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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number 001-37416

 

ALTABANCORP

(Exact name of registrant as specified in its charter)

 

 

Utah

 

87-0622021

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

1 East Main Street

American Fork, Utah

 

84003

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (801) 642-3998

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

ALTA

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

☐

 

Accelerated filer

☒

 

 

 

 

 

Non-accelerated filer

☐

 

Smaller reporting company

☐

 

 

 

 

 

Emerging growth company

☒

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐  Yes    No  ☒

As of July 31, 2020, the registrant had 18,794,120 shares of common stock $0.01 par value per share, outstanding. No preferred shares are issued or outstanding.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

Unaudited Consolidated Balance Sheets

3

Unaudited Consolidated Statements of Income

4

Unaudited Consolidated Statements of Comprehensive Income

5

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

6

Unaudited Consolidated Statements of Cash Flows

7

Notes to Unaudited Consolidated Financial Statements

8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

54

Item 4 – Controls and Procedures

54

PART II. OTHER INFORMATION

 

Item 1 – Legal Proceedings

55

Item 1A – Risk Factors

55

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3 – Defaults upon Senior Securities

56

Item 4 – Mine Safety Disclosures

56

Item 5 – Other Information

56

Item 6 – Exhibits

57

Signatures

58

 

 

 

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ALTABANCORPTM AND SUBSIDIARY

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands, except share amounts)

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

47,088

 

 

$

38,987

 

Interest-bearing deposits

 

 

275,920

 

 

 

171,955

 

Federal funds sold

 

 

829

 

 

 

1,039

 

Total cash and cash equivalents

 

 

323,837

 

 

 

211,981

 

Investment securities - available for sale, at fair value

 

 

973,457

 

 

 

405,995

 

Non-marketable equity securities

 

 

2,890

 

 

 

2,623

 

Loans held for sale

 

 

29,264

 

 

 

18,669

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

1,659,018

 

 

 

1,680,918

 

Allowance for credit losses

 

 

(42,683

)

 

 

(31,426

)

Total loans held for investment, net

 

 

1,616,335

 

 

 

1,649,492

 

Premises and equipment, net

 

 

38,673

 

 

 

39,474

 

Goodwill

 

 

25,673

 

 

 

25,673

 

Bank-owned life insurance

 

 

27,330

 

 

 

27,037

 

Deferred income tax assets, net

 

 

8,586

 

 

 

9,716

 

Accrued interest receivable

 

 

11,682

 

 

 

7,904

 

Other intangibles

 

 

2,749

 

 

 

2,970

 

Other real estate owned

 

 

-

 

 

 

-

 

Other assets

 

 

5,169

 

 

 

4,800

 

Total assets

 

$

3,065,645

 

 

$

2,406,334

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

985,455

 

 

$

719,410

 

Interest bearing deposits

 

 

1,627,884

 

 

 

1,336,957

 

Total deposits

 

 

2,613,339

 

 

 

2,056,367

 

Short-term borrowings

 

 

83,490

 

 

 

-

 

Accrued interest payable

 

 

408

 

 

 

546

 

Other liabilities

 

 

18,278

 

 

 

17,059

 

Total liabilities

 

 

2,715,515

 

 

 

2,073,972

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred shares, $0.01 par value: 3,000,000 shares authorized; no shares issued

 

 

-

 

 

 

-

 

Common shares, $0.01 par value: 30,000,000 shares authorized; 18,793,217

 

 

 

 

 

 

 

 

and 18,870,498 shares issued and outstanding as of June 30, 2020

 

 

 

 

 

 

 

 

and December 31, 2019, respectively

 

 

188

 

 

 

189

 

Additional paid-in capital

 

 

86,721

 

 

 

87,913

 

Retained earnings

 

 

252,032

 

 

 

242,878

 

Accumulated other comprehensive income

 

 

11,189

 

 

 

1,382

 

Total shareholders’ equity

 

 

350,130

 

 

 

332,362

 

Total liabilities and shareholders’ equity

 

$

3,065,645

 

 

$

2,406,334

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3

 

ALTABANCORPTM AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands, except share and per share amounts)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

23,649

 

 

$

27,628

 

 

$

49,574

 

 

$

54,608

 

Interest and dividends on investments

 

 

3,753

 

 

 

2,422

 

 

 

7,212

 

 

 

4,594

 

Total interest income

 

 

27,402

 

 

 

30,050

 

 

 

56,786

 

 

 

59,202

 

Interest expense

 

 

1,613

 

 

 

2,330

 

 

 

3,776

 

 

 

4,575

 

Net interest income

 

 

25,789

 

 

 

27,720

 

 

 

53,010

 

 

 

54,627

 

Provision for credit losses

 

 

2,100

 

 

 

2,150

 

 

 

2,750

 

 

 

3,700

 

Net interest income after provision for credit losses

 

 

23,689

 

 

 

25,570

 

 

 

50,260

 

 

 

50,927

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking

 

 

3,036

 

 

 

1,621

 

 

 

4,746

 

 

 

3,038

 

Card processing

 

 

917

 

 

 

814

 

 

 

1,624

 

 

 

1,429

 

Service charges on deposit accounts

 

 

763

 

 

 

705

 

 

 

1,543

 

 

 

1,362

 

Net gain on sale of investment securities

 

 

1,441

 

 

 

-

 

 

 

1,441

 

 

 

-

 

Other

 

 

(41

)

 

 

458

 

 

 

502

 

 

 

1,106

 

Total non-interest income

 

 

6,116

 

 

 

3,598

 

 

 

9,856

 

 

 

6,935

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,786

 

 

 

9,526

 

 

 

21,630

 

 

 

19,412

 

Occupancy, equipment and depreciation

 

 

831

 

 

 

1,558

 

 

 

2,370

 

 

 

3,014

 

Data processing

 

 

2,383

 

 

 

1,018

 

 

 

3,519

 

 

 

1,982

 

Marketing and advertising

 

 

339

 

 

 

226

 

 

 

771

 

 

 

342

 

FDIC premiums

 

 

165

 

 

 

148

 

 

 

165

 

 

 

238

 

Other

 

 

1,771

 

 

 

2,223

 

 

 

3,981

 

 

 

4,627

 

Total non-interest expense

 

 

16,275

 

 

 

14,699

 

 

 

32,436

 

 

 

29,615

 

Income before income tax expense

 

 

13,530

 

 

 

14,469

 

 

 

27,680

 

 

 

28,247

 

Income tax expense

 

 

3,192

 

 

 

3,480

 

 

 

6,569

 

 

 

6,753

 

Net income

 

$

10,338

 

 

$

10,989

 

 

$

21,111

 

 

$

21,494

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.55

 

 

$

0.58

 

 

$

1.12

 

 

$

1.14

 

Diluted

 

$

0.55

 

 

$

0.58

 

 

$

1.11

 

 

$

1.13

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,789,561

 

 

 

18,805,760

 

 

 

18,837,209

 

 

 

18,793,553

 

Diluted

 

 

18,932,511

 

 

 

19,007,297

 

 

 

18,985,319

 

 

 

18,998,480

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4

 

ALTABANCORPTM AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

10,338

 

 

$

10,989

 

 

$

21,111

 

 

$

21,494

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on securities available for sale

 

 

3,951

 

 

 

3,140

 

 

 

14,518

 

 

 

5,996

 

Reclassification adjustment for gains on available for sale securities

 

 

(1,441

)

 

 

-

 

 

 

(1,441

)

 

 

-

 

Net unrealized holding gains on securities available for sale

 

 

2,510

 

 

 

3,140

 

 

 

13,077

 

 

 

5,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(627

)

 

 

(785

)

 

 

(3,270

)

 

 

(1,498

)

Other comprehensive income, net of tax

 

 

1,883

 

 

 

2,355

 

 

 

9,807

 

 

 

4,498

 

Total comprehensive income

 

$

12,221

 

 

$

13,344

 

 

$

30,918

 

 

$

25,992

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 

ALTABANCORPTM AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

(Dollars in thousands, except share and per share

 

Common

 

 

Common

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

    amounts)

 

Shares

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance as of January 1, 2019

 

 

18,728,823

 

 

$

187

 

 

$

86,308

 

 

$

207,779

 

 

$

(4,112

)

 

$

290,162

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,505

 

 

 

-

 

 

 

10,505

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,143

 

 

 

2,143

 

Cash dividends ($0.11 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,068

)

 

 

-

 

 

 

(2,068

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

191

 

 

 

-

 

 

 

-

 

 

 

191

 

Issuance of shares under stock incentive plans

 

 

68,457

 

 

 

1

 

 

 

393

 

 

 

-

 

 

 

-

 

 

 

394

 

Balance as of March 31, 2019

 

 

18,797,280

 

 

$

188

 

 

$

86,892

 

 

$

216,216

 

 

$

(1,969

)

 

$

301,327

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,989

 

 

 

-

 

 

 

10,989

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,355

 

 

 

2,355

 

Cash dividends ($0.12 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,255

)

 

 

-

 

 

 

(2,255

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

190

 

 

 

-

 

 

 

-

 

 

 

190

 

Issuance of shares under stock incentive plans

 

 

22,052

 

 

 

-

 

 

 

193

 

 

 

-

 

 

 

-

 

 

 

193

 

Balance as of June 30, 2019

 

 

18,819,332

 

 

$

188

 

 

$

87,275

 

 

$

224,950

 

 

$

386

 

 

$

312,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2020

 

 

18,870,498

 

 

$

189

 

 

$

87,913

 

 

$

242,878

 

 

$

1,382

 

 

$

332,362

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,773

 

 

 

-

 

 

 

10,773

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,924

 

 

 

7,924

 

Cash dividends ($0.14 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,646

)

 

 

-

 

 

 

(2,646

)

Reclass related to ASC 326 adoption (CECL)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,680

)

 

 

-

 

 

 

(6,680

)

Shares repurchased

 

 

(120,906

)

 

 

(1

)

 

 

(2,139

)

 

 

-

 

 

 

-

 

 

 

(2,140

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

385

 

 

 

-

 

 

 

-

 

 

 

385

 

Issuance of shares under stock incentive plans

 

 

38,218

 

 

 

-

 

 

 

159

 

 

 

-

 

 

 

-

 

 

 

159

 

Balance as of March 31, 2020

 

 

18,787,810

 

 

$

188

 

 

$

86,318

 

 

$

244,325

 

 

$

9,306

 

 

$

340,137

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,338

 

 

 

-

 

 

 

10,338

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,883

 

 

 

1,883

 

Cash dividends ($0.14 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,631

)

 

 

-

 

 

 

(2,631

)

Share-based compensation

 

 

-

 

 

 

-

 

 

 

380

 

 

 

-

 

 

 

-

 

 

 

380

 

Issuance of shares under stock incentive plans

 

 

5,407

 

 

 

-

 

 

 

23

 

 

 

-

 

 

 

-

 

 

 

23

 

Balance as of June 30, 2020

 

 

18,793,217

 

 

$

188

 

 

$

86,721

 

 

$

252,032

 

 

$

11,189

 

 

$

350,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

6

 

ALTABANCORPTM AND SUBSIDIARY

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended

 

 

 

June 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

21,111

 

 

$

21,494

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

2,750

 

 

 

3,700

 

Depreciation and amortization

 

 

1,822

 

 

 

1,889

 

Loss on sale of OREO

 

 

1

 

 

 

-

 

Deferred income taxes

 

 

(24

)

 

 

837

 

Net amortization of securities discounts and premiums

 

 

1,541

 

 

 

1,172

 

Increase in cash surrender value of bank-owned life insurance

 

 

(293

)

 

 

(301

)

Share-based compensation

 

 

765

 

 

 

381

 

Gain on sale of loans held for sale

 

 

(3,467

)

 

 

(1,984

)

Originations of loans held for sale

 

 

(136,459

)

 

 

(99,270

)

Proceeds from sale of loans held for sale

 

 

129,331

 

 

 

93,075

 

Net changes in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(3,778

)

 

 

(360

)

Other assets

 

 

(938

)

 

 

3,596

 

Accrued interest payable

 

 

(138

)

 

 

63

 

Other liabilities

 

 

1,552

 

 

 

(2,149

)

Net cash provided by operating activities

 

 

13,776

 

 

 

22,143

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net change in loans held for investment

 

 

22,057

 

 

 

5,412

 

Purchase of available for sale securities

 

 

(674,709

)

 

 

(12,831

)

Proceeds from maturities/sales of available for sale securities

 

 

118,783

 

 

 

27,949

 

Proceeds from maturities of held to maturity securities

 

 

-

 

 

 

1,370

 

Purchase of premises and equipment

 

 

(1,354

)

 

 

(3,464

)

Proceeds from sale of assets

 

 

-

 

 

 

2,297

 

Proceeds from sale of other real estate owned, net of improvements

 

 

343

 

 

 

-

 

Purchase of non-marketable equity securities

 

 

(267

)

 

 

(4,032

)

Proceeds from sale of non-marketable equity securities

 

 

-

 

 

 

3,960

 

Net cash (used in) provided by investing activities

 

 

(535,147

)

 

 

20,661

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

556,972

 

 

 

104,851

 

Proceeds related to exercise of stock options

 

 

182

 

 

 

587

 

Net change in short-term borrowings

 

 

83,490

 

 

 

-

 

Net cash used in share repurchase program

 

 

(2,140

)

 

 

-

 

Cash dividends paid

 

 

(5,277

)

 

 

(4,323

)

Net cash provided by financing activities

 

 

633,227

 

 

 

101,115

 

Net change in cash and cash equivalents

 

 

111,856

 

 

 

143,919

 

Cash and cash equivalents, beginning of period

 

 

211,981

 

 

 

48,547

 

Cash and cash equivalents, end of period

 

$

323,837

 

 

$

192,466

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,914

 

 

$

4,512

 

Income taxes paid

 

$

25

 

 

$

6,510

 

Supplemental disclosures of non-cash investing transactions:

 

 

 

 

 

 

 

 

Reclassifications from loans to other real estate owned

 

$

344

 

 

$

-

 

Unrealized gains on securities available for sale

 

$

13,077

 

 

$

5,996

 

Transfer of HTM securities to AFS

 

$

-

 

 

$

64,648

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

7

 

ALTABANCORPTM AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Basis of Presentation and Significant Accounting Policies

Nature of operations and basis of consolidation — AltabancorpTM (“ALTA” or the “Company”) is a Utah corporation headquartered in American Fork, Utah. The Company operates all business activities through its wholly-owned banking subsidiary, AltabankTM (the “Bank”), which was organized in 1913.  AltabankTM is a Utah state-chartered bank.  AltabankTM operates under the jurisdiction of the Utah Department of Financial Institutions (“UDFI”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). AltabankTM is not a member of the Federal Reserve System; however, ALTA is operated as a bank holding company under the Federal Bank Holding Company Act of 1956 and is the sole shareholder of AltabankTM. Both ALTA and AltabankTM are subject to periodic examination by all of the applicable federal and state regulatory agencies and file periodic reports and other information with such agencies.  The Company considers AltabankTM to be its sole operating segment.

AltabankTM is a community bank that provides highly personalized retail and commercial banking products and services to small-to-medium sized businesses and to individuals.  Products and services are offered primarily through 26 retail branches located throughout Utah and southern Idaho.  AltabankTM offers a full range of short-term to long-term commercial, personal and mortgage loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and accounts receivable), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans to finance automobiles, home improvements, education, and personal investments. AltabankTM also offers mortgage loans secured by single family residences. AltabankTM offers a full range of deposit services typically available in most financial institutions, including checking accounts, savings accounts, and time deposits. AltabankTM solicits these accounts from individuals, businesses, associations and organizations, and governmental entities.

The accompanying unaudited interim consolidated financial statements include the accounts of the Company together with its subsidiary Bank. All intercompany transactions and balances have been eliminated.  These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements.

Use of estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses (“ACL”), the determination of the fair value of certain financial instruments, the valuation of real estate acquired through foreclosure, deferred income tax assets, and share-based compensation.

 

Reclassifications — Certain reclassifications have been made to the 2019 Consolidated Financial Statements and/or schedules to conform to the 2020 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial.

Business combinations — Business combinations are accounted for using the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed, both tangible and intangible, and consideration exchanged are recorded at fair value on the acquisition date.  The excess purchase consideration over fair value of net assets acquired is recorded as goodwill.  Expenses incurred in connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement period.

8

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

Cash and cash equivalents — Cash and cash equivalents consist of cash on hand, amounts due from banks, interest bearing deposits, and federal funds sold, all of which have original maturities of three months or less. The Company places its cash with high credit quality institutions. The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects the Company to credit risk.

 

Investment securities — Investment securities are classified as held to maturity (“HTM”) when the Company has the positive intent and ability to hold the securities to maturity.  Investment securities are classified as available for sale (“AFS”) when the Company has the intent of holding the security for an indefinite period of time, but not necessarily to maturity.  The Company determines the appropriate classification at the time of purchase, and periodically thereafter.  Investment securities classified as HTM are carried at amortized cost.  Investment securities classified as AFS are reported at fair value.  As the fair value of AFS securities changes, the changes are reported (net of tax, if applicable) in comprehensive income and as an element of accumulated other comprehensive income/loss (“AOCI”) in shareholder’s equity.

 

Interest income includes amortization of purchase premium or discount.  Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for callable debt securities.  Premiums on callable debt securities are amortized to the earliest call date.  When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from AOCI to non-interest income.

 

A debt security is placed on nonaccrual status at the time any principal or interest payments become greater than 90 days delinquent.  Delinquent interest accrued but not received for a security placed on nonaccrual is reversed against interest income.  The Company did not have any accrued interest reversed against interest income for the six months ended June 30, 2020.

 

Allowance for credit losses – AFS securities—For AFS debt securities in an unrealized loss position, management assesses whether the Company intends to sell or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.  If either criterion regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to the fair value through non-interest income.  For AFS debt securities that do not meet the aforementioned criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors.  In making this assessment, management considers the extent to which the fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and any adverse conditions specifically related to the security, among other factors.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security.  If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, which is limited by the amount that the fair value is less than the amortized cost basis.  Any impairment that has not been recorded through an allowance for credit losses is recognized in AOCI.

Changes in the allowance for credit losses are recorded as a Provision for Credit Losses (“PCL”).  Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criterion regarding intent or requirement to sell is met.

Non-marketable equity securities — Non-marketable equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock. FHLB stock is restricted because such stock may only be sold to FHLB at its par value. Due to the restrictive terms, and the lack of a readily determinable market value, FHLB stock is carried at cost. The investments in FHLB stock are required investments related to the Bank’s borrowings from FHLB. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs is jointly and severally liable for repayment of each other’s debt.

9

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

Loans held for sale —Single-family residential mortgage loans originated with the intent to be sold in the secondary market are considered held for sale. Loans with best effort delivery commitments are carried at the lower of aggregate cost or estimated fair value.  Loans under mandatory delivery commitments are carried at fair value in order to match changes in the value of the loans with the value of the economic hedges on the loans.  Fair values for loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans.  Net unrealized losses on loans held for sale that are carried at lower of cost or market are recognized through the valuation allowance by charges to income.  Mortgage loans held for sale are generally sold with the mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Substantially all of the residential mortgage loans originated are sold to larger financial institutions.

Loans held for investment — Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at amortized cost, net of the allowance for credit losses.  Amortized cost includes the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs.  Accrued interest is reported as a separate line item on the unaudited consolidated balance sheets.  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the effective interest method without anticipating prepayments.

Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent, unless the loan is well secured and in process of collection.  Mortgage loans are charged off at 180 days past due, and commercial loan are charged-off to the extent principal or interest is deemed uncollectible.  Consumer and credit card loans continue to accrue interest until they are charged-off no later than 120 days past due unless the loan is in the process of collection.  Past-due status is based on the contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charge-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income.  Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero.  Under the cash-basis method, interest income is recorded when the payment is received in cash.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Troubled debt restructurings (“TDR”)—A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR.  TDRs are then evaluated to determine if the TDR loan has estimated credit losses using the same methodology used for other individually evaluated loans as described in the next section.  With the recent COVID-19 pandemic, the number of loans that have had loan payments deferred has significantly increased.  In accordance with regulatory guidance, to the extent that the borrower was not experiencing financial difficulties prior to the pandemic, such modifications have not been classified as TDRs.

 

Individually evaluated loans — The Company considers loans individually evaluated when, based on current information and events, it is probable the Company will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. Such loans are generally classified as Substandard or Doubtful loans (see Note 3). Individually evaluated loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, adjusted for selling costs, if the loan is collateral dependent. Changes in these values are recorded to the ACL through the PCL.

Factors considered by management in determining estimated credit losses include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as individually evaluated. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

10

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

Acquired loans – Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date, including estimates of current expected credit losses.  Some acquired loans have experienced more than insignificant credit deterioration since origination.  Such loans are defined as Purchased Credit Deteriorated (“PCD”). The Company makes the determination if a loan is PCD by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest the Company will not be able to collect all contractual payments due.  Subsequent to acquisition, the amount of expected credit losses as of the acquisition date is added to the purchase price of PCD loans with an offsetting entry to ACL.  Any difference between the unpaid principal balance and the amortized cost basis of the PCD loan as of the acquisition date is the non-credit discount or premium. The non-credit discount recorded at acquisition is amortized or accreted into interest income over the remaining life of the PCD loan on an effective interest method.  To the extent that management changes the Company’s estimate of expected credit losses on PCD loans, the ACL will be increased or decreased with a corresponding entry to PCL.

Some acquired loans may not have experienced more than insignificant credit deterioration since origination.  Such loans are defined as Purchased non-Credit Deteriorated (“Non-PCD”) loans.  Non-PCD loans are also recorded at fair value at the time of acquisition, including estimates of current expected credit losses.  However, any current expected credit losses estimated as of the acquisition date are not added to the purchase price with an offsetting entry to ACL, but rather such estimate is included in the difference between the unpaid principal balance and the amortized cost basis of the Non-PCD loan.  This credit and non-credit discount is amortized or accreted into interest income over the remaining life of the Non-PCD loan on an effective interest method.  In addition, an allowance for credit losses is determined for Non-PCD loans using the same methodology as loans held for investment with an offset recorded to PCL.  

An acquired loan previously classified by the seller as a TDR is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status.  Changes to the ACL for acquired loans are recorded through PCL after adoption.

Allowance for credit losses – Loans — Credit risk is inherent in the business of extending loans and leases to borrowers.  Normally, this credit risk is addressed through a valuation allowance termed allowance for credit losses.  The ACL represents management’s estimate of current expected credit losses (“CECL”) inherent in the loan portfolio at each balance sheet date.  Netted against the outstanding loan balance, this ACL reduces the balance to the Company’s estimate of what will be collected from borrowers.  The ACL is established through charges to current period earnings by recording a PCL.  When losses become specifically identifiable and quantifiable, the loan balance is reduced through recording a charge-off against the ACL.  Should payments be received on a charged-off loan, the payment is credited to the ACL as a recovery.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.  Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses.  Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. Management must exercise significant judgment when evaluating the effect of qualitative factors on the amount of the ACL because data may not be reasonably available or directly applicable for management to determine the precise impact of a factor on the collectability of the loan portfolio as of the evaluation date.  

Management considers qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, including but not limited to: i) changes in lending policies and procedures; ii) changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; iii) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; iv) changes in the nature and volume of the portfolio and in the terms of loans; v) changes in the experience, ability, and depth of lending management and other relevant staff; vi) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; vii) changes in the quality of the institution’s loan review system; viii) changes in the value of underlying collateral for collateral-dependent loans; ix) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and, x) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available.

11

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

The Company used the weighted average remaining maturity (or “WARM”) approach, adjusted for prepayments, to calculate CECL at June 30, 2020 and segmented its loan portfolio into seventeen loan segments based on similar risk characteristics.  Management may change the approach used to calculated current expected credit losses or loan segments from time-to-time as the Company improves credit loss estimation techniques.  The Company has elected to exclude accrued interest receivable from its calculation of the ACL.

Off-balance sheet credit related financial instruments — In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Allowance for credit losses on off-balance sheet credit exposures — The Company estimates expected credit losses on off-balance sheet credit exposures using the same CECL historical loss rates applied to loans held for investment over the contractual period in which the Company is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company, adjusted for funding factors.  The allowance for credit losses on off-balance sheet credit exposures is reported in other liabilities on the unaudited consolidated balance sheets with an offset to other non-interest expense.  The estimate of CECL includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated life.

Premises and equipment — Land is carried at cost. Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is computed using the straight-line method based on the estimated useful lives of the related assets below:

 

Building and building improvements

 

15 to 40 years

Leasehold improvements

 

  3 to 15 years

Furniture and equipment

 

  3 to 15 years

Computers, software and equipment

 

  3 to 5 years

 

Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

Bank-owned life insurance (“BOLI”) — The Bank has purchased life insurance policies. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment; however, there may be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. BOLI is carried at the cash surrender value (“CSV”) of the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest income.

Goodwill — Goodwill represents the excess of the purchase considerations paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment compares the reporting unit's estimated fair values, including goodwill, to its carrying amount. If the carrying amount exceeds its reporting unit’s fair value, then an impairment loss would be recognized as a charge to earnings but is limited by the amount of goodwill allocated to that reporting unit.

Other intangible assets — Other intangible assets consist primarily of core deposit intangibles (“CDI”), which are amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships associated with the deposits. Core deposit intangibles are amortized over the estimated useful life of such deposits. These assets are reviewed at least annually for events or circumstances that could affect their recoverability. These events could include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable; impairment losses are recorded in other non-interest expense to reduce the carrying amount of the assets.

12

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

Mortgage and other servicing rights — Mortgage and other servicing rights are recognized as separate assets when rights are acquired through purchase of such rights or through the sale of loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For loans sold, the fair value of the servicing rights are estimated and capitalized. Fair value is based on market prices for comparable servicing rights contracts. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

 

Other real estate owned — Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of the carrying amount of the foreclosed loan or the fair value of the foreclosed asset, less costs to sell, at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations and the assets are carried at the lower of carrying amount or fair value, less selling costs. Revenues and expenses from operations and changes in the valuation allowance are included in other real estate owned expense.

Transfers of financial assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income taxes — Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse.  The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets.  Judgments and tax strategies are subject to audit by various taxing authorities.  While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial positions, result of operations, or cash flows.

Share-based compensation plans — The fair value of incentive share-based awards is recorded as compensation expense over the vesting period of the award. Compensation expense for stock options is estimated at the date of grant using the Black-Scholes option-pricing model. Compensation expense for RSUs is based on the fair value of the Company’s common shares at the date of grant. RSU awards generally vest in thirds over three years from date of grant.

Earnings per share — Basic earnings per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares include shares that may be issued by the Company for outstanding stock options determined using the treasury stock method and for all outstanding RSUs.

13

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

Earnings per common share have been computed based on the following:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands, except share and per share data)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,338

 

 

$

10,989

 

 

$

21,111

 

 

$

21,494

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

18,789,561

 

 

 

18,805,760

 

 

 

18,837,209

 

 

 

18,793,553

 

Incremental shares assumed for stock options and RSUs

 

 

142,950

 

 

 

201,537

 

 

 

148,110

 

 

 

204,927

 

Weighted-average number of dilutive shares outstanding

 

 

18,932,511

 

 

 

19,007,297

 

 

 

18,985,319

 

 

 

18,998,480

 

Basic earnings per common share

 

$

0.55

 

 

$

0.58

 

 

$

1.12

 

 

$

1.14

 

Diluted earnings per common share

 

$

0.55

 

 

$

0.58

 

 

$

1.11

 

 

$

1.13

 

 

Comprehensive income — U.S. GAAP generally requires that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, net of the related income tax effect, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.

Impact of recent authoritative accounting guidance — The Accounting Standards Codification™ (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities.  Periodically, the FASB will issue Accounting Standard Updates (“ASU”) to its ASC.  Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for us as an SEC registrant. All other accounting literature is non-authoritative.

In December 2019, FASB issued ASU 2019-12, Income Taxes.  The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.  For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. Adoption of ASU 2019-12 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

14

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

In August 2018, FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU broaden the scope of ASC Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with the accounting for costs for internal-use software. The amendments in this ASU result in consistent capitalization of implementation costs of a hosting arrangement that is a service contract and implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. The amendments in this ASU were applied prospectively to all implementation costs incurred after the date of adoption. Adoption of ASU 2018-15 did not have a material impact on the Company’s Consolidated Financial Statements.

In August 2018, FASB issued ASU 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU removes, modifies and adds disclosure requirements in Topic 820. The following disclosure requirements were removed: 1) the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, and 3) the valuation processes for Level 3 fair value measurements. This ASU modified disclosure requirements by requiring that the measurement uncertainty disclosure communicates information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added: 1) changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period, and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adoption of ASU 2018-13 did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU significantly changes the accounting for credit loss measurement on loans and debt securities. For loans and held-to-maturity debt securities, the ASU requires a current expected credit loss measurement to estimate the allowance for credit losses for the remaining estimated life of the financial asset (including off-balance sheet credit exposures) using historical experience, current conditions, and reasonable and supportable forecasts. The ASU eliminates the existing guidance for purchased credit impaired (“PCI”) loans but requires an allowance for purchased financial assets with more than an insignificant deterioration since origination, otherwise known as purchased credit deteriorated assets. In addition, the ASU modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on an improvement in credit. This ASU was effective for interim and annual reporting periods beginning after December 15, 2019.

 

On October 16, 2019, the FASB voted to delay the adoption of CECL by two years to January 2023 for private companies, not-for-profit companies, and certain small public companies that meet the definition of a smaller reporting company (“SRC”), as defined by the Securities and Exchange Commission. To meet the requirements of an SRC, an entity must be an issuer as defined by the SEC and have public float of less than $250 million, or public float of less than $700 million and annual revenues of less than $100 million. As of June 30, 2019, our public float was $466 million and annual revenues for 2018 were $130 million.  As a result, we are not an SRC and, therefore, were required to adopt the ASU effective January 1, 2020.

 

15

 

Note 1 — Basis of Presentation and Significant Accounting Policies – Continued

On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.  Results for reporting periods beginning after January 1, 2020, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.  The Company adopted ASC 326 using the prospective transition approach for financial assets purchased through an acquisition or business combination.  Loans that were previously classified as PCI and accounted for under ASC 310-30 were reclassified as PCD loans.  In accordance with the new standard, management did not reassess whether PCI loans met the criteria of PCD loan as of the date of adoption.  On January 1, 2020 the amortized cost basis for PCD loans was increased by $1.5 million to reflect the addition of credit discounts to ACL.  The remaining noncredit discount will be accreted into interest income over the remaining life of the portfolio.  For Non-PCD loans, the Company increased its ACL by $2.6 million using the same methodology used for loans held for investment.  The remaining credit and noncredit discount will be accreted into interest income over the remaining life of the portfolio.  The Company further increased its ACL by $5.4 million to reflect the change in accounting methodology for CECL.

The following table illustrates the impact of the adoption of ASC 326:

 

 

 

January 1, 2020

 

 

(Dollars in thousands)

 

Reported

Under ASC

326

 

 

Reported

Pre

Adoption

 

 

Impact of

ASC 326

Adoption

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

12,683

 

 

$

12,275

 

 

$

408

 

 

Construction and land development

 

 

13,393

 

 

 

6,990

 

 

 

6,403

 

 

Total commercial real estate

 

 

26,076

 

 

 

19,265

 

 

 

6,811

 

 

Commercial and industrial

 

 

11,541

 

 

 

10,892

 

 

 

649

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

2,635

 

 

 

1,118

 

 

 

1,517

 

 

Consumer and other

 

 

640

 

 

 

151

 

 

 

489

 

 

Total consumer

 

 

3,275

 

 

 

1,269

 

 

 

2,006

 

 

Total allowance for credit losses on loans

 

$

40,892

 

 

$

31,426

 

 

$

9,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for off-balance sheet obligations

 

 

1,669

 

 

 

880

 

 

 

789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

325,682

 

 

 

332,362

 

 

 

(6,680

)

 

The Company expects greater volatility in its earnings and those of other banks after adoption due to the nature and time horizon used to calculate CECL. In addition, the Company expects a potential negative impact to credit availability and reduced loan terms to borrowers as this ASU is adopted by financial institutions. Lastly, the Company expects a lack of comparability with financial performance to many of its peers as it adopts this ASU, due to delayed adoption for public companies with total assets similar in size to us and the recent option to delay implementation.

Subsequent events — The Company has evaluated events occurring subsequent to June 30, 2020 for disclosure in the consolidated financial statements.

16

 

Note 2 — Investment Securities

Amortized cost and estimated fair value of investment securities available for sale are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Than

 

 

Months

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

12

 

 

or

 

 

Fair

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Months

 

 

Longer

 

 

Value

 

As of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored securities

 

$

13,480

 

 

$

391

 

 

$

-

 

 

$

-

 

 

$

13,871

 

Municipal securities

 

 

45,723

 

 

 

1,210

 

 

 

-

 

 

 

-

 

 

 

46,933

 

Mortgage-backed securities

 

 

894,335

 

 

 

14,307

 

 

 

(694

)

 

 

(37

)

 

 

907,911

 

Corporate securities

 

 

5,000

 

 

 

1

 

 

 

-

 

 

 

(259

)

 

 

4,742

 

 

 

$

958,538

 

 

$

15,909

 

 

$

(694

)

 

$

(296

)

 

$

973,457

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored securities

 

$

20,957

 

 

$

235

 

 

$

-

 

 

$

(2

)

 

$

21,190

 

Municipal securities

 

 

56,252

 

 

 

670

 

 

 

(1

)

 

 

(9

)

 

 

56,912

 

Mortgage-backed securities

 

 

321,944

 

 

 

2,188

 

 

 

(481

)

 

 

(543

)

 

 

323,108

 

Corporate securities

 

 

5,000

 

 

 

-

 

 

 

-

 

 

 

(215

)

 

 

4,785

 

 

 

$

404,153

 

 

$

3,093

 

 

$

(482

)

 

$

(769

)

 

$

405,995

 

 

  

 

At June 30, 2020 and December 31, 2019, the gross unrealized losses and the fair value for securities available for sale and held to maturity were as follows:

 

 

 

As of June 30, 2020

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(Dollars in thousands)

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored securities

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Municipal securities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Mortgage-backed securities

 

 

95,605

 

 

 

(694

)

 

 

3,031

 

 

 

(37

)

 

 

98,636

 

 

 

(731

)

Corporate securities

 

 

-

 

 

 

-

 

 

 

2,741

 

 

 

(259

)

 

 

2,741

 

 

 

(259

)

 

 

$

95,605

 

 

$

(694

)

 

$

5,772

 

 

$

(296

)

 

$

101,377

 

 

$

(990

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(Dollars in thousands)

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored securities

 

$

-

 

 

$

-

 

 

$

5,998

 

 

$

(2

)

 

$

5,998

 

 

$

(2

)

Municipal securities

 

 

3,060

 

 

 

(1

)

 

 

1,338

 

 

 

(9

)

 

 

4,398

 

 

 

(10

)

Mortgage-backed securities

 

 

115,243

 

 

 

(481

)

 

 

70,383

 

 

 

(543

)

 

 

185,626

 

 

 

(1,024

)

Corporate securities

 

 

-

 

 

 

-

 

 

 

4,785

 

 

 

(215

)

 

 

4,785

 

 

 

(215

)

 

 

$

118,303

 

 

$

(482

)

 

$

82,504

 

 

$

(769

)

 

$

200,807

 

 

$

(1,251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company monitors the credit quality of debt securities AFS through the use of credit ratings from Nationally Recognized Statistical Ration Organizations (“NRSRO”) to assist in the determination of any current expected credit losses. At June 30, 2020, the Company had no allowance for credit losses on AFS securities. The following table summarizes the amortized cost of debt securities AFS at June 30, 2020, aggregated by credit quality indicator.

 

17

 

Note 2 — Investment Securities – continued

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less

 

 

12

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Than

 

 

Months

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

12

 

 

or

 

 

Fair

 

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Months

 

 

Longer

 

 

Value

 

As of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-backed securities(1)

 

$

907,815

 

 

$

14,698

 

 

$

(694

)

 

$

(37

)

 

$

921,782

 

Investment grade rating

 

 

42,486

 

 

 

950

 

 

 

-

 

 

 

(259

)

 

 

43,177

 

Below investment grade

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Unrated investment securities

 

 

8,237

 

 

 

261

 

 

 

-

 

 

 

-

 

 

 

8,498

 

 

 

$

958,538

 

 

$

15,909

 

 

$

(694

)

 

$

(296

)

 

$

973,457

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored securities(1)

 

$

342,901

 

 

$

2,423

 

 

$

(481

)

 

$

(545

)

 

$

344,298

 

Investment grade rating

 

 

50,793

 

 

 

544

 

 

 

(1

)

 

 

(224

)

 

 

51,112

 

Below investment grade

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Unrated investment securities

 

 

10,459

 

 

 

126

 

 

 

-

 

 

 

-

 

 

 

10,585

 

 

 

$

404,153

 

 

$

3,093

 

 

$

(482

)

 

$

(769

)

 

$

405,995

 

 

 

(1)

Securities backed by the full faith and credit of the U.S. Government.

 

The amortized cost and estimated fair value of investment securities that are available for sale and held to maturity at June 30, 2020, by contractual maturity, are as follows:

 

 

 

Available For Sale

 

 

 

Amortized

 

 

Fair

 

(Dollars in thousands)

 

Cost

 

 

Value

 

Securities maturing in:

 

 

 

 

 

 

 

 

One year or less

 

$

13,658

 

 

$

13,720

 

After one year through five years

 

 

37,643

 

 

 

38,598

 

After five years through ten years

 

 

40,723

 

 

 

41,720

 

After ten years

 

 

866,514

 

 

 

879,419

 

 

 

$

958,538

 

 

$

973,457

 

 

 

Actual maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties and other securities may experience pre-payments.

As of June 30, 2020, the Company held 23 available for sale investment securities with fair value less than amortized cost compared to 146 at December 31, 2019. In addition, the Company had no held to maturity securities at June 30, 2020, and December 31, 2019. Management evaluated these investment securities and determined that the decline in value is temporary and related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event. The Company anticipates full recovery of the amortized cost with respect to these securities at maturity, or sooner, in the event of a more favorable market interest rate environment.

18

 

Note 2 — Investment Securities – continued

The Company sold $48.2 million available for sale securities during the six months ended June 30, 2020, and recorded a $1.4 million gain on sale of investment securities. The Company did not sell any available for sale securities during the six months ended June 30, 2019.  There were no available for sale securities in a nonaccrual status at June 30, 2020, or December 31, 2019.

During the year ended December 31, 2019, the Company elected to make a one-time transfer of 140 securities from the held to maturity classification of $64.6 million to the available for sale classification, and recorded an unrecognized loss of $19,000, net of taxes, to other comprehensive income.

Note 3 — Loans and Allowance for Credit Losses

Loans are summarized as follows:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Loans held for investment:

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

$

958,783

 

 

$

948,073

 

Construction and land development

 

 

243,212

 

 

 

273,963

 

Total commercial real estate loans

 

 

1,201,995

 

 

 

1,222,036

 

Commercial and industrial loans

 

 

310,837

 

 

 

284,738

 

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

141,174

 

 

 

162,559

 

Consumer and other

 

 

11,548

 

 

 

16,036

 

Total consumer loans

 

 

152,722

 

 

 

178,595

 

Total gross loans

 

 

1,665,554

 

 

 

1,685,369

 

Net deferred loan fees

 

 

(6,536

)

 

 

(4,451

)

Total loans held for investment

 

 

1,659,018

 

 

 

1,680,918

 

Allowance for credit losses

 

 

(42,683

)

 

 

(31,426

)

Total loans held for investment, net

 

$

1,616,335

 

 

$

1,649,492

 

 

At June 30, 2020, the Company held 333 loans totaling $84.6 million of SBA PPP loans included in commercial and industrial loans above.  The SBA guarantees 100% of the outstanding balance, and that guarantee is backed by the full faith and credit of the United States.

19

 

Note 3 — Loans and Allowance for Credit Losses – Continued

Changes in the allowance for credit losses are as follows:

 

 

 

Three Months Ended June 30, 2020

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

12,997

 

 

$

13,677

 

 

$

11,468

 

 

$

2,553

 

 

$

558

 

 

$

41,253

 

Provision for credit losses

 

 

(460

)

 

 

1,452

 

 

 

905

 

 

 

211

 

 

 

(8

)

 

 

2,100

 

Gross loan charge-offs

 

 

(99

)

 

 

(43

)

 

 

(654

)

 

 

-

 

 

 

(61

)

 

 

(857

)

Recoveries

 

 

69

 

 

 

35

 

 

 

41

 

 

 

3

 

 

 

39

 

 

 

187

 

Net loan (charge-offs) / recoveries

 

 

(30

)

 

 

(8

)

 

 

(613

)

 

 

3

 

 

 

(22

)

 

 

(670

)

Balance at end of period

 

$

12,507

 

 

$

15,121

 

 

$

11,760

 

 

$

2,767

 

 

$

528

 

 

$

42,683

 

 

 

 

Three Months Ended June 30, 2019

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

10,172

 

 

$

7,182

 

 

$

7,602

 

 

$

804

 

 

$

163

 

 

$

25,923

 

Provision for credit losses

 

 

276

 

 

 

(114

)

 

 

1,965

 

 

 

(42

)

 

 

65

 

 

 

2,150

 

Gross loan charge-offs

 

 

-

 

 

 

-

 

 

 

(497

)

 

 

-

 

 

 

(110

)

 

 

(607

)

Recoveries

 

 

24

 

 

 

319

 

 

 

167

 

 

 

10

 

 

 

53

 

 

 

573

 

Net loan (charge-offs) / recoveries

 

 

24

 

 

 

319

 

 

 

(330

)

 

 

10

 

 

 

(57

)

 

 

(34

)

Balance at end of period

 

$

10,472

 

 

$

7,387

 

 

$

9,237

 

 

$

772

 

 

$

171

 

 

$

28,039

 

 

 

 

 

Six Months Ended June 30, 2020

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

12,275

 

 

$

6,990

 

 

$

10,892

 

 

$

1,118

 

 

$

151

 

 

$

31,426

 

Impact of adopting ASC 326

 

 

408

 

 

 

6,403

 

 

 

649

 

 

 

1,517

 

 

 

489

 

 

 

9,466

 

Provision for credit losses

 

 

(132

)

 

 

1,752

 

 

 

1,092

 

 

 

107

 

 

 

(69

)

 

 

2,750

 

Gross loan charge-offs

 

 

(113

)

 

 

(73

)

 

 

(1,040

)

 

 

-

 

 

 

(183

)

 

 

(1,409

)

Recoveries

 

 

69

 

 

 

49

 

 

 

167

 

 

 

25

 

 

 

140

 

 

 

450

 

Net loan (charge-offs) / recoveries

 

 

(44

)

 

 

(24

)

 

 

(873

)

 

 

25

 

 

 

(43

)

 

 

(959

)

Balance at end of period

 

$

12,507

 

 

$

15,121

 

 

$

11,760

 

 

$

2,767

 

 

$

528

 

 

$

42,683

 

 

 

 

Six Months Ended June 30, 2019

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

Balance at beginning of period

 

$

9,968

 

 

$

7,022

 

 

$

7,227

 

 

$

729

 

 

$

299

 

 

$

25,245

 

Provision for credit losses

 

 

480

 

 

 

19

 

 

 

3,246

 

 

 

30

 

 

 

(75

)

 

 

3,700

 

Gross loan charge-offs

 

 

-

 

 

 

(5

)

 

 

(1,583

)

 

 

(19

)

 

 

(174

)

 

 

(1,781

)

Recoveries

 

 

24

 

 

 

351

 

 

 

347

 

 

 

32

 

 

 

121

 

 

 

875

 

Net loan (charge-offs) / recoveries

 

 

24

 

 

 

346

 

 

 

(1,236

)

 

 

13

 

 

 

(53

)

 

 

(906

)

Balance at end of period

 

$

10,472

 

 

$

7,387

 

 

$

9,237

 

 

$

772

 

 

$

171

 

 

$

28,039

 

 

 

20

 

Note 3 — Loans and Allowance for Credit Losses – Continued

 

Non-accrual loans are summarized as follows:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Non-accrual loans, not troubled debt restructured:

 

 

 

 

 

 

 

 

Real estate term

 

$

131

 

 

$

2,416

 

Construction and land development

 

 

139

 

 

 

60

 

Commercial and industrial

 

 

545

 

 

 

1,550

 

Residential and home equity

 

 

549

 

 

 

45

 

Consumer and other

 

 

2

 

 

 

8

 

Total non-accrual loans, not troubled debt restructured

 

 

1,366

 

 

 

4,079

 

Troubled debt restructured loans, non-accrual:

 

 

 

 

 

 

 

 

Real estate term

 

 

2,521

 

 

 

2,393

 

Construction and land development

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

2,499

 

 

 

658

 

Residential and home equity

 

 

-

 

 

 

-

 

Consumer and other

 

 

-

 

 

 

-

 

Total troubled debt restructured loans, non-accrual

 

 

5,020

 

 

 

3,051

 

Total non-accrual loans

 

$

6,386

 

 

$

7,130

 

 

Non-performing assets as of June 30, 2020 and December 31, 2019 have not been reduced by U.S. government guarantees of $1.8 million and $859,000, respectively.

Troubled debt restructured loans are summarized as follows:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Accruing troubled debt restructured loans

 

$

5,480

 

 

$

25,346

 

Non-accrual troubled debt restructured loans

 

 

5,020

 

 

 

3,051

 

Total troubled debt restructured loans

 

$

10,500

 

 

$

28,397

 

 

As of June 30, 2020, TDRs totaling $15.0 million met the criteria to be delisted for reporting purposes.  To be delisted as a TDR, the Company follows established regulatory guidelines. For a loan that is a TDR, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of the restructuring and the loan is in compliance with its modified terms, the loan need not continue to be reported as a TDR in calendar years after the year in which the restructuring took place. A market interest rate is a contractual interest rate that at the time of the restructuring is greater than or equal to the rate that the institution was willing to accept for a new loan with comparable risk. To be considered in compliance with its modified terms, a loan that is a TDR must be in accrual status and must be current or less than 30 days past due on its contractual principal and interest payments under the modified repayment terms

 

21

 

Note 3 — Loans and Allowance for Credit Losses – Continued

The below tables summarize TDRs by year of occurrence and type of modification:

 

 

 

Six Months Ended June 30, 2020

 

 

 

# of

 

 

$ of

 

 

# of Non-

 

 

$ of Non-

 

 

# of

 

 

$ of

 

 

 

Accruing

 

 

Accruing

 

 

accrual

 

 

accrual

 

 

Total

 

 

Total

 

(Dollars in thousands)

 

TDR

 

 

TDR

 

 

TDR

 

 

TDR

 

 

TDR

 

 

TDR

 

TDRs that occurred during the period

 

 

4

 

 

$

708

 

 

 

-

 

 

$

-

 

 

 

4

 

 

$

708

 

2019

 

 

3

 

 

 

4,713

 

 

 

9

 

 

 

3,555

 

 

 

12

 

 

 

8,268

 

2018

 

 

-

 

 

 

-

 

 

 

3

 

 

 

1,465

 

 

 

3

 

 

 

1,465

 

2017

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Thereafter

 

 

1

 

 

 

59

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

59

 

Total

 

 

8

 

 

$

5,480

 

 

 

12

 

 

$

5,020

 

 

 

20

 

 

$

10,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2020

 

 

 

# of

 

 

$ of

 

 

# of Non-

 

 

$ of Non-

 

 

# of

 

 

$ of

 

 

 

Accruing

 

 

Accruing

 

 

accrual

 

 

accrual

 

 

Total

 

 

Total

 

(Dollars in thousands)

 

TDR

 

 

TDR

 

 

TDR

 

 

TDR

 

 

TDR

 

 

TDR

 

Interest rate reduction

 

 

1

 

 

$

59

 

 

 

-

 

 

$

-

 

 

 

1

 

 

$

59

 

Loan payment deferment

 

 

4

 

 

 

852

 

 

 

4

 

 

 

604

 

 

 

8

 

 

 

1,456

 

Loan re-amortization

 

 

2

 

 

 

4,492

 

 

 

3

 

 

 

1,465

 

 

 

5

 

 

 

5,957

 

Loan extension

 

 

1

 

 

 

77

 

 

 

5

 

 

 

2,951

 

 

 

6

 

 

 

3,028

 

Total

 

 

8

 

 

$

5,480

 

 

 

12

 

 

$

5,020

 

 

 

20

 

 

$

10,500

 

 

The following tables present TDRs that occurred during the periods presented and the TDRs for which the payment default occurred within twelve months of the restructure date.  A default on a TDR results in a transfer to nonaccrual status, a charge-off or a combination of both.

 

 

 

Six Months Ended June 30, 2020

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

TDRs that occurred during the period (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

 

2

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

4

 

Pre-modification balance

 

$

583

 

 

$

-

 

 

$

128

 

 

$

-

 

 

$

-

 

 

$

711

 

Post-modification balance

 

$

583

 

 

$

-

 

 

$

128

 

 

$

-

 

 

$

-

 

 

$

711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDRs that subsequently defaulted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

Recorded balance

 

$

113

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

TDRs that occurred during the period (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

 

6

 

 

 

-

 

 

 

25

 

 

 

2

 

 

 

-

 

 

 

33

 

Pre-modification balance

 

$

5,076

 

 

$

-

 

 

$

9,848

 

 

$

277

 

 

$

-

 

 

$

15,201

 

Post-modification balance

 

$

5,076

 

 

$

-

 

 

$

9,848

 

 

$

277

 

 

$

-

 

 

$

15,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDRs that subsequently defaulted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

Recorded balance

 

$

-

 

 

$

-

 

 

$

18

 

 

$

-

 

 

$

-

 

 

$

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Since most loans were already considered classified and/or on non-accrual status prior to restructuring, the modifications did not have a material effect on the Company’s determination of the allowance for credit losses.

22

 

Note 3 — Loans and Allowance for Credit Losses – Continued

Current and past due loans held for investment (accruing and non-accruing) are summarized as follows:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

30-89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days

 

 

90+ Days

 

 

Non-

 

 

Total

 

 

Total

 

(Dollars in thousands)

 

Current

 

 

Past Due

 

 

Past Due

 

 

accrual

 

 

Past Due

 

 

Loans

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

955,545

 

 

$

586

 

 

$

-

 

 

$

2,652

 

 

$

3,238

 

 

$

958,783

 

Construction and land development

 

 

242,808

 

 

 

265

 

 

 

-

 

 

 

139

 

 

 

404

 

 

 

243,212

 

Total commercial real estate

 

 

1,198,353

 

 

 

851

 

 

 

-

 

 

 

2,791

 

 

 

3,642

 

 

 

1,201,995

 

Commercial and industrial

 

 

306,437

 

 

 

1,356

 

 

 

-

 

 

 

3,044

 

 

 

4,400

 

 

 

310,837

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

139,888

 

 

 

737

 

 

 

-

 

 

 

549

 

 

 

1,286

 

 

 

141,174

 

Consumer and other

 

 

11,463

 

 

 

81

 

 

 

2

 

 

 

2

 

 

 

85

 

 

 

11,548

 

Total consumer

 

 

151,351

 

 

 

818

 

 

 

2

 

 

 

551

 

 

 

1,371

 

 

 

152,722

 

Total gross loans

 

$

1,656,141

 

 

$

3,025

 

 

$

2

 

 

$

6,386

 

 

$

9,413

 

 

$

1,665,554

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

30-89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased

 

 

 

 

 

 

 

 

 

 

 

Days

 

 

90+ Days

 

 

Non-

 

 

Total

 

 

Credit

 

 

Total

 

(Dollars in thousands)

 

Current

 

 

Past Due

 

 

Past Due

 

 

accrual

 

 

Past Due

 

 

Impaired

 

 

Loans

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

942,370

 

 

$

534

 

 

$

-

 

 

$

4,809

 

 

$

5,343

 

 

$

360

 

 

$

948,073

 

Construction and land development

 

 

273,268

 

 

 

570

 

 

 

-

 

 

 

60

 

 

 

630

 

 

 

65

 

 

 

273,963

 

Total commercial real estate

 

 

1,215,638

 

 

 

1,104

 

 

 

-

 

 

 

4,869

 

 

 

5,973

 

 

 

425

 

 

 

1,222,036

 

Commercial and industrial

 

 

279,072

 

 

 

403

 

 

 

-

 

 

 

2,208

 

 

 

2,611

 

 

 

3,055

 

 

 

284,738

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

162,360

 

 

 

154

 

 

 

-

 

 

 

45

 

 

 

199

 

 

 

-

 

 

 

162,559

 

Consumer and other

 

 

15,727

 

 

 

298

 

 

 

3

 

 

 

8

 

 

 

309

 

 

 

-

 

 

 

16,036

 

Total consumer

 

 

178,087

 

 

 

452

 

 

 

3

 

 

 

53

 

 

 

508

 

 

 

-

 

 

 

178,595

 

Total gross loans

 

$

1,672,797

 

 

$

1,959

 

 

$

3

 

 

$

7,130

 

 

$

9,092

 

 

$

3,480

 

 

$

1,685,369

 

 

Credit Quality Indicators:

In addition to past due and non-accrual criteria, the Company also analyzes loans using a grading system. Performance-based grading follows the Company’s definitions of Pass, Special Mention, Substandard and Doubtful, which are consistent with published definitions of regulatory risk classifications.

Definitions of Pass, Special Mention, Substandard, and Doubtful are summarized as follows:

Pass: A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered remote.

Special Mention: A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Company is currently protected and loss is considered unlikely and not imminent.

Substandard: A Substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well defined weaknesses and are characterized by the distinct possibility that the Company may sustain some loss if deficiencies are not corrected.

Doubtful: A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable.

23

 

Note 3 — Loans and Allowance for Credit Losses – Continued

For consumer loans, the Company generally assigns internal risk grades similar to those described above based on payment performance.

 

Outstanding loan balances (accruing and non-accruing) categorized by these credit quality indicators are summarized as follows:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

Total

 

 

Total

 

(Dollars in thousands)

 

Pass

 

 

Mention

 

 

Substandard

 

 

Doubtful

 

 

Loans

 

 

ACL

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

908,884

 

 

$

22,746

 

 

$

27,153

 

 

$

-

 

 

$

958,783

 

 

$

12,507

 

Construction and land development

 

 

228,769

 

 

 

11,151

 

 

 

3,292

 

 

 

-

 

 

 

243,212

 

 

 

15,121

 

Total commercial real estate

 

 

1,137,653

 

 

 

33,897

 

 

 

30,445

 

 

 

-

 

 

 

1,201,995

 

 

 

27,628

 

Commercial and industrial

 

 

293,321

 

 

 

6,588

 

 

 

10,928

 

 

 

-

 

 

 

310,837

 

 

 

11,760

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

137,524

 

 

 

-

 

 

 

3,650

 

 

 

-

 

 

 

141,174

 

 

 

2,767

 

Consumer and other

 

 

11,545

 

 

 

-

 

 

 

3

 

 

 

-

 

 

 

11,548

 

 

 

528

 

Total consumer

 

 

149,069

 

 

 

-

 

 

 

3,653

 

 

 

-

 

 

 

152,722

 

 

 

3,295

 

Total

 

$

1,580,043

 

 

$

40,485

 

 

$

45,026

 

 

$

-

 

 

$

1,665,554

 

 

$

42,683

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

Total

 

 

Total

 

(Dollars in thousands)

 

Pass

 

 

Mention

 

 

Substandard

 

 

Doubtful

 

 

Loans

 

 

ACL

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

903,910

 

 

$

23,202

 

 

$

20,961

 

 

$

-

 

 

$

948,073

 

 

$

12,275

 

Construction and land development

 

 

259,245

 

 

 

10,182

 

 

 

4,536

 

 

 

-

 

 

 

273,963

 

 

 

6,990

 

Total commercial real estate

 

 

1,163,155

 

 

 

33,384

 

 

 

25,497

 

 

 

-

 

 

 

1,222,036

 

 

 

19,265

 

Commercial and industrial

 

 

263,588

 

 

 

6,629

 

 

 

14,521

 

 

 

-

 

 

 

284,738

 

 

 

10,892

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

159,176

 

 

 

204

 

 

 

3,179

 

 

 

-

 

 

 

162,559

 

 

 

1,118

 

Consumer and other

 

 

16,034

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

16,036

 

 

 

151

 

Total consumer

 

 

175,210

 

 

 

204

 

 

 

3,181

 

 

 

-

 

 

 

178,595

 

 

 

1,269

 

Total

 

$

1,601,953

 

 

$

40,217

 

 

$

43,199

 

 

$

-

 

 

$

1,685,369

 

 

$

31,426

 

 

24

 

Note 3 — Loans and Allowance for Credit Losses – Continued

The following table represents outstanding loan balances by credit quality indicators and vintage year by class of financing receivable as of June 30, 2020:

 

 

June 30, 2020

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

Revolving Loans

 

 

 

 

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Amortized Cost

 

 

Total

 

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

91,900

 

 

$

143,466

 

 

$

100,325

 

 

$

93,752

 

 

$

56,269

 

 

$

201,275

 

 

$

221,897

 

 

$

908,884

 

Special mention

 

 

-

 

 

 

-

 

 

 

3,668

 

 

 

2,344

 

 

 

2,957

 

 

 

13,162

 

 

 

615

 

 

 

22,746

 

Substandard

 

 

1,265

 

 

 

1,243

 

 

 

195

 

 

 

377

 

 

 

300

 

 

 

5,296

 

 

 

18,477

 

 

 

27,153

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total real estate term loans

 

$

93,165

 

 

$

144,709

 

 

$

104,188

 

 

$

96,473

 

 

$

59,526

 

 

$

219,733

 

 

$

240,989

 

 

$

958,783

 

Construction and land development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

6,996

 

 

$

8,139

 

 

$

10,714

 

 

$

3,492

 

 

$

6,750

 

 

$

8,941

 

 

$

183,737

 

 

$

228,769

 

Special mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,151

 

 

 

11,151

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60

 

 

 

3,232

 

 

 

3,292

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total construction and land development loans

 

$

6,996

 

 

$

8,139

 

 

$

10,714

 

 

$

3,492

 

 

$

6,750

 

 

$

9,001

 

 

$

198,120

 

 

$

243,212

 

Total commercial real estate loans

 

$

100,161

 

 

$

152,848

 

 

$

114,902

 

 

$

99,965

 

 

$

66,276

 

 

$

228,734

 

 

$

439,109

 

 

$

1,201,995

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

96,206

 

 

$

35,106

 

 

$

39,473

 

 

$

19,902

 

 

$

11,832

 

 

$

45,044

 

 

$

45,758

 

 

$

293,321

 

Special mention

 

 

-

 

 

 

197

 

 

 

446

 

 

 

-

 

 

 

1,227

 

 

 

4,522

 

 

 

196

 

 

 

6,588

 

Substandard

 

 

-

 

 

 

1,973

 

 

 

732

 

 

 

1,467

 

 

 

437

 

 

 

4,691

 

 

 

1,628

 

 

 

10,928

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total commercial and industrial loans

 

$

96,206

 

 

$

37,276

 

 

$

40,651

 

 

$

21,369

 

 

$

13,496

 

 

$

54,257

 

 

$

47,582

 

 

$

310,837

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

11,250

 

 

$

28,060

 

 

$

23,884

 

 

$

18,786

 

 

$

12,897

 

 

$

35,303

 

 

$

7,344

 

 

$

137,524

 

Special mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

183

 

 

 

-

 

 

 

85

 

 

 

242

 

 

 

780

 

 

 

2,360

 

 

 

-

 

 

 

3,650

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total residential real estate loans

 

$

11,433

 

 

$

28,060

 

 

$

23,969

 

 

$

19,028

 

 

$

13,677

 

 

$

37,663

 

 

$

7,344

 

 

$

141,174

 

Consumer and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

4,652

 

 

$

2,610

 

 

$

1,941

 

 

$

957

 

 

$

364

 

 

$

1,018

 

 

$

3

 

 

$

11,545

 

Special mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

3

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer and other loans

 

$

4,654

 

 

$

2,610

 

 

$

1,941

 

 

$

957

 

 

$

365

 

 

$

1,018

 

 

$

3

 

 

$

11,548

 

Total consumer loans

 

$

16,087

 

 

$

30,670

 

 

$

25,910

 

 

$

19,985

 

 

$

14,042

 

 

$

38,681

 

 

$

7,347

 

 

$

152,722

 

Total gross loans

 

$

212,454

 

 

$

220,794

 

 

$

181,463

 

 

$

141,319

 

 

$

93,814

 

 

$

321,672

 

 

$

494,038

 

 

$

1,665,554

 

 

 

 

25

 

Note 3 — Loans and Allowance for Credit Losses – Continued

The ACL and outstanding loan balances reviewed according to the Company’s estimated credit loss methods are summarized as follows:

 

 

 

June 30, 2020

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

892

 

 

$

1,512

 

 

$

4,402

 

 

$

401

 

 

$

-

 

 

$

7,207

 

Collectively evaluated for impairment

 

 

11,615

 

 

 

13,609

 

 

 

7,358

 

 

 

2,366

 

 

 

528

 

 

 

35,476

 

Total

 

$

12,507

 

 

$

15,121

 

 

$

11,760

 

 

$

2,767

 

 

$

528

 

 

$

42,683

 

Outstanding loan balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

2,423

 

 

$

4,806

 

 

$

10,819

 

 

$

504

 

 

$

-

 

 

$

18,552

 

Collectively evaluated for impairment

 

 

956,360

 

 

 

238,406

 

 

 

300,018

 

 

 

140,670

 

 

 

11,548

 

 

 

1,647,002

 

Total gross loans

 

$

958,783

 

 

$

243,212

 

 

$

310,837

 

 

$

141,174

 

 

$

11,548

 

 

$

1,665,554

 

 

 

 

December 31, 2019

 

 

 

Real

 

 

Construction

 

 

Commercial

 

 

Residential

 

 

Consumer

 

 

 

 

 

 

 

Estate

 

 

and Land

 

 

and

 

 

and Home

 

 

and

 

 

 

 

 

(Dollars in thousands)

 

Term

 

 

Development

 

 

Industrial

 

 

Equity

 

 

Other

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

825

 

 

$

1,305

 

 

$

4,901

 

 

$

401

 

 

$

-

 

 

$

7,432

 

Collectively evaluated for impairment

 

 

11,255

 

 

 

5,669

 

 

 

5,991

 

 

 

717

 

 

 

151

 

 

 

23,783

 

Purchased credit-impaired loans

 

 

195

 

 

 

16

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

211

 

Total

 

$

12,275

 

 

$

6,990

 

 

$

10,892

 

 

$

1,118

 

 

$

151

 

 

$

31,426

 

Outstanding loan balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

18,305

 

 

$

4,474

 

 

$

14,467

 

 

$

3,701

 

 

$

-

 

 

$

40,947

 

Collectively evaluated for impairment

 

 

929,408

 

 

 

269,424

 

 

 

267,216

 

 

 

158,858

 

 

 

16,036

 

 

 

1,640,942

 

Purchased credit-impaired loans

 

 

360

 

 

 

65

 

 

 

3,055

 

 

 

-

 

 

 

-

 

 

 

3,480

 

Total gross loans

 

$

948,073

 

 

$

273,963

 

 

$

284,738

 

 

$

162,559

 

 

$

16,036

 

 

$

1,685,369

 

 

 

The following table provides amortized cost basis of collateral dependent loans as of June 30, 2020:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real

 

 

Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Estate

 

 

Receivable

 

 

Equipment

 

 

Livestock

 

 

Auto

 

 

Total

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

891

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

891

 

Construction and land development

 

 

4,806

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,806

 

Total commercial real estate

 

 

5,697

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,697

 

Commercial and industrial

 

 

-

 

 

 

3,794

 

 

 

3,415

 

 

 

70

 

 

 

148

 

 

 

7,427

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

399

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

399

 

Consumer and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer

 

 

399

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

399

 

Total collateral dependent loans

 

$

6,096

 

 

$

3,794

 

 

$

3,415

 

 

$

70

 

 

$

148

 

 

$

13,523

 

26

 

Note 3 — Loans and Allowance for Credit Losses – Continued

Information on individually evaluated loans is summarized as follows:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Principal

 

 

With No

 

 

With

 

 

Recorded

 

 

Related

 

(Dollars in thousands)

 

Balance

 

 

Allowance

 

 

Allowance

 

 

Investment

 

 

ACL

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

2,779

 

 

$

-

 

 

$

2,423

 

 

$

2,423

 

 

$

892

 

Construction and land development

 

 

4,808

 

 

 

-

 

 

 

4,806

 

 

 

4,806

 

 

 

1,512

 

Total commercial real estate

 

 

7,587

 

 

 

-

 

 

 

7,229

 

 

 

7,229

 

 

 

2,404

 

Commercial and industrial

 

 

12,229

 

 

 

-

 

 

 

10,819

 

 

 

10,819

 

 

 

4,402

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

504

 

 

 

-

 

 

 

504

 

 

 

504

 

 

 

401

 

Consumer and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer

 

 

504

 

 

 

-

 

 

 

504

 

 

 

504

 

 

 

401

 

Total

 

$

20,320

 

 

$

-

 

 

$

18,552

 

 

$

18,552

 

 

$

7,207

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Principal

 

 

With No

 

 

With

 

 

Recorded

 

 

Related

 

(Dollars in thousands)

 

Balance

 

 

Allowance

 

 

Allowance

 

 

Investment

 

 

ACL

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

18,305

 

 

$

11,684

 

 

$

6,621

 

 

$

18,305

 

 

$

825

 

Construction and land development

 

 

4,474

 

 

 

121

 

 

 

4,353

 

 

 

4,474

 

 

 

1,305

 

Total commercial real estate

 

 

22,779

 

 

 

11,805

 

 

 

10,974

 

 

 

22,779

 

 

 

2,130

 

Commercial and industrial

 

 

14,467

 

 

 

2,591

 

 

 

11,876

 

 

 

14,467

 

 

 

4,901

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

3,701

 

 

 

3,194

 

 

 

507

 

 

 

3,701

 

 

 

401

 

Consumer and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer

 

 

3,701

 

 

 

3,194

 

 

 

507

 

 

 

3,701

 

 

 

401

 

Total

 

$

40,947

 

 

$

17,590

 

 

$

23,357

 

 

$

40,947

 

 

$

7,432

 

 

Interest income recognized on the average recorded investment of individually evaluated loans was as follows:  

 

 

 

Three Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

(Dollars in thousands)

 

Investment

 

 

Recognition

 

 

Investment

 

 

Recognition

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

4,835

 

 

$

25

 

 

$

13,858

 

 

$

182

 

Construction and land development

 

 

2,958

 

 

 

47

 

 

 

3,987

 

 

 

71

 

Total commercial real estate

 

 

7,793

 

 

 

72

 

 

 

17,845

 

 

 

253

 

Commercial and industrial

 

 

10,733

 

 

 

96

 

 

 

12,183

 

 

 

170

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

828

 

 

 

4

 

 

 

3,096

 

 

 

44

 

Consumer and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer

 

 

828

 

 

 

4

 

 

 

3,096

 

 

 

44

 

Total

 

$

19,354

 

 

$

172

 

 

$

33,124

 

 

$

467

 

 

 

27

 

Note 3 — Loans and Allowance for Credit Losses – Continued

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

(Dollars in thousands)

 

Investment

 

 

Recognition

 

 

Investment

 

 

Recognition

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

8,806

 

 

$

155

 

 

$

11,998

 

 

$

305

 

Construction and land development

 

 

2,962

 

 

 

99

 

 

 

2,545

 

 

 

88

 

Total commercial real estate

 

 

11,768

 

 

 

254

 

 

 

14,543

 

 

 

393

 

Commercial and industrial

 

 

11,644

 

 

 

261

 

 

 

10,806

 

 

 

325

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

1,540

 

 

 

32

 

 

 

3,134

 

 

 

91

 

Consumer and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer

 

 

1,540

 

 

 

32

 

 

 

3,134

 

 

 

91

 

Total

 

$

24,952

 

 

$

547

 

 

$

28,483

 

 

$

809

 

 

Purchased credit-deteriorated loans and purchased non-credit-deteriorated loans. Prior to adoption of ASC 326, purchased loans, including loans acquired in business combinations, were recorded at their fair value at the acquisition date. Credit discounts were included in the determination of fair value; therefore, an allowance for loan and lease losses was not recorded at the acquisition date. Acquired loans were evaluated upon acquisition and classified as either PCI or purchased non-credit-impaired. PCI loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments. The outstanding contractual unpaid principal balance of PCI loans, excluding acquisition accounting adjustments, was $6.2 million at December 31, 2019. As of December 31, 2019, the non-accretable difference between the contractually required payments and cash flows expected to be collected were $2.8 million. The carrying balance of PCI loans was $3.5 million at December 31, 2019. On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.  Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.  The Company adopted ASC 326 using the prospective transition approach for financial assets purchased through an acquisition or business combination.  Loans that were previously classified as PCI and accounted for under ASC 310-30 were reclassified as PCD loans.  In accordance with the new standard, management did not reassess whether PCI loans met the criteria of PCD loan as of the date of adoption.  On January 1, 2020, the amortized cost basis for PCD loans was increased by $1.5 million to reflect the addition of ACL.  The remaining noncredit discount will continue to be accreted into interest income over the remaining life of the portfolio.  The outstanding contractual unpaid principal balance of PCD loans was $2.5 million at June 30, 2020.

The following table presents the changes in the accretable yield for non-PCD loans for the six months ended June 30, 2020, and 2019:

 

 

 

Six Months Ended

 

 

 

June 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Balance, beginning of period

 

$

4,247

 

 

$

5,884

 

Accretion to interest income

 

 

(1,192

)

 

 

(874

)

Reclassification from non-accretable difference

 

 

402

 

 

 

96

 

Balance, end of period

 

$

3,457

 

 

$

5,106

 

 

 

28

 

Note 3 — Loans and Allowance for Credit Losses – Continued

 

Loans and Deposits to affiliates — The Company has entered into loan transactions with certain directors, affiliated companies and executive officers (“affiliates”). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Total outstanding loans with affiliates were approximately $7.9 million and $5.4 million as of June 30, 2020, and December 31, 2019, respectively.  Available lines of credit for loans and credit cards to affiliates were approximately $3.9 million and $278,000 as of June 30, 2020, and December 31, 2019, respectively.  Deposits from affiliates were $8.0 million and $4.5 million as of June 30, 2020 and December 31, 2019, respectively.

 

 

Note 4 — Commitments and Contingencies

Litigation contingencies — The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.

Commitments to extend credit — In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and unused credit card lines, which are not included in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of non-performance by other parties to the financial instruments for commitments to extend credit and unused credit card lines is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.

Contractual amounts of off-balance sheet financial instruments were as follows:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Commitments to extend credit, including unsecured

   commitments of $12,822 and $32,995 as of June 30,

   2020 and December 31, 2019, respectively

 

$

659,794

 

 

$

632,577

 

Stand-by letters of credit and bond commitments,

   including unsecured commitments of $403 and $555

   as of June 30, 2020 and December 31, 2019,

   respectively

 

 

23,493

 

 

 

23,860

 

Unused credit card lines, all unsecured

 

 

26,860

 

 

 

26,121

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unused credit card lines are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

 

29

 

Note 5 — Fair Value

The Company measures and discloses certain assets and liabilities at fair value. The standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These two types of inputs create the following fair value hierarchy:

 

•

Level 1 – Quoted prices in active markets for identical instruments.

 

•

Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

 

•

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  

 

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

The following methods were used to estimate the fair value of each class of financial instruments:

Securities: The estimated fair values of investment securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2.  Level 3 measurements were determined using discounted cash flow analyses based on the net present value of each security’s projected cash flows using observable market data for similar securities.

Non-marketable securities: The fair value is based upon the redemption value of the stock, which equates to its carrying value.

Loans held for sale: The carrying value of these items is a reasonable estimate of their fair value.

Loans held for investment: The fair value is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types’ fair value approximated carrying value because of their floating rate or expected maturity characteristics.

Deposits: The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using the rates currently offered on comparable instruments.

30

 

Note 5 — Fair Value - Continued

The following table presents estimated fair values of the Company’s financial instruments as of June 30, 2020 and December 31, 2019:

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

(Dollars in thousands)

 

Level

 

 

Value

 

 

Fair Value

 

 

Value

 

 

Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

1

 

 

$

323,837

 

 

$

323,837

 

 

$

211,981

 

 

$

211,981

 

Investment securities available for sale

 

 

2

 

 

 

964,959

 

 

 

964,959

 

 

 

395,410

 

 

 

395,410

 

Investment securities available for sale

 

 

3

 

 

 

8,498

 

 

 

8,498

 

 

 

10,585

 

 

 

10,585

 

Non-marketable securities

 

 

2

 

 

 

2,890

 

 

 

2,890

 

 

 

2,623

 

 

 

2,623

 

Loans held for sale

 

 

2

 

 

 

29,264

 

 

 

29,264

 

 

 

18,669

 

 

 

18,669

 

Loans held for investment

 

 

3

 

 

 

1,616,335

 

 

 

1,583,362

 

 

 

1,649,492

 

 

 

1,639,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

 

2

 

 

$

2,613,339

 

 

$

2,465,845

 

 

$

2,056,367

 

 

$

1,851,954

 

 

Assets measured on a recurring and non-recurring basis are as follows:

 

(Dollars in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

As of June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair valued on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

$

-

 

 

$

964,959

 

 

$

8,498

 

 

$

973,457

 

Fair valued on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated loans

 

 

-

 

 

 

-

 

 

 

945

 

 

 

945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair valued on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

$

-

 

 

$

395,410

 

 

$

10,585

 

 

$

405,995

 

Fair valued on a non-recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated loans

 

 

-

 

 

 

-

 

 

 

17,497

 

 

 

17,497

 

 

 

 

Note 6 — Income Taxes

Income tax expense was $3.2 million and $3.5 million for the three months ended June 30, 2020 and 2019, respectively. The Company’s effective tax rate for the second quarter of 2020 was 23.6% compared with 24.1% in the second quarter of 2019.

Income tax expense was $6.6 million and $6.8 million for the six months ended June 30, 2020 and 2019, respectively. The Company’s effective tax rate for the six months ended June 30, 2020 was 23.7% compared with 23.9% for the same period in 2019.

 

Note 7 — Regulatory Capital Matters

The Company is subject to various regulatory capital requirements administered by its primary federal regulator, the FDIC. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and its consolidated financial statements. Under the regulatory capital adequacy guidelines and regulatory framework for prompt corrective action, the Company must meet specific capital guidelines involving quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

As of June 30, 2020, the Company was categorized as well capitalized under the regulatory framework. To be categorized as well capitalized, an institution must maintain minimum common Tier 1 (“CET1”), Tier 1 risk-based capital, total risk-based capital, and Tier 1 to average assets (“Tier 1 Leverage”) capital ratios as disclosed in the table below.

31

 

Note 7 — Regulatory Capital Matters – continued

The Company’s actual and required capital amounts and ratios are as follows:

 

 

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Well Capitalized

 

 

 

Actual

 

 

Requirement

 

 

Requirement

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital to Risk-Weighted Assets

 

$

310,678

 

 

 

17.94

%

 

$

77,941

 

 

 

4.50

%

 

$

112,581

 

 

 

6.50

%

Tier 1 Capital to Risk-Weighted Assets

 

 

310,678

 

 

 

17.94

%

 

 

103,921

 

 

 

6.00

%

 

 

138,561

 

 

 

8.00

%

Total Risk-Based Capital to Risk-Weighted Assets

 

 

332,608

 

 

 

19.20

%

 

 

138,561

 

 

 

8.00

%

 

 

173,202

 

 

 

10.00

%

Tier 1 Leverage

 

 

310,678

 

 

 

11.68

%

 

 

106,380

 

 

 

4.00

%

 

NA

 

 

NA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AltabankTM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital to Risk-Weighted Assets

 

$

305,829

 

 

 

17.66

%

 

$

77,922

 

 

 

4.50

%

 

$

112,554

 

 

 

6.50

%

Tier 1 Capital to Risk-Weighted Assets

 

 

305,829

 

 

 

17.66

%

 

 

103,896

 

 

 

6.00

%

 

 

138,528

 

 

 

8.00

%

Total Risk-Based Capital to Risk-Weighted Assets

 

 

327,759

 

 

 

18.93

%

 

 

138,528

 

 

 

8.00

%

 

 

173,160

 

 

 

10.00

%

Tier 1 Leverage

 

 

305,829

 

 

 

11.52

%

 

 

106,207

 

 

 

4.00

%

 

 

132,759

 

 

 

5.00

%

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Well Capitalized

 

 

 

Actual

 

 

Requirement

 

 

Requirement

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital to Risk-Weighted Assets

 

$

302,291

 

 

 

17.18

%

 

$

79,193

 

 

 

4.50

%

 

$

114,390

 

 

 

6.50

%

Tier 1 Capital to Risk-Weighted Assets

 

 

302,291

 

 

 

17.18

%

 

 

105,590

 

 

 

6.00

%

 

 

140,787

 

 

 

8.00

%

Total Risk-Based Capital to Risk-Weighted Assets

 

 

324,415

 

 

 

18.43

%

 

 

140,787

 

 

 

8.00

%

 

 

175,984

 

 

 

10.00

%

Tier 1 Leverage

 

 

302,291

 

 

 

12.67

%

 

 

95,431

 

 

 

4.00

%

 

NA

 

 

NA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AltabankTM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital to Risk-Weighted Assets

 

$

297,108

 

 

 

16.88

%

 

$

79,191

 

 

 

4.50

%

 

$

114,387

 

 

 

6.50

%

Tier 1 Capital to Risk-Weighted Assets

 

 

297,108

 

 

 

16.88

%

 

 

105,588

 

 

 

6.00

%

 

 

140,784

 

 

 

8.00

%

Total Risk-Based Capital to Risk-Weighted Assets

 

 

319,233

 

 

 

18.14

%

 

 

140,784

 

 

 

8.00

%

 

 

175,981

 

 

 

10.00

%

Tier 1 Leverage

 

 

297,108

 

 

 

12.45

%

 

 

95,429

 

 

 

4.00

%

 

 

119,286

 

 

 

5.00

%

 

Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits.  On March 15, 2020, the Board of Governors of the Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020.  This action eliminated reserve requirements for all depository institutions.  The Bank had a reserve requirement of $9.4 million as of December 31, 2019.

The Company’s Board of Directors may declare a cash or stock dividend out of retained earnings provided the regulatory minimum capital ratios are met. The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations and, therefore, dividend amounts may be correspondingly limited.

 

 

32

 

Note 8 — Incentive Share-Based Plan and Other Employee Benefits

In May 2020, on approval by and at the recommendation of the Board of Directors (“Board”), the shareholders of the Company approved a share-based incentive plan (“the Plan”). The Plan provides for various share-based incentive awards including incentive share-based options, non-qualified share-based options, restricted shares, and stock appreciation rights to be granted to officers, directors and other key employees. The maximum aggregate number of shares that may be issued under the Plan is 1,000,000 common shares. The share-based awards are granted to participants under the Plan at a price not less than the fair value on the date of grant and for terms of up to ten years. The Plan also allows for granting of share-based awards to directors and consultants who are not employees of the Company.

During the six months ended June 30, 2020, the Company granted 55,187 restricted stock units (“RSU”) at a weighted-average fair value of $29.02 per unit.  All awards granted thru June 30, 2020 were done so under the prior employee incentive plan.  Beginning July 1, 2020, any new grants awarded to associates will be under the new Plan.  The RSUs generally vest over periods from one to three years. The Company recorded share-based compensation expense of $765,000 and $381,000 for the six months ended June 30, 2020 and 2019, respectively.  Additionally, the Company did not grant any options for the purchase of common shares during the six months ended June 30, 2020, and 2019, respectively.

 

33

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of AltabancorpTM’s operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. The discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views and are not historical facts.  These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These are forward-looking statements and involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report and our Annual Report on Form 10-K for the year ended December 31, 2019 (“Form 10-K”), and other parts of this report that could cause our actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause our actual results to differ materially from our forward-looking statements in this filing:

 

•

the duration and impact of the COVID-19 pandemic;

 

•

changes in general economic conditions, either nationally or in our local market;

 

•

inflation, interest rates, securities market volatility and monetary fluctuations;

 

•

increases in competitive pressures among financial institutions and businesses offering similar products and services;

 

•

higher defaults on our loan portfolio than we expect;

 

•

changes in management’s estimate of the adequacy of the allowance for credit losses or the adoption of ASU 2016-13;

 

•

risks associated with our growth and expansion strategy and related costs;

 

•

ability to raise liquidity, either with deposits or other funding sources, to support our growth in assets;

 

•

risks associated with the integration of current and future acquisitions;

 

•

increased lending risks associated with our high concentration of real estate loans;

 

•

ability to successfully grow our business in Utah and neighboring states;

 

•

legislative or regulatory changes or changes in accounting principles, policies or guidelines;

 

•

risks associated with cyber security;

 

•

technological changes;

 

•

regulatory or judicial proceedings; and

 

•

other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and our Annual Report on Form 10-K for the year ended December 31, 2019.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.

Please take into account that forward-looking statements speak only as of the date of this Form 10-Q. We do not undertake any obligation to release publicly our revisions to such forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, except as required by law.

34

 

Overview

AltabancorpTM (“ALTA” or the “Company”) is a Utah registered bank holding company organized in 1998.  As a Utah registered bank holding company, ALTA is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System and by the Utah Department of Financial Institutions (“UDFI”).  The Company operates all business activities through its wholly-owned banking subsidiary, AltabankTM (the “Bank”) which was organized in 1913.  The Bank is a Utah state-chartered bank subject to primary regulation, supervision and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the UDFI.  The Company received federal trademark approval for the operating bank and holding company name and accompanying logos in July 2020.

AltabankTM is the largest community bank in Utah.  AltabankTM, a full-service bank, provides loans, deposit and cash management services to businesses and individuals through 26 branch locations from Preston, Idaho to St. George, Utah. Our clients have direct access to bankers and decision-makers who work with clients to understand their specific needs and offer customized financial solutions. AltabankTM has been serving communities in Utah and southern Idaho for more than 100 years.  Our loan growth historically has been the result of mergers and acquisitions as well as organic growth that we believe was generated by our seasoned relationship managers and supporting associates who provide outstanding service and quick responsiveness to our customers.  The primary source of funding for our asset growth has been the generation of core deposits, which we raised from our existing branch system as well as through acquisitions.

Our results of operations are largely dependent on net interest income. Net interest income is the difference between interest income we earn on interest earning assets, which are comprised of loans, investment securities and short-term investments and the interest we pay on our interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.

We measure our performance by calculating our net interest margin, return on average assets, and return on average equity. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is our largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic.  Local and national governments and regulatory authorities have systematically implemented remedial measures to try to slow and curb the spread of COVID-19, including business closures and operating restrictions, travel bans, and shelter in place, stay home, and similar directives and orders.  In response to the COVID-19 pandemic and in adherence with state and local guidelines, we have implemented our business continuity plan and other measures and activities to protect our associates and, at the same time, to assist our clients and the communities of which we are a part, including remote working for the majority of our associates, increased mobile banking and electronic transaction options for clients, payment deferral assistance to commercial and consumer borrowers, and participation in the SBA’s Paycheck Protection Program for loans to qualifying small businesses.

Share Repurchase Program

As previously announced, the Company temporarily suspended its share repurchase program effective March 25, 2020.  The Company made this decision, in part, to provide maximum flexibility to use its capital and liquidity to support new lending and to assist commercial and consumer borrowers with deferrals on existing loans during the pendency of the COVID-19 pandemic.  The Company is well-capitalized and, as such, may determine to reinstate its share repurchase program in accordance with Board authorization and as executive management deems advisable, taking into account market conditions and other considerations.

 

35

 

Selected Financial Information

You should read the selected financial information data set forth below in conjunction with our historical consolidated financial statements and related notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

March 31,

 

 

December 31,

 

 

June 30,

 

(Dollars in thousands, except share data)

 

2020

 

 

2020

 

 

2019

 

 

2019

 

Selected Balance Sheet Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share

 

$

18.63

 

 

$

18.10

 

 

$

17.61

 

 

$

16.62

 

Tangible book value per share

 

$

17.12

 

 

$

16.59

 

 

$

16.09

 

 

$

15.09

 

Non-performing loans to total loans

 

 

0.39

%

 

 

0.41

%

 

 

0.53

%

 

 

0.31

%

Non-performing assets to total assets

 

 

0.21

%

 

 

0.27

%

 

 

0.37

%

 

 

0.22

%

Allowance for credit losses to loans held for

   investment

 

 

2.57

%

 

 

2.51

%

 

 

1.87

%

 

 

1.68

%

Loans to Deposits

 

 

62.97

%

 

 

76.48

%

 

 

81.12

%

 

 

83.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans

 

$

6,388

 

 

$

6,590

 

 

$

8,814

 

 

$

5,104

 

Non-performing assets

 

$

6,388

 

 

$

6,590

 

 

$

8,814

 

 

$

5,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

11.68

%

 

 

12.74

%

 

 

12.67

%

 

 

12.78

%

Total risk-based capital

 

 

19.20

%

 

 

18.62

%

 

 

18.43

%

 

 

17.24

%

Average equity to average assets

 

 

12.57

%

 

 

13.82

%

 

 

13.63

%

 

 

13.69

%

Tangible common equity to tangible assets (1)

 

 

10.59

%

 

 

12.73

%

 

 

12.77

%

 

 

12.44

%

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Selected Financial Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.55

 

 

$

0.57

 

 

$

0.58

 

 

$

1.12

 

 

$

1.14

 

Diluted earnings per share

 

$

0.55

 

 

$

0.57

 

 

$

0.58

 

 

$

1.11

 

 

$

1.13

 

Net interest margin (2)

 

 

3.96

%

 

 

4.79

%

 

 

5.24

%

 

 

4.35

%

 

 

5.27

%

Efficiency ratio

 

 

51.01

%

 

 

52.20

%

 

 

46.93

%

 

 

51.60

%

 

 

48.11

%

Non-interest income to average assets

 

 

0.90

%

 

 

0.63

%

 

 

0.64

%

 

 

0.77

%

 

 

0.63

%

Non-interest expense to average assets

 

 

2.39

%

 

 

2.71

%

 

 

2.63

%

 

 

2.54

%

 

 

2.69

%

Return on average assets

 

 

1.52

%

 

 

1.80

%

 

 

1.96

%

 

 

1.65

%

 

 

1.96

%

Return on average equity

 

 

12.06

%

 

 

13.05

%

 

 

14.33

%

 

 

12.55

%

 

 

14.35

%

Net charge-offs

 

$

670

 

 

$

289

 

 

$

34

 

 

$

959

 

 

$

906

 

Annualized net charge-offs to average loans

 

 

0.16

%

 

 

0.07

%

 

 

0.01

%

 

 

0.11

%

 

 

0.11

%

 

(1)

Represents the sum of total shareholders’ equity less intangible assets all divided by the sum of total assets less intangible assets.  Intangible assets were $28.4 million, $28.5 million, $28.6 million, and $28.9 million at June 30, 2020, March 31, 2020, December 31, 2019, and June 30, 2019, respectively.

(2)

Net interest margin is defined as net interest income divided by average earning assets.

 

36

 

Results of Operations

Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income primarily includes service charges and other fees on deposits, and mortgage banking income. Non-interest expense consists primarily of employee compensation and benefits, occupancy, equipment and depreciation expense, and other operating expenses.

Average Balance and Yields. The following tables summarize average balances with corresponding interest income and interest expense, as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances. Average non-accrual loans are derived from quarterly balances and are included as non-interest earning assets for purposes of these tables.

 

 

 

Three Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

(Dollars in thousands, except footnotes)

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits in other banks and

   federal funds sold

 

$

228,032

 

 

$

52

 

 

 

0.09

%

 

$

88,654

 

 

$

511

 

 

 

2.31

%

Securities: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

 

645,720

 

 

 

3,452

 

 

 

2.15

%

 

 

276,993

 

 

 

1,572

 

 

 

2.28

%

Non-taxable securities (2)

 

 

45,670

 

 

 

229

 

 

 

2.02

%

 

 

66,425

 

 

 

312

 

 

 

1.88

%

Total securities

 

 

691,390

 

 

 

3,681

 

 

 

2.14

%

 

 

343,418

 

 

 

1,884

 

 

 

2.20

%

Loans (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

945,680

 

 

 

13,165

 

 

 

5.60

%

 

 

902,214

 

 

 

13,447

 

 

 

5.98

%

Construction and land development

 

 

257,561

 

 

 

4,157

 

 

 

6.49

%

 

 

313,412

 

 

 

6,304

 

 

 

8.07

%

Commercial and industrial

 

 

303,809

 

 

 

3,885

 

 

 

5.14

%

 

 

294,488

 

 

 

5,255

 

 

 

7.16

%

Residential and home equity

 

 

175,837

 

 

 

2,235

 

 

 

5.11

%

 

 

161,299

 

 

 

2,371

 

 

 

5.89

%

Consumer and other

 

 

11,306

 

 

 

207

 

 

 

7.38

%

 

 

16,039

 

 

 

251

 

 

 

6.27

%

Total loans

 

 

1,694,193

 

 

 

23,649

 

 

 

5.61

%

 

 

1,687,452

 

 

 

27,628

 

 

 

6.57

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-marketable equity securities

 

 

2,890

 

 

 

20

 

 

 

2.79

%

 

 

2,624

 

 

 

27

 

 

 

4.07

%

Total interest earning assets

 

 

2,616,505

 

 

 

27,402

 

 

 

4.21

%

 

 

2,122,148

 

 

 

30,050

 

 

 

5.68

%

Allowance for loan losses

 

 

(42,213

)

 

 

 

 

 

 

 

 

 

 

(26,008

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

167,969

 

 

 

 

 

 

 

 

 

 

 

149,431

 

 

 

 

 

 

 

 

 

Total average assets

 

$

2,742,261

 

 

 

 

 

 

 

 

 

 

$

2,245,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’

   EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings accounts

 

$

911,270

 

 

$

539

 

 

 

0.24

%

 

$

815,687

 

 

$

1,034

 

 

 

0.51

%

Money market accounts

 

 

416,458

 

 

 

505

 

 

 

0.49

%

 

 

274,667

 

 

 

677

 

 

 

0.99

%

Certificates of deposit less than or equal to $250,000

 

 

129,378

 

 

 

368

 

 

 

1.14

%

 

 

140,637

 

 

 

436

 

 

 

1.24

%

Certificates of deposit greater than $250,000

 

 

44,005

 

 

 

201

 

 

 

1.84

%

 

 

38,604

 

 

 

183

 

 

 

1.90

%

Total interest bearing deposits

 

 

1,501,111

 

 

 

1,613

 

 

 

0.43

%

 

 

1,269,595

 

 

 

2,330

 

 

 

0.74

%

Short-term borrowings

 

 

24,410

 

 

 

-

 

 

 

0.00

%

 

 

-

 

 

 

-

 

 

 

0.00

%

Total interest-bearing liabilities

 

 

1,525,521

 

 

 

1,613

 

 

 

0.43

%

 

 

1,269,595

 

 

 

2,330

 

 

 

0.74

%

Non-interest bearing deposits

 

 

858,566

 

 

 

 

 

 

 

 

 

 

 

650,836

 

 

 

 

 

 

 

 

 

Total funding

 

 

2,384,087

 

 

 

1,613

 

 

 

0.27

%

 

 

1,920,431

 

 

 

2,330

 

 

 

0.49

%

Other non-interest bearing liabilities

 

 

13,490

 

 

 

 

 

 

 

 

 

 

 

17,610

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

344,684

 

 

 

 

 

 

 

 

 

 

 

307,530

 

 

 

 

 

 

 

 

 

Total average liabilities and shareholders’

   equity

 

$

2,742,261

 

 

 

 

 

 

 

 

 

 

$

2,245,571

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

25,789

 

 

 

 

 

 

 

 

 

 

$

27,720

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

3.79

%

 

 

 

 

 

 

 

 

 

 

4.94

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.96

%

 

 

 

 

 

 

 

 

 

 

5.24

%

 

(1)

Excludes average unrealized gains (losses) of $11.5 million and ($2.7) million for the three months ended June 30, 2020 and 2019, respectively.

(2)

Does not include tax effect on tax-exempt investment security income of $76,000 and $104,000 for the three months ended June 30, 2020 and 2019, respectively.  

(3)

Loan interest income includes loan fees of $1.7 million and $1.8 million for the three months ended June 30, 2020 and 2019, respectively.

37

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

(Dollars in thousands, except footnotes)

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits in other banks and

   federal funds sold

 

$

165,566

 

 

$

368

 

 

 

0.45

%

 

$

63,016

 

 

$

730

 

 

 

2.33

%

Securities: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

 

547,457

 

 

 

6,320

 

 

 

2.32

%

 

 

276,948

 

 

 

3,176

 

 

 

2.31

%

Non-taxable securities (2)

 

 

48,093

 

 

 

482

 

 

 

2.02

%

 

 

67,965

 

 

 

634

 

 

 

1.88

%

Total securities

 

 

595,550

 

 

 

6,802

 

 

 

2.30

%

 

 

344,913

 

 

 

3,810

 

 

 

2.23

%

Loans (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

940,716

 

 

 

26,632

 

 

 

5.69

%

 

 

895,700

 

 

 

26,494

 

 

 

5.96

%

Construction and land development

 

 

267,641

 

 

 

9,181

 

 

 

6.90

%

 

 

314,604

 

 

 

12,535

 

 

 

8.04

%

Commercial and industrial

 

 

291,543

 

 

 

8,791

 

 

 

6.06

%

 

 

295,668

 

 

 

10,383

 

 

 

7.08

%

Residential and home equity

 

 

173,302

 

 

 

4,521

 

 

 

5.25

%

 

 

158,813

 

 

 

4,687

 

 

 

5.95

%

Consumer and other

 

 

13,208

 

 

 

449

 

 

 

6.84

%

 

 

16,404

 

 

 

509

 

 

 

6.25

%

Total loans

 

 

1,686,410

 

 

 

49,574

 

 

 

5.91

%

 

 

1,681,189

 

 

 

54,608

 

 

 

6.55

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-marketable equity securities

 

 

2,764

 

 

 

42

 

 

 

3.04

%

 

 

2,785

 

 

 

54

 

 

 

3.90

%

Total interest earning assets

 

 

2,450,290

 

 

 

56,786

 

 

 

4.66

%

 

 

2,091,903

 

 

 

59,202

 

 

 

5.71

%

Allowance for loan losses

 

 

(42,174

)

 

 

 

 

 

 

 

 

 

 

(25,907

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

163,773

 

 

 

 

 

 

 

 

 

 

 

150,474

 

 

 

 

 

 

 

 

 

Total average assets

 

$

2,571,889

 

 

 

 

 

 

 

 

 

 

$

2,216,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’

   EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings accounts

 

$

871,676

 

 

$

1,318

 

 

 

0.30

%

 

$

807,043

 

 

$

2,027

 

 

 

0.51

%

Money market accounts

 

 

384,289

 

 

 

1,316

 

 

 

0.69

%

 

 

262,171

 

 

 

1,281

 

 

 

0.99

%

Certificates of deposit less than or equal to $250,000

 

 

130,133

 

 

 

760

 

 

 

1.17

%

 

 

142,450

 

 

 

849

 

 

 

1.20

%

Certificates of deposit greater than $250,000

 

 

41,392

 

 

 

382

 

 

 

1.85

%

 

 

38,136

 

 

 

354

 

 

 

1.87

%

Total interest bearing deposits

 

 

1,427,490

 

 

 

3,776

 

 

 

0.53

%

 

 

1,249,800

 

 

 

4,511

 

 

 

0.73

%

Short-term borrowings

 

 

12,205

 

 

 

-

 

 

 

0.00

%

 

 

4,879

 

 

 

64

 

 

 

2.63

%

Total interest-bearing liabilities

 

 

1,439,695

 

 

 

3,776

 

 

 

0.53

%

 

 

1,254,679

 

 

 

4,575

 

 

 

0.74

%

Non-interest bearing deposits

 

 

779,173

 

 

 

 

 

 

 

 

 

 

 

643,642

 

 

 

 

 

 

 

 

 

Total funding

 

 

2,218,868

 

 

 

3,776

 

 

 

0.34

%

 

 

1,898,321

 

 

 

4,575

 

 

 

0.49

%

Other non-interest bearing liabilities

 

 

14,684

 

 

 

 

 

 

 

 

 

 

 

16,173

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

338,337

 

 

 

 

 

 

 

 

 

 

 

301,976

 

 

 

 

 

 

 

 

 

Total average liabilities and shareholders’

   equity

 

$

2,571,889

 

 

 

 

 

 

 

 

 

 

$

2,216,470

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

53,010

 

 

 

 

 

 

 

 

 

 

$

54,627

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

4.13

%

 

 

 

 

 

 

 

 

 

 

4.97

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

4.35

%

 

 

 

 

 

 

 

 

 

 

5.27

%

 

(1)

Excludes average unrealized gains (losses) of $7.3 million and ($3.9) million for the six months ended June 30, 2020 and 2019, respectively.

(2)

Does not include tax effect on tax-exempt investment security income of $161,000 and $211,000 for the six months ended June 30, 2020 and 2019, respectively.

(3)

Loan interest income includes loan fees of $3.2 million for both six months ended June 30, 2020 and 2019.

 

38

 

 

Rate/Volume Analysis. The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020 vs. 2019

 

 

2020 vs. 2019

 

 

 

Increase (Decrease) Due to:

 

 

Increase (Decrease) Due to:

 

(Dollars in thousands)

 

Volume

 

 

Rate

 

 

Net

 

 

Volume

 

 

Rate

 

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits in other banks

   and federal funds sold

 

$

324

 

 

$

(783

)

 

$

(459

)

 

$

546

 

 

$

(908

)

 

$

(362

)

Taxable securities

 

 

1,976

 

 

 

(96

)

 

 

1,880

 

 

 

3,123

 

 

 

21

 

 

 

3,144

 

Non-taxable securities

 

 

(103

)

 

 

20

 

 

 

(83

)

 

 

(196

)

 

 

44

 

 

 

(152

)

Total securities

 

 

1,873

 

 

 

(76

)

 

 

1,797

 

 

 

2,927

 

 

 

65

 

 

 

2,992

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

630

 

 

 

(912

)

 

 

(282

)

 

 

1,301

 

 

 

(1,163

)

 

 

138

 

Construction and land development

 

 

(1,018

)

 

 

(1,129

)

 

 

(2,147

)

 

 

(1,736

)

 

 

(1,618

)

 

 

(3,354

)

Commercial and industrial

 

 

162

 

 

 

(1,532

)

 

 

(1,370

)

 

 

(143

)

 

 

(1,449

)

 

 

(1,592

)

Residential and home equity

 

 

202

 

 

 

(338

)

 

 

(136

)

 

 

406

 

 

 

(572

)

 

 

(166

)

Consumer and other

 

 

(82

)

 

 

38

 

 

 

(44

)

 

 

(106

)

 

 

46

 

 

 

(60

)

Total Loans

 

 

(106

)

 

 

(3,873

)

 

 

(3,979

)

 

 

(278

)

 

 

(4,756

)

 

 

(5,034

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-marketable equity securities

 

 

2

 

 

 

(9

)

 

 

(7

)

 

 

-

 

 

 

(12

)

 

 

(12

)

Total interest income

 

 

2,093

 

 

 

(4,741

)

 

 

(2,648

)

 

 

3,195

 

 

 

(5,611

)

 

 

(2,416

)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings accounts

 

 

109

 

 

 

(604

)

 

 

(495

)

 

 

152

 

 

 

(861

)

 

 

(709

)

Money market accounts

 

 

260

 

 

 

(432

)

 

 

(172

)

 

 

488

 

 

 

(453

)

 

 

35

 

Certificates of deposit less than or equal to $250,000

 

 

(33

)

 

 

(35

)

 

 

(68

)

 

 

(72

)

 

 

(17

)

 

 

(89

)

Certificates of deposit greater than $250,000

 

 

24

 

 

 

(6

)

 

 

18

 

 

 

30

 

 

 

(2

)

 

 

28

 

Short-term borrowings

 

 

-

 

 

 

-

 

 

 

-

 

 

 

38

 

 

 

(102

)

 

 

(64

)

Total interest expense

 

 

360

 

 

 

(1,077

)

 

 

(717

)

 

 

636

 

 

 

(1,435

)

 

 

(799

)

Net interest income

 

$

1,733

 

 

$

(3,664

)

 

$

(1,931

)

 

$

2,559

 

 

$

(4,176

)

 

$

(1,617

)

 

For the three months ended June 30, 2020, net interest income decreased $1.9 million, or 6.97%, to $25.8 million compared with $27.7 million for the same period a year earlier. The decrease is primarily the result of net interest margins narrowing 128 basis points to 3.96% for the same comparable periods offset by average interest earning assets increasing $494 million, or 23.30%, to $2.6 billion for the same comparable periods. The narrowing of net interest margins is primarily the result of the Federal Reserve reducing benchmark rates to almost zero and an increase in the average amount of lower yielding cash and investment securities held by the Company stemming from average core deposits increasing $232 million, or 18.24%, for the same respective periods. The percentage of average loans to total average interest earning assets decreased to 64.75% for the three months ended June 30, 2020 compared with 79.52% for the same period a year earlier.

 

Yields on interest earning assets declined 147 basis points to 4.21% for the three months ended June 30, 2020 compared with 5.68% for the same period a year earlier. The decline in yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by the Company increasing $487 million, or 112.79%, to $919 million for the same comparable periods with the yield on cash and securities decreasing 59 basis points to 1.63% for the same comparable periods.

 

39

 

In addition, the yield on loans declined 96 basis points for the same comparable periods and average loans outstanding increased $6.7 million, or 0.40%, to $1.69 billion for the same comparable periods. Yields on loans were negatively impacted by the lower yield on SBA PPP loans. For the three months ended June 30, 2020, the yield on SBA PPP loans was 2.77%, including the amortization of deferred fees and costs recognized over the contractual term of the loans. The Company expects that the yield on SBA PPP loans will increase as it begins the process of loan forgiveness with the SBA.

 

For the three months ended June 30, 2020, total cost of interest bearing liabilities decreased 31 basis points to 0.43% compared with 0.74% for the same period a year earlier, and is the result of the cost of interest bearing deposits decreasing 31 basis points to 0.43% compared with 0.74% for the same period a year ago. For the three months ended June 30, 2020, the total cost of funds decreased 22 basis points to 0.27% compared with 0.49% for the same period a year ago.

 

For the three months ended June 30, 2020, acquisition accounting adjustments, including the accretion of loan discounts and fair value amortization on time deposits, added 5 basis points to net interest margin.

 

For the six months ended June 30, 2020, net interest income decreased $1.6 million, or 2.96%, to $53.0 million compared with $54.6 million for the same period a year earlier. The decrease is primarily the result of the narrowing of net interest margins resulting from the Federal Reserve reducing benchmark rates to almost zero and an increase in the average amount of lower yielding cash and investment securities held by the Company stemming from average core deposits increasing $178 million, or 14.22%, for the same respective periods. The percentage of average loans to total average interest earning assets decreased to 68.82% for the six months ended June 30, 2020 compared with 80.37% for the same period a year earlier. This decrease was offset by average interest earning assets increasing $358 million, or 17.13%, to $2.5 billion for the same comparable periods.

 

Yields on interest earning assets declined 105 basis points to 4.66% for the six months ended June 30, 2020 compared with 5.71% for the same period a year earlier. The decline in yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by the Company increasing $353 million, or 86.58%, to $761 million for the same comparable periods with the yield on cash and securities decreasing 35 basis points to 1.89% for the same comparable periods. In addition, the yield on loans declined 64 basis points for the same comparable periods and average loans outstanding increased $5.2 million, or 0.31%, to $1.69 billion for the same comparable periods.

 

For the six months ended June 30, 2020, total cost of interest bearing liabilities decreased 21 basis points to 0.53% compared with 0.74% for the same period a year earlier, and is the result of the cost of interest bearing deposits decreasing 20 basis points to 0.53% compared with 0.73% for the same period a year ago. For the six months ended June 30, 2020, the total cost of funds decreased 15 basis points to 0.34% compared with 0.49% for the same period a year ago.

 

For the six months ended June 30, 2020, acquisition accounting adjustments, including the accretion of loan discounts and fair value amortization on time deposits, added 10 basis points to net interest margin.

 

The Company expects its net interest income and net interest margins to continue to be adversely impacted in future periods because of the Federal Reserve lowering benchmark rates to near zero and the current asset mix of the Company’s balance sheet. The amount of the impact is dependent upon the length in time that the Federal Reserve holds benchmark rates to near zero, and the amount of time the Company holds a higher percentage of low yielding cash and investment securities.

40

 

Financial Overview for the Three Months Ended June 30, 2020 and 2019

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

$ Better /

 

 

% Better /

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

(Worse)

 

 

(Worse)

 

Interest income

 

$

27,402

 

 

$

30,050

 

 

$

(2,648

)

 

 

-8.8

%

Interest expense

 

 

1,613

 

 

 

2,330

 

 

 

717

 

 

 

30.8

%

Net interest income

 

 

25,789

 

 

 

27,720

 

 

 

(1,931

)

 

 

-7.0

%

Provision for credit losses

 

 

2,100

 

 

 

2,150

 

 

 

50

 

 

 

2.3

%

Net interest income after provision for credit losses

 

 

23,689

 

 

 

25,570

 

 

 

(1,881

)

 

 

-7.4

%

Non-interest income

 

 

6,116

 

 

 

3,598

 

 

 

2,518

 

 

 

70.0

%

Non-interest expense

 

 

16,275

 

 

 

14,699

 

 

 

(1,576

)

 

 

-10.7

%

Income before income tax expense

 

 

13,530

 

 

 

14,469

 

 

 

(939

)

 

 

-6.5

%

Income tax expense

 

 

3,192

 

 

 

3,480

 

 

 

288

 

 

 

8.3

%

Net income

 

$

10,338

 

 

$

10,989

 

 

$

(651

)

 

 

-5.9

%

 

Net Income. Net income decreased $0.7 million to $10.3 million for the three months ended June 30, 2020, compared with $11.0 million for the three months ended June 30, 2019. This was primarily attributable to a decrease in net interest income of $1.9 million, and an increase in non-interest expense of $1.6 million, offset by an increase in non-interest income of $2.5 million and a decrease in income tax expense of $0.3 million.

Net Interest Income and Net Interest Margin. For the three months ended June 30, 2020, net interest income decreased $1.9 million, or 6.97%, to $25.8 million compared with $27.7 million for the same period a year earlier. The decrease is primarily the result of net interest margins narrowing 128 basis points to 3.96% for the same comparable periods offset by average interest earning assets increasing $494 million, or 23.30%, to $2.6 billion for the same comparable periods. The narrowing of net interest margins is primarily the result of the Federal Reserve reducing benchmark rates to almost zero and an increase in the average amount of lower yielding cash and investment securities held by the Company stemming from average core deposits increasing $232 million, or 18.24%, for the same respective periods. The percentage of average loans to total average interest earning assets decreased to 64.75% for the three months ended June 30, 2020 compared with 79.52% for the same period a year earlier.

Yields on interest earning assets declined 147 basis points to 4.21% for the three months ended June 30, 2020 compared with 5.68% for the same period a year earlier. The decline in yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by the Company increasing $487 million, or 112.79%, to $919 million for the same comparable periods with the yield on cash and securities decreasing 59 basis points to 1.63% for the same comparable periods. In addition, the yield on loans declined 96 basis points for the same comparable periods and average loans outstanding increased $6.7 million, or 0.40%, to $1.69 billion for the same comparable periods.

Yields on loans were negatively impacted by the lower yield on SBA PPP loans. For the three months ended June 30, 2020, the yield on SBA PPP loans was 2.77%, including the amortization of deferred fees and costs recognized over the contractual term of the loans. The Company expects that the yield on SBA PPP loans will increase as it begins the process of loan forgiveness with the SBA.

For the three months ended June 30, 2020, total cost of interest bearing liabilities decreased 31 basis points to 0.43% compared with 0.74% for the same period a year earlier, and is the result of the cost of interest bearing deposits decreasing 31 basis points to 0.43% compared with 0.74% for the same period a year ago. For the three months ended June 30, 2020, the total cost of funds decreased 22 basis points to 0.27% compared with 0.49% for the same period a year ago.

For the three months ended June 30, 2020, acquisition accounting adjustments, including the accretion of loan discounts and fair value amortization on time deposits, added 5 basis points to net interest margin.

Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is that amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb current expected credit losses in the loan portfolio.

41

 

For the three months ended June 30, 2020, provision for credit losses was $2.1 million compared with $2.2 million for the same period a year earlier. For the three months ended June 30, 2020, the Company incurred net charge-offs of $0.7 million compared with net charge-offs less than $0.1 million for the same period a year ago. The decrease in provision for credit losses in the three months ended June 30, 2020 is due primarily to no loan growth quarter-over-quarter offset by higher charge-offs in the second quarter.

Non-interest Income. The following table presents, for the periods indicated, the major categories of non-interest income:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

$ Better /

 

 

% Better /

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

(Worse)

 

 

(Worse)

 

Mortgage banking

 

$

3,036

 

 

$

1,621

 

 

$

1,415

 

 

 

87.3

%

Card processing

 

 

917

 

 

 

814

 

 

 

103

 

 

 

12.7

%

Service charges on deposit accounts

 

 

763

 

 

 

705

 

 

 

58

 

 

 

8.2

%

Net gain on sale of investment securities

 

 

1,441

 

 

 

-

 

 

 

1,441

 

 

 

0.0

%

Other

 

 

(41

)

 

 

458

 

 

 

(499

)

 

 

-109.0

%

Total non-interest income

 

$

6,116

 

 

$

3,598

 

 

$

2,518

 

 

 

70.0

%

 

For the three months ended June 30, 2020, noninterest income increased $2.5 million, or 69.98%, to $6.1 million compared with $3.6 million the same period a year ago. The increase was primarily due to a $1.4 million increase in mortgage banking income resulting from higher loan volume of refinanced mortgages, which was driven by a lower interest rate environment for the same comparable periods. Total loans sold increased $27.9 million, or 58.37%, to $75.7 million for the three months ended June 30, 2020, compared with $47.8 million for the same period a year earlier. In addition, the Company recorded a $1.4 million gain on sale of investment securities in the second quarter of 2020 as it sold $48 million of securities to re-balance its investment securities portfolio.

Non-interest Expense. The following table presents, for the periods indicated, the major categories of non-interest expense:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

$ Better /

 

 

% Better /

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

(Worse)

 

 

(Worse)

 

Salaries and employee benefits

 

$

10,786

 

 

$

9,526

 

 

$

(1,260

)

 

 

-13.2

%

Occupancy, equipment and depreciation

 

 

831

 

 

 

1,558

 

 

 

727

 

 

 

46.7

%

Data processing

 

 

2,383

 

 

 

1,018

 

 

 

(1,365

)

 

 

-134.1

%

Marketing and advertising

 

 

339

 

 

 

226

 

 

 

(113

)

 

 

-50.0

%

FDIC premiums

 

 

165

 

 

 

148

 

 

 

(17

)

 

 

-11.5

%

Other

 

 

1,771

 

 

 

2,223

 

 

 

452

 

 

 

20.3

%

Total non-interest expense

 

$

16,275

 

 

$

14,699

 

 

$

(1,576

)

 

 

-10.7

%

 

For the three months ended June 30, 2020, noninterest expense was $16.3 million compared with $14.7 million for the same period a year earlier. For the three months ended June 30, 2020, the Company’s efficiency ratio was 51.01% compared with 46.93% for the same period a year ago.

 

The increase in noninterest expense for the three months ended June 30, 2020 was primarily the result of higher salaries and employee benefits resulting from higher incentive payments made primarily to mortgage loan officers, higher data processing costs and higher marketing and advertising costs. These higher amounts were partially offset by lower occupancy, equipment and depreciation costs.

Income Tax Expense. For the three months ended June 30, 2020, income tax expense was $3.2 million compared with $3.5 million for the same period a year earlier. For the three months ended June 30, 2020, the effective tax rate was 23.59% compared with 24.05% for the same period a year ago.

42

 

Financial Overview for the Six Months Ended June 30, 2020 and 2019

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

$ Better /

 

 

% Better /

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

(Worse)

 

 

(Worse)

 

Interest income

 

$

56,786

 

 

$

59,202

 

 

$

(2,416

)

 

 

-4.1

%

Interest expense

 

 

3,776

 

 

 

4,575

 

 

 

799

 

 

 

17.5

%

Net interest income

 

 

53,010

 

 

 

54,627

 

 

 

(1,617

)

 

 

-3.0

%

Provision for credit losses

 

 

2,750

 

 

 

3,700

 

 

 

950

 

 

 

25.7

%

Net interest income after provision for credit losses

 

 

50,260

 

 

 

50,927

 

 

 

(667

)

 

 

-1.3

%

Non-interest income

 

 

9,856

 

 

 

6,935

 

 

 

2,921

 

 

 

42.1

%

Non-interest expense

 

 

32,436

 

 

 

29,615

 

 

 

(2,821

)

 

 

-9.5

%

Income before income tax expense

 

 

27,680

 

 

 

28,247

 

 

 

(567

)

 

 

-2.0

%

Income tax expense

 

 

6,569

 

 

 

6,753

 

 

 

184

 

 

 

2.7

%

Net income

 

$

21,111

 

 

$

21,494

 

 

$

(383

)

 

 

-1.8

%

 

Net Income. Net income decreased $0.4 million to $21.1 million for the six months ended June 30, 2020, compared with $21.5 million for the six months ended June 30, 2019. This was primarily attributable to a decrease in net interest income of $1.6 million, and an increase in non-interest expense of $2.8 million, offset by an increase in non-interest income of $2.9 million, a decrease in provision for credit losses of $1.0 million and a decrease in income tax expense of $0.2 million

Net Interest Income and Net Interest Margin. For the six months ended June 30, 2020, net interest income decreased $1.6 million, or 2.96%, to $53.0 million compared with $54.6 million for the same period a year earlier. The decrease is primarily the result of the narrowing of net interest margins resulting from the Federal Reserve reducing benchmark rates to almost zero and an increase in the average amount of lower yielding cash and investment securities held by the Company stemming from average core deposits increasing $178 million, or 14.22%, for the same respective periods. The percentage of average loans to total average interest earning assets decreased to 68.82% for the six months ended June 30, 2020 compared with 80.37% for the same period a year earlier. This decrease was offset by average interest earning assets increasing $358 million, or 17.13%, to $2.5 billion for the same comparable periods.

Yields on interest earning assets declined 105 basis points to 4.66% for the six months ended June 30, 2020 compared with 5.71% for the same period a year earlier. The decline in yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by the Company increasing $353 million, or 86.58%, to $761 million for the same comparable periods with the yield on cash and securities decreasing 35 basis points to 1.89% for the same comparable periods. In addition, the yield on loans declined 64 basis points for the same comparable periods and average loans outstanding increased $5.2 million, or 0.31%, to $1.69 billion for the same comparable periods.

For the six months ended June 30, 2020, total cost of interest bearing liabilities decreased 21 basis points to 0.53% compared with 0.74% for the same period a year earlier, and is the result of the cost of interest bearing deposits decreasing 20 basis points to 0.53% compared with 0.73% for the same period a year ago. For the six months ended June 30, 2020, the total cost of funds decreased 15 basis points to 0.34% compared with 0.49% for the same period a year ago.

For the six months ended June 30, 2020, acquisition accounting adjustments, including the accretion of loan discounts and fair value amortization on time deposits, added 10 basis points to net interest margin.

Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is that amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb current expected credit losses in the loan portfolio.

43

 

For the six months ended June 30, 2020, provision for credit losses was $2.8 million compared with $3.7 million for the same period a year earlier. For the six months ended June 30, 2020, the Company incurred net charge-offs of $1.0 million compared with net charge-offs of $0.9 million for the same period a year ago. The decrease in provision for credit losses in the six months ended June 30, 2020 is due primarily to a decrease of reserves on individually evaluated loans and no loan growth during the six months ended June 30, 2020.

Non-interest Income. The following table presents, for the periods indicated, the major categories of non-interest income:

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

$ Better /

 

 

% Better /

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

(Worse)

 

 

(Worse)

 

Mortgage banking

 

$

4,746

 

 

$

3,038

 

 

$

1,708

 

 

 

56.2

%

Card processing

 

 

1,624

 

 

 

1,429

 

 

 

195

 

 

 

13.6

%

Service charges on deposit accounts

 

 

1,543

 

 

 

1,362

 

 

 

181

 

 

 

13.3

%

Net gain on sale of investment securities

 

 

1,441

 

 

 

-

 

 

 

1,441

 

 

 

0.0

%

Other

 

 

502

 

 

 

1,106

 

 

 

(604

)

 

 

-54.6

%

Total non-interest income

 

$

9,856

 

 

$

6,935

 

 

$

2,921

 

 

 

42.1

%

 

For the six months ended June 30, 2020, noninterest income increased $2.9 million, or 42.12%, to $9.9 million compared with $6.9 million the same period a year ago. The increase was primarily due to a $1.7 million increase in mortgage banking income resulting from higher loan volume of refinanced mortgages, which was driven by a lower interest rate environment for the same comparable periods and gains on sale of investment securities. Total loans sold increased $34.9 million, or 38.31%, to $126 million for the six months ended June 30, 2020, compared with $91.1 million for the same period a year ago.

Non-interest Expense. The following table presents, for the periods indicated, the major categories of non-interest expense:

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

$ Better /

 

 

% Better /

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

(Worse)

 

 

(Worse)

 

Salaries and employee benefits

 

$

21,630

 

 

$

19,412

 

 

$

(2,218

)

 

 

-11.4

%

Occupancy, equipment and depreciation

 

 

2,370

 

 

 

3,014

 

 

 

644

 

 

 

21.4

%

Data processing

 

 

3,519

 

 

 

1,982

 

 

 

(1,537

)

 

 

-77.5

%

Marketing and advertising

 

 

771

 

 

 

342

 

 

 

(429

)

 

 

-125.4

%

FDIC premiums

 

 

165

 

 

 

238

 

 

 

73

 

 

 

30.7

%

Other

 

 

3,981

 

 

 

4,627

 

 

 

646

 

 

 

14.0

%

Total non-interest expense

 

$

32,436

 

 

$

29,615

 

 

$

(2,821

)

 

 

-9.5

%

 

For the six months ended June 30, 2020, noninterest expense was $32.4 million compared with $29.6 million for the same period a year earlier. For the six months ended June 30, 2020, the Company’s efficiency ratio was 51.60% compared with 48.11% for the same period a year ago.

 

The increase in noninterest expense for the six months ended June 30, 2020 was primarily the result of higher salaries and employee benefits resulting from higher incentive payments made primarily to mortgage loan officers, higher data processing costs and higher marketing and advertising costs. These higher amounts were partially offset by lower occupancy, equipment and depreciation costs.

Income Tax Expense. For the six months ended June 30, 2020, income tax expense was $6.6 million compared with $6.8 million for the same period a year earlier. For the six months ended June 30, 2020, the effective tax rate was 23.73% compared with 23.91% for the same period a year ago.

44

 

Financial Condition

Total assets were $3.1 billion at June 30, 2020, a 27.4% increase compared with December 31, 2019. Total loans held for investment were $1.7 billion at June 30, 2020, a decrease of 1.3% from December 31, 2019. Total deposits were $2.6 billion at June 30, 2020, an increase of 27.1% compared with December 31, 2019.

Loans

The following table sets forth information regarding the composition of the loan portfolio at the end of each of the periods presented.

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Loans held for sale

 

$

29,264

 

 

$

18,669

 

 

 

 

 

 

 

 

 

 

Loans held for investment:

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

$

958,783

 

 

$

948,073

 

Construction and land development

 

 

243,212

 

 

 

273,963

 

Total commercial real estate loans

 

 

1,201,995

 

 

 

1,222,036

 

Commercial and industrial loans

 

 

310,837

 

 

 

284,738

 

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

141,174

 

 

 

162,559

 

Consumer and other

 

 

11,548

 

 

 

16,036

 

Total consumer loans

 

 

152,722

 

 

 

178,595

 

Total gross loans

 

 

1,665,554

 

 

 

1,685,369

 

Net deferred loan fees

 

 

(6,536

)

 

 

(4,451

)

Total loans held for investment

 

 

1,659,018

 

 

 

1,680,918

 

Allowance for credit losses

 

 

(42,683

)

 

 

(31,426

)

Total loans held for investment, net

 

$

1,616,335

 

 

$

1,649,492

 

 

 

 

June 30,

 

 

December 31,

 

(Percentage of total gross loans)

 

2020

 

 

2019

 

Loans held for investment:

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

 

57.5

%

 

 

56.2

%

Construction and land development

 

 

14.6

%

 

 

16.3

%

Total commercial real estate loans

 

 

72.1

%

 

 

72.5

%

Commercial and industrial loans

 

 

18.7

%

 

 

16.9

%

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

8.5

%

 

 

9.6

%

Consumer and other

 

 

0.7

%

 

 

1.0

%

Total consumer loans

 

 

9.2

%

 

 

10.6

%

Total loans held for investment

 

 

100.0

%

 

 

100.0

%

We originate certain residential mortgage loans for sale to investors that are carried at cost. Due to the short period held, generally less than 90 days, we consider the carrying value of these loans held for sale to be the approximate fair value.

The following table shows the amounts of outstanding loans, which, based on remaining scheduled repayments of principal, were due in one year or less, more than one year through five years, and more than five years. Lines of credit or other loans having no stated maturity and no stated schedule of repayments are reported as due in one year or less. In the table below, loans are classified as real estate related if they are collateralized by real estate. The tables also present, for loans with maturities over one year, an analysis with respect to fixed interest rate loans and adjustable interest rate loans.

45

 

Contractual maturities at June 30, 2020 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate Structure for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Maturing Over

 

 

 

 

Maturity

 

 

One Year

 

 

 

 

 

 

 

 

One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One

 

 

through

 

 

After

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year

 

 

Five

 

 

Five

 

 

 

 

 

 

 

 

 

 

Adjustable

 

 

(Dollars in thousands)

 

or Less

 

 

Years

 

 

Years

 

 

Total

 

 

Fixed Rate

 

 

Rate

 

 

Loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

$

55,394

 

 

$

196,592

 

 

$

706,797

 

 

$

958,783

 

 

$

160,851

 

 

$

742,538

 

 

Construction and land development

 

 

203,291

 

 

 

24,887

 

 

 

15,034

 

 

 

243,212

 

 

 

10,856

 

 

 

29,065

 

 

Total commercial real estate loans

 

 

258,685

 

 

 

221,479

 

 

 

721,831

 

 

 

1,201,995

 

 

 

171,707

 

 

 

771,603

 

 

Commercial and industrial loans

 

 

87,162

 

 

 

190,207

 

 

 

33,468

 

 

 

310,837

 

 

 

166,489

 

 

 

57,186

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential and home equity

 

 

16,716

 

 

 

24,532

 

 

 

99,926

 

 

 

141,174

 

 

 

8,090

 

 

 

116,368

 

 

Consumer and other

 

 

1,667

 

 

 

7,526

 

 

 

2,355

 

 

 

11,548

 

 

 

9,541

 

 

 

340

 

 

Total consumer loans

 

 

18,383

 

 

 

32,058

 

 

 

102,281

 

 

 

152,722

 

 

 

17,631

 

 

 

116,708

 

 

Total gross loans held for investment

 

$

364,230

 

(1)

$

443,744

 

 

$

857,580

 

 

$

1,665,554

 

 

$

355,827

 

 

$

945,497

 

(1)

(1)

The sum of adjustable rate loans maturing after one year and total loans maturing within one year is $1.3 billion or 78.6% of total gross loans held for investment at June 30, 2020.

Concentrations. As of June 30, 2020, in management’s judgment, a concentration of loans existed in real estate related loans. At that date, real estate related loans comprised 80.7% of total loans held for investment, of which 57.6% are real estate term loans, 14.6% are construction and land development loans, and 8.5% are residential and home equity loans. We require collateral on real estate lending arrangements and typically maintain loan-to-value ratios of up to 85%, except for some residential construction loans of up to 95% loan-to-value provided the loan includes pre-approved long-term financing and some commercial real estate loans of up to 75% with a minimum debt coverage ratio of 1.25 times.  Our concentration in commercial and industrial loans has increased to 18.7% at June 30, 2020 from 16.9% at December 31, 2019.  

Non-Performing Assets. Loans are placed on non-accrual status when they become 90 days or more past due or at such earlier time as management determines timely recognition of interest to be in doubt. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, collection efforts, and the borrower’s financial condition, that the borrower will be unable to make payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received, or payment is considered certain. Loans may be returned to accrual status when all delinquent interest and principal amounts contractually due are brought current and future payments are reasonably assured.

46

 

The following non-performing assets table summarizes the loans for which the accrual of interest has been discontinued, loans more than 90 days past due and still accruing interest, including those non-accrual loans that are TDRs, and OREO:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Non-accrual loans, not troubled-debt restructured

 

 

 

 

 

 

 

 

Real estate term

 

$

131

 

 

$

2,416

 

Construction and land development

 

 

139

 

 

 

60

 

Commercial and industrial

 

 

545

 

 

 

1,550

 

Residential and home equity

 

 

549

 

 

 

45

 

Consumer and other

 

 

2

 

 

 

8

 

Total non-accrual, not troubled-debt restructured loans

 

 

1,366

 

 

 

4,079

 

Troubled-debt restructured loans non-accrual

 

 

 

 

 

 

 

 

Real estate term

 

 

2,521

 

 

 

2,393

 

Construction and land development

 

 

-

 

 

 

-

 

Commercial and industrial

 

 

2,499

 

 

 

658

 

Residential and home equity

 

 

-

 

 

 

-

 

Consumer and other

 

 

-

 

 

 

-

 

Total troubled-debt restructured, non-accrual loans

 

 

5,020

 

 

 

3,051

 

Total non-accrual loans (1)

 

 

6,386

 

 

 

7,130

 

Accruing loans past due 90 days or more

 

 

2

 

 

 

3

 

Total non-performing loans (NPL)

 

 

6,388

 

 

 

7,133

 

 

 

 

 

 

 

 

 

 

OREO

 

 

-

 

 

 

-

 

Total non-performing assets (NPA) (2)

 

$

6,388

 

 

$

7,133

 

Accruing troubled debt restructured loans

 

$

5,480

 

 

$

25,346

 

Non-accrual troubled debt restructured loans

 

 

5,020

 

 

 

3,051

 

Total troubled debt restructured loans

 

$

10,500

 

 

$

28,397

 

(1)

We estimate that approximately $107,000 and $208,000 of interest income would have been recognized on loans accounted for on a non-accrual basis for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively, had such loans performed pursuant to contractual terms.

(2)

Non-performing assets as of June 30, 2020 and December 31, 2019 have not been reduced by U.S. government guarantees of $2.6 million and $0.9 million, respectively.  

Individually evaluated Loans. Individually evaluated loans are loans for which it is probable that we will be unable to collect all principal and interest payments due according to the contractual terms of the loan agreement. We measure estimated credit losses based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral-dependent.

In determining whether or not a loan is individually evaluated, we consider payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as individually evaluated. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Loans for which an insignificant shortfall in amount of payments is anticipated, but where we expect to collect all amounts due, are not considered individually evaluated.

Troubled-debt Restructured Loans. A restructured loan is considered a troubled debt restructuring, or TDR, if we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession in terms or a below-market interest rate to the debtor that we would not otherwise consider. TDRs were $10.5 million and $28.4 million at June 30, 2020 and December 31, 2019, respectively. Our TDRs are considered individually evaluated loans of which $5.0 million and $3.1 million were designated as non-accrual at June 30, 2020, and December 31, 2019, respectively.

47

 

Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified.

The Bank implemented borrower relief programs to assist commercial and consumer clients impacted by the COVID-19 pandemic.  The Bank offered full deferral of loan payments to qualifying commercial clients of up to six months with a subsequent re-amortization of payments after the deferral period.  Commercial clients who qualified for payment deferrals complied with contractual terms of their loan; and provided support regarding the effect the COVID-19 pandemic had on the results of their operations.  The Company offered temporary loan payment relief to 435 businesses and 108 individuals totaling approximately $327 million, or 19.7% of total loans, excluding SBA PPP loans, to address cash flow challenges for those impacted by the COVID-19 pandemic. Of the $327 million in loans, where the payments were deferred, 89.54% were on loans that were secured by real estate with a weighted average loan to value (“LTV”) ratio of approximately 50%. Loans that the Company has offered temporary loan payment relief included approximately $88.5 million that the Company has identified as higher risk business sectors, including hotels, retail, restaurants and assisted living centers. The Company expects to reamortize each loan at the end of the payment deferral period to extend the maturity date rather than retain the original maturity date with a balloon payment upon maturity. The Company believes this approach provides its clients with the short-term payment relief they need to address the negative cash flow effects resulting from the pandemic and mitigates unusual large cash outlays after the deferment.

The Company funded 333 applications from businesses that participated in the SBA PPP for a total of $84.6 million. The SBA announced that they would begin taking applications for loan forgiveness on August 10, 2020, at which time the Company intends to begin filing such applications.

OREO Properties. OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. All OREO properties are recorded by us at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The following table provides a summary of the changes in the OREO balance:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Balance, beginning of period

 

$

-

 

 

$

-

 

Additions

 

 

(344

)

 

 

-

 

Write-downs

 

 

1

 

 

 

-

 

Sales

 

 

343

 

 

 

-

 

Balance, end of period

 

$

-

 

 

$

-

 

 

 

Allowance for Credit Losses

We maintain an adequate allowance for credit losses, or ACL, based on a comprehensive methodology that determines our current expected credit losses (“CECL”) for investment securities available for sale, loans held for investment, and off balance sheet commitments.

Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.  Historical credit loss experience, either internal or peer information, provides the basis for the estimation of expected credit losses.  Adjustments to historical loss information are made, using qualitative factors, when management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. Management must exercise significant judgment when evaluating the effect of qualitative factors on the amount of the ACL because data may not be reasonably available or directly applicable for management to determine the precise impact of a factor on the collectability of the loan portfolio as of the evaluation date.  

48

 

Management considers qualitative or environmental factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, including but not limited to; i) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; ii)  changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; iii) changes in the nature and volume of the portfolio and in the terms of loans; iv) changes in the experience, ability, and depth of lending management and other relevant staff;  v) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; vi) changes in the quality of the institution’s loan review system; vii) changes in the value of underlying collateral for collateral-dependent loans; viii) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and, ix) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available.

The Company used the weighted average remaining maturity (or “WARM”) approach, adjusted for prepayments, to calculate CECL at June 30, 2020 and segmented its loan portfolio into seventeen loan segments based on similar risk characteristics.  Management may change the approach used to calculate current expected credit losses or loan segments from time-to-time as we improved credit loss estimation techniques.  The Company has elected to exclude accrued interest receivable and net deferred fees from its calculation of ACL.

The following table sets forth the activity in our allowance for credit losses for the periods indicated:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

41,253

 

 

$

25,923

 

 

$

31,426

 

 

$

25,245

 

Impact of adopting ASC 326

 

 

-

 

 

 

-

 

 

 

9,466

 

 

 

-

 

Loans charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

(99

)

 

 

-

 

 

 

(113

)

 

 

-

 

Construction and land development

 

 

(43

)

 

 

-

 

 

 

(73

)

 

 

(5

)

Commercial and industrial

 

 

(654

)

 

 

(497

)

 

 

(1,040

)

 

 

(1,583

)

Residential and home equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19

)

Consumer and other

 

 

(61

)

 

 

(110

)

 

 

(183

)

 

 

(174

)

Total charge-offs

 

 

(857

)

 

 

(607

)

 

 

(1,409

)

 

 

(1,781

)

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate term

 

 

69

 

 

 

24

 

 

 

69

 

 

 

24

 

Construction and land development

 

 

35

 

 

 

319

 

 

 

49

 

 

 

351

 

Commercial and industrial

 

 

41

 

 

 

167

 

 

 

167

 

 

 

347

 

Residential and home equity

 

 

3

 

 

 

10

 

 

 

25

 

 

 

32

 

Consumer and other

 

 

39

 

 

 

53

 

 

 

140

 

 

 

121

 

Total recoveries

 

 

187

 

 

 

573

 

 

 

450

 

 

 

875

 

Net loan charge-offs

 

 

(670

)

 

 

(34

)

 

 

(959

)

 

 

(906

)

Provision for credit losses

 

 

2,100

 

 

 

2,150

 

 

 

2,750

 

 

 

3,700

 

Ending balance ACL

 

$

42,683

 

 

$

28,039

 

 

$

42,683

 

 

$

28,039

 

Loans held for investment

 

$

1,659,018

 

 

$

1,672,584

 

 

$

1,659,018

 

 

$

1,672,584

 

Average loans

 

 

1,694,193

 

 

 

1,687,452

 

 

 

1,686,410

 

 

 

1,681,189

 

Selected ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loan charge-offs to average loans

 

 

0.16

%

 

 

0.01

%

 

 

0.11

%

 

 

0.11

%

Provision for credit losses to average loans

 

 

0.50

%

 

 

0.51

%

 

 

0.33

%

 

 

0.44

%

Allowance for credit losses to loans held for investment

 

 

2.57

%

 

 

1.68

%

 

 

2.57

%

 

 

1.68

%

 

The ACL to loans held for investment was 2.57% at June 30, 2020, compared with 1.68% at June 30, 2019.  The allowance for credit losses is also adjusted based on changes to the underlying loan portfolio, changes to our historical loss rates, and adjustments to qualitative ACL factors due to changes in current conditions.

49

 

Our construction and land development portfolio reflects borrower concentration risk, and also carries the enhanced risks encountered with construction loans generally. Construction and land development loans are generally more risky than permanent mortgage loans because they are dependent upon the borrower’s ability to generate cash to service the loan, and the value of the collateral depends on project completion when market conditions may have changed.  Our commercial real estate loans are a mixture of new and seasoned properties, retail, office, warehouse, and some industrial properties. Loans on properties are usually underwritten at a loan to value ratio of up to 75% with a minimum debt coverage ratio of 1.25 times.  

The following table indicates management’s allocation of the ACL in each category to total loans as of each of the following dates:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Commercial real estate loans:

 

 

 

 

 

 

 

 

Real estate term

 

$

12,507

 

 

$

12,275

 

Construction and land development

 

 

15,121

 

 

 

6,990

 

Total commercial real estate loans

 

 

27,628

 

 

 

19,265

 

Commercial and industrial loans

 

 

11,760

 

 

 

10,892

 

Consumer loans:

 

 

 

 

 

 

 

 

Residential and home equity

 

 

2,767

 

 

 

1,118

 

Consumer and other

 

 

528

 

 

 

151

 

Total consumer loans

 

 

3,295

 

 

 

1,269

 

Total

 

$

42,683

 

 

$

31,426

 

 

 

Investments

Investment securities were $973.5 million at June 30, 2020 and $406.0 million at December 31, 2019. As of June 30, 2020, our portfolio of investment securities was comprised of available for sale securities.  At June 30, 2020, we held no investment securities from any issuer which totaled over 10% of our shareholders’ equity.

The carrying value of our portfolio of investment securities was as follows:

 

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2020

 

 

2019

 

Available for sale securities: (Fair Value)

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

13,871

 

 

$

21,190

 

Municipal securities

 

 

46,933

 

 

 

56,912

 

Mortgage-backed securities

 

 

907,911

 

 

 

323,108

 

Corporate securities

 

 

4,742

 

 

 

4,785

 

Total investment securities

 

$

973,457

 

 

$

405,995

 

50

 

The following table shows the amortized cost for maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities:

Investment securities maturities as of June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

After One but

 

 

After Five but

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within One Year

 

 

within Five Years

 

 

within Ten Years

 

 

After Ten Years

 

 

Total

 

(Dollars in thousands)

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

-

 

 

 

0.00

%

 

$

13,480

 

 

 

1.65

%

 

$

-

 

 

 

0.00

%

 

$

-

 

 

 

0.00

%

 

$

13,480

 

 

 

1.65

%

Municipal securities

 

 

13,658

 

 

 

2.09

%

 

 

17,253

 

 

 

1.91

%

 

 

14,812

 

 

 

2.19

%

 

 

-

 

 

 

0.00

%

 

 

45,723

 

 

 

2.05

%

Mortgage-backed securities

 

 

-

 

 

 

0.00

%

 

 

4,910

 

 

 

1.78

%

 

 

22,911

 

 

 

2.07

%

 

 

866,514

 

 

 

2.19

%

 

 

894,335

 

 

 

2.18

%

Other securities

 

 

-

 

 

 

0.00

%

 

 

2,000

 

 

 

1.99

%

 

 

3,000

 

 

 

0.59

%

 

 

-

 

 

 

0.00

%

 

 

5,000

 

 

 

1.15

%

Total investment

   securities

 

$

13,658

 

 

 

2.09

%

 

$

37,643

 

 

 

1.80

%

 

$

40,723

 

 

 

2.00

%

 

$

866,514

 

 

 

2.19

%

 

$

958,538

 

 

 

2.16

%

Actual maturities may differ from contractual maturities because issuers may have the right to call obligations with or without penalties.

We evaluate securities for other-than-temporary impairment at least on an annual basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Deposits

Total deposits were $2.6 billion at June 30, 2020 and $2.06 billion at December 31, 2019. The increase in total deposits is attributed primarily to organic growth.  Non-interest bearing demand deposits were $779.2 million, or 37.7% of total deposits at June 30, 2020 compared with $719.4 million, or 35.0% of total deposits at December 31, 2019. Interest bearing deposits are comprised of interest bearing DDA accounts, money market accounts, regular savings accounts, certificates of deposit of $250,000 or less, and certificates of deposit of more than $250,000.

The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented:

 

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June30, 2019

 

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

(Dollars in thousands)

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

Non-interest bearing deposits

 

$

779,173

 

 

 

0.00

%

 

$

643,642

 

 

 

0.00

%

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand and savings

 

 

871,676

 

 

 

0.30

%

 

 

807,043

 

 

 

0.51

%

Money market

 

 

384,289

 

 

 

0.69

%

 

 

262,171

 

 

 

0.99

%

Certificates of deposit less than or equal to $250,000

 

 

130,133

 

 

 

1.17

%

 

 

142,450

 

 

 

1.20

%

Certificates of deposit greater than $250,000

 

 

41,392

 

 

 

1.85

%

 

 

38,136

 

 

 

1.87

%

Total interest bearing deposits

 

 

1,427,490

 

 

 

0.53

%

 

 

1,249,800

 

 

 

0.73

%

Total

 

$

2,206,663

 

 

 

0.34

%

 

$

1,893,442

 

 

 

0.48

%

51

 

 

Additionally, the following table shows the maturities of CDs of $250,000 or more:

 

 

 

June 30,

 

(Dollars in thousands)

 

2020

 

Due in three months or less

 

$

3,217

 

Due in over three months through six months

 

 

6,852

 

Due in over six months through twelve months

 

 

9,032

 

Due in over twelve months

 

 

26,254

 

Total

 

$

45,355

 

Deposits are gathered from individuals, partnerships and corporations in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing.

Shareholders’ Equity

Shareholders’ equity totaled $350.1 million at June 30, 2020, an increase of $17.8 million, or 5.35%, since December 31, 2019. The increase in shareholders’ equity for the six months ended June 30, 2020 was primarily due to an increase of $9.8 million in accumulated other comprehensive income, and net income of $21.1 million for the period less dividends paid of $5.3 million, the impact to capital of adopting ASC 326 of $6.7 million and shares repurchased of $2.1 million.

Dividends of $0.28 per share were declared during the six months ended June 30, 2020 representing 25.5% of the net income for the same period. We announced a quarterly dividend of $0.13 per share on July 29, 2020, payable on August 17, 2020 for shareholders’ of record on August 10, 2020.  Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions, and regulatory considerations.

Capital Resources

We are subject to risk-based capital adequacy guidelines related to the adoption of U.S. Basel III Capital Rules. Specifically, the rules impose, among other requirements, minimum capital requirements including a Tier 1 leverage capital ratio of 4.0%, a common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 8%.

The following table sets forth our capital ratios:

 

 

 

Basel III

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Requirements -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Well Capitalized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Greater than or

 

ALTA

 

 

Equal to Stated

 

June 30,

 

December 31,

 

June 30,

 

 

Percentage)

 

2020

 

2019

 

2019

Common equity tier 1 capital

 

 

6.50

%

 

 

 

17.94

%

 

 

 

17.18

%

 

 

 

15.99

%

 

Tier 1 risk-based capital

 

 

8.00

%

 

 

 

17.94

%

 

 

 

17.18

%

 

 

 

15.99

%

 

Total risk-based capital

 

 

10.00

%

 

 

 

19.20

%

 

 

 

18.43

%

 

 

 

17.24

%

 

Tier 1 leverage capital ratio

 

 

5.00

%

 

 

 

11.68

%

 

 

 

12.67

%

 

 

 

12.78

%

 

AltabancorpTM and AltabankTM met the requirements to be defined as a “well-capitalized” institution at June 30, 2020, December 31, 2019 and June 30, 2019 for federal regulatory purposes.

 

 

52

 

Off-Balance Sheet Arrangements

The following table sets forth our off-balance sheet lending commitments as of June 30, 2020:

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

Total

 

 

 

 

 

 

One to

 

 

Three to

 

 

After

 

 

 

Amounts

 

 

Less than

 

 

Three

 

 

Five

 

 

Five

 

Other Commitments (Dollars in thousands)

 

Committed

 

 

One Year

 

 

Years

 

 

Years

 

 

Years

 

Commitments to extend credit

 

$

659,794

 

 

$

448,691

 

 

$

107,625

 

 

$

15,939

 

 

$

87,539

 

Standby letters of credit

 

 

23,493

 

 

 

23,493

 

 

 

-

 

 

 

-

 

 

 

-

 

Credit cards

 

 

26,860

 

 

 

26,860

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

710,147

 

 

$

499,044

 

 

$

107,625

 

 

$

15,939

 

 

$

87,539

 

 

Contractual Obligations

The following table sets forth our significant contractual obligations as of June 30, 2020:

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

 

 

 

 

One to

 

 

Three to

 

 

After

 

 

 

 

 

 

 

Less than

 

 

Three

 

 

Five

 

 

Five

 

Contractual Obligations (Dollars in thousands)

 

Total

 

 

One Year

 

 

Years

 

 

Years

 

 

Years

 

Time certificates of deposit

 

$

173,349

 

 

$

88,853

 

 

$

47,959

 

 

$

32,699

 

 

$

3,838

 

Deposits without stated maturity

 

 

2,439,990

 

 

 

2,439,990

 

 

 

-

 

 

 

-

 

 

 

-

 

Short-term borrowings

 

 

83,490

 

 

 

83,490

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

2,696,829

 

 

$

2,612,333

 

 

$

47,959

 

 

$

32,699

 

 

$

3,838

 

Liquidity

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash borrowing lines, federal funds and available for sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting, on a monthly basis, the amount of funds that will be required, and we maintain relationships with a diversified customer base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We have borrowing lines at a correspondent bank totaling $25.0 million. We also have a current borrowing line with the FHLB, totaling $1.3 billion at June 30, 2020, which is secured by various real estate loans pledged as collateral totaling $757.5 million and investment securities of $850.4 million.  To provide liquidity to small business lenders, to help stabilize the financial system, and to provide economic relief to small businesses nationwide, the Board of Governors of the Federal Reserve System authorized each of the Federal Reserve Banks to participate in the Paycheck Protection Program Lending Facility (“PPPLF”). Under the PPPLF, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund loans guaranteed by the Small Business Administration under the Paycheck Protection Program. In addition, loans originated under the SBA PPP will receive a zero percent risk weight under the agencies’ regulatory capital rule.  The Company funded 333 applications from businesses that participated in the SBA PPP for a total of $84.6 million.  The Company has chosen to participate in the PPPLF and has a balance of $83.5 million collateralized by these SBA PPP loans.  The Company has an additional borrowing line with the Federal Reserve Bank of $22.2 million, which is secured by $22.8 million of investment securities.

We believe our liquid assets are adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for the next 60 to 90 days. At June 30, 2020, we had approximately $418.8 million in net liquid assets comprised of $323.8 million in cash and cash equivalents, including interest bearing deposits of $275.9 million and federal funds sold of $0.8 million, $973.5 million in available for sale investment securities and $29.3 million in loans held for sale, less $907.8 million of available for sale securities pledged as collateral for short-term borrowings.

On a long-term basis, our liquidity will be met by changing the relative distribution of our asset portfolios by reducing our investment or loan volumes, or selling or encumbering assets. Further, we will increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks, as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan originations and commitments, deposit withdrawals and pending acquisitions. All of these needs can currently be met by cash flows from investment payments and maturities, and investment sales if the need arises.

Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities.

53

 

Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the loan loss provision, depreciation and amortization, amortization of investment discount and premiums, share based compensation, changes in the value of bank owned life insurance and other gains and losses.

Our primary investing activities are the origination of real estate, commercial and consumer loans and purchases and sales of investment securities. At June 30, 2020, we had outstanding loan commitments of $659.8 million, credit card commitments of $26.9 million and outstanding letters of credit of $23.5 million. We anticipate that we will have sufficient funds available to meet current loan commitments.

Net cash provided by financing activities for the six months ended June 30, 2020 was $633.2 million, principally from an increase in deposit balances, an increase in short-term borrowings offset by dividends paid to shareholders during the period and share repurchases.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk at June 30, 2020 indicates there have been no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) at June 30, 2020. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2020, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

54

 

PART II – OTHER INFORMATION

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.

 

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2019 (“Form 10-K 2019”) identifies various market, credit, and operations risk factors that could affect our results of operations.  For example, we explained therein that the Company’s “profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates.”  Form 10-K 2019 at page 29.  Specifically, “[i]n response to market concerns arising from the spread of COVID-19, among other domestic and global events, interest rates in the U.S. have recently declined” and “interest rates may decrease further as a result of such events, which could adversely affect our financial condition and earnings.”  As conditions and circumstances related to COVID-19, including its declaration as a global pandemic by the World Health Organization on March 11, 2020, are continuing to evolve, the Company provides the following supplement to the risk factors identified in its Form 10-K 2019:

COVID-19 Pandemic

The COVID-19 pandemic has significantly adversely impacted the global and national economies since its onset in late 2019.  This pandemic is expected to continue to adversely impact the global economy, though the scope, extent, and duration of such impact is presently not known or quantifiable.  The future direct and indirect qualitative and quantitative impacts of the COVID-19 pandemic on the Company’s business, operations, and financial condition remain uncertain.  As the COVID-19 pandemic persists and global and national economies continue to decline, the effects on the Company’s business and operations could include, without limitation: (i) increased margin compression as lower interest rates persist; (ii) increased noninterest expenses; (iii) increased credit losses and net charge-offs; (iv) deterioration of asset and collateral values due to declining financial condition of consumer and commercial borrowers; and (v) decreased demand for financial products and services.

National government and regulatory authorities have taken steps to try to stimulate the economy and counteract the effects of the COVID-19 pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included the implementation of the SBA’s Paycheck Protection Program (PPP), providing loans to eligible small businesses to fund payroll and other qualifying expenses.  The Board of Governors of the Federal Reserve System (Federal Reserve) has also taken economic stimuli steps by lowering the federal funds rate and the interest rate on the Federal Reserve’s discount window; issuing clarifying guidance on loan modifications due to COVID-19-related non-payment, and implementing and expanding the scope and access of its Main Street Lending Program and its Paycheck Protection Program Liquidity Facility for SBA-qualified lenders.  The impact of these prophylactic measures is not yet known.

The Company continues to monitor the COVID-19 pandemic situation closely.  The scope and duration of the COVID-19 pandemic is not yet known and, as such, its potential adverse impact on the Company’s business, results of operations, and financial results is highly uncertain.  As recession-like economic conditions persist in global, national, and local economies, however, the COVID-19 pandemic could have a long-term negative effect on the Company’s business, results of operations, and financial condition.

 

55

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

 

Item 5. Other Information

None

 


56

 

Item 6. Exhibits

 

Exhibit

Number

 

Description

 

 

 

3.1

 

Second Restated Articles of Incorporation of the Company(1)

 

 

 

3.2

 

Amended and Restated Bylaws(2)

 

 

 

10.1

 

People’s Utah Bancorp 2020 Equity Incentive Plan(2)

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

 

 

 

101

 

The following financial information from AltabancorpTM Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 is formatted in Inline XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Stockholders’ Equity (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

(1)Filed as part of the Registrant’s Definitive Proxy Statement filed on April 17, 2020.

 

(2)Filed as part of the Registrant’s Current Report on Form 8-K filed on May 28, 2020.

 

 

57

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 7, 2020.

 

ALTABANCORPTM

 

 

 

/s/ Len E. Williams

Len E. Williams

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

/s/ Mark K. Olson

Mark K. Olson

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

58