for each loan segment with PCD loans not individually
analyzed for credit losses. The initial allowance for credit losses determined
on a collective basis is allocated to individual loans. The sum of the loan's
purchase price and allowance for credit losses becomes its initial amortized
cost basis. The difference between the initial amortized cost basis and the par
value of the loan is a non-credit discount or premium, which is amortized into
interest income over the life of the loan. Subsequent changes to the allowance
for credit losses are recorded through the provision for credit losses.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company
estimates expected credit losses over the contractual period in which the
Company is exposed to credit risk via a contractual obligation to extend credit
unless that obligation is unconditionally cancellable by the Company. The
allowance for credit losses on off-balance sheet credit exposures is adjusted as
a provision for credit loss expense. The estimate includes consideration of the
likelihood that funding will occur and an estimate of expected credit losses on
commitments expected to be funded over its estimated life.
Specific Allocations. As a general rule, if a specific allocation is warranted,
it is the result of a credit loss analysis of a previously classified credit or
relationship. Typically, when it becomes evident through the payment history or
a financial statement review that a loan or relationship is no longer supported
by the cash flows of the asset and/or borrower and has become collateral
dependent, we will use appraisals or other collateral analysis to determine if a
specific allocation is needed. The amount or likelihood of loss on this credit
may not yet be evident, so a charge-off would not be prudent. However, if the
analysis indicates that a specific allocation is needed, then a specific
allocation will be determined for this loan. This analysis is performed each
quarter in connection with the preparation of the analysis of the adequacy of
the allowance for credit losses, and if necessary, adjustments are made to the
specific allocation provided for a particular loan.
75--------------------------------------------------------------------------------
Table of Contents
For collateral dependent loans, we do not consider an appraisal outdated simply due to the passage of time. However, if an appraisal is older than 13 months and if market or other conditions have deteriorated and we believe that the current market value of the property is not within approximately 20% of the appraised value, we will consider the appraisal outdated and order either a new appraisal or an internal valuation report for the credit loss analysis. The recognition of any provision or related charge-off on a collateral dependent loan is either through annual credit analysis or, many times, when the relationship becomes delinquent. If the borrower is not current, we will update our credit and cash flow analysis to determine the borrower's repayment ability. If we determine this ability does not exist and it appears that the collection of the entire principal and interest is not likely, then the loan could be placed on non-accrual status. In any case, loans are classified as non-accrual no later than 105 days past due. If the loan requires a quarterly credit loss analysis, this analysis is completed in conjunction with the completion of the analysis of the adequacy of the allowance for credit losses. Any exposure identified through the credit loss analysis is shown as a specific reserve. If it is determined that a new appraisal or internal validation report is required, it is ordered and will be taken into consideration during completion of the next credit loss analysis. In estimating the net realizable value of the collateral, management may deem it appropriate to discount the appraisal based on the applicable circumstances. In such case, the amount charged off may result in loan principal outstanding being below fair value as presented in the appraisal. Between the receipt of the original appraisal and the updated appraisal, we monitor the loan's repayment history. If the loan is$3.0 million or greater or the total loan relationship is$5.0 million or greater, our policy requires an annual credit review. For these loans, our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually on these loans. As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or by law at 105 days past due, we will reflect that loan as non-performing. It will remain non-performing until it performs in a manner that it is reasonable to expect that we will collect the full principal and accrued interest.
When the amount or likelihood of a loss on a loan has been determined, a charge-off should be taken in the period it is determined. If a partial charge-off occurs, the quarterly credit loss analysis will determine if the loan is still collateral dependent, and thus continues to require a specific allocation.
The Company had$195.6 million and$221.1 million in impaired loans (which includes loans individually analyzed for credit losses for which a specific reserve has been recorded, non-accrual loans, loans past due 90 days or more and restructured loans made to borrowers experiencing financial difficulty) for the periods endedMarch 31, 2023 andDecember 31, 2022 , respectively. Loans Collectively Evaluated for Credit Loss. Loans receivable collectively evaluated for credit loss increased by approximately$58.2 million from$14.19 billion atDecember 31, 2022 to$14.25 billion atMarch 31, 2023 . The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for credit loss to the total loans collectively evaluated for credit loss was 1.85% and 1.82% atMarch 31, 2023 andDecember 31, 2022 , respectively. Charge-offs and Recoveries. Total charge-offs increased to$4.3 million for the three months endedMarch 31, 2023 , compared to$2.3 million for the same period in 2022. Total recoveries were$588,000 and$364,000 for the three months endedMarch 31, 2023 and 2022, respectively. For the three months endedMarch 31, 2023 , net charge-offs were$214,000 forArkansas ,$200,000 forFlorida ,$1.2 million forTexas ,$6,000 forAlabama ,$136,000 for SPF and$2.0 million for Centennial CFG. These equal a net charge-off position of$3.7 million . We have not charged off an amount less than what was determined to be the fair value of the collateral as presented in the appraisal, less estimated costs to sell (for collateral dependent loans), for any period presented. Loans partially charged-off are placed on non-accrual status until it is proven that the borrower's repayment ability with respect to the remaining principal balance can be reasonably assured. This is usually established over a period of 6-12 months of timely payment performance. 76
--------------------------------------------------------------------------------
Table of Contents
Table 13 shows the allowance for credit losses, charge-offs and recoveries as of
and for the three months ended
Table 13: Analysis of Allowance for Credit Losses
Three Months Ended March 31,
2023 2022
(Dollars in thousands)
Balance, beginning of period $ 289,669 $ 236,714
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential 71 -
Construction/land development 25 -
Agricultural 2 -
Residential real estate loans:
Residential 1-4 family 59 250
Total real estate 157 250
Consumer 221 63
Commercial and industrial 3,006 1,416
Other 904 581
Total loans charged off 4,288 2,310
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential 19 26
Construction/land development 7 15
Residential real estate loans:
Residential 1-4 family 118 26
Multifamily residential 8 -
Total real estate 152 67
Consumer 41 11
Commercial and industrial 109 109
Other 286 177
Total recoveries 588 364
Net loans charged off 3,700 1,946
Provision for credit loss - acquired loans 1,200 -
Balance, March 31 $ 287,169 $ 234,768
Net charge-offs to average loans receivable 0.10 % 0.08 %
Allowance for credit losses to total loans 2.00 2.34
Allowance for credit losses to net charge-offs 1,913.75 2,974.72
77--------------------------------------------------------------------------------
Table of Contents
Table 14 presents the allocation of allowance for credit losses as of
Table 14: Allocation of Allowance for Credit Losses
As of March 31, 2023 As of December 31, 2022
Allowance % of Allowance % of
Amount loans(1) Amount loans(1)
(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non- residential $ 85,504 38.3 % $ 92,197 39.1 %
Construction/land development 31,172 15.0 32,243 14.8
Agricultural residential real estate loans 1,474 2.4 1,651 2.4
Residential real estate loans:
Residential 1-4 family 44,847 12.2 45,312 12.1
Multifamily residential 6,586 4.4 5,651 4.0
Total real estate 169,583 72.3 177,054 72.4
Consumer 22,705 8.2 20,907 8.0
Commercial and industrial 91,357 16.5 88,131 16.3
Agricultural 1,039 1.7 1,223 2.0
Other 2,485 1.3 2,354 1.3
Total $ 287,169 100.0 % $ 289,669 100.0 %
(1)Percentage of loans in each category to total loans receivable.
Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 5.4 years as ofMarch 31, 2023 . Securities held-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. We had$1.29 billion of held-to-maturity securities at bothMarch 31, 2023 andDecember 31, 2022 . At bothMarch 31, 2023 andDecember 31, 2022 ,$1.11 billion , or 86.2%, was invested in obligations of state and political subdivisions. As ofMarch 31, 2023 ,$43.1 million , or 3.3%, was invested in obligations ofU.S. Government -sponsored enterprises, compared to$43.0 million , or 3.34%, as ofDecember 31, 2022 . We had$133.9 million , or 10.4%, invested in mortgage-backed securities as ofMarch 31, 2023 , compared to$135.0 million , or 10.5% as ofDecember 31, 2022 . TheU.S. government-sponsored enterprises and mortgage-backed securities are guaranteed by theU.S. government. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders' equity as other comprehensive (loss) income. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. Available-for-sale securities were$3.77 billion and$4.04 billion asMarch 31, 2023 andDecember 31, 2022 , respectively. 78
--------------------------------------------------------------------------------
Table of Contents
As ofMarch 31, 2023 ,$1.85 billion , or 49.1%, of our available-for-sale securities were invested in mortgage-backed securities, compared to$1.86 billion , or 46.1%, of our available-for-sale securities as ofDecember 31, 2022 . To reduce our income tax burden,$916.2 million , or 24.3%, of our available-for-sale securities portfolio as ofMarch 31, 2023 , were primarily invested in tax-exempt obligations of state and political subdivisions, compared to$906.3 million , or 22.4%, of our available-for-sale securities as ofDecember 31, 2022 . We had$397.1 million , or 10.5%, invested in obligations ofU.S. Government -sponsored enterprises as ofMarch 31, 2023 , compared to$661.8 million , or 16.4%, of our available-for-sale securities as ofDecember 31, 2022 . Also, we had approximately$607.0 million , or 16.1%, invested in other securities as ofMarch 31, 2023 , compared to$608.9 million , or 15.1% of our available-for-sale securities as ofDecember 31, 2022 . The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company first assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. AtMarch 31, 2023 , the Company determined that the allowance for credit losses of$842,000 was adequate for the available-for-sale investment portfolio, and the$2.0 million allowance for credit losses for the held-to-maturity portfolio was also considered adequate. No additional provision for credit losses was considered necessary for the portfolio.
See Note 3 to the Condensed Notes to Consolidated Financial Statements for the carrying value and fair value of investment securities.
Deposits
Our deposits averaged$17.69 billion for the three endedMarch 31, 2023 . Our deposits averaged$14.37 billion for the three months endedMarch 31, 2022 . Total deposits were$17.45 billion as ofMarch 31, 2023 , and$17.94 billion as ofDecember 31, 2022 . Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent,U.S. Government and other depository institutions. Our policy also permits the acceptance of brokered deposits. From time to time, when appropriate in order to fund strong loan demand, we accept brokered time deposits, generally in denominations of less than$250,000 , from a regional brokerage firm, and other national brokerage networks. We also participate in the One-Way Buy Insured Cash Sweep ("ICS") service and similar services, which provide for one-way buy transactions among banks for the purpose of purchasing cost-effective floating-rate funding without collateralization or stock purchase requirements. Management believes these sources represent a reliable and cost-efficient alternative funding source for the Company. However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.
Table 15 reflects the classification of the brokered deposits as of
Table 15: Brokered Deposits
December 31,
March 31, 2023 2022
(In thousands)
Insured Cash Sweep and Other Transaction Accounts $ 484,487 $ 476,630
Total Brokered Deposits $ 484,487 $ 476,630
79--------------------------------------------------------------------------------
Table of Contents
The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. We may allow higher rate deposits to run off during periods of limited loan demand. We believe that additional funds can be attracted, and deposit growth can be realized through deposit pricing if we experience increased loan demand or other liquidity needs. TheFederal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. TheFederal Reserve increased the target rate seven times during 2022. First, onMarch 16, 2022 , the target rate was increased to 0.25% to 0.50%. Second, onMay 4, 2022 , the target rate was increased to 0.75% to 1.00%. Third, onJune 15, 2022 , the target rate was increased to 1.50% to 1.75%. Fourth, onJuly 27, 2022 , the target rate was increased to 2.25% to 2.50%. Fifth, onSeptember 21, 2022 , the target rate was increased to 3.00% to 3.25%. Sixth, onNovember 2, 2022 , the target rate was increased to 3.75% to 4.00%. Seventh, onDecember 14, 2022 , the target rate was increased to 4.25% to 4.50%. TheFederal Reserve increased the target rate twice during the first quarter of 2023. First, onFebruary 1, 2023 , the target rate was increased to 4.50% to 4.75%, and second, onMarch 22, 2023 , the target rate was increased to 4.75% to 5.00%. Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three months endedMarch 31, 2023 and 2022. Table 16: Average Deposit Balances and Rates Three Months Ended March 31, 2023 2022 Average Average Average Average Amount Rate Paid Amount Rate Paid (Dollars in thousands) Non-interest-bearing transaction accounts$ 5,043,219 - %$ 4,155,894 - % Interest-bearing transaction accounts 10,225,694 2.08 8,389,038 0.18 Savings deposits 1,353,635 0.76 974,755 0.06 Time deposits:$100,000 or more 661,623 1.81 518,864 0.60 Other time deposits 410,471 1.34 335,729 0.31 Total$ 17,694,642 1.36 %$ 14,374,280 0.14 %
Securities Sold Under Agreements to Repurchase
We enter into short-term purchases of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) of substantially identical securities. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the balance sheet at the amount advanced. Interest incurred on repurchase agreements is reported as interest expense. Securities sold under agreements to repurchase increased$7.6 million , or 5.8%, from$131.1 million as ofDecember 31, 2022 to$138.7 million as ofMarch 31, 2023 .
FHLB and Other Borrowed Funds
The Company's FHLB borrowed funds, which are secured by our loan portfolio, were$650.0 million at bothMarch 31, 2023 andDecember 31, 2022 . The Company had no other borrowed funds as ofMarch 31, 2023 orDecember 31, 2022 . AtMarch 31, 2023 ,$50.0 million and$600.0 million of the outstanding balances were classified as short-term and long-term advances, respectively. AtDecember 31, 2022 ,$50.0 million and$600.0 million of the outstanding balances were classified as short-term and long-term advances, respectively. The FHLB advances mature from 2023 to 2037 with fixed interest rates ranging from 2.26% to 4.84%. As noted above, expected maturities could differ from contractual maturities because FHLB may have the right to call, or the Company may have the right to prepay certain obligations. The Company had access to approximately$677.7 million in liquidity with theFederal Reserve Bank as ofMarch 31, 2023 . This consisted of$71.8 million available from the Discount Window and$605.9 million available through the Bank Term Funding Program ("BTFP"). As ofMarch 31, 2023 , the primary and secondary credit rates available through the Discount Window were 5.00% and 5.50%, respectively, and the BTFP rate was 4.85%. As ofMarch 31, 2023 , the balance on these available sources was zero. For further discussion of the Company's available sources of liquidity, see Item 3: Quantitative and Qualitative Disclosures about Market Risk. 80
--------------------------------------------------------------------------------
Table of Contents
Subordinated Debentures
Subordinated debentures were
OnApril 1, 2022 , the Company acquired$140.0 million in aggregate principal amount of 5.500% Fixed-to-Floating Rate Subordinated Notes due 2030 (the "2030 Notes") from Happy, and the Company recorded approximately$144.4 million which included fair value adjustments. The 2030 Notes are unsecured, subordinated debt obligations of the Company and will mature onJuly 31, 2030 . From and including the date of issuance to, but excludingJuly 31, 2025 or the date of earlier redemption, the 2030 Notes will bear interest at an initial rate of 5.50% per annum, payable in arrears onJanuary 31 andJuly 31 of each year. From and includingJuly 31, 2025 to, but excluding, the maturity date or earlier redemption, the 2030 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be 3-month Secured Overnight Funding Rate (SOFR)), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2030 Notes, plus 5.345%, payable quarterly in arrears onJanuary 31 ,April 30 ,July 31 , andOctober 31 of each year, commencing onOctober 31, 2025 . The Company may, beginning with the interest payment date ofJuly 31, 2025 , and on any interest payment date thereafter, redeem the 2030 Notes, in whole or in part, subject to prior approval of theFederal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2030 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2030 Notes at any time, including prior toJuly 31, 2025 , at the Company's option, in whole but not in part, subject to prior approval of theFederal Reserve if then required, if certain events occur that could impact the Company's ability to deduct interest payable on the 2030 Notes forU.S. federal income tax purposes or preclude the 2030 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2030 Notes plus any accrued and unpaid interest to, but excluding, the redemption date. OnJanuary 18, 2022 , the Company completed an underwritten public offering of$300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the "2032 Notes") for net proceeds, after underwriting discounts and issuance costs, of approximately$296.4 million . The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature onJanuary 30, 2032 . From and including the date of issuance to, but excludingJanuary 30, 2027 or the date of earlier redemption, the 2032 Notes will bear interest at an initial rate of 3.125% per annum, payable in arrears onJanuary 30 andJuly 30 of each year. From and includingJanuary 30, 2027 to, but excluding the maturity date or earlier redemption, the 2032 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be Three-Month Term SOFR), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2032 Notes, plus 182 basis points, payable quarterly in arrears onJanuary 30 ,April 30 ,July 30 , andOctober 30 of each year, commencing onApril 30, 2027 . The Company may, beginning with the interest payment date ofJanuary 30, 2027 , and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of theFederal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior toJanuary 30, 2027 , at the Company's option, in whole but not in part, subject to prior approval of theFederal Reserve if then required, if certain events occur that could impact the Company's ability to deduct interest payable on the 2032 Notes forU.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.
Stockholders' Equity
Stockholders' equity increased$104.5 million to$3.63 billion as ofMarch 31, 2023 , compared to$3.53 billion as ofDecember 31, 2022 . The$104.5 million increase in stockholders' equity is primarily associated with the$103.0 million in net income for the three months endedMarch 31, 2023 and the$49.2 million in other comprehensive income, partially offset by the$36.6 million of shareholder dividends paid and stock repurchases of$13.5 million in 2023. As ofMarch 31, 2023 andDecember 31, 2022 , our equity to asset ratio was 16.12% and 15.41%, respectively. Book value per share was$17.87 as ofMarch 31, 2023 , compared to$17.33 as ofDecember 31, 2022 , a 12.6% annualized increase. Common Stock Cash Dividends. We declared cash dividends on our common stock of$0.18 and$0.165 per share for the three months endedMarch 31, 2023 and 2022, respectively. The common stock dividend payout ratio for the three months endedMarch 31, 2023 and 2022 was 35.6% and 41.7%, respectively. OnApril 20, 2023 , the Board of Directors declared a regular$0.18 per share quarterly cash dividend payableJune 7, 2023 , to shareholders of recordMay 17, 2023 . 81
--------------------------------------------------------------------------------
Table of Contents
Stock Repurchase Program. During the first three months of 2023, the Company repurchased a total of 590,000 shares with a weighted-average stock price of$22.92 per share. Shares repurchased under the program as ofMarch 31, 2023 since its inception total 21,349,866 shares. The remaining balance available for repurchase is 18,402,134 shares atMarch 31, 2023 .
Liquidity and Capital Adequacy Requirements
Risk-Based Capital . We, as well as our bank subsidiary, are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors. InJuly 2013 , theFederal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by theBasel Committee on Banking Supervision in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" and certain provisions of the Dodd-Frank Act ("Basel III"). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of$500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary onJanuary 1, 2015 . Basel III limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" of 2.5% of common equity Tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements. Basel III amended the prompt corrective action rules to incorporate a common equity Tier 1 ("CET1") capital requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization is required to have at least a 4.5% CET1 risk-based capital ratio, a 4% Tier 1 leverage ratio, a 6% Tier 1 risk-based capital ratio and an 8% total risk-based capital ratio. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as ofMarch 31, 2023 andDecember 31, 2022 , we met all regulatory capital adequacy requirements to which we were subject. OnJanuary 18, 2022 , the Company completed an underwritten public offering of the 2032 Notes in aggregate principal amount of$300.0 million . The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature onJanuary 30, 2032 . The Company may, beginning with the interest payment date ofJanuary 30, 2027 , and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of theFederal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior toJanuary 30, 2027 , at the Company's option, in whole but not in part, subject to prior approval of theFederal Reserve if then required, if certain events occur that could impact the Company's ability to deduct interest payable on the 2032 Notes forU.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date. 82
--------------------------------------------------------------------------------
Table of Contents
OnApril 1, 2022 , the Company acquired$140.0 million in aggregate principal amount of 5.500% Fixed-to-Floating Rate Subordinated Notes due 2030 from Happy, and the Company recorded approximately$144.4 million which included fair value adjustments. The 2030 Notes are unsecured, subordinated debt obligations of the Company and will mature onJuly 31, 2030 . The Company may, beginning with the interest payment date ofJuly 31, 2025 , and on any interest payment date thereafter, redeem the 2030 Notes, in whole or in part, subject to prior approval of theFederal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2030 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2030 Notes at any time, including prior toJuly 31, 2025 , at the Company's option, in whole but not in part, subject to prior approval of theFederal Reserve if then required, if certain events occur that could impact the Company's ability to deduct interest payable on the 2030 Notes forU.S. federal income tax purposes or preclude the 2030 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2030 Notes plus any accrued and unpaid interest to, but excluding, the redemption OnDecember 21, 2018 , the federal banking agencies issued a joint final rule to revise their regulatory capital rules to permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, onMarch 27, 2020 , the federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company has elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below. 83
--------------------------------------------------------------------------------
Table of Contents
Table 17 presents our risk-based capital ratios on a consolidated basis as of
Table 17: Risk-Based Capital
As of March 31, As of December
2023 31, 2022
(Dollars in thousands)
Tier 1 capital
Stockholders' equity $ 3,630,885 $ 3,526,362
ASC 326 transitional period adjustment 16,246 24,369
Goodwill and core deposit intangibles, net (1,453,793) (1,456,270)
Unrealized loss on available-for-sale securities 256,301 305,458
Total common equity Tier 1 capital 2,449,639 2,399,919
Total Tier 1 capital 2,449,639 2,399,919
Tier 2 capital
Allowance for credit losses 287,169 289,669
ASC 326 transitional period adjustment (16,246) (24,369)
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets)
(38,150) (32,184)
Qualifying allowance for credit losses 232,773 233,116
Qualifying subordinated notes 440,276 440,420
Total Tier 2 capital 673,049 673,536
Total risk-based capital $ 3,122,688 $ 3,073,455
Average total assets for leverage ratio $ 21,541,545 $ 22,091,588
Risk weighted assets $ 18,546,971 $ 18,583,293
Ratios at end of period
Common equity Tier 1 capital 13.21 % 12.91 %
Leverage ratio 11.37 10.86
Tier 1 risk-based capital 13.21 12.91
Total risk-based capital 16.84 16.54
Minimum guidelines - Basel III
Common equity Tier 1 capital 7.00 % 7.00 %
Leverage ratio 4.00 4.00
Tier 1 risk-based capital 8.50 8.50
Total risk-based capital 10.50 10.50
Well-capitalized guidelines
Common equity Tier 1 capital 6.50 % 6.50 %
Leverage ratio 5.00 5.00
Tier 1 risk-based capital 8.00 8.00
Total risk-based capital 10.00 10.00
As of the most recent notification from regulatory agencies, our bank subsidiary
was "well-capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well-capitalized," we, as well as our banking
subsidiary, must maintain minimum CET1 capital, leverage, Tier 1 risk-based
capital, and total risk-based capital ratios as set forth in the table. There
are no conditions or events since that notification that we believe have changed
the bank subsidiary's category.
Non-GAAP Financial Measurements
Our accounting and reporting policies conform to generally accepted accounting principles inthe United States ("GAAP") and the prevailing practices in the banking industry. However, this report contains financial information determined by methods other than in accordance with GAAP, including earnings, as adjusted; diluted earnings per common share, as adjusted; tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity, excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. 84
--------------------------------------------------------------------------------
Table of Contents
We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. The tables below present non-GAAP reconciliations of earnings, as adjusted, and diluted earnings per share, as adjusted, as well as the non-GAAP computations of tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. The items used in these calculations are included in financial results presented in accordance with GAAP. Earnings, as adjusted, and diluted earnings per common share, as adjusted, are meaningful non-GAAP financial measures for management, as they exclude certain items such as merger expenses and/or certain gains and losses. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business, because management does not consider these items to be relevant to ongoing financial performance.
In Table 18 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Table 18: Earnings, As Adjusted
Three Months Ended March 31,
2023 2022
(Dollars in thousands)
GAAP net income available to common shareholders (A) $ 102,962 $ 64,892
Pre-tax adjustments:
Merger and acquisition expenses - 863
Fair value adjustment for marketable securities 11,408 (2,125)
Recoveries on historic losses (3,461) (3,288)
Total pre-tax adjustments 7,947 (4,550)
Tax-effect of adjustments(1) 1,961 (1,220)
Total adjustments after-tax (B) 5,986 (3,330)
Earnings, as adjusted (C) $ 108,948 $ 61,562
Average diluted shares outstanding (D) 203,625 164,196
GAAP diluted earnings per share: A/D $ 0.51 $ 0.40
Adjustments after-tax: B/D 0.03 (0.03)
Diluted earnings per common share excluding adjustments: C/D
(1) Blended statutory rate of 24.674% for 2023 and 26.135% for 2022.
We had$1.45 billion ,$1.46 billion , and$996.6 million in total goodwill and core deposit intangibles as ofMarch 31, 2023 ,December 31, 2022 andMarch 31, 2022 , respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets excluding intangible amortization, return on average tangible equity, return on average tangible equity excluding intangible amortization, and tangible equity to tangible assets are useful in evaluating our company. Management also believes return on average assets, as adjusted, return on average equity, as adjusted, and return on average tangible equity, as adjusted, are meaningful non-GAAP financial measures, as they exclude items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. These calculations, which are similar to the GAAP calculations of book value per share, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively. 85
--------------------------------------------------------------------------------
Table of Contents
Table 19: Tangible Book Value Per Share
As of March 31, As of December
2023 31, 2022
(In thousands, except per share data)
Book value per share: A/B $ 17.87 $ 17.33
Tangible book value per share: (A-C-D)/B 10.71 10.17
(A) Total equity $ 3,630,885 $ 3,526,362
(B) Shares outstanding 203,168 203,434
(C) Goodwill 1,398,253 1,398,253
(D) Core deposit intangibles 55,978 58,455
Table 20: Return on Average Assets
Three Months Ended
2023 2022
(Dollars in thousands)
Return on average assets: A/D 1.84 % 1.43 %
Return on average assets, as adjusted: (A+C)/D 1.95 1.36
Return on average assets excluding intangible amortization: B/(D-E)
2.00 1.54
(A) Net income $ 102,962 $ 64,892
Intangible amortization after-tax 1,866 1,049
(B) Earnings excluding intangible amortization $ 104,828 $ 65,941
(C) Adjustments after-tax $ 5,986 $ (3,330)
(D) Average assets 22,695,855 18,393,075
(E) Average goodwill, core deposits and other intangible assets 1,455,423 997,338
Table 21: Return on Average Equity
Three Months Ended
2023 2022
(Dollars in thousands)
Return on average equity: A/D 11.70 % 9.58 %
Return on average common equity, as adjusted: (A+C)/D 12.38 9.09
Return on average tangible common equity: A/(D-E) 19.75 15.03
Return on average tangible equity excluding intangible amortization: B/(D-E)
20.11 15.28
Return on average tangible common equity, as adjusted: (A+C)/(D-E)
20.90 14.26
(A) Net income $ 102,962 $ 64,892
(B) Earnings excluding intangible amortization 104,828 65,941
(C) Adjustments after-tax 5,986 (3,330)
(D) Average equity 3,569,592 2,747,980
(E) Average goodwill, core deposits and other intangible assets 1,455,423
997,338
86--------------------------------------------------------------------------------
Table of Contents
Table 22: Tangible Equity to Tangible Assets
As of March 31, As of December
2023 31, 2022
(Dollars in thousands)
Equity to assets: B/A 16.12 % 15.41 %
Tangible equity to tangible assets: (B-C-D)/(A-C-D) 10.33 9.66
(A) Total assets $ 22,518,255 $ 22,883,588
(B) Total equity 3,630,885 3,526,362
(C) Goodwill 1,398,253 1,398,253
(D) Core deposit intangibles 55,978 58,455
The efficiency ratio is a standard measure used in the banking industry and is
calculated by dividing non-interest expense less amortization of core deposit
intangibles by the sum of net interest income on a tax equivalent basis and
non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP
measure for management, as it excludes certain items and is calculated by
dividing non-interest expense less amortization of core deposit intangibles by
the sum of net interest income on a tax equivalent basis and non-interest income
excluding items such as merger expenses and/or certain gains, losses and other
non-interest income and expenses. In Table 23 below, we have provided a
reconciliation of the non-GAAP calculation of the financial measure for the
periods indicated.
Table 23: Efficiency Ratio, As Adjusted
Three Months Ended
2023 2022
(Dollars in thousands)
Net interest income (A) $ 214,595 $ 131,148
Non-interest income (B) 34,164 30,669
Non-interest expense (C) 114,644 76,896
FTE Adjustment (D) 1,628 1,738
Amortization of intangibles (E) 2,477 1,421
Adjustments:
Non-interest income: Fair value adjustment for marketable securities $
(11,408)
Gain on OREO, net - 478 Gain (loss) on branches, equipment and other assets, net 7 16 Recoveries on historic losses 3,461 3,288 Total non-interest income adjustments (F)$ (7,940) $ 5,907 Non-interest expense: Merger and acquisition expenses - 863 Total non-core non-interest expense (G) $ -$ 863 Efficiency ratio (reported): ((C-E)/(A+B+D)) 44.80 % 46.15 % Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F)) 43.42 47.33
Recently Issued Accounting Pronouncements
See Note 21 to the Condensed Notes to Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.
87
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
