The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations ofIBERIABANK Corporation and its wholly-owned subsidiaries (collectively, the Company) as of and for the period endedMarch 31, 2020 , and updates the Annual Report on Form 10-K for the year endedDecember 31, 2019 . This discussion should be read in conjunction with the unaudited consolidated financial statements, accompanying footnotes and supplemental financial data included herein. The emphasis of this discussion will be amounts as ofMarch 31, 2020 compared toDecember 31, 2019 for the balance sheets and the three months endedMarch 31, 2020 compared toMarch 31, 2019 for the statements of comprehensive income. Certain amounts in prior year presentations have been reclassified to conform to the current year presentation. When we refer to the "Company," "we," "our" or "us" in this Report, we meanIBERIABANK Corporation and subsidiaries (consolidated). When we refer to the "Parent," we meanIBERIABANK Corporation . See the Glossary of Defined Terms at the end of this Report for terms used throughout this Report. Forward-looking Statements To the extent that statements in this Report relate to future plans, objectives, financial results or performance of the Company, these statements are deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management's current information, estimates and assumptions and the current economic environment, are generally identified by use of the words "may," "plan," "believe," "expect," "intend," "will," "should," "continue," "potential," "anticipate," "estimate," "predict," "project" or similar expressions, or the negative of these terms or other comparable terminology. The Company's actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. Forward-looking statements represent management's beliefs, based upon information available at the time the statements are made, with regard to the matters addressed; they are not guarantees of future performance. Forward-looking statements are subject to numerous assumptions, risks and uncertainties that change over time and could cause actual results or financial condition to differ materially from those expressed in or implied by such statements. Factors that could cause or contribute to such differences include, but are not limited to:
• economic or business conditions in our markets or nationally, including the
future impacts of the novel coronavirus disease (COVID-19) outbreak and
measures taken in response for which future developments are highly uncertain
and difficult to predict;
• the level of market volatility;
• our ability to execute our growth strategy, including the availability of
future bank acquisition opportunities;
• our ability to execute on our revenue and efficiency improvement initiatives;
• unanticipated delays, losses, business disruptions and diversion of management
time related to the completion and integration of mergers and acquisitions;
• actual results deviating from the Company's current estimates and assumptions
of timing and amounts of cash flows;
• credit risk of our customers;
• effects of decreases in oil and other energy prices;
• effects of residential real estate prices and levels of home sales;
52 --------------------------------------------------------------------------------
• our ability to satisfy capital and liquidity standards;
• sufficiency of our allowance for expected credit losses and the accuracy of
the assumptions or estimates used in preparing our financial statements,
including those related to the new CECL accounting guidance;
• changes in interest rates;
• access to funding sources;
• reliance on the services of executive management;
• competition for loans, deposits and investment dollars;
• competition from competitors with greater financial resources;
• reputational risks and social factors;
• changes in
interpretations;
• changes in government regulations and legislation, including tax regulations;
• increases in
• geographic concentration of our markets;
• rapid changes in the financial services industry;
• significant litigation;
• cyber-security risks including dependence on our operational, technological,
and organizational systems and infrastructure and those of third party
providers of those services;
• hurricanes and other adverse weather events;
• valuation of intangible assets; and
• merger-related risks, including:
• possible negative impact on our stock price and future business and financial results,
• uncertainties while the merger is pending which could have a negative effect,
• termination of the merger agreement,
• uncertainty regarding the market price of First Horizon National Corporation common stock at closing,
• receipt of required regulatory approvals with adverse conditions, and
• current or future adverse legislation or regulation.
Factors that may cause actual results to differ materially from these forward-looking statements are discussed in the Company's Annual Report on Form 10-K and other filings with theSecurities and Exchange Commission (the "SEC"), available at theSEC's website, www.sec.gov, and the Company's website, www.iberiabank.com, under the heading "Investor Relations" and then "Financial Information." Except as otherwise disclosed herein, information is as of the date of this report. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward-looking statement for any reason. 53 --------------------------------------------------------------------------------
INTRODUCTION
IBERIABANK Corporation is a financial holding company based inLafayette, Louisiana . Through its subsidiaries, the Company provides a full range of commercial and consumer banking services, including private banking, small business, wealth and trust management, retail brokerage, mortgage, commercial leasing and equipment financing, and title insurance services through locations inLouisiana ,Arkansas ,Tennessee ,Alabama ,Texas ,Florida ,Georgia ,South Carolina ,North Carolina ,Mississippi ,Missouri , andNew York . This following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of the Company. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q, as well as with the other information contained in this report. EXECUTIVE OVERVIEW Significant Events
COVID-19 Pandemic and Economic Impact
The COVID-19 pandemic began to meaningfully affectthe United States inMarch 2020 . The spread of COVID-19 has created a public health crisis that has resulted in widespread volatility and disruptions in household, business, economic, and market conditions. The majority of states in theU.S. , including some where the Company operates, have declared public health emergencies and have also enacted temporary closures of businesses, issued quarantine orders and taken other restrictive measures in response to the COVID-19 pandemic. COVID-19 has not yet been officially contained and could affect significantly more households and businesses. The duration and severity of the pandemic continue to be impossible to predict, as is the potential for a seasonal or other resurgence after its initial containment. The extent to which the pandemic will impact the Company's business and results of operations will depend on future developments which are beyond the Company's control and are highly uncertain. New information may emerge concerning the severity of the pandemic and further action taken to prevent, treat, or mitigate the spread of COVID-19 including economic impacts, such as governmental, regulatory, banking supervisory and other federal, state and local actions. The Company's business has been designated an essential business, which allows it to continue to serve its customers. The Company has taken steps to operate through this crisis by executing its business continuity plan to protect the health and welfare of associates and mitigate disruption in the operation of its business as it is currently operating under a drive-through and appointment-only strategy at almost all branch locations. The Company currently has approximately 60% of its workforce working remotely. While we have not yet experienced material adverse disruptions to internal operations due to the pandemic, we continue to monitor and review the existing and evolving risks and developments. In light of volatility in the capital markets and economic disruptions, the Company continues to carefully monitor its capital and liquidity positions.The Company continues to work with customers affected by COVID-19, and in certain instances has deferred scheduled loan payments and/or loan maturities. As ofApril 30, 2020 , almost 4,800 customers have requested these deferrals for$3.5 billion in loans. All of these deferrals are for loans due in 2020, and none of the deferrals exceed a period of six months. InMarch 2020 , in response to the COVID-19 pandemic, theFOMC lowered the target range for the federal funds rate 150 basis points to 0.00% to 0.25%. TheFOMC expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. Maintaining the current level of the federal funds rate could cause overall interest rates to fall, which may negatively impact the Company's net interest margin. 54 -------------------------------------------------------------------------------- The COVID-19 pandemic and its impact on certain portions of the world's economy has contributed to a significant reduction in oil consumption. Combined with a failure ofOPEC andRussia to reach a production cut agreement in March of 2020, excess oil supply and weakening global demand have weighed heavily on oil prices, which reached an 18-year intra-day low at$20 per barrel in March of 2020 and continued to decline throughout April. As a result, the expectation of continuing inventory builds, concern over future global economic growth and associated global oil demand, the responsiveness of oil producers, and general economic and geopolitical uncertainty could contribute to future disruptions in oil prices. The Company remains cautious regarding the effects of this disruption in oil prices on its customers in the oil and gas industry. The Company has made a concerted effort through stringent underwriting standards and conservative concentration limits to balance risk and return as it relates to energy exposures. Energy-related loans were$1.3 billion , or 5% of the Company's total loan portfolio atMarch 31, 2020 . Given events during the first quarter of 2020, the Company experienced some downward migration in the ratings of energy credits as might be expected, and there were two energy-related charge-offs during the period. Future losses, however, will depend on the duration and severity of the depression in oil prices. The Company will continue to manage risk by reducing and exiting energy relationships that no longer fit its credit profile and recording additional provision, as necessary. TheU.S. government has taken numerous actions through multiple stimulus packages, the most significant of which is the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The CARES Act was signed into law onMarch 27, 2020 , and provides over$2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act includes a range of other provisions designed to support theU.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that theU.S. Department of the Treasury , theSmall Business Administration , theFederal Reserve Board , and other federal banking agencies may or are required to implement. Further, in response to the COVID-19 outbreak, theFederal Reserve Board has implemented or announced a number of facilities to provide emergency liquidity to various segments of theU.S. economy and financial markets. The Company has not participated as a borrower in any of the lending facilities created by the CARES Act for financial institutions as it believes it has adequate liquidity to fund ongoing operations. Additionally, the CARES Act authorized theSmall Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. An eligible business can apply for a PPP loan up to the greater of: 2.5 times its average monthly "payroll costs;" or$10 million . PPP loans will have: an interest rate of 1.0%, a two-year loan term to maturity, and principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made eligible to borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employees and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. As ofApril 30, 2020 , the Company had funded approximately$1.6 billion in PPP loans to over 6,700 customers. These loans have been funded by short-term advances from the FHLB and deposits, with the majority of funding coming from non-interest-bearing deposits. As of that date, the Company had received approximately 7,400 additional applications for up to$560 million of loans under the PPP. Adoption of New Accounting Standard OnJanuary 1, 2020 , the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments. ASC 326 replaced the incurred loss model for determining the allowance for credit losses with a current expected credit loss model for financial assets carried at amortized cost, including loans, leases, and loan commitments. ASC 326 requires recognition of lifetime expected credit losses that takes into consideration all available relevant information including details of past events, current conditions and reasonable and supportable forecasts of future economic conditions. The transition adjustment onJanuary 1, 2020 resulted in an increase to the AECL of$82.3 million . The increase in the AECL at transition primarily related to required increases for residential mortgage loans to establish an estimate of lifetime expected credit losses for these longer dated loans, as well as an increase for non-owner-occupied real estate loans reflecting higher LGDs under the CECL model. 55 -------------------------------------------------------------------------------- InMarch 2020 , theU.S. banking agencies issued an interim final rule that became effective onMarch 31, 2020 , and that provides banking organizations with an alternative option to delay for two years their estimates of the impact of CECL, relative to the incurred loss methodology, on regulatory capital, followed by a three-year transition period. As further described in Note 8 to the accompanying consolidated financial statements, the Company has elected to use this alternative option. The Company continues to anticipate that capital levels will be sufficient to meet all applicable regulatory capital requirements. See Note 2, Recent Accounting Pronouncements, in the accompanying consolidated financial statements for additional discussion of the adoption of ASC 326. Quarterly Financial Performance Summary Highlights of the Company's financial performance for the first quarter of 2020 are discussed below compared to the results for the first quarter of 2019. Refer to the subsequent sections of MD&A for further detail. • Net income available to common shareholders for the quarter ended March
31, 2020 totaled
million, or
EPS, which excludes merger-related costs and other items, was
the first quarter of 2020 compared to
Refer to Table 16 - Non-GAAP Measures in this MD&A for further information
on non-GAAP items.
• Net interest income was
$20.1 million , or 8%, decrease compared to the same quarter of 2019. Net interest margin on a tax-equivalent basis decreased 42 basis points to 3.17% from 3.59%, primarily attributable to lower yields on loans and investment securities as well as lower average investment securities
balances. Asset yields were unfavorably impacted by cuts to the target
federal funds rate and the corresponding impact to LIBOR over the past 12
months.
• Non-interest income increased
the quarter ended
income. • Non-interest expense for the first quarter of 2020 increased$18.7 million , or 12%, to$177.4 million compared to the same period of 2019,
primarily from
derivatives and higher non-core expenses, primarily related to salaries
and employee benefits. Non-interest expenses in the first quarter of 2019
were favorably impacted by interest received on refunds from the Company's
federal income tax filings.
• Income tax expense decreased
the quarter ended
before income taxes.
• Total assets at
2%, from
• Total loans and leases increased
from
(reserve-based and midstream lending) groups, as well as in the
• Effective
loss (CECL) methodology for estimating its credit losses, which resulted
in an
increasing the allowance coverage of total loans and leases from 0.68% to
1.02% upon adoption.
• The Company recorded a provision for expected credit losses of
million for the quarter ended
from the provision recorded for the same period of 2019, primarily driven
by the expected impact of the COVID-19 pandemic on future losses and to a
much lesser extent the increase attributable to reserving for expected
lifetime losses under CECL.
• Credit quality remained strong. Non-performing assets to total assets were
0.60% at
charge-offs to average loans and leases on an annualized basis increased
three basis points to 0.16% for the three months endedMarch 31, 2020 compared to 0.13% for the comparable 2019 period. 56
--------------------------------------------------------------------------------
• Total deposits increased
31, 2020, attributable to growth in demand deposits, including
million in non-interest-bearing deposit growth, offset by maturing time deposits. Deposit growth was strongest in thePalm Beach /Broward ,Southwest Louisiana ,Birmingham , andNew Orleans markets, as well as the Energy group. Pending Merger As previously disclosed, onNovember 3, 2019 , the Company entered into a merger agreement to combine with First Horizon in an all-stock merger of equals. OnApril 24, 2020 , the Company received shareholder approval for the merger. The merger is expected to be completed in the second quarter of 2020, pending receipt of the remaining regulatory approvals and other customary closing conditions. FINANCIAL OVERVIEW The following table sets forth selected financial ratios and other relevant data used by management to analyze the Company's performance. TABLE 1-SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
As of and For the Three Months Ended March 31, 2020 2019 Key Ratios (1) Return on average assets 0.46 % 1.32 % Core return on average assets (Non-GAAP) (2) 0.49 1.29 Return on average common equity 3.21 9.85 Core return on average tangible common equity (Non-GAAP) (2) (3) 5.53 15.03 Equity to assets at end of period 13.48 13.25 Earning assets to interest-bearing liabilities at end of period 143.60 142.25 Interest rate spread (4) 2.74 3.15 Net interest margin (TE) (4) (5) 3.17 3.59 Non-interest expense to average assets (annualized) 2.23 2.09 Efficiency ratio (6) 60.1 52.4 Core tangible efficiency ratio (TE) (Non-GAAP) (2) (3) (5) (6) 57.4 51.3 Common stock dividend payout ratio 75.3 24.3 Asset Quality Data Non-performing assets to total assets at end of period (7) 0.60 % 0.58 % Allowance for expected credit losses to non-performing loans and leases at end of period (7) 171.80 104.46 Allowance for expected credit losses to total loans and leases at end of period 1.24 0.69 Consolidated Capital Ratios Tier 1 leverage ratio 9.93 % 9.67 % Common equity tier 1 (CET1) 10.44 10.73 Tier 1 risk-based capital ratio 11.28 11.25 Total risk-based capital ratio 12.48 12.33
(1) With the exception of end-of-period ratios, all ratios are based on average
daily balances during the respective periods. (2) See Table 16 for GAAP to Non-GAAP reconciliations. (3) Tangible calculations eliminate the effect of goodwill and
acquisition-related intangible assets and the corresponding amortization
expense on a tax-effected basis where applicable.
(4) Interest rate spread represents the difference between the weighted average
yield on earning assets and the weighted average cost of interest-bearing
liabilities. Net interest margin represents net interest income as a percentage of average earning assets. 57
--------------------------------------------------------------------------------
(5) Fully taxable equivalent (TE) calculations include the tax benefit
associated with related income sources that are tax-exempt using a rate of
21%.
(6) The efficiency ratio represents non-interest expense as a percentage of
total revenues. Total revenues are the sum of net interest income and
non-interest income.
(7) Non-performing loans consist of non-accruing loans and accruing loans 90
days or more past due. Non-performing assets consist of non-performing loans
and other real estate owned, including repossessed assets.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing the consolidated financial statements and accompanying notes,
management is required to apply significant judgment to various accounting,
reporting and disclosure matters. Other than the items discussed below, there
have been no changes to other critical accounting policies subsequent to
Allowance for Expected Credit Losses
EffectiveJanuary 1, 2020 , the Company adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)," (ASC 326) which significantly changed the measurement of credit losses for certain financial instruments, such as loans and investment securities. See Note, 2, Recent Accounting Pronouncements, in the accompanying consolidated financial statements for a complete discussion of the adoption of ASC 326. However, the allowance for expected credit losses (AECL) continues to be considered a critical accounting estimate based on the associated degree of judgment and complexity involved in establishing the estimate for credit losses and is described below. The Company maintains the AECL at a level that management believes appropriate to absorb estimated lifetime credit losses, including losses associated with unfunded commitments. The AECL includes three components: 1) a model-based component using a probability of default (PD) and loss given default (LGD) methodology; 2) a qualitative component that accommodates for the imprecision of certain assumptions and inherent uncertainties in the model-based component; and 3) a specific reserve component for loans that must be individually assessed for impairment. The following discusses the factors used to determine the AECL which have a significant impact on the determination of the AECL and require significant judgment and estimation by management:
• Risk ratings assigned to individual commercial loans and unfunded credit
commitments. All commercial loans are assigned a risk rating in accordance
with the borrower's financial strength which is used to assign a PD and
LGD rating to the loan. The scorecards are prepared by various experienced
individuals, such as underwriters, relationship managers or portfolio
managers and are subject to periodic review by an internal team of credit
specialists.
• Forecasts of future economic conditions used in the model-based component
of the AECL. Forecasts of future economic conditions are extremely complex
and require a significant amount of judgment. The interdependencies of
economic variables within a forecast increase the uncertainty inherently
present in all forecasts. The Company uses multiple externally developed
macroeconomic scenarios to establish a reasonable and supportable forecast
that takes into consideration available information and assumptions
regarding the evolution of the economy over time. Forecasts of a stable
economic environment produce lower estimates of expected credit losses
than forecasts of slower near-term growth or with recessionary concerns.
• Application of qualitative adjustments to the quantitative model-based
component of the AECL. This reflects management's judgment of risk for
imprecision of certain assumptions and uncertainties inherent in the
model-based component and considers model assumptions and performance,
process risk, and other considerations. 58
-------------------------------------------------------------------------------- Changes in the factors noted above or other factors may not occur at the same rate and may not be consistent across all geographies or product types. Additionally, changes in factors may be directionally inconsistent, such that improvements in one factor may offset deterioration in other factors. As a result, it is difficult to estimate how the overall AECL would be impacted by isolated changes in one factor. It is also difficult to predict how changes in forecasts of future economic conditions or assumptions might affect borrower behavior or other factors management considers in estimating the AECL. Because significant judgment is used in the development of the AECL, it is possible that others performing similar analyses could reach different conclusions. As a result of the deterioration in economic conditions caused by the COVID-19 pandemic during the first quarter of 2020 and the related increase in economic uncertainty, the Company updated the various forward-looking economic scenarios to be considered in the development of the AECL, taking into consideration possible economic outcomes of the COVID-19 pandemic, including the possibility of recessionary conditions. These economic scenarios and the related impact on the AECL varied significantly as they considered this unprecedented freeze on commerce in theU.S. and the uncertainty surrounding the length of the COVID-19 pandemic. As an illustration of the effect of changes in estimates relating to the AECL, if the economic scenario previously referred to as "moderate recession" (as it existed as ofMarch 31, 2020 ) were to be fully realized, it would result in an increase in the model-based component of the AECL of approximately$180 million . However, the modeling of this scenario includes forecasts of certain macroeconomic variables at levels never before seen in modern history. Thus, modeled relationships between losses and economic variables, which are based on history, may be less reliable when applied to such scenarios. This illustration only represents the impact of changes on the model-based component of the AECL as ofMarch 31, 2020 and does not consider qualitative changes in the AECL related to management judgment that might occur.
For further discussion of the AECL, see Note 1, Summary of Significant Accounting Policies, and Note 5, Allowance for Expected Credit Losses, to the consolidated financial statements.
Valuation of
The Company accounts for acquisitions using the acquisition method of accounting. Under this method, the Company records the assets acquired, including identified intangible assets, and liabilities assumed, at their respective fair values, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Any excess of consideration paid in the acquisition over the fair value of the identifiable net assets acquired is recorded as goodwill.Goodwill is not amortized, but is assessed for potential impairment at the reporting unit level on an annual basis, as ofOctober 1st , or whenever events or changes in circumstances indicate that it is more likely than not the fair value of a reporting unit is less than its respective carrying amount. In light of the COVID-19 pandemic and its impact on macroeconomic conditions, the unprecedented economic uncertainty, and the significant declines in the Company's stock price and overall prices in the equity markets, management concluded that an interim quantitative test was necessary for all reporting units for the first quarter of 2020. The Company revised its fair value methodologies to include a higher weighting of the discounted cash flow method compared to market-based methods and updated key assumptions including discount rate. The Company factored in multiple economic scenarios, in an effort to take into account the current economic uncertainty, and determined that the estimated fair value of each reporting unit exceeded its carrying value. Therefore, the goodwill of each reporting unit was considered not to be impaired as of the testing date. The goodwill impairment evaluation requires management to utilize significant judgments and assumptions which are based on the best information available at the time. Performing a sensitivity analysis is difficult given the current unprecedented and uncertain economic environment and the results of future impairment tests could vary in subsequent reporting periods if conditions differ substantially from the assumptions utilized in completing the evaluations. The excess of fair value over the carrying amount is narrow. Any further deterioration in economic conditions or prolonged levels of depressed economic activity resulting from the COVID-19 pandemic could likely result in some level of goodwill impairment.
For additional information on goodwill, see Note 1, Summary of Significant
Accounting Policies, in the Company's 2019 10-K and Note 6,
59 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS The Company reported net income available to common shareholders of$32.8 million and$96.5 million for the three months endedMarch 31, 2020 and 2019, respectively. EPS on a diluted basis was$0.62 for the first quarter of 2020 and$1.75 for the same period of 2019. The following discussion provides additional information on the Company's operating results for the three months endedMarch 31, 2020 and 2019, segregated by major income statement captions. Net Interest Income/Net Interest margin Net interest income is the difference between interest realized on earning assets and interest accrued on interest-bearing liabilities and is also the largest driver of earnings. As such, it is subject to constant scrutiny by management. The rate of return and relative risk associated with earning assets are weighed to determine the appropriateness and mix of earning assets. Additionally, the need for lower cost funding sources is weighed against relationships with clients and future growth opportunities. 60 -------------------------------------------------------------------------------- The following table sets forth information regarding (i) the total dollar amount of interest income from earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Net interest spread is the difference between the yields earned on average earning assets and the rates paid on average interest-bearing liabilities. Net interest margin on a tax-equivalent basis is net interest income (TE) as a percentage of average earning assets. Information is based on average daily balances during the indicated periods. Investment security market value adjustments and trade-date accounting adjustments are not considered to be earning assets and, as such, the net effect of these adjustments is included in non-earning assets. TABLE 2-QUARTERLY AVERAGE BALANCES, NET INTEREST INCOME AND INTEREST YIELDS / RATES Three Months Ended March 31, 2020 2019 Average Interest Yield/ Rate Average Interest Yield/ Rate (in thousands) Balance Income/Expense (1) (TE)(2) Balance Income/Expense (1) (TE)(2) Earning Assets: Loans and leases: Commercial loans and leases$ 16,791,766 $ 188,063 4.52 %$ 15,253,655 $ 194,510 5.19 % Residential mortgage loans 4,800,131 50,457 4.20 % 4,385,634 47,829 4.36 % Consumer and other loans 2,561,285 33,226 5.22 % 2,960,397 42,540 5.83 % Total loans and leases 24,153,182 271,746 4.53 % 22,599,686 284,879 5.11 % Mortgage loans held for sale 189,597 1,678 3.54 % 95,588 1,054 4.41 % Investment securities(3) 4,035,469 25,402 2.56 % 5,052,922 36,125 2.90 % Other earning assets 960,762 4,103 1.72 % 533,745 4,026 3.06 % Total earning assets 29,339,010 302,929 4.17 % 28,281,941 326,084 4.68 % Allowance for loan and lease losses (231,914 ) (140,915 ) Non-earning assets 2,879,043 2,692,474 Total assets$ 31,986,139 $ 30,833,500 Interest-bearing liabilities: Deposits: Interest-bearing demand deposits$ 4,834,171 $ 9,962 0.83 %$ 4,458,634 $ 11,396 1.04 % Savings and money market accounts 9,930,353 31,244 1.27 % 9,089,099 28,762 1.28 % Time deposits 4,149,574 22,470 2.18 % 3,859,354 20,077 2.11 % Total interest-bearing deposits (4) 18,914,098 63,676 1.35 % 17,407,087 60,235 1.40 % Short-term borrowings 226,665 266 0.47 % 1,151,219 5,716 2.01 % Long-term debt 1,341,943 8,645 2.59 % 1,463,862 9,649 2.67 % Total interest-bearing liabilities 20,482,706 72,587 1.43 % 20,022,168 75,600 1.53 % Non-interest-bearing deposits 6,540,532 6,271,313 Non-interest-bearing liabilities 623,868 434,516 Total liabilities 27,647,106 26,727,997 Total shareholders' equity 4,339,033 4,105,503 Total liabilities and shareholders' equity$ 31,986,139 $ 30,833,500 Net earning assets$ 8,856,304 $ 8,259,773 Net interest income / Net interest spread $ 230,342 2.74 % $ 250,484 3.15 % Net interest income (TE) / Net interest margin (TE) (1) $ 231,653 3.17 % $ 251,833 3.59 %
(1) Interest income includes loan fees of
three-month periods ended
(2) Fully taxable equivalent (TE) calculations include the tax benefit
associated with related income sources that are tax-exempt using a rate of
21%.
(3) Balances exclude unrealized gains or losses on securities available for sale
and the impact of trade date accounting.
(4) Total deposit costs for the three months ended
1.01% and 1.03%, respectively. 61
-------------------------------------------------------------------------------- Net interest income decreased$20.1 million , or 8%, to$230.3 million in the first quarter of 2020 when compared to the same quarter of 2019. Tax equivalent net interest margin decreased 42 basis points to 3.17% from 3.59% when comparing the periods. Interest income decreased$23.2 million in the first quarter of 2020 when compared to the same quarter of 2019, as the yield on average earnings assets decreased 51 basis points to 4.17% from 4.68% when comparing the periods. The decrease in yield was primarily attributable to a 58 basis point decrease in the yield on average loans and leases. This was partially offset by a$1.6 billion increase in the average balance of loans and leases driven by organic loan growth throughout the Company's footprint. The decrease in interest income was also attributable to a$1.0 billion decrease in the average balance of investment securities and a 34 basis point decrease in the respective yield when comparing the periods. Interest expense decreased$3.0 million in the first quarter of 2020 when compared to the same quarter of 2019. Interest expense on borrowings decreased$6.5 million due to a$924.6 million decrease in the average balance on short-term borrowings from FHLB advance repayments and a 154 basis point decrease in the average rate paid when comparing the periods. This was partially offset by a$3.4 million increase in interest expense on deposits as the average balance on interest-bearing deposits increased$1.5 billion when compared to the first quarter of 2019. The average rate paid on interest-bearing deposits decreased 5 basis points when comparing the quarters. Earning assets yields and funding costs were impacted by threeFOMC target federal funds rate decreases of 25 basis points each in 2019 and a decrease of 150 basis points inMarch 2020 which lowered the target range to 0.00% to 0.25%. The following table displays the dollar amount of changes in interest income and interest expense for major components of earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times the average yield/rate for the two periods), (ii) changes attributable to rate (changes in average rate between periods times the average volume for the two periods), and (iii) total increase (decrease). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories. TABLE 3 - SUMMARY OF CHANGES IN NET INTEREST INCOME Three months ended March
31, 2020 compared to
Change Attributable To Net Increase (in thousands) Volume Rate (Decrease) Earning assets: Loans and leases: Commercial loans and leases $ 19,741 $ (26,188 ) $ (6,447 ) Residential mortgage loans 4,403 (1,775 ) 2,628 Consumer and other loans (4,932 ) (4,382 ) (9,314 ) Mortgage loans held for sale 866 (242 ) 624 Investment securities (6,748 ) (3,975 ) (10,723 ) Other earning assets 2,047 (1,970 ) 77 Net change in income on earning assets 15,377 (38,532 ) (23,155 ) Interest-bearing liabilities: Deposits: Interest-bearing demand deposits 986 (2,420 ) (1,434 ) Savings and money market accounts 3,347 (865 ) 2,482 Time deposits 1,730 663 2,393 Borrowings (3,917 ) (2,537 ) (6,454 ) Net change in expense on interest-bearing liabilities 2,146 (5,159 ) (3,013 ) Change in net interest income $ 13,231 $ (33,373 ) $ (20,142 ) 62
-------------------------------------------------------------------------------- Provision for Expected Credit Losses The provision for expected credit losses represents the expense necessary to maintain the AECL at a level that in management's judgment is appropriate to absorb estimated lifetime expected credit losses, including losses associated with unfunded commitments, inherent in the portfolio at the balance sheet date. The provision for expected credit losses totaled$69.0 million for the first quarter of 2020, a$55.2 million , or 401%, increase compared to the same period in 2019. The increase in the provision reflects the projected impact of the COVID-19 pandemic on expected future losses and to a much lesser extent the increase attributable to reserving for expected lifetime losses under CECL. For additional information about general asset quality trends, see the Asset Quality section of this MD&A. Non-interest Income Non-interest income was$64.7 million for the three months endedMarch 31, 2020 compared to$52.5 million for the same period of 2019, a$12.1 million , or 23%, increase. The increase was primarily attributable to an$11.4 million increase in mortgage income which was favorably impacted by a$230.2 million increase in sales volume and an increase in the fair value of mortgage derivatives. Title income increased$0.7 million due to increases in title insurance and closing fee income. This was partially offset by a decrease of$0.5 million in commission income due to lower customer swap activity. Non-interest Expense Non-interest expense was$177.4 million for the first quarter of 2020, an increase of$18.7 million , or 12%, when compared to the same period of 2019. For the quarter, the Company's efficiency ratio was 60.1%, compared to 52.4% in the first quarter of 2019. Other non-interest expense increased$8.7 million primarily from$5.5 million in credit valuation adjustments on customer derivatives during the first quarter of 2020. Other non-interest expense in the first quarter of 2019 was favorably impacted by interest received on refunds from the Company's federal income tax filings. Salaries and employee benefits increased$4.2 million , or 4%, when comparing the first quarter of 2020 to the same period of 2019, primarily driven by merit increases and an additional business day during the quarter. In addition, mortgage incentive expense was higher due to increased mortgage production. The increase in impairment of long-lived assets and other losses was a result of$2.4 million in impairment related to mortgage servicing rights during the first quarter of 2020. Net occupancy and equipment expense increased$1.4 million , primarily as a result of increases in rent, moving and merger-related expenses. Income Taxes The Company recorded income tax expense of$12.2 million for the three months endedMarch 31, 2020 and$30.3 million for the three months endedMarch 31, 2019 , which resulted in an effective income tax rate of 25.1% and 23.3%, respectively. The decrease in income tax expense was primarily the result of lower taxable income before income taxes in the current period. The Company's effective tax rate is impacted by state income taxes (net of federal income tax benefit), tax-exempt income, non-deductible expenses, and the recognition of tax credits. The effective tax rate may vary significantly due to fluctuations in the amount and source of pre-tax income, changes in amounts of non-deductible expenses, and timing of the recognition of tax credits. The Company's federal tax returns for the years 2014 to 2017 are currently under audit by the Internal Revenue Service. ANALYSIS OF FINANCIAL CONDITION Loans and Leases The Company had total loans and leases of$24.5 billion atMarch 31, 2020 , an increase of$520.1 million , or 2%, fromDecember 31, 2019 . The increase was a result of legacy loan growth of$736.7 billion , or 4%, offset by pay-downs and pay-offs on acquired loans. 63 -------------------------------------------------------------------------------- The Company believes its loan portfolio is diversified by product and geography throughout its footprint. Loan growth thus far in 2020 was strongest in the Corporate Asset Finance (equipment financing and leasing business) and Energy (primarily reserve-based and midstream lending) groups, as well as theHouston ,New Orleans andNew York markets. Loans in the Corporate Asset Finance group increased$172.1 million , or 22% sinceDecember 31, 2019 . In the first three months of 2020, theHouston market grew loans$119.4 million , or 9%, theNew Orleans market grew loans$96.7 million , or 4%, and theNew York market grew loans$47.4 million , or 9%. The Energy group grew loans and leases$46.0 million , or 4%, thus far in 2020. The Company's loan to deposit ratio was 96% atMarch 31, 2020 and 95% atDecember 31, 2019 . The percentage of fixed-rate loans to total loans was approximately 38% at bothMarch 31, 2020 andDecember 31, 2019 . Loans and leases outstanding atMarch 31, 2020 andDecember 31, 2019 by portfolio segment and class are presented in the following table. TABLE 4-SUMMARY OF LOANS March 31, 2020 December 31, 2019 $ Change % Change (in thousands) Balance Mix Balance Mix Commercial loans and leases: Real estate- construction$ 1,322,627 5 %$ 1,321,663 6 % 964 - Real estate- owner-occupied 2,424,139 10 2,475,326 10 (51,187 ) (2 ) Real estate- non-owner-occupied 6,484,257 27 6,267,106 26 217,151 3 Commercial and industrial (1) 6,909,841 28 6,547,538 27 362,303 6 Total commercial loans and leases 17,140,864 70 16,611,633 69 529,231 3
Consumer and other loans:
Residential mortgage 4,849,119 20 4,739,075 20 110,044 2 Home equity 1,926,753 8 1,987,336 8 (60,583 ) (3 ) Other 624,896 2 683,455 3 (58,559 ) (9 ) Total consumer and other loans 7,400,768 30 7,409,866 31 (9,098 ) - Total loans and leases$ 24,541,632 100 %$ 24,021,499 100 % 520,133 2
(1) Includes equipment financing leases
Commercial Loans and Leases Total commercial loans and leases increased$529.2 million , or 3%, fromDecember 31, 2019 . Commercial loans and leases were 70% of the total portfolio atMarch 31, 2020 and 69% atDecember 31, 2019 . Unfunded commitments on commercial loans including approved loan commitments not yet funded were$6.2 billion atMarch 31, 2020 , a decrease of$340.5 million , or 5%, when compared to the end of 2019. Commercial real estate loans include loans to commercial customers for medium-term financing of land and buildings or for land development or construction of a building. These loans are repaid from revenues through operations of the businesses, rents of properties, sales of properties and refinances. The Company's underwriting standards generally provide for loan terms of three to seven years, with amortization schedules of generally no more than twenty-five years. Low loan-to-value ratios are generally maintained and usually limited to no more than 80% at the time of origination. The commercial real estate portfolio is comprised of approximately 13% construction loans, 24% owner-occupied loans, and 63% non-owner-occupied loans as ofMarch 31, 2020 , relatively consistent with the portfolio mix atDecember 31, 2019 . Commercial real estate loans increased$166.9 million , or 2%, during the first three months of 2020, from loan growth across multiple markets, primarily in theHouston ,New Orleans , andMiami-Dade markets, which all had commercial real estate loan growth of over$50 million . 64 -------------------------------------------------------------------------------- Commercial and industrial loans and leases represent loans to commercial customers to finance general working capital needs, equipment purchases and leases and other projects where repayment is derived from cash flows resulting from business operations. The Company originates C&I loans and leases on a secured and, to a lesser extent, unsecured basis. C&I loans may be term loans or revolving lines of credit. Term loans are generally structured with terms of no more than three to seven years, with amortization schedules of generally no more than fifteen years. C&I term loans and leases are generally secured by equipment, machinery, or other corporate assets. Revolving lines of credit are generally structured as advances upon perfected security interests in accounts receivable and inventory and generally have annual maturities. As ofMarch 31, 2020 , C&I loans and leases totaled$6.9 billion , a$362.3 million , or 6%, increase fromDecember 31, 2019 , primarily driven by growth in the Company's Corporate Asset Finance and Energy groups, which grew C&I loans$172.1 million and$45.6 million , respectively, thus far in 2020. Commercial and industrial loans and leases comprised 28% of the total portfolio atMarch 31, 2020 and 27% atDecember 31, 2019 . The following table details the Company's commercial loans and leases by state. TABLE 5-COMMERCIAL LOANS AND LEASES BY STATE OF ORIGINATION (in thousands) March 31, 2020 December 31, 2019 $ Change % Change Louisiana$ 3,664,488 $ 3,586,091 78,397 2 Florida 4,875,938 4,802,565 73,373 2 Alabama 1,598,919 1,568,307 30,612 2 Texas (1) 2,917,050 2,780,641 136,409 5 Georgia 1,186,970 1,188,253 (1,283 ) - Arkansas 759,920 766,781 (6,861 ) (1 ) Tennessee 499,423 504,235 (4,812 ) (1 ) New York 143,770 110,503 33,267 30South Carolina and North Carolina 224,657 210,014 14,643 7 Other (2) 1,269,729 1,094,243 175,486 16 Total$ 17,140,864 $ 16,611,633 529,231 3
(1)
March 31, 2020 andDecember 31, 2019 , respectively. (2) Other loans include primarily equipment financing and corporate asset
financing loans and leases, which the Company does not classify by state.
Consumer and Other Loans The Company offers consumer loans in order to provide a full range of retail financial services to customers in the communities in which it operates. The Company originates substantially all of its consumer loans in its primary market areas. Residential mortgage loans consist of loans to consumers to finance a primary or secondary residence. The vast majority of the residential mortgage loan portfolio is comprised of non-conforming 1-4 family mortgage loans secured by properties located in the Company's market areas and is originated under terms and documentation that permit their sale in a secondary market. The larger mortgage loans of current and prospective private banking clients are generally retained to enhance relationships, but also tend to be more profitable due to the expected shorter durations and relatively lower servicing costs associated with loans of this size. The Company does not originate or hold negative amortization, option ARM, or other exotic mortgage loans in its portfolio. The Company makes insignificant investments in loans that would be considered sub-prime (e.g., loans with a credit score of less than 620) in order to facilitate compliance with relevant Community Reinvestment Act regulations. Total residential mortgage loans increased$110.0 million , or 2%, compared toDecember 31, 2019 , primarily the result of growth in theHouston ,New York ,Dallas ,Atlanta , andNew Orleans markets, which all had growth over$10 million . 65 -------------------------------------------------------------------------------- Home equity loans allow customers to borrow against the equity in their home and are secured by a first or second mortgage on the borrower's residence. Home equity loans were$1.9 billion atMarch 31, 2020 , a decrease of$60.6 million fromDecember 31, 2019 . Unfunded commitments related to home equity loans and lines were$1.0 billion atMarch 31, 2020 , a decrease of$30.0 million , or 3%, from the end of 2019. All other consumer loans, which consist of credit card loans, automobile loans and other personal loans, decreased$58.6 million , or 9%, fromDecember 31, 2019 , primarily from decreases in other personal loans and indirect automobile loans, a product that is no longer offered. Additional information on the Company's consumer loan portfolio is presented in the following tables. For the purposes of Table 7, unscoreable consumer loans have been included with loans with credit scores below 660. Credit scores reflect the most recent information available as of the dates indicated. TABLE 6-CONSUMER AND OTHER LOANS BY STATE OF ORIGINATION
(in thousands) March 31, 2020 December 31, 2019 $ Change % Change Louisiana$ 1,538,831 $ 1,564,325 (25,494 ) (2 ) Florida 3,411,439 3,418,268 (6,829 ) - Alabama 434,969 434,327 642 - Texas 624,719 581,754 42,965 7 Georgia 310,540 294,047 16,493 6 Arkansas 326,204 330,775 (4,571 ) (1 ) Tennessee 76,523 82,115 (5,592 ) (7 ) New York 410,197 396,092 14,105 4South Carolina and North Carolina 11,154 8,102 3,052 38 Other (1) 256,192 300,061 (43,869 ) (15 ) Total$ 7,400,768 $ 7,409,866 (9,098 ) -
(1) Other loans include primarily credit card and indirect consumer loans, which
the Company does not classify by state.
TABLE 7-CONSUMER AND OTHER LOANS BY CREDIT SCORE (in thousands) March 31, 2020 December 31, 2019 Above 720$ 4,617,815 $ 4,538,571 660-720 1,378,817 1,328,041 Below 660 1,404,136 1,543,254 Total$ 7,400,768 $ 7,409,866 Impact of COVID-19 Pandemic Due to the unprecedented economic disruption due to the COVID-19 pandemic, onMarch 27, 2020 , the CARES Act was signed into law, which provides relief for small businesses. Among other provisions, as part of this relief, the CARES Act established the Payroll Protection Program (PPP), intended to provide small businesses with eight weeks of cash flow assistance through loans that are fully guaranteed by the federal government. Loans funded under the PPP will be forgiven as long as the loan proceeds are used to cover payroll costs and most mortgage interest, rent, and utility costs over the eight-week period after the loan is funded and employee and compensation levels are maintained. Although loan terms are standard, the amount of the loan may vary by customer, but is limited by a$10 million cap. As ofApril 30, 2020 , the Company had funded approximately$1.6 billion in PPP loans to over 6,700 customers. These loans have been funded by short-term advances from the FHLB and deposits, with the majority of funding coming from non-interest-bearing deposits. As of that date, the Company had received approximately 7,400 additional applications for up to$560 million of loans under the PPP. 66 -------------------------------------------------------------------------------- In response to the COVID-19 pandemic, during the first quarter of 2020, the joint federal bank regulatory agencies issued an interagency statement that encouraged financial institutions to work with borrowers affected by COVID-19, specifically noting that theFDIC will not criticize financial institutions for prudent loan modifications and will not direct financial institutions to automatically categorize these COVID-19 related loan modifications as TDRs, as long as these modifications are short-term modifications made on a good faith basis. The Company continues to work with its affected customers, and in certain instances has deferred scheduled loan payments and/or loan maturities. As ofApril 30, 2020 , almost 4,800 customers have requested these deferrals for$3.5 billion in loans. All of these deferrals are for loans due in 2020, and none of the deferrals exceed a period of six months. In addition to these deferrals, the Company has funded loans with associated interest rate swap agreements, whereby the Company has advanced funds under the loan to fund interest payments on the swaps. As ofApril 30, 2020 , there were approximately$525 million of these loans. Certain industries have felt an immediate impact from social distancing measures implemented as a result of the pandemic. The Company has internally segmented its commercial loan and lease portfolio by immediacy and severity of impact, using a number of assumptions, to assess the risk of loss inherent in its portfolio. Certain industries are experiencing immediate severe disruption from various COVID-19-related impacts, including social distancing and a decline in commodity prices. Industries the Company has included in those immediately and severely impacted include hotels, lodging, and other traveler accommodation, restaurants and food service, retail, energy, and entertainment, among others. AtMarch 31, 2020 , approximately$4.4 billion , or 26%, of the Company's commercial loan and lease portfolio has been included in those industries immediately impacted and are most at risk of rating downgrades or default, and as a result are at an elevated risk of credit loss. Due to uncertainty as to the length and magnitude of the COVID-19 pandemic, as well as uncertainty as to the success of the CARES Act and other stimulus packages on the restoration of normal economic conditions, the long-term impact of the COVID-19 pandemic on expected future losses and overall asset quality of the Company's loan and lease portfolio are subject to change from current expectations. Mortgage Loans Held for Sale Mortgage loans held for sale totaled$207.8 million atMarch 31, 2020 , a decrease of$5.5 million , or 3%, from$213.4 million at year-end 2019, as sales have outpaced origination activity during the first quarter of 2020. The Company sells the majority of conforming mortgage loan originations in the secondary market rather than assume the interest rate risk associated with these longer term assets. Upon the sale, the Company retains servicing on a limited portion of these loans. Loans held for sale are primarily fixed-rate single-family residential mortgage loans under contracts to be sold in the secondary market. In most cases, loans in this category are sold within thirty days of closing. Buyers generally have recourse to return a purchased loan to the Company under limited circumstances. See Note 1, Summary of Significant Accounting Policies, in the 2019 10-K for further discussion.Investment Securities Investment securities decreased$23.4 million , or 1%, sinceDecember 31, 2019 to$4.1 billion atMarch 31, 2020 , primarily due to net principal payments, partially offset by increases in unrealized gains on the available-for-sale portfolio. Approximately 96% of the Company's investment portfolio is in AFS securities, which experience unrealized gains when interest rates fall. Investment securities approximated 13% of total assets atMarch 31, 2020 andDecember 31, 2019 , respectively. All of the Company's mortgage-backed securities were issued by government-sponsored enterprises atMarch 31, 2020 andDecember 31, 2019 . The Company does not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, or structured investment vehicles, nor does it hold any private label collateralized mortgage obligations, subprime, Alt-A, sovereign debt, or second lien elements in its investment portfolio. AtMarch 31, 2020 andDecember 31, 2019 , the Company's investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages. Funds generated as a result of sales and prepayments of investment securities are used to fund loan growth and purchase other securities. The Company continues to monitor market conditions and take advantage of market opportunities with appropriate risk and return elements. 67 -------------------------------------------------------------------------------- Asset Quality The lending activities of the Company are governed by underwriting policies established by management and approved by the Board Risk Committee of the Board of Directors. For additional information on loan underwriting, loan origination, monitoring of loan payment performance, loan review, and the determination of past due and non-accrual status, as well as the Company's policies for recording payments received, placing loans and leases on non-accrual status, and the resumption of interest accrual on non-accruing loans and leases, see Note 1, Description of Business, Basis of Presentation, and Changes in Significant Accounting Policies, in the accompanying consolidated financial statements. For commercial loans and leases, the Company utilizes regulatory classification ratings to monitor credit quality. For further discussion of regulatory classification ratings, see Note 5, Allowance for Expected Credit Losses And Credit Quality, to the unaudited consolidated financial statements. For consumer loans, the Company utilizes FICO scores to monitor credit quality as these are widely accepted measures of a borrowers risk of non-repayment over the life of a loan. These credit quality indicators are continually updated and monitored. Real estate acquired by the Company through foreclosure or by deed-in-lieu of foreclosure is classified as OREO, and is recorded at the lesser of the related loan balance (the pro-rata carrying value for acquired loans) or estimated fair value less costs to sell. Closed bank branches are also classified as OREO and recorded at the lower of cost or market value. Non-performing Assets and Troubled Debt RestructuringsThe Company defines non-performing assets as non-accrual loans, accruing loans more than 90 days past due, OREO, and foreclosed property. Management continuously monitors and transfers loans to non-accrual status when warranted. Under GAAP, certain loan modifications or restructurings are designated as TDRs. In general, the modification or restructuring of a debt constitutes a TDR if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise consider under current market conditions. Prior to the adoption of ASC 326 onJanuary 1, 2020 , acquired loans that reflected credit deterioration since origination to the extent that it was probable that the Company would be unable to collect all contractually required payments were classified as purchased credit impaired loans, or "acquired impaired loans". All other acquired loans were classified as purchased non-impaired loans, or "acquired non-impaired loans". In accordance with ASC Topic 310-30, at the time of acquisition, acquired impaired loans were accounted for individually or aggregated into loan pools with similar characteristics. From these pools, the Company used certain loan information to estimate the expected cash flows for each loan pool. For acquired impaired loans, the expected cash flows at the acquisition date in excess of the fair value of loans were recorded as interest income over the life of the loans using a level yield method if the timing and amount of future cash flows was reasonably estimable. The adoption of ASC 326 resulted in a change in the accounting for purchased credit impaired loans, which are considered purchased credit deteriorated (PCD) loans under ASC 326. Prior toJanuary 1, 2020 , past due and non-accrual loan and lease amounts excluded PCD loans, even if contractually past due or if the Company did not expect to receive payment in full, as the Company was accreting interest income over the expected life of the loans. Accordingly, the asset quality measures atMarch 31, 2020 are not comparable to prior periods. 68 --------------------------------------------------------------------------------
The following table sets forth the composition of the Company's non-performing assets and TDRs for the periods indicated.
TABLE 8-NON-PERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (in thousands) March 31, 2020 December 31, 2019 $ Change % Change Non-accrual loans and leases: Commercial$ 84,712 $ 76,287 8,425 11 Mortgage 48,067 34,833 13,234 38 Consumer and other 33,784 27,785 5,999 22 Total non-accrual loans and leases 166,563 138,905 27,658 20 Accruing loans and leases 90 days or more past due 10,963 3,257 7,706 237 Total non-performing loans and leases (1) 177,526 142,162 35,364 25 OREO and foreclosed property (2) 15,893 27,985 (12,092 ) (43 ) Total non-performing assets 193,419 170,147 23,272 14 Performing troubled debt restructurings (3) 68,113 67,972 141 - Total non-performing assets and performing troubled debt restructurings$ 261,532 $ 238,119 23,413 10 Non-performing loans and leases to total loans and leases (1) 0.72 % 0.59 % Non-performing assets to total assets 0.60 % 0.54 % Non-performing assets and performing troubled debt restructurings to total assets (2) 0.81 % 0.75 % Allowance for expected credit losses to non-performing loans and leases 171.80 % 114.82 % Allowance for expected credit losses to total loans and leases 1.24 % 0.68 %
(1) Non-performing loans exclude acquired impaired loans, even if contractually
past due or if the Company does not expect to receive payment in full, as
the Company was currently accreting interest income over the expected life
of the loans prior to
31, 2020 included
million in accruing loans and leases 90 days or more past due that are PCD
loans.
(2) There were no former bank properties held for development or resale at March
31, 2020 or
(3) Performing troubled debt restructurings for
2019 exclude
restructurings that meet non-performing asset criteria.
Total non-performing assets increased$23.3 million , or 14%, compared toDecember 31, 2019 , as non-performing loans and leases increased$35.4 million and OREO and foreclosed property decreased$12.1 million from the sale of multiple properties in the first three months of 2020. Non-performing loans and leases increased partially driven by the implementation of CECL which requires acquired impaired loans to be classified as non-accrual or past due based on performance. The increase was also driven by an increase in non-accrual mortgage and commercial loans, as a limited number of loans moved to non-accrual in 2020. Potential Problem Loans AtMarch 31, 2020 , the Company had$168.5 million of commercial loans and leases classified as substandard and$27.8 million of commercial loans classified as doubtful. Accordingly, the aggregate of the Company's classified commercial loans was 0.61% of total assets and 1.15% of total commercial loans atMarch 31, 2020 . AtDecember 31, 2019 , classified commercial loans totaled$158.5 million , or 0.50% of total assets, and 0.95% of total commercial loans. The increase from year-end 2019 was primarily driven by the downgrades of a limited number of larger commercial loans during 2020. 69 -------------------------------------------------------------------------------- In addition to the problem loans described above, there were$96.9 of commercial loans classified as special mention atMarch 31, 2020 , which in management's opinion were subject to potential future rating downgrades. Special mention loans have potential weaknesses that, if left uncorrected, may result in deterioration of the Company's credit position at some future date. Special mention loans decreased$30.8 million , or 24%, from year-end 2019, and were 0.57% of total commercial loans atMarch 31, 2020 and 0.77% atDecember 31, 2019 . Past Due and Non-accrual Loans Past due status is based on the contractual terms of loans. Total past due and non-accrual loans were 1.05% of total loans and leases atMarch 31, 2020 compared to 0.88% atDecember 31, 2019 . Additional information on past due loans and leases is presented in the following table. TABLE 9-PAST DUE AND NON-ACCRUAL LOAN SEGREGATION (1) March 31, 2020 December 31, 2019 % of % of Outstanding Outstanding (in thousands) Amount Balance Amount Balance $ Change % Change Accruing loans and leases 30-59 days past due$ 62,372 0.25$ 44,119 0.19 18,253 41 60-89 days past due 18,330 0.07 24,085 0.10 (5,755 ) (24 ) 90-119 days past due 9,023 0.04 2,217 0.01 6,806 307 120 days past due or more 1,940 0.01 1,040 - 900 87 91,665 0.37 71,461 0.30 20,204 28 Non-accrual loans and leases 166,563 0.68 138,905 0.58 27,658 20 Total past due and non-accrual loans and leases$ 258,228 1.05$ 210,366 0.88 47,862 23
(1) Prior to
loans, even if contractually past due, or if the Company did not expect to
receive payment in full, as the Company was accreting interest income over
the expected life of the loans.
Total past due and non-accrual loans and leases increased$47.9 million fromDecember 31, 2019 to$258.2 million atMarch 31, 2020 . The implementation of CECL requires purchased credit deteriorated loans to be classified as non-accrual or past due based on performance, resulting in a$14.7 million increase in non-accrual loans and a$5.6 million increase in accruing loans past due more than 30 days. The remaining increases were a result of the movement of a limited number of loans to non-accrual and accruing past due during the first quarter of 2020. Of the total accruing past due loans, 68% were past due less than 60 days compared to 62% at year-end 2019, and 88% were past due less than 90 days compared to 95% at year-end 2019. Allowance for Expected Credit Losses The AECL represents management's best estimate of lifetime expected credit losses, including losses associated with unfunded commitments, inherent at the balance sheet date. Determination of the AECL involves a high degree of complexity and requires significant judgment. Several factors are taken into consideration in the determination of the overall AECL, including but not limited to past events, current conditions, and reasonable and supportable forecasts of future economic conditions. Based on facts and circumstances available, management of the Company believes that the AECL was appropriate atMarch 31, 2020 to cover future expected credit losses over the life of the Company's loan and lease portfolio. However, future adjustments to the allowance may be necessary, and the results of operations could be adversely affected, if circumstances differ substantially from the assumptions used by management in determining the AECL. See "Application of Critical Accounting Policies and Estimates" included in MD&A, Note 1, Description of Business, Basis of Presentation, and Changes in Significant Accounting Policies, Note 2, Recent Accounting Pronouncements, and Note 5, Allowance for Expected Credit Losses and Credit Quality, to the unaudited consolidated financial statements, for more information. 70 --------------------------------------------------------------------------------
The following table sets forth the activity in the Company's AECL for the
three-month periods ended
TABLE 10-SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR CREDIT LOSSES (in thousands)
March 31, 2020
$ 146,588 $
140,571
Transition adjustment for ASC 326 83,194
-
Allowance for loan and lease losses, as adjusted 229,782
140,571
Provision for loan and lease losses 66,431
12,612
Transfer of balance to OREO and other - (2,885 ) Charge-offs (12,119 ) (8,918 ) Recoveries 2,591 1,586 Allowance for loan and lease losses at end of period$ 286,685 $
142,966
Reserve for unfunded commitments at beginning of period 16,637
14,830
Transition adjustment for ASC 326 (875 )
-
Reserve for unfunded lending commitments, as adjusted 15,762
14,830
Provision for unfunded lending commitments 2,540
1,151
Reserve for unfunded lending commitments at end of period
18,302
15,981
Allowance for expected credit losses at end of period$ 304,987 $
158,947
The AECL totaled$305.0 million atMarch 31, 2020 compared to$163.2 million atDecember 31, 2019 . The AECL was 1.24% of total loans and leases atMarch 31, 2020 and 0.68% atDecember 31, 2019 . The Company adopted ASC 326 onJanuary 1, 2020 which resulted in an$82.3 million increase in the AECL. Additionally, the AECL increased as a result of higher expected credit losses in future periods, including those as a result of the COVID-19 pandemic. Net charge-offs during the three months endedMarch 31, 2020 were$9.5 million , an increase of$2.2 million from the comparable 2019 period. Net charge-offs were 0.16% of average loans and leases on an annualized basis for the three months endedMarch 31, 2020 compared to 0.13% for the comparable 2019 period. The provision for loan and lease losses covered 697% and 172% of net charge-offs for the first three months of 2020 and 2019, respectively. AtMarch 31, 2020 andDecember 31, 2019 , the ALLL covered 161% and 103% of total non-performing loans and leases, respectively. FUNDING SOURCES Deposits are the Company's principal source of funds for use in lending and other business purposes. The Company attracts local deposit accounts by offering a wide variety of products, competitive interest rates and convenient branch office locations and service hours, as well as online banking services at www.iberiabank.com and www.virtualbank.com. The Company's continued focus on increasing core deposits has been accomplished through the development of client relationships and, in the past, through acquisitions. Short-term and long-term borrowings are also important funding sources for the Company. Other funding sources include subordinated debt and shareholders' equity. Refer to the Liquidity and Other Off-Balance Sheet Activities section of this MD&A for further discussion of the Company's sources and uses of funding. The following discussion highlights the major changes in the mix of deposits and other funding sources during the first three months of 2020. 71 --------------------------------------------------------------------------------
Deposits
Total deposits increased$306.9 million , or 1%, to$25.5 billion atMarch 31, 2020 , from$25.2 billion atDecember 31 , 2019.The following table sets forth the composition of the Company's deposits as of the dates indicated. TABLE 11-DEPOSIT COMPOSITION BY PRODUCTMarch 31, 2020 December 31 ,
2019
(in thousands) Ending Balance Mix Ending Balance
Mix $ Change % Change Non-interest-bearing deposits$ 6,628,901 26 %$ 6,319,806 25 % 309,095 5 Interest-bearing demand deposits 5,046,434 20 4,821,252 19 225,182 5 Money market accounts 9,305,923 36 9,121,283 36 184,640 2 Savings accounts 703,862 3 683,366 3 20,496 3 Time deposits 3,841,117 15 4,273,642 17 (432,525 ) (10 ) Total deposits$ 25,526,237 100 %$ 25,219,349 100 % 306,888 1 Short-term Borrowings The Company may obtain advances from the FHLB ofDallas based upon its ownership of FHLB stock and certain pledges of its real estate loans and investment securities, provided certain standards related to the Company's creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. The level of short-term borrowings can fluctuate significantly on a daily basis depending on funding needs and the source of funds chosen to satisfy those needs. The Company also enters into repurchase agreements to facilitate customer transactions that are accounted for as secured borrowings. These transactions typically involve the receipt of deposits from customers that the Company collateralizes with its investment portfolio. Repurchase agreements had an average rate of 44.7 basis points as ofMarch 31, 2020 . Total short-term borrowings increased$186.5 million , or 91%, fromDecember 31, 2019 , to$390.7 million atMarch 31, 2020 , primarily due to additional short-term FHLB advances made in the first quarter of 2020. On a period-end basis, short-term borrowings were 1% of total liabilities and 23% of total borrowings atMarch 31, 2020 compared to 1% and 13%, respectively, atDecember 31, 2019 . On a quarter-to-date average basis, short-term borrowings decreased$924.6 million , or 80%, compared to the first quarter of 2019 and were 1% of total liabilities and 14% of total borrowings in the first quarter of 2020, compared to 4% and 44%, respectively, during the same period of 2019. Long-term Debt Long-term debt decreased$55.5 million , or 4%, fromDecember 31, 2019 , to$1.3 billion atMarch 31, 2020 , primarily due to advance repayments on long-term FHLB advances. On a period-end basis, long-term debt was 5% of total liabilities atMarch 31, 2020 andDecember 31, 2019 , respectively. On a quarter-to-date average basis, long-term debt decreased to$1.3 billion in the first quarter of 2020,$121.9 million , or 8%, lower than the first quarter of 2019, and were 5% of total liabilities in the first quarter of 2020 and 2019. Long-term debt atMarch 31, 2020 included$1.1 billion in fixed-rate advances from the FHLB ofDallas that cannot be prepaid without incurring substantial penalties. The remaining debt consisted of$120.1 million of the Company's junior subordinated debt and$35.0 million in notes payable on investments in new market tax credit entities. CAPITAL RESOURCES
Shareholders' Equity
Shareholders' equity increased$10.4 million during the first three months of 2020. The increase in shareholders' equity during the period was attributable to an increase in accumulated other comprehensive income of$66.4 million , primarily resulting from unrealized gains on the Company's available-for-sale securities portfolio, and undistributed income of$8.1 million . These increases in shareholders' equity were partially offset by a$67.6 million transition adjustment related to the adoption of the CECL methodology. 72 -------------------------------------------------------------------------------- The Company's quarterly dividend to common shareholders was$0.47 per common share in the first quarter of 2020 compared to$0.43 in the first quarter of 2019, a 9% increase. The dividend payout ratio was 75.3% for the first quarter of 2020 compared to 24.3% in 2019. The increase was the result of both a higher dividend paid and lower income available to common shareholders.Regulatory Capital Federal regulations impose minimum regulatory capital requirements on all institutions with deposits insured by theFDIC . The FRB imposes similar capital regulations on bank holding companies. Compliance with bank and bank holding company regulatory capital requirements, which include leverage and risk-based capital guidelines, are monitored by the Company on an ongoing basis. Under the risk-based capital method, a risk weight is assigned to balance sheet and off-balance sheet items based on regulatory guidelines. AtMarch 31, 2020 andDecember 31, 2019 , the Company exceeded all required regulatory capital ratios, and the regulatory capital ratios ofIBERIABANK were in excess of the levels established for "well-capitalized" institutions, as shown in the following table. In response to the COVID-19 pandemic, during the first quarter of 2020, the joint federal bank regulatory agencies issued an interim final rule that allows financial institutions to mitigate the effects of the adoption of CECL on regulatory capital. Because the Company adopted CECL as ofJanuary 1, 2020 , it has elected to mitigate the estimated cumulative effects of adoption on regulatory capital for two years, after which the effects of adoption will be phased-in over a three-year period fromJanuary 1, 2022 throughDecember 31, 2024 . Under the interim final rule, the adjustments to regulatory capital that are deferred until the phase-in period include both the initial impact of the adoption of CECL atJanuary 1, 2020 on retained earnings, as well as 25% of the subsequent change in the Company's total allowance for expected credit losses during each three-month period of the two-year period endingDecember 31, 2021 . Capital amounts and ratios atMarch 31, 2020 in the table below reflect the adoption of the CECL regulatory capital adjustment. TABLE 12-REGULATORY CAPITAL RATIOS Well- March 31, 2020 December 31, 2019 Capitalized Ratio Entity Minimums Actual Actual Tier 1 Leverage IBERIABANK Corporation N/A 9.93 % 9.90 % IBERIABANK 5.00 % 9.82 9.69
Common Equity Tier 1 (CET1)
10.44 10.52 IBERIABANK 6.50 % 11.16 11.14
Tier 1
11.28 11.38 IBERIABANK 8.00 % 11.16 11.14
12.48 12.43 IBERIABANK 10.00 % 11.94 11.76 Minimum capital ratios are subject to a capital conservation buffer. In order to avoid limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers, an institution must hold a capital conservation buffer above its minimum risk-based capital requirements. This capital conservation buffer is calculated as the lowest of the differences between the actual CET1 ratio, Tier 1 Risk-Based Capital Ratio, andTotal Risk-Based Capital ratio and the corresponding minimum ratios. AtMarch 31, 2020 , the required minimum capital conservation buffer was 2.50%. AtMarch 31, 2020 , the capital conservation buffers of the Company andIBERIABANK were 4.48% and 3.94%, respectively. LIQUIDITY AND OTHER OFF-BALANCE SHEET ACTIVITIES Liquidity refers to the Company's ability to generate sufficient cash flows to support its operations and to meet its obligations, including the withdrawal of deposits by customers, commitments to originate loans, and its ability to repay its borrowings and other liabilities. Liquidity risk is the risk to earnings or capital resulting from the Company's inability to fulfill its obligations as they become due. Liquidity risk also develops from the Company's failure to timely recognize or address changes in market conditions that affect the ability to liquidate assets in a timely manner or to obtain adequate funding to continue to operate on a profitable basis. 73 -------------------------------------------------------------------------------- The primary sources of funds for the Company are deposits and borrowings. Other sources of funds include repayments and maturities of loans and investment securities, securities sold under agreements to repurchase, and, to a lesser extent, off-balance sheet borrowing availability. Time deposits scheduled to mature in one year or less atMarch 31, 2020 totaled$3.4 billion . Based on past experience, management believes that a significant portion of maturing deposits will remain with the Company. Additionally, the majority of the investment securities portfolio is classified as available for sale, which provides the ability to liquidate unencumbered securities as needed. Of the$4.1 billion in the investment securities portfolio,$1.7 billion is unencumbered and$2.4 billion has been pledged to support repurchase transactions, public funds deposits and certain long-term borrowings. Due to the relatively short implied duration of the investment securities portfolio, the Company has historically experienced consistent cash inflows on a regular basis. Securities cash flows are highly dependent on prepayment speeds and could change materially as economic or market conditions change. Scheduled cash flows from the amortization and maturities of loans and securities are relatively predictable sources of funds. Conversely, deposit flows, prepayments of loans and securities, and draws on customer letters and lines of credit are greatly influenced by general interest rates, economic conditions, competition, and customer demand. The FHLB ofDallas provides an additional source of liquidity to make funds available for general requirements and also to assist with the variability of less predictable funding sources. AtMarch 31, 2020 , the Company had$1.3 billion in outstanding FHLB advances,$218.0 million of which was short-term and$1.1 billion that was long-term. Additional FHLB borrowing capacity available atMarch 31, 2020 amounted to$8.0 billion . AtMarch 31, 2020 , the Company also had various funding arrangements with theFederal Reserve discount window and commercial banks providing up to$606.0 million in the form of federal funds and other lines of credit. AtMarch 31, 2020 , there were no balances outstanding on these lines and all of the funding was available to the Company. Liquidity management is both a daily and long-term function of business management. The Company manages its liquidity with the objective of maintaining sufficient funds to respond to the predicted needs of depositors and borrowers and to take advantage of investments in earning assets and other earnings enhancement opportunities. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, the Company maintains a strategy of investing in various lending and investment security products. The Company uses its sources of funds primarily to fund loan commitments and meet its ongoing commitments associated with its operations. The Company has adequate availability of funds from deposits, borrowings, repayments and maturities of loans and investment securities to provide the Company additional working capital if needed. Additionally, onMarch 15, 2020 , in response to the COVID-19 pandemic, theFederal Reserve Board reduced reserve requirements for insured depository institutions to zero percent, which further increased the Company's available liquidity. Based on its available cash atMarch 31, 2020 and current deposit modeling, the Company believes it has adequate liquidity to fund ongoing operations as it enters a period of uncertain economic conditions related to COVID-19. The Company will continue to closely monitor liquidity as economic conditions change. In the normal course of business, the Company is a party to a number of activities that contain credit, market and operational risk that are not reflected in whole or in part in the Company's consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments. The Company provides customers with off-balance sheet credit support through loan commitments, lines of credit, and standby letters of credit. Many of the commitments are expected to expire unused or be only partially used; therefore, the total amount of commitments does not necessarily represent future cash requirements. Based on its available liquidity and available borrowing capacity, the Company anticipates it will continue to have sufficient funds to meet its current commitments. ASSET/LIABILITY MANAGEMENT, MARKET RISK AND COUNTERPARTY CREDIT RISK The principal objective of the Company's asset and liability management function is to evaluate the Company's interest rate risk included in certain balance sheet accounts, determine the appropriate level of risk given the Company's business focus, operating environment, capital and liquidity requirements, and performance objectives, establish prudent asset concentration guidelines and manage the risk consistent with Board-approved guidelines. Through such management, the Company seeks to reduce the vulnerability of its operations to changes in interest rates. The Company's actions in this regard are taken under the guidance of theAsset and Liability Committee .The Asset and Liability Committee reviews, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions, and interest rates. As part of this review, theAsset and Liability Committee generally reviews the Company's liquidity, cash flow needs, composition of investments, deposits, borrowings, and capital position. 74 -------------------------------------------------------------------------------- The objective of interest rate risk management is to control the effects that interest rate fluctuations have on net interest income and on the net present value of the Company's earning assets and interest-bearing liabilities. Management and the Board are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulation and asset/liability net present value sensitivity analyses. The Company uses financial modeling to measure the impact of changes in interest rates on the net interest margin and to predict market risk. Estimates are based upon numerous assumptions including the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. These analyses provide a range of potential impacts on net interest income and portfolio equity caused by interest rate movements. Included in the modeling are instantaneous parallel rate shift scenarios, which are utilized to establish exposure limits. These scenarios are known as "rate shocks" because all rates are modeled to change instantaneously by the indicated shock amount, rather than a gradual rate shift over a period of time. The Company's interest rate risk model indicates that the Company is asset sensitive in terms of interest rate sensitivity. Based on the Company's interest rate risk model atMarch 31, 2020 , the table below illustrates the impact of an immediate and sustained 100 and 200 basis point increase or decrease in interest rates on net interest income over the next twelve months. TABLE 13-INTEREST RATE SENSITIVITY
Shift in Interest Rates % Change in Projected (in bps) Net Interest Income +200 4.9% +100 3.8% -100 -6.3% -200 -3.2% The influence of using the forward curve as ofMarch 31, 2020 as a basis for projecting the interest rate environment would approximate a 4.8% decrease in net interest income over the next 12 months. The computations of interest rate risk shown above are performed on a static balance sheet and do not necessarily include certain actions that management may undertake to manage this risk in response to unanticipated changes in interest rates and other factors including shifts in deposit behavior. The short-term interest rate environment is primarily a function of the monetary policy of the FRB. The principal tools of the FRB for implementing monetary policy are open market operations, or the purchases and sales ofU.S. Treasury and Federal agency securities, as well as the establishment of a short-term target rate. The FRB's objective for open market operations has varied over the years, but the focus has gradually shifted toward attaining a specified level of the federal funds rate to achieve the long-run goals of price stability and sustainable economic growth. The federal funds rate is the basis for overnight funding and drives the short end of the yield curve. Longer maturities are influenced by the market's expectations for economic growth and inflation, but can also be influenced by FRB purchases and sales and expectations of monetary policy going forward. TheFOMC of the FRB, in an attempt to stimulate the overall economy, has, among other things, kept interest rates low through its targeted federal funds rate. InMarch 2020 , in response to the COVID-19 pandemic, its effect on economic activity in the near term and the risk it poses to the economic outlook, theFOMC lowered the target range for the federal funds rate 150 basis points to 0.00% to 0.25%. TheFOMC expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. Maintaining the current level of the federal funds rate could cause overall interest rates to fall, which may negatively impact financial performance from greater borrower refinancing incentives. Increases in the federal funds rate and the unwinding of its balance sheet could cause overall interest rates to rise, which may negatively impact theU.S. real estate markets and affect deposit growth and pricing. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans, which could negatively affect our financial performance. 75 -------------------------------------------------------------------------------- The Company's commercial loan portfolio is also impacted by fluctuations in the level of one-month LIBOR, as a large portion of this portfolio reprices based on this index, and to a lesser extent Prime. Net interest income may be reduced if more interest-earning assets than interest-bearing liabilities reprice or mature during a period when interest rates are declining, or if more interest-bearing liabilities than interest-earning assets reprice or mature during a period when interest rates are rising. InJuly 2017 , theFinancial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The ARRC has proposed that SOFR is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. We are not currently able to predict the impact that the transition from LIBOR will have on the Company though we are monitoring this activity and evaluating related risks. Efforts the Company has initiated include (1) developing an inventory of affected loans, securities and other instruments, (2) evaluating and drafting modifications as needed to address loans outstanding at the time of LIBOR retirement and (3) assessing revisions to product pricing structures based on alternative reference rates.
The table below presents the Company's anticipated repricing of loans and investment securities over the next four quarters.
TABLE 14-REPRICING OF CERTAIN EARNING ASSETS (1) Total less than (in thousands) 2Q 2020 3Q 2020 4Q 2020 1Q 2021 one year Investment securities$ 536,908 $ 317,277 $ 303,271 $ 241,952 $ 1,399,408 Fixed rate loans 850,779 688,231 631,080 602,788 2,772,878 Variable rate loans 12,022,412 463,435 390,681 342,923 13,219,451 Total$ 13,410,099 $ 1,468,943 $ 1,325,032 $ 1,187,663 $ 17,391,737
(1) Amounts include expected maturities, scheduled paydowns, expected prepayments, and loans subject to caps and floors and exclude the repricing of assets from prior periods, as well as non-accrual loans and market value adjustments.
As part of its asset/liability management strategy, the Company has generally seen greater levels of loan originations with adjustable or variable rates of interest in commercial and consumer loan products, which typically have shorter terms than residential mortgage loans. The majority of fixed-rate, long-term, agency-conforming residential loans are sold in the secondary market to avoid bearing the interest rate risk associated with longer duration assets in the current rate environment. However, the Sabadell andGibraltar acquisitions brought a considerable amount of jumbo, non-agency-conforming residential mortgage loan exposure onto the balance sheet, both fixed rate and variable rate in nature, which has increased the overall duration of the portfolio. As ofMarch 31, 2020 ,$15.3 billion , or 62%, of the Company's total loan portfolio had variable interest rates, of which$3.0 billion , or 20%, had an expected repricing date beyond the next four quarters. The Company had no significant concentration to any single borrower or industry segment atMarch 31, 2020 . The Company's strategy with respect to liabilities in recent periods has been to emphasize transaction accounts, particularly non-interest or low interest-bearing transaction accounts, which are significantly less sensitive to changes in interest rates. AtMarch 31, 2020 , 85% of the Company's deposits were in transaction and limited-transaction accounts, compared to 83% atDecember 31, 2019 . Non-interest-bearing transaction accounts were 26% of total deposits atMarch 31, 2020 , compared to 25% of total deposits atDecember 31, 2019 . The behavior of non-interest-bearing deposits and other types of demand deposits is one of the most important assumptions used in determining the interest rate and liquidity risk positions. A loss of these deposits in the future would reduce the asset sensitivity of the Company's balance sheet as interest-bearing funds would most likely be increased to offset the loss of this favorable funding source. 76 --------------------------------------------------------------------------------
The table below presents the Company's anticipated repricing of liabilities over the next four quarters.
TABLE 15-REPRICING OF LIABILITIES (1) Total less than (in thousands) 2Q 2020 3Q 2020 4Q 2020 1Q 2021 one year Time deposits$ 1,413,567 $ 1,018,747 $ 544,535 $ 441,557 $ 3,418,406
Short-term borrowings 390,747 - - - 390,747 Long-term debt 240,645 150,430 256,784 50,335 698,194 Total$ 2,044,959 $ 1,169,177 $ 801,319 $ 491,892 $ 4,507,347 (1) Amounts exclude the repricing of liabilities from prior periods. As part of an overall interest rate risk management strategy, derivative instruments may also be used as an efficient way to modify the repricing or maturity characteristics of on-balance sheet assets and liabilities. Management may from time to time engage in such derivative instruments to effectively manage interest rate risk. These derivative instruments of the Company would modify net interest sensitivity to levels deemed appropriate. IMPACT OF INFLATION OR DEFLATION AND CHANGING PRICES The unaudited consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, the majority of the Company's assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Company's performance than does the effect of inflation. Although fluctuations in interest rates are neither completely predictable nor controllable, the Company regularly monitors its interest rate position and oversees its financial risk management by establishing policies and operating limits. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. Although not as critical to the banking industry as to other industries, inflationary factors may have some impact on the Company's growth, earnings, total assets and capital levels. Management does not expect inflation to be a significant factor in 2020. Conversely, a period of deflation could affect our business, as well as all financial institutions and other industries. Deflation could lead to lower profits, higher unemployment, lower production and deterioration in overall economic conditions. In addition, deflation could depress economic activity, including loan demand and the ability of borrowers to repay loans, and consequently impair earnings through increasing the value of debt while decreasing the value of collateral for loans. Management believes the most significant potential impact of deflation on financial results relates to the Company's ability to maintain a sufficient amount of capital to cushion against future losses. However, the Company could employ certain risk management tools to maintain its balance sheet strength in the event a deflationary scenario were to develop. 77 -------------------------------------------------------------------------------- Non-GAAP Measures This discussion and analysis contains financial information determined by methods other than in accordance with GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. Non-GAAP measures include, but are not limited to, descriptions such as core, tangible, and pre-tax pre-provision. These measures typically adjust GAAP performance measures to exclude the effects of the amortization of intangibles and include the tax benefit associated with revenue items that are tax-exempt, as well as adjust income available to common shareholders for certain significant activities or transactions that, in management's opinion, can distort period-to-period comparisons of the Company's performance. Transactions that are typically excluded from non-GAAP performance measures include realized and unrealized gains/losses on former bank owned real estate, realized gains/losses on securities, income tax gains/losses, merger-related charges and recoveries, litigation charges and recoveries, and debt repayment penalties. Management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company's core businesses. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of GAAP to non-GAAP disclosures are presented in Table 16. The Company is unable to estimate GAAP EPS guidance without unreasonable efforts due to the nature of one-time or unusual items that cannot be predicted, and therefore has not provided this information under Regulation S-K Item 10(e)(1)(i)(B). TABLE 16-RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES Three Months Ended March 31, 2020 March 31, 2019 (in thousands, except per share amounts) Pre-tax After-tax Per share (2) Pre-tax After-tax Per share (2) Net income$ 48,600 $ 36,425 $ 0.69$ 130,477 $ 100,131 $ 1.82 Less: Preferred stock dividends - 3,598 0.07 - 3,598 0.07 Income available to common shareholders (GAAP)$ 48,600 $ 32,827 $ 0.62 $
130,477
Non-interest expense adjustments (1): Merger-related expense 2,734 2,157 0.04 (334 ) (254 ) - Hazard-related expense 281 213 - - - - Compensation-related expense - - - (9 ) (7 ) - Impairment of long-lived assets, net of (gain) loss on sale (4 ) (3 ) - 986 749 0.01 Other non-core non-interest expense - - - (3,129 ) (2,378 ) (0.04 ) Total non-interest expense adjustments 3,011 2,367 0.04 (2,486 ) (1,890 ) (0.03 ) Income tax expense (benefit) - other - 241 0.01 - - - Core earnings (Non-GAAP) 51,611 35,435 0.67 127,991 94,643 1.72 Provision for expected credit losses (1) 68,971 52,418 13,763 10,460 Pre-provision earnings, as adjusted (Non-GAAP)$ 120,582 $ 87,853 $
141,754
(1) Excluding preferred stock dividends and merger-related expense, after-tax
amounts are calculated using a tax rate of 24%, which approximates the marginal tax rate. (2) Diluted per share amounts may not appear to foot due to rounding. 78
--------------------------------------------------------------------------------
As of and For the Three Months Ended March 31, (in thousands) 2020 2019 Net interest income (GAAP)$ 230,342 $ 250,484 Taxable equivalent benefit 1,311 1,349 Net interest income (TE) (Non-GAAP) (1)$ 231,653 $ 251,833 Non-interest income (GAAP)$ 64,656 $ 52,509 Taxable equivalent benefit 484 478 Non-interest income (TE) (Non-GAAP) (1) 65,140
52,987
Taxable equivalent revenues (Non-GAAP) (1) 296,793
304,820
Securities (gains) losses and other non-core non-interest income - -
Core taxable equivalent revenues (Non-GAAP) (1)
Total non-interest expense (GAAP)$ 177,427 $ 158,753 Less: Intangible amortization expense 4,187
5,009
Tangible non-interest expense (Non-GAAP) (2) 173,240
153,744
Less: Merger-related expense 2,734 (334 ) Hazard-related expense 281 - Compensation-related expense - (9 )
Impairment of long-lived assets, net of (gain) loss on sale
(4 ) 986 Other non-core non-interest expense -
(3,129 )
Core tangible non-interest expense (Non-GAAP)(2)
Average assets (GAAP)$ 31,986,139 $ 30,833,500 Less: Average intangible assets, net 1,295,180
1,313,368
Total average tangible assets (Non-GAAP) (2)
Total shareholders' equity (GAAP)$ 4,347,107 $ 4,141,831 Less: Goodwill and other intangibles 1,292,910
1,310,458
Preferred stock 228,485
132,097
Tangible common equity (Non-GAAP) (2)$ 2,825,712
Average shareholders' equity (GAAP)$ 4,339,033 $ 4,105,503 Less: Average preferred equity 228,485
132,097
Average common equity 4,110,548
3,973,406
Less: Average intangible assets, net 1,295,180
1,313,368
Average tangible common shareholders' equity (Non-GAAP) (2)$ 2,815,368
Return on average assets (GAAP) 0.46 % 1.32 % Effect of non-core revenues and expenses 0.03 (0.03 ) Core return on average assets (Non-GAAP) 0.49 % 1.29 % Return on average common equity (GAAP) 3.21 % 9.85 % Effect of non-core revenues and expenses 0.26 (0.19 ) Core return on average common equity (Non-GAAP) 3.47 % 9.66 % Effect of intangibles (2) 2.06 5.37 Core return on average tangible common equity (Non-GAAP) (2) 5.53 % 15.03 % Efficiency ratio (GAAP) 60.1 % 52.4 % Effect of tax benefit related to tax-exempt income (0.3 ) (0.3 ) Efficiency ratio (TE) (Non-GAAP) (1) 59.8 % 52.1 % Effect of amortization of intangibles (1.3 ) (1.6 ) 79
-------------------------------------------------------------------------------- Effect of non-core items (1.1 )
0.8
Core tangible efficiency ratio (TE) (Non-GAAP) (1) (2) 57.4 %
51.3 %
Total assets (GAAP)$ 32,239,983 $ 31,260,189 Less: Goodwill and other intangibles 1,292,910
1,310,458
Tangible assets (Non-GAAP) (2)$ 30,947,073 $ 29,949,731 Tangible common equity ratio (Non-GAAP) (2) 9.13 %
9.01 %
Cash Yield: Earning assets average balance (GAAP)$ 29,339,010 $ 28,281,941 Add: Adjustments 94,709
136,415
Earning assets average balance, as adjusted (Non-GAAP)$ 29,433,719 $ 28,418,356 Net interest income (GAAP)$ 230,342 $ 250,484 Add: Adjustments (7,338 ) (10,881 ) Net interest income, as adjusted (Non-GAAP)$ 223,004 $ 239,603 Yield, as reported 3.17 % 3.59 % Add: Adjustments (0.11 ) (0.17 ) Yield, as adjusted (Non-GAAP) 3.06 % 3.42 % (1) Fully taxable-equivalent (TE) calculations include the tax benefit associated with related income sources that are tax-exempt using a rate of 21%. (2) Tangible calculations eliminate the effect of goodwill and acquisition-related intangibles and the corresponding amortization expense on a tax-effected basis where applicable. 80 --------------------------------------------------------------------------------
Glossary of Defined Terms Term Definition 2019 10-K Annual Report on Form 10-K for the year endedDecember 31, 2019 AECL Allowance for expected credit losses Acquired loans Loans acquired in a business combination AFS Securities available for saleALCO Asset and Liability Committee ALLL Allowance for loan and lease losses AOCI Accumulated other comprehensive income (loss) ARRC Alternative Reference Rates Committee ASC Accounting Standards Codification ASU Accounting Standards Update CECL Current expected credit loss C&I Commercial and Industrial loans CEO Chief Executive Officer CET1 Common Equity Tier 1 Capital defined by Basel III capital rules CFO Chief Financial Officer CRA Community Reinvestment Act CompanyIBERIABANK Corporation and Subsidiaries DOJDepartment of Justice EPS Earnings per common share Exchange Act Securities Exchange Act of 1934 FASBFinancial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FHAFederal Housing Administration FHLBFederal Home Loan Bank First Horizon First Horizon National CorporationFOMC Federal Open Market Committee FRBBoard of Governors of theFederal Reserve System GAAP Accounting principles generally accepted inthe United States of America Gibraltar Gibraltar Private Bank & Trust Co. GSE Government-sponsored enterprises HTM Securities held-to-maturity HUDU.S. Department of Housing and Urban Development IBERIABANK Banking subsidiary ofIBERIABANK Corporation IBKCIBERIABANK Corporation MD&A Management's Discussion and Analysis Legacy loans Loans that were originated directly or otherwise underwritten by the Company LIBOR London Interbank Borrowing Offered Rate LTCLenders Title Company LGD Loss given default NASDAQNational Association of Securities Dealers, Inc. Automated Quotation Composite Index Non-GAAP Financial measures determined by methods other than in accordance with GAAP OCI Other comprehensive income OREO Other real estate owned OTTI Other than temporary impairment ParentIBERIABANK Corporation PCD Purchase credit deteriorated PD Probability of default PPP Paycheck Protection Program 81
-------------------------------------------------------------------------------- ROU Right-of-Use RRP Recognition and Retention PlanSabadell United Sabadell United Bank, N.A. SEC Securities and Exchange Commission SOFR Secured Overnight Financing Rate TE Fully taxable equivalent TDR Troubled debt restructuringU.S. United States of America
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