ENTERPRISE FINANCIAL SERVICES CORP - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||||
For the quarterly period ended March 31, 2021.
| ☐ | 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 001-15373
ENTERPRISE FINANCIAL SERVICES CORP
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
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 | EFSC | Nasdaq Global Select Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☒
As of April 27, 2021, the Registrant had 31,259,491 shares of outstanding common stock, $0.01 par value per share.
This document is also available through our website at http://www.enterprisebank.com.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
| Page | ||||||||
| PART I - FINANCIAL INFORMATION | ||||||||
| Item 1. Financial Statements | ||||||||
| Condensed Consolidated Balance Sheets (Unaudited) | ||||||||
| Condensed Consolidated Statements of Operations (Unaudited) | ||||||||
| Condensed Consolidated Statements of Comprehensive Income (Unaudited) | ||||||||
| Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) | ||||||||
| Condensed Consolidated Statements of Cash Flows (Unaudited) | ||||||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||||||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||||||||
| Item 4. Controls and Procedures | ||||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 1. Legal Proceedings | ||||||||
| Item 1A. Risk Factors | ||||||||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||
| Item 3. Defaults Upon Senior Securities | ||||||||
| Item 4. Mine Safety Disclosures | ||||||||
| Item 5. Other Information | ||||||||
| Item 6. Exhibits | ||||||||
| Signatures | ||||||||
Glossary of Acronyms, Abbreviations and Entities
The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 2 and the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.
| ACL | Allowance for Credit Losses | FHLB | Federal Home Loan Bank | |||||||||||
| ASC | Accounting Standards Codification | GAAP | Generally Accepted Accounting Principles (United States) | |||||||||||
| ASU | Accounting Standards Update | LIBOR | London Interbank Offered Rate | |||||||||||
| Bank | Enterprise Bank & Trust | MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||||
| C&I | Commercial and Industrial | NIM | Net Interest Margin | |||||||||||
| CECL | Current Expected Credit Loss | PCD | Purchased Credit Deteriorated | |||||||||||
| Company | Enterprise Financial Services Corp and Subsidiaries | PCI | Purchased Credit Impaired | |||||||||||
| CRE | Commercial Real Estate | PPP | Paycheck Protection Program | |||||||||||
| DCF | Discounted Cash Flow | SBA | Small Business Administration | |||||||||||
| EFSC | Enterprise Financial Services Corp | SCBH | Seacoast Commerce Banc Holdings | |||||||||||
| Enterprise | Enterprise Financial Services Corp and Subsidiaries | Seacoast | Seacoast Commerce Bank | |||||||||||
| FASB | Financial Accounting Standards Board | SEC | Securities and Exchange Commission | |||||||||||
| FDIC | Federal Deposit Insurance Corporation | SOFR | Secured Overnight Financing Rate | |||||||||||
PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| (in thousands, except share and per share data) | March 31, 2021 | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | 103,367 | $ | 99,760 | |||||||
| Federal funds sold | 1,638 | 1,519 | |||||||||
| Interest-earning deposits (including $23,835 and $36,525 pledged as collateral, respectively) | 778,810 | 436,424 | |||||||||
| Total cash and cash equivalents | 883,815 | 537,703 | |||||||||
| Interest-earning deposits greater than 90 days | 8,016 | 7,626 | |||||||||
| Securities available-for-sale | 945,660 | 912,429 | |||||||||
| Securities held-to-maturity, net | 467,059 | 487,610 | |||||||||
| Loans held-for-sale | 8,531 | 13,564 | |||||||||
| Loans | 7,288,781 | 7,224,935 | |||||||||
Less: Allowance for credit losses on loans | 131,527 | 136,671 | |||||||||
Total loans, net | 7,157,254 | 7,088,264 | |||||||||
| Other investments | 51,099 | 48,764 | |||||||||
| Fixed assets, net | 52,078 | 53,169 | |||||||||
| Goodwill | 260,567 | 260,567 | |||||||||
| Intangible assets, net | 21,670 | 23,084 | |||||||||
| Other assets | 334,950 | 318,791 | |||||||||
| Total assets | $ | 10,190,699 | $ | 9,751,571 | |||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Noninterest-bearing deposit accounts | $ | 2,910,216 | $ | 2,711,828 | |||||||
| Interest-bearing transaction accounts | 1,990,308 | 1,768,497 | |||||||||
| Money market accounts | 2,405,451 | 2,327,066 | |||||||||
| Savings accounts | 688,118 | 627,903 | |||||||||
| Certificates of deposit: | |||||||||||
| Brokered | 50,209 | 50,209 | |||||||||
| Other | 471,142 | 499,886 | |||||||||
| Total deposits | 8,515,444 | 7,985,389 | |||||||||
| Subordinated debentures and notes | 203,778 | 203,637 | |||||||||
| FHLB advances | 50,000 | 50,000 | |||||||||
| Other borrowings | 202,246 | 271,081 | |||||||||
| Notes payable | 27,143 | 30,000 | |||||||||
| Other liabilities | 99,591 | 132,489 | |||||||||
| Total liabilities | $ | 9,098,202 | $ | 8,672,596 | |||||||
| Commitments and contingent liabilities (Note 5) | |||||||||||
| Shareholders' equity: | |||||||||||
| Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding | — | — | |||||||||
| Common stock, $0.01 par value; 45,000,000 shares authorized; 33,239,276 and 33,190,306 shares issued, respectively | 332 | 332 | |||||||||
| Treasury stock, at cost; 1,980,093 shares | (73,528) | (73,528) | |||||||||
| Additional paid in capital | 698,005 | 697,839 | |||||||||
| Retained earnings | 441,511 | 417,212 | |||||||||
| Accumulated other comprehensive income | 26,177 | 37,120 | |||||||||
| Total shareholders' equity | 1,092,497 | 1,078,975 | |||||||||
| Total liabilities and shareholders' equity | $ | 10,190,699 | $ | 9,751,571 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| Three months ended March 31, | |||||||||||
| (in thousands, except per share data) | 2021 | 2020 | |||||||||
| Interest income: | |||||||||||
| Interest and fees on loans | $ | 76,973 | $ | 67,169 | |||||||
| Interest on debt securities: | |||||||||||
| Taxable | 4,540 | 7,557 | |||||||||
| Nontaxable | 3,079 | 1,489 | |||||||||
| Interest on interest-earning deposits | 189 | 300 | |||||||||
| Dividends on equity securities | 179 | 173 | |||||||||
| Total interest income | 84,960 | 76,688 | |||||||||
| Interest expense: | |||||||||||
| Deposits | 2,663 | 9,888 | |||||||||
| Subordinated debentures and notes | 2,819 | 1,919 | |||||||||
| FHLB advances | 195 | 895 | |||||||||
| Notes payable and other borrowings | 160 | 618 | |||||||||
| Total interest expense | 5,837 | 13,320 | |||||||||
| Net interest income | 79,123 | 63,368 | |||||||||
| Provision for credit losses | 46 | 22,264 | |||||||||
| Net interest income after provision for credit losses | 79,077 | 41,104 | |||||||||
| Noninterest income: | |||||||||||
| Service charges on deposit accounts | 3,084 | 3,143 | |||||||||
| Wealth management revenue | 2,483 | 2,501 | |||||||||
| Card services revenue | 2,496 | 2,247 | |||||||||
| Tax credit income (expense) | (1,041) | 2,036 | |||||||||
| Miscellaneous income | 4,268 | 3,481 | |||||||||
| Total noninterest income | 11,290 | 13,408 | |||||||||
| Noninterest expense: | |||||||||||
| Employee compensation and benefits | 29,562 | 21,685 | |||||||||
| Occupancy | 3,751 | 3,347 | |||||||||
| Data processing | 2,890 | 2,082 | |||||||||
| Professional fees | 988 | 862 | |||||||||
| Merger-related expenses | 3,142 | — | |||||||||
| Other | 12,551 | 10,697 | |||||||||
| Total noninterest expense | 52,884 | 38,673 | |||||||||
| Income before income tax expense | 37,483 | 15,839 | |||||||||
| Income tax expense | 7,557 | 2,971 | |||||||||
| Net income | $ | 29,926 | $ | 12,868 | |||||||
| Earnings per common share | |||||||||||
| Basic | $ | 0.96 | $ | 0.49 | |||||||
| Diluted | 0.96 | 0.48 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| Three months ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Net income | $ | 29,926 | $ | 12,868 | |||||||
| Other comprehensive income (loss), after-tax: | |||||||||||
| Change in unrealized gain (loss) on available-for-sale debt securities | (10,920) | 10,564 | |||||||||
| Reclassification adjustment for realized gain on sale of available-for-sale debt securities | — | (3) | |||||||||
| Reclassification of gain on held-to-maturity securities | (1,149) | (156) | |||||||||
| Change in unrealized gain (loss) on cash flow hedges arising during the period | 847 | (5,180) | |||||||||
| Reclassification of loss on cash flow hedges | 279 | 123 | |||||||||
| Total other comprehensive income (loss), after-tax | (10,943) | 5,348 | |||||||||
| Comprehensive income | $ | 18,983 | $ | 18,216 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
| Three months ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Common Stock | Treasury Stock | Additional paid in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders’ equity | |||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 332 | $ | (73,528) | $ | 697,839 | $ | 417,212 | $ | 37,120 | $ | 1,078,975 | |||||||||||||||||||||||
| Net income | — | — | — | 29,926 | — | 29,926 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (10,943) | (10,943) | |||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | 29,926 | (10,943) | 18,983 | |||||||||||||||||||||||||||||
| Cash dividends paid on common shares, $0.18 per share | — | — | — | (5,627) | — | (5,627) | |||||||||||||||||||||||||||||
| Issuance under equity compensation plans, 48,970 shares, net | — | — | (1,109) | — | — | (1,109) | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 1,275 | — | — | 1,275 | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 332 | $ | (73,528) | $ | 698,005 | $ | 441,511 | $ | 26,177 | $ | 1,092,497 | |||||||||||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Common Stock | Treasury Stock | Additional paid in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders’ equity | |||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 281 | $ | (58,181) | $ | 526,599 | $ | 380,737 | $ | 17,749 | $ | 867,185 | |||||||||||||||||||||||
| Net income | — | — | — | 12,868 | — | 12,868 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 5,348 | 5,348 | |||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | 12,868 | 5,348 | 18,216 | |||||||||||||||||||||||||||||
| Cash dividends paid on common shares, $0.18 per share | — | — | — | (4,743) | — | (4,743) | |||||||||||||||||||||||||||||
| Repurchase of common shares | — | (15,347) | — | — | — | (15,347) | |||||||||||||||||||||||||||||
| Issuance under equity compensation plans, 73,515 shares, net | — | — | (1,721) | — | — | (1,721) | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 960 | — | — | 960 | |||||||||||||||||||||||||||||
| Reclassification for the adoption of ASU 2016-13 (CECL) | — | — | — | (18,114) | — | (18,114) | |||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | 281 | $ | (73,528) | $ | 525,838 | $ | 370,748 | $ | 23,097 | $ | 846,436 | |||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three months ended March 31, | |||||||||||
| (in thousands, except share data) | 2021 | 2020 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 29,926 | $ | 12,868 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation | 1,581 | 1,524 | |||||||||
| Provision for credit losses | 46 | 22,264 | |||||||||
| Deferred income taxes | 3,834 | (183) | |||||||||
| Net amortization of debt securities | 1,937 | 1,054 | |||||||||
| Amortization of intangible assets | 1,415 | 1,491 | |||||||||
| Mortgage loans originated-for-sale | (49,065) | (33,537) | |||||||||
| Proceeds from mortgage loans sold | 52,908 | 30,888 | |||||||||
| Loss (gain) on: | |||||||||||
| Sale of investment securities | — | (4) | |||||||||
| Sale of other real estate | (47) | 52 | |||||||||
| Sale of state tax credits | (326) | (124) | |||||||||
| Share-based compensation | 1,275 | 960 | |||||||||
| Net accretion of loan discount | (736) | (2,510) | |||||||||
| Changes in other assets and liabilities, net | (46,423) | (2,181) | |||||||||
| Net cash (used in) provided by operating activities | (3,675) | 32,562 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Net increase in loans | (69,907) | (134,482) | |||||||||
| Proceeds received from: | |||||||||||
| Sale of debt securities, available-for-sale | — | 207 | |||||||||
| Paydown or maturity of debt securities, available-for-sale | 69,953 | 55,932 | |||||||||
| Paydown or maturity of debt securities, held-to-maturity | 18,220 | 1,595 | |||||||||
| Redemption of other investments | 752 | 24,310 | |||||||||
| Sale of state tax credits held for sale | 1,632 | 1,186 | |||||||||
| Sale of other real estate | 450 | 443 | |||||||||
| Payments for the purchase of: | |||||||||||
| Available-for-sale debt securities | (118,791) | (69,336) | |||||||||
| Other investments | (3,660) | (28,809) | |||||||||
| State tax credits held for sale | — | (3,780) | |||||||||
| Fixed assets, net | (489) | (918) | |||||||||
| Net cash used in investing activities | (101,840) | (153,652) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Net increase in noninterest-bearing deposit accounts | 198,389 | 27,223 | |||||||||
| Net increase in interest-bearing deposit accounts | 331,666 | 191,659 | |||||||||
| Proceeds from FHLB advances, net | — | (300) | |||||||||
| Repayments of notes payable | (2,857) | (1,429) | |||||||||
| Net decrease in other borrowings | (68,835) | (57,825) | |||||||||
| Cash dividends paid on common stock | (5,627) | (4,743) | |||||||||
| Payments for the repurchase of common stock | — | (15,347) | |||||||||
| Payments for the issuance of equity instruments, net | (1,109) | (1,721) | |||||||||
| Net cash provided by financing activities | 451,627 | 137,517 | |||||||||
| Net increase in cash and cash equivalents | 346,112 | 16,427 | |||||||||
| Cash and cash equivalents, beginning of period | 537,703 | 167,256 | |||||||||
| Cash and cash equivalents, end of period | $ | 883,815 | $ | 183,683 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 4,836 | $ | 13,026 | |||||||
| Income taxes | 30,167 | — | |||||||||
| Noncash transactions: | |||||||||||
| Transfer to other real estate owned in settlement of loans | $ | 1,236 | $ | — | |||||||
| Right-of-use assets obtained in exchange for lease obligations | — | 200 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used by Enterprise Financial Services Corp (the “Company,” “EFSC,” or “Enterprise”) in the preparation of the condensed consolidated financial statements are summarized below:
Business and Consolidation
Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers primarily located in Arizona, California, Kansas, Missouri, Nevada, and New Mexico through its banking subsidiary, Enterprise Bank & Trust.
Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the statements of financial position, results of operations, and cash flow for the interim periods.
Recent Accounting Pronouncements
FASB ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In March 2020, the FASB issued “Reference Rate Reform (Topic 848)” which provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for contract modifications as of March 12, 2020 through December 31, 2022. The Company is actively working to amend and address impacted contracts to allow for a replacement index. Additionally, the Company is currently evaluating the optional expedients and exceptions and has not yet determined the impact this standard may have on its consolidated financial statements.
6
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share data is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.
The following table presents a summary of per common share data and amounts for the periods indicated.
| Three months ended March 31, | |||||||||||
| (in thousands, except per share data) | 2021 | 2020 | |||||||||
| Net income as reported | $ | 29,926 | $ | 12,868 | |||||||
| Weighted average common shares outstanding | 31,247 | 26,473 | |||||||||
| Additional dilutive common stock equivalents | 59 | 66 | |||||||||
| Weighted average diluted common shares outstanding | 31,306 | 26,539 | |||||||||
| Basic earnings per common share: | $ | 0.96 | $ | 0.49 | |||||||
| Diluted earnings per common share: | 0.96 | 0.48 | |||||||||
For the three months ended March 31, 2021 common stock equivalents of approximately 222,000 were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were 62,000 common stock equivalents excluded in the prior year period.
NOTE 3 - INVESTMENTS
The following tables present the amortized cost, gross unrealized gains and losses, allowance of credit losses and fair value of securities available for sale and held to maturity:
| March 31, 2021 | |||||||||||||||||||||||
| (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Obligations of U.S. Government-sponsored enterprises | $ | 23,484 | $ | 137 | $ | (176) | $ | 23,445 | |||||||||||||||
| Obligations of states and political subdivisions | 404,087 | 3,132 | (3,662) | 403,557 | |||||||||||||||||||
| Agency mortgage-backed securities | 477,151 | 16,841 | (1,911) | 492,081 | |||||||||||||||||||
| U.S. Treasury bills | 10,982 | 427 | — | 11,409 | |||||||||||||||||||
| Corporate debt securities | 14,750 | 425 | (7) | 15,168 | |||||||||||||||||||
| Total securities available for sale | $ | 930,454 | $ | 20,962 | $ | (5,756) | $ | 945,660 | |||||||||||||||
| Held-to-maturity securities: | |||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 244,030 | $ | 900 | $ | (2,491) | $ | 242,439 | |||||||||||||||
| Agency mortgage-backed securities | 96,777 | 1,432 | (458) | 97,751 | |||||||||||||||||||
| Corporate debt securities | 126,701 | 3,208 | — | 129,909 | |||||||||||||||||||
| Total securities held-to-maturity | $ | 467,508 | $ | 5,540 | $ | (2,949) | $ | 470,099 | |||||||||||||||
| Less: Allowance for credit losses | 449 | ||||||||||||||||||||||
| Total securities held-to-maturity, net | $ | 467,059 | |||||||||||||||||||||
7
| December 31, 2020 | |||||||||||||||||||||||
| (in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| Obligations of U.S. Government-sponsored enterprises | $ | 14,978 | $ | 186 | $ | (3) | $ | 15,161 | |||||||||||||||
| Obligations of states and political subdivisions | 335,271 | 8,994 | (33) | 344,232 | |||||||||||||||||||
| Agency mortgage-backed securities | 506,703 | 20,190 | (321) | 526,572 | |||||||||||||||||||
| U.S. Treasury Bills | 10,980 | 486 | — | 11,466 | |||||||||||||||||||
| Corporate debt securities | 14,750 | 248 | — | 14,998 | |||||||||||||||||||
| Total securities available for sale | $ | 882,682 | $ | 30,104 | $ | (357) | $ | 912,429 | |||||||||||||||
| Held-to-maturity securities: | |||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 248,324 | $ | 2,814 | $ | — | $ | 251,138 | |||||||||||||||
| Agency mortgage-backed securities | 112,742 | 2,295 | (496) | 114,541 | |||||||||||||||||||
| Corporate debt securities | 126,993 | 8,851 | — | 135,844 | |||||||||||||||||||
| Total securities held to maturity | $ | 488,059 | $ | 13,960 | $ | (496) | $ | 501,523 | |||||||||||||||
| Less: Allowance for credit losses | 449 | ||||||||||||||||||||||
| Total securities held-to-maturity, net | $ | 487,610 | |||||||||||||||||||||
At March 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of $465.9 million and $525.8 million at March 31, 2021 and December 31, 2020, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.
The amortized cost and estimated fair value of debt securities at March 31, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 3 years.
| Available for sale | Held to maturity | ||||||||||||||||||||||
| (in thousands) | Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||||||||
| Due in one year or less | $ | 11,176 | $ | 11,316 | $ | — | $ | — | |||||||||||||||
| Due after one year through five years | 23,972 | 24,517 | 12,733 | 13,109 | |||||||||||||||||||
| Due after five years through ten years | 32,875 | 33,175 | 132,553 | 135,497 | |||||||||||||||||||
| Due after ten years | 385,280 | 384,571 | 225,445 | 223,742 | |||||||||||||||||||
| Agency mortgage-backed securities | 477,151 | 492,081 | 96,777 | 97,751 | |||||||||||||||||||
| $ | 930,454 | $ | 945,660 | $ | 467,508 | $ | 470,099 | ||||||||||||||||
8
The following tables presents a summary of available-for-sale investment securities in an unrealized loss position:
| March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Obligations of U.S. Government-sponsored enterprises | $ | 13,324 | $ | 176 | $ | — | $ | — | $ | 13,324 | $ | 176 | |||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 222,901 | $ | 3,662 | $ | — | $ | — | $ | 222,901 | $ | 3,662 | |||||||||||||||||||||||
| Agency mortgage-backed securities | 89,591 | 1,911 | — | — | 89,591 | 1,911 | |||||||||||||||||||||||||||||
| Corporate debt securities | 4,493 | 7 | — | — | 4,493 | 7 | |||||||||||||||||||||||||||||
| $ | 330,309 | $ | 5,756 | $ | — | $ | — | $ | 330,309 | $ | 5,756 | ||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||
| (in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Obligations of U.S. Government-sponsored enterprises | $ | 4,997 | $ | 3 | $ | — | $ | — | $ | 4,997 | $ | 3 | |||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 4,079 | $ | 33 | $ | — | $ | — | $ | 4,079 | $ | 33 | |||||||||||||||||||||||
| Agency mortgage-backed securities | 65,986 | 321 | — | — | 65,986 | 321 | |||||||||||||||||||||||||||||
| $ | 75,062 | $ | 357 | $ | — | $ | — | $ | 75,062 | $ | 357 | ||||||||||||||||||||||||
The unrealized losses at both March 31, 2021 and December 31, 2020 were primarily attributable to changes in market interest rates after the securities were purchased. At March 31, 2021, the Company had not recorded an ACL on available-for-sale securities. At March 31, 2021, the Company had not recognized an other-than-temporary impairment.
Accrued interest receivable on held-to-maturity debt securities totaled $3.5 million at March 31, 2021 and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. At March 31, 2021, the ACL on held-to-maturity securities was $0.4 million.
During the three months ended March 31, 2021, there were no sales of available-for-sale investment securities. Proceeds from sales of available-for-sale investment securities during the three months ended March 31, 2020 were $207 thousand and gross gains were $4 thousand.
Other Investments
At March 31, 2021 and December 31, 2020, other investments totaled $51.1 million and $48.8 million, respectively. As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $12.0 million and $10.8 million at March 31, 2021 and December 31, 2020, respectively, is recorded at cost, which represents redemption value, and is included in other investments in the consolidated balance sheets. The remaining amounts in other investments primarily include various investments in SBICs, CDFIs, and the Company’s investment in unconsolidated trusts used to issue preferred securities to third parties.
9
NOTE 4 - LOANS
The following table presents a summary of loans by category:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Commercial and industrial | $ | 3,096,319 | $ | 3,100,299 | |||||||
| Real estate: | |||||||||||
| Commercial - investor owned | 1,669,215 | 1,589,419 | |||||||||
| Commercial - owner occupied | 1,517,755 | 1,498,408 | |||||||||
| Construction and land development | 510,501 | 546,686 | |||||||||
| Residential | 303,047 | 319,179 | |||||||||
| Total real estate loans | 4,000,518 | 3,953,692 | |||||||||
| Other | 212,068 | 187,083 | |||||||||
| Loans, before unearned loan fees | 7,308,905 | 7,241,074 | |||||||||
| Unearned loan fees, net | (20,124) | (16,139) | |||||||||
| Loans, including unearned loan fees | $ | 7,288,781 | $ | 7,224,935 | |||||||
PPP loans totaled $754.4 million at March 31, 2021, or $737.7 million net of deferred fees of $16.7 million. The loan balance at March 31, 2021 also includes a net premium on acquired loans of $17.7 million. At March 31, 2021 loans of $2.7 billion were pledged to FHLB and the Federal Reserve Bank.
PPP loans totaled $709.9 million at December 31, 2020, or $698.6 million net of unearned fees of $11.3 million. The loan balance includes a net premium on acquired loans of $16.1 million at December 31, 2020. At December 31, 2020 loans of $2.5 billion were pledged to FHLB and the Federal Reserve Bank.
The Company has elected to present the accrued interest receivable balance separate from amortized cost basis, to exclude accrued interest receivable balances from the tabular disclosures, and not to estimate an ACL on accrued interest receivable as these amounts are timely written off as a credit loss expense.
Accrued interest receivable totaled $30.7 million at March 31, 2021 and was reported in Other Assets on the consolidated balance sheets.
A summary of the activity in the ACL on loans by category for the three months ended March 31, 2021 is as follows:
| (in thousands) | Commercial and industrial | CRE - investor owned | CRE - owner occupied | Construction and land development | Residential real estate | Other | Total | ||||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans: | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 58,812 | $ | 32,062 | $ | 17,012 | $ | 21,413 | $ | 4,585 | $ | 2,787 | $ | 136,671 | |||||||||||||||||||||||||||
| Provision for credit losses | 541 | 3,381 | 3,226 | (7,091) | (152) | 598 | 503 | ||||||||||||||||||||||||||||||||||
| Charge-offs | (3,739) | (2,372) | (28) | — | (271) | (64) | (6,474) | ||||||||||||||||||||||||||||||||||
| Recoveries | 327 | 34 | 9 | 235 | 143 | 79 | 827 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 55,941 | $ | 33,105 | $ | 20,219 | $ | 14,557 | $ | 4,305 | $ | 3,400 | $ | 131,527 | |||||||||||||||||||||||||||
The ACL on sponsor finance loans, which is included in the categories above, represented $19.7 million and $19.0 million, respectively, as of March 31, 2021 and December 31, 2020.
10
A summary of the activity in the ACL on loans by category for the three months ended March 31, 2020 is as follows:
| (in thousands) | Commercial and industrial | CRE - investor owned | CRE - owner occupied | Construction and land development | Residential real estate | Other | Total | ||||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans: | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 27,455 | $ | 5,935 | $ | 4,873 | $ | 2,611 | $ | 1,280 | $ | 1,134 | $ | 43,288 | |||||||||||||||||||||||||||
| CECL adoption | 6,494 | 10,726 | 2,598 | 5,183 | 3,470 | (84) | 28,387 | ||||||||||||||||||||||||||||||||||
| PCD loans immediately charged off | — | (5) | (57) | (217) | (1,401) | — | (1,680) | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | 33,949 | $ | 16,656 | $ | 7,414 | $ | 7,577 | $ | 3,349 | $ | 1,050 | $ | 69,995 | |||||||||||||||||||||||||||
| Provision for credit losses | 11,591 | 3,224 | 1,994 | 2,309 | 2,011 | 566 | 21,695 | ||||||||||||||||||||||||||||||||||
| Charge-offs | (63) | (2) | — | (31) | (122) | (86) | (304) | ||||||||||||||||||||||||||||||||||
| Recoveries | 504 | 14 | 69 | 40 | 157 | 17 | 801 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | 45,981 | $ | 19,892 | $ | 9,477 | $ | 9,895 | $ | 5,395 | $ | 1,547 | $ | 92,187 | |||||||||||||||||||||||||||
The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model: Moody’s baseline, a stronger near-term growth upside and a moderate recession downside forecast. The Company weights these scenarios at 70%, 5%, and 25%, respectively, which added approximately $5.4 million to the ACL over the baseline model. These forecasts incorporate an accommodative monetary policy and the current and anticipated impact of government stimulus. The Company has also recognized the risk posed by loans that have received multiple deferrals of principal and interest payments, loans in the hospitality sector, and loans with other specific identified risks by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines if another significant wave of COVID hits, the vaccination process stalls, small-business bankruptcies occur at higher levels, or unemployment increases.
The following tables present the recorded investment in nonperforming loans by category:
| March 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands) | Nonaccrual | Restructured, accruing | Loans over 90 days past due and still accruing interest | Total nonperforming loans | Nonaccrual loans with no allowance | ||||||||||||||||||||||||
| Commercial and industrial | $ | 18,372 | $ | 3,243 | $ | 893 | $ | 22,508 | $ | 8,239 | |||||||||||||||||||
| Real estate: | |||||||||||||||||||||||||||||
| Commercial - investor owned | 7,379 | — | — | 7,379 | 455 | ||||||||||||||||||||||||
| Commercial - owner occupied | 2,589 | — | — | 2,589 | 2,331 | ||||||||||||||||||||||||
| Construction and land development | — | — | — | — | — | ||||||||||||||||||||||||
| Residential | 3,868 | 77 | — | 3,945 | 2,795 | ||||||||||||||||||||||||
| Other | 17 | — | 221 | 238 | — | ||||||||||||||||||||||||
| Total | $ | 32,225 | $ | 3,320 | $ | 1,114 | $ | 36,659 | $ | 13,820 | |||||||||||||||||||
11
| December 31, 2020 | |||||||||||||||||||||||||||||
| (in thousands) | Nonaccrual | Restructured, accruing | Loans over 90 days past due and still accruing interest | Total nonperforming loans | Nonaccrual loans with no allowance | ||||||||||||||||||||||||
| Commercial and industrial | $ | 18,158 | $ | 3,482 | $ | 130 | $ | 21,770 | $ | 8,316 | |||||||||||||||||||
| Real estate: | |||||||||||||||||||||||||||||
| Commercial - investor owned | 9,579 | — | — | 9,579 | 716 | ||||||||||||||||||||||||
| Commercial - owner occupied | 2,940 | — | — | 2,940 | 6,024 | ||||||||||||||||||||||||
| Residential | 4,112 | 77 | — | 4,189 | — | ||||||||||||||||||||||||
| Other | 29 | — | — | 29 | 3,190 | ||||||||||||||||||||||||
| Total | $ | 34,818 | $ | 3,559 | $ | 130 | $ | 38,507 | $ | 18,246 | |||||||||||||||||||
No interest income was recognized on nonaccrual loans during the three months ended March 31, 2021 or 2020.
The following table presents the amortized cost basis of collateral-dependent nonperforming loans by class of loan at March 31, 2021:
| Type of Collateral | |||||||||||||||||||||||
| (in thousands) | Commercial Real Estate | Residential Real Estate | Blanket Lien | Other | |||||||||||||||||||
| Commercial and industrial | $ | 10,737 | $ | — | $ | 3,064 | $ | — | |||||||||||||||
| Real estate: | |||||||||||||||||||||||
| Commercial - investor owned | 7,155 | — | — | — | |||||||||||||||||||
| Commercial - owner occupied | 2,387 | — | — | — | |||||||||||||||||||
| Residential | — | 3,891 | — | — | |||||||||||||||||||
| Other | — | — | — | 215 | |||||||||||||||||||
| Total | $ | 20,279 | $ | 3,891 | $ | 3,064 | $ | 215 | |||||||||||||||
There were no loans restructured during the three months ended March 31, 2021. The recorded investment by category for troubled debt restructurings that occurred during the three months ended March 31, 2020 are as follows:
| March 31, 2020 | |||||||||||||||||
| (in thousands, except for number of loans) | Number of loans | Pre-Modification Outstanding Recorded Balance | Post-Modification Outstanding Recorded Balance | ||||||||||||||
| Commercial and industrial | 1 | $ | 3,731 | $ | 3,731 | ||||||||||||
| Real estate: | |||||||||||||||||
| Residential | 2 | 155 | 155 | ||||||||||||||
| Total | 3 | $ | 3,886 | $ | 3,886 | ||||||||||||
No troubled debt restructurings subsequently defaulted during the three months ended March 31, 2021 or 2020.
In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt restructurings. As of March 31, 2021, $21.1 million loans remain in a deferral status. Interest of $4.2 million has been deferred and will be collected upon final maturity.
12
The aging of the recorded investment in past due loans by class at March 31, 2021 is shown below.
| March 31, 2021 | |||||||||||||||||||||||||||||
| (in thousands) | 30-89 Days Past Due | 90 or More Days Past Due | Total Past Due | Current | Total | ||||||||||||||||||||||||
| Commercial and industrial | $ | 25,976 | $ | 17,091 | $ | 43,067 | $ | 3,036,576 | $ | 3,079,643 | |||||||||||||||||||
| Real estate: | |||||||||||||||||||||||||||||
| Commercial - investor owned | 768 | 6,700 | 7,468 | 1,661,747 | 1,669,215 | ||||||||||||||||||||||||
| Commercial - owner occupied | 312 | 3,987 | 4,299 | 1,513,456 | 1,517,755 | ||||||||||||||||||||||||
| Construction and land development | 400 | — | 400 | 510,101 | 510,501 | ||||||||||||||||||||||||
| Residential | 2,371 | 1,090 | 3,461 | 299,586 | 303,047 | ||||||||||||||||||||||||
| Other | 486 | 237 | 723 | 207,897 | 208,620 | ||||||||||||||||||||||||
| Total | $ | 30,313 | $ | 29,105 | $ | 59,418 | $ | 7,229,363 | $ | 7,288,781 | |||||||||||||||||||
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
•Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
•Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
•Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
•Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.
•Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated at this time, due to strong collateral and/or guarantor support.
•Grade 8 – Substandard credits include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.
•Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on nonaccrual.
13
The recorded investment by risk category of the loans by class at March 31, 2021, which is based upon the most recent analysis performed is as follows:
| Term Loans by Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Converted to Term Loans | Revolving Loans | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass (1-6) | $ | 510,640 | $ | 1,044,599 | $ | 403,420 | $ | 196,752 | $ | 121,210 | $ | 65,492 | $ | 8,432 | $ | 515,327 | $ | 2,865,872 | ||||||||||||||||||||||||||||||||||||||
| Watch (7) | 20,506 | 34,164 | 8,303 | 15,706 | 4,378 | 15,002 | 191 | 57,994 | 156,244 | |||||||||||||||||||||||||||||||||||||||||||||||
| Classified (8-9) | 3,731 | 6,220 | 9,270 | 2,823 | 354 | 1,761 | 407 | 19,277 | 43,843 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Commercial and industrial | $ | 534,877 | $ | 1,084,983 | $ | 420,993 | $ | 215,281 | $ | 125,942 | $ | 82,255 | $ | 9,030 | $ | 592,598 | $ | 3,065,959 | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate-investor owned | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass (1-6) | $ | 125,834 | $ | 471,216 | $ | 351,386 | $ | 195,605 | $ | 129,903 | $ | 252,747 | $ | 3,712 | $ | 38,880 | $ | 1,569,283 | ||||||||||||||||||||||||||||||||||||||
| Watch (7) | 2,782 | 32,554 | 13,017 | 6,588 | — | 24,282 | — | — | 79,223 | |||||||||||||||||||||||||||||||||||||||||||||||
| Classified (8-9) | — | 6,012 | 5,300 | 6,651 | — | 2,746 | — | — | 20,709 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Commercial real estate-investor owned | $ | 128,616 | $ | 509,782 | $ | 369,703 | $ | 208,844 | $ | 129,903 | $ | 279,775 | $ | 3,712 | $ | 38,880 | $ | 1,669,215 | ||||||||||||||||||||||||||||||||||||||
| Commercial real estate-owner occupied | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass (1-6) | $ | 88,848 | $ | 422,455 | $ | 253,188 | $ | 205,203 | $ | 161,983 | $ | 258,470 | $ | — | $ | 42,003 | $ | 1,432,150 | ||||||||||||||||||||||||||||||||||||||
| Watch (7) | 2,111 | 8,967 | 5,212 | 17,006 | 6,130 | 9,732 | — | 1,752 | 50,910 | |||||||||||||||||||||||||||||||||||||||||||||||
| Classified (8-9) | 383 | 1,794 | 7,595 | 5,976 | 7,726 | 11,158 | — | 63 | 34,695 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Commercial real estate-owner occupied | $ | 91,342 | $ | 433,216 | $ | 265,995 | $ | 228,185 | $ | 175,839 | $ | 279,360 | $ | — | $ | 43,818 | $ | 1,517,755 | ||||||||||||||||||||||||||||||||||||||
| Construction real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass (1-6) | $ | 76,142 | $ | 180,898 | $ | 120,004 | $ | 30,559 | $ | 7,843 | $ | 15,954 | $ | — | $ | 24,405 | $ | 455,805 | ||||||||||||||||||||||||||||||||||||||
| Watch (7) | 16,333 | 62 | 85 | 20,748 | 11,287 | 2,468 | — | — | 50,983 | |||||||||||||||||||||||||||||||||||||||||||||||
| Classified (8-9) | — | 55 | 3,030 | 499 | — | 29 | — | 100 | 3,713 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Construction real estate | $ | 92,475 | $ | 181,015 | $ | 123,119 | $ | 51,806 | $ | 19,130 | $ | 18,451 | $ | — | $ | 24,505 | $ | 510,501 | ||||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass (1-6) | $ | 15,166 | $ | 56,188 | $ | 23,567 | $ | 15,421 | $ | 14,844 | $ | 109,575 | $ | 112 | $ | 57,997 | $ | 292,870 | ||||||||||||||||||||||||||||||||||||||
| Watch (7) | — | 313 | 801 | 513 | — | 1,725 | — | 379 | 3,731 | |||||||||||||||||||||||||||||||||||||||||||||||
| Classified (8-9) | 220 | 887 | 717 | 77 | 14 | 3,543 | — | 72 | 5,530 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total residential real estate | $ | 15,386 | $ | 57,388 | $ | 25,085 | $ | 16,011 | $ | 14,858 | $ | 114,843 | $ | 112 | $ | 58,448 | $ | 302,131 | ||||||||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass (1-6) | $ | 33,630 | $ | 56,052 | $ | 21,753 | $ | 27,503 | $ | 9,290 | $ | 25,300 | $ | — | $ | 31,640 | $ | 205,168 | ||||||||||||||||||||||||||||||||||||||
| Watch (7) | — | — | 1 | 7 | — | 2,588 | — | 5 | 2,601 | |||||||||||||||||||||||||||||||||||||||||||||||
| Classified (8-9) | — | — | 16 | 18 | 1 | 23 | — | 1 | 59 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Other | $ | 33,630 | $ | 56,052 | $ | 21,770 | $ | 27,528 | $ | 9,291 | $ | 27,911 | $ | — | $ | 31,646 | $ | 207,828 | ||||||||||||||||||||||||||||||||||||||
In the table above, loan originations in 2021 and 2020 with a classification of watch or classified primarily represent renewals or modifications initially underwritten and originated in prior years.
14
For certain loans, primarily credit cards, the Company evaluates credit quality based on the aging status.
The following table presents the recorded investment on loans based on payment activity:
| March 31, 2021 | |||||||||||||||||
| (in thousands) | Performing | Non Performing | Total | ||||||||||||||
| Commercial and industrial | $ | 13,682 | $ | 2 | $ | 13,684 | |||||||||||
| Real estate: | |||||||||||||||||
| Residential | 916 | — | 916 | ||||||||||||||
| Other | 771 | 21 | 792 | ||||||||||||||
| Total | $ | 15,369 | $ | 23 | $ | 15,392 | |||||||||||
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets.
The contractual amounts of off-balance-sheet financial instruments are as follows:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Commitments to extend credit | $ | 2,043,850 | $ | 1,946,068 | |||||||
| Letters of credit | 58,093 | 50,971 | |||||||||
Off-Balance Sheet Credit Risk
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 usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at March 31, 2021, and December 31, 2020, approximately $178.5 million and $160.6 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes $5.4 million and $5.7 million for estimated losses attributable to the unadvanced commitments at March 31, 2021, and December 31, 2020, respectively.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk
15
involved in extending loans to customers. As of March 31, 2021, the approximate remaining terms of standby letters of credit range from 1 month to 4 years, 9 months.
Contingencies
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not enter into derivative financial instruments for trading purposes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. These derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The Company has executed a series of cash flow hedges to fix the effective interest rate for payments due on $62.0 million of LIBOR-based junior subordinated debentures to a weighted-average-fixed rate of 2.62%. Select terms of the hedges are as follows:
| $ in thousands | ||||||||||||||
| Notional | Fixed Rate | Maturity Date | ||||||||||||
| $ | 15,465 | 2.60 | % | March 15, 2024 | ||||||||||
| $ | 14,433 | 2.60 | % | March 30, 2024 | ||||||||||
| $ | 18,558 | 2.64 | % | March 15, 2026 | ||||||||||
| $ | 13,506 | 2.64 | % | March 17, 2026 | ||||||||||
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.5 million will be reclassified as an increase to interest expense.
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Non-designated Hedges
Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income.
The table below presents the fair value of the Company’s derivative financial instruments:
| Notional Amount | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 61,962 | $ | 61,962 | $ | — | $ | — | $ | 4,488 | $ | 5,987 | |||||||||||||||||||||||
| Derivatives not Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 1,007,417 | $ | 1,026,016 | $ | 20,271 | $ | 28,703 | $ | 20,311 | $ | 28,980 | |||||||||||||||||||||||
| Derivative assets are classified on the balance sheet in other assets. Derivative liabilities are classified on the balance sheet in other liabilities. | |||||||||||||||||||||||||||||||||||
17
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to offsetting. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The fair value table above provides the location that financial assets and liabilities are presented on the Balance Sheet.
| As of March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statement of Financial Position | |||||||||||||||||||||||||||||||||||
(in thousands) | Gross Amounts Recognized | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets presented in the Statement of Financial Position | Financial Instruments | Fair Value Collateral Posted | Net Amount | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 20,271 | $ | — | $ | 20,271 | $ | 1,322 | $ | — | $ | 18,949 | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 24,799 | $ | — | $ | 24,799 | $ | 1,322 | $ | 23,090 | $ | 387 | |||||||||||||||||||||||
| Securities sold under agreements to repurchase | 202,246 | — | 202,246 | — | 202,246 | — | |||||||||||||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Statement of Financial Position | |||||||||||||||||||||||||||||||||||
(in thousands) | Gross Amounts Recognized | Gross Amounts Offset in the Statement of Financial Position | Net Amounts of Assets presented in the Statement of Financial Position | Financial Instruments | Fair Value Collateral Posted | Net Amount | |||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 28,703 | $ | — | $ | 28,703 | $ | 2 | $ | — | $ | 28,701 | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Interest rate swap | $ | 34,967 | $ | — | $ | 34,967 | $ | 2 | $ | 34,903 | $ | 62 | |||||||||||||||||||||||
| Securities sold under agreements to repurchase | 271,081 | — | 271,081 | — | 271,081 | — | |||||||||||||||||||||||||||||
As of March 31, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $25.6 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $23.8 million.
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NOTE 7 - FAIR VALUE MEASUREMENTS
The following table summarizes financial instruments measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| March 31, 2021 | |||||||||||||||||||||||
| (in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||
| Obligations of U.S. Government-sponsored enterprises | $ | — | $ | 23,445 | $ | — | $ | 23,445 | |||||||||||||||
| Obligations of states and political subdivisions | — | 403,557 | — | 403,557 | |||||||||||||||||||
| Agency mortgage-backed securities | — | 492,081 | — | 492,081 | |||||||||||||||||||
| U.S. Treasury bills | — | 11,409 | — | 11,409 | |||||||||||||||||||
| Corporate debt securities | — | 15,168 | — | 15,168 | |||||||||||||||||||
| Total securities available for sale | — | 945,660 | — | 945,660 | |||||||||||||||||||
| Derivatives | — | 20,271 | — | 20,271 | |||||||||||||||||||
| Total assets | $ | — | $ | 965,931 | $ | — | $ | 965,931 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | $ | — | $ | 24,799 | $ | — | $ | 24,799 | |||||||||||||||
| Total liabilities | $ | — | $ | 24,799 | $ | — | $ | 24,799 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| (in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||
| Obligations of U.S. Government-sponsored enterprises | $ | — | $ | 15,161 | $ | — | $ | 15,161 | |||||||||||||||
| Obligations of states and political subdivisions | — | 344,232 | — | 344,232 | |||||||||||||||||||
| Residential mortgage-backed securities | — | 526,572 | — | 526,572 | |||||||||||||||||||
| Corporate debt securities | — | 14,998 | — | 14,998 | |||||||||||||||||||
| U.S. Treasury bills | — | 11,466 | — | 11,466 | |||||||||||||||||||
| Total securities available-for-sale | — | 912,429 | — | 912,429 | |||||||||||||||||||
| Derivative financial instruments | — | 28,703 | — | 28,703 | |||||||||||||||||||
| Total assets | $ | — | $ | 941,132 | $ | — | $ | 941,132 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | $ | — | $ | 34,967 | $ | — | $ | 34,967 | |||||||||||||||
| Total liabilities | $ | — | $ | 34,967 | $ | — | $ | 34,967 | |||||||||||||||
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From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.
| March 31, 2021 | |||||||||||||||||||||||
| (in thousands) | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| Nonaccrual loans (1) | $ | 2,503 | $ | — | $ | — | $ | 2,503 | |||||||||||||||
| (1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date. | |||||||||||||||||||||||
The following table presents the losses recorded in relation to assets measured on a nonrecurring basis and still held as of the reporting date.
| Three months ended | |||||||||||
| (in thousands) | March 31, 2021 | March 31, 2020 | |||||||||
| Nonaccrual loans | $ | 1,742 | $ | 11 | |||||||
| Other real estate | — | 777 | |||||||||
| Total | $ | 1,742 | $ | 788 | |||||||
Following is a summary of the carrying amounts and fair values of certain financial instruments:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Carrying Amount | Estimated fair value | Level | Carrying Amount | Estimated fair value | Level | |||||||||||||||||||||||||||||
| Balance sheet assets | |||||||||||||||||||||||||||||||||||
| Securities held-to-maturity, net | $ | 467,059 | $ | 470,099 | Level 2 | $ | 487,610 | $ | 501,523 | Level 2 | |||||||||||||||||||||||||
| Other investments | 51,099 | 51,099 | Level 2 | 48,764 | 48,764 | Level 2 | |||||||||||||||||||||||||||||
| Loans held for sale | 8,531 | 8,531 | Level 2 | 13,564 | 13,564 | Level 2 | |||||||||||||||||||||||||||||
| Loans, net | 7,157,254 | 7,099,662 | Level 3 | 7,088,264 | 7,067,562 | Level 3 | |||||||||||||||||||||||||||||
| State tax credits, held for sale | 34,287 | 37,802 | Level 3 | 36,853 | 39,925 | Level 3 | |||||||||||||||||||||||||||||
| Balance sheet liabilities | |||||||||||||||||||||||||||||||||||
| Certificates of deposit | $ | 521,351 | $ | 525,000 | Level 3 | $ | 550,095 | $ | 553,946 | Level 3 | |||||||||||||||||||||||||
| Subordinated debentures and notes | 203,778 | 193,071 | Level 2 | 203,637 | 192,889 | Level 2 | |||||||||||||||||||||||||||||
| FHLB advances | 50,000 | 51,694 | Level 2 | 50,000 | 51,871 | Level 2 | |||||||||||||||||||||||||||||
| Other borrowings and notes payable | 229,389 | 229,389 | Level 2 | 301,081 | 301,081 | Level 2 | |||||||||||||||||||||||||||||
For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments refer to Note 19 – Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.
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NOTE 8 - SHAREHOLDERS’ EQUITY AND COMPENSATION PLANS
Shareholders’ Equity
Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in accumulated other comprehensive income after-tax by component:
| Three months ended March 31, 2021 | |||||||||||||||||||||||
| (in thousands) | Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities | Unamortized Gain (Loss) on Held-to-Maturity Securities | Net Unrealized Loss on Cash Flow Hedges | Total | |||||||||||||||||||
| Balance, December 31, 2020 | $ | 22,320 | $ | 19,308 | $ | (4,508) | $ | 37,120 | |||||||||||||||
| Net change | $ | (10,920) | $ | (1,149) | $ | 1,126 | $ | (10,943) | |||||||||||||||
| Balance, March 31, 2021 | $ | 11,400 | $ | 18,159 | $ | (3,382) | $ | 26,177 | |||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||
| (in thousands) | Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities | Unamortized Gain (Loss) on Held-to-Maturity Securities | Net Unrealized Loss on Cash Flow Hedges | Total | |||||||||||||||||||
| Balance, December 31, 2019 | $ | 14,977 | $ | 4,934 | $ | (2,162) | $ | 17,749 | |||||||||||||||
| Net change | $ | 10,561 | $ | (156) | $ | (5,057) | $ | 5,348 | |||||||||||||||
| Balance, March 31, 2020 | $ | 25,538 | $ | 4,778 | $ | (7,219) | $ | 23,097 | |||||||||||||||
The following tables present the pre-tax and after-tax changes in the components of other comprehensive income:
| Three months ended March 31, | |||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Pre-tax | Tax effect | After-tax | Pre-tax | Tax effect | After-tax | ||||||||||||||||||||||||||||||
| Change in unrealized gain (loss) on available-for-sale debt securities | $ | (14,541) | $ | (3,621) | $ | (10,920) | $ | 14,029 | $ | 3,465 | $ | 10,564 | |||||||||||||||||||||||
Reclassification adjustment for realized gain on sale of available-for-sale debt securities(a) | — | — | — | (4) | (1) | (3) | |||||||||||||||||||||||||||||
Reclassification of gain on held-to-maturity securities(b) | (1,530) | (381) | (1,149) | (207) | (51) | (156) | |||||||||||||||||||||||||||||
| Change in unrealized gain (loss) on cash flow hedges arising during the period | 1,128 | 281 | 847 | (6,879) | (1,699) | (5,180) | |||||||||||||||||||||||||||||
Reclassification of loss on cash flow hedges(b) | 372 | 93 | 279 | 163 | 40 | 123 | |||||||||||||||||||||||||||||
| Total other comprehensive income | $ | (14,571) | $ | (3,628) | $ | (10,943) | $ | 7,102 | $ | 1,754 | $ | 5,348 | |||||||||||||||||||||||
(a)The pre-tax amount is reported in noninterest income/expense in the Consolidated Statements of Operations
(b)The pre-tax amount is reported in interest income/expense in the Consolidated Statements of Operations
21
Compensation Plans
Employee Stock Options
During the three months ended March 31, 2021, employee stock options were granted under the Amended and Restated 2018 Stock Incentive Plan.
Various information related to the stock options is shown below.
| Employee Stock Options | Weighted Average Life | Weighted Average Price | Shares Exercisable | Weighted Average Exercise Price | |||||||||||||||||||||||||
| Options Outstanding, December 31, 2020 | — | ||||||||||||||||||||||||||||
| Options granted | 111,804 | 9.9 | $ | 43.81 | — | $ | — | ||||||||||||||||||||||
| Options Outstanding, March 31, 2021 | 111,804 | ||||||||||||||||||||||||||||
NOTE 9 - SUBSEQUENT EVENT
On April 26, 2021 the Company and the Bank entered into a definitive merger agreement with First Choice Bancorp (“FCBP”), the holding company of First Choice Bank (“First Choice”) pursuant to which the Company will acquire FCBP in an all-stock merger. Under the terms of the merger agreement, FCBP will merge with and into the Company, and First Choice will subsequently merge with and into the Bank (with the Company and the Bank as the surviving entities) in a transaction valued at approximately $397.7 million, or $33.40 per FCBP share, based on the closing price of EFSC’s common stock on April 23, 2021. On a pro forma consolidated basis, the combined company would have approximately $12.7 billion in consolidated total assets as of March 31, 2021.
22
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company, and include, without limitation, statements about the Company’s plans, strategies, goals, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries, as well as statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of the FCBP acquisition and other acquisitions. Forward-looking statements are typically identified with the use of terms such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue,” “intend,” and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements are inherently subject to risks and uncertainties and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements.
The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: our ability to efficiently consummate and integrate acquisitions, including the FCBP acquisition, into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting policies and practices or accounting standards, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as CECL model, which has changed how we estimate credit losses; uncertainty regarding the future of LIBOR; natural disasters, war or terrorist activities, or pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which we operate; increased unemployment rates and defaults as a result of the economic disruptions caused by COVID-19; the impact of governmental orders issued in response to COVID-19; and other risks discussed under the caption “Risk Factors” under Part 1, Item 1A of our 2020 Annual Report on Form 10-K, and other reports filed with the SEC, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.
Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the SEC which are available on our website at www.enterprisebank.com under “Investor Relations.”
23
Introduction
The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first three months of 2021 compared to the financial condition as of December 31, 2020. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three months ended March 31, 2021, compared to the linked fourth quarter (“linked quarter”) in 2020. In light of the nature of the Company’s business, which is not seasonal, the Company’s management believes that the comparison to the linked quarter is the most relevant to understand the financial results from management’s perspective. For purposes of the Quarterly Report on Form 10-Q, the Company is presenting a comparison to the corresponding year-to-date period in 2020. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2020.
Critical Accounting Policies
The Company’s critical accounting policies are considered important to the understanding of the Company’s financial condition and results of operations. These accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected.
A full description of our critical accounting policies and the impact and any associated risks related to those policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The three months ended March 31, 2021 continued to be characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.
Allowance for Credit Losses
Utilizing the CECL methodology, the Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted
24
for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company’s credit costs. The Company’s allowance for credit losses was $131.5 million at March 31, 2021 based on the weighting of the different economic scenarios. As a hypothetical example, if the Company had only used the upside scenario, the allowance would have decreased $21.9 million. Conversely, the allowance would have increased $19.4 million using only the downside scenario.
25
Executive Summary
The Company closed its acquisition of Seacoast on November 12, 2020. The results of operations of Seacoast are included in our results from this date forward, which may affect certain comparisons to the three months ended March 31, 2020.
Below are highlights of our financial performance for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020.
| (in thousands, except per share data) | At or for the three months ended | ||||||||||||||||
| March 31, 2021 | December 31, 2020 | March 31, 2020 | |||||||||||||||
| EARNINGS | |||||||||||||||||
| Total interest income | $ | 84,960 | $ | 84,113 | $ | 76,688 | |||||||||||
| Total interest expense | 5,837 | 6,667 | 13,320 | ||||||||||||||
| Net interest income | 79,123 | 77,446 | 63,368 | ||||||||||||||
| Provision for credit losses | 46 | 9,463 | 22,264 | ||||||||||||||
| Net interest income after provision for credit losses | 79,077 | 67,983 | 41,104 | ||||||||||||||
| Total noninterest income | 11,290 | 18,506 | 13,408 | ||||||||||||||
| Total noninterest expense | 52,884 | 51,050 | 38,673 | ||||||||||||||
| Income before income tax expense | 37,483 | 35,439 | 15,839 | ||||||||||||||
| Income tax expense | 7,557 | 6,508 | 2,971 | ||||||||||||||
| Net income | $ | 29,926 | $ | 28,931 | $ | 12,868 | |||||||||||
| Basic earnings per share | $ | 0.96 | $ | 1.00 | $ | 0.49 | |||||||||||
| Diluted earnings per share | $ | 0.96 | 1.00 | $ | 0.48 | ||||||||||||
| Return on average assets | 1.22 | % | 1.26 | % | 0.70 | % | |||||||||||
| Return on average common equity | 11.07 | % | 11.60 | 5.98 | % | ||||||||||||
Return on average tangible common equity1 | 14.92 | % | 15.73 | 8.22 | % | ||||||||||||
| Net interest margin (tax equivalent) | 3.50 | % | 3.66 | 3.79 | % | ||||||||||||
| Efficiency ratio | 58.49 | % | 53.20 | 50.37 | % | ||||||||||||
Core efficiency ratio1 | 55.02 | % | 50.93 | 51.21 | % | ||||||||||||
| Book value per common share | $ | 34.95 | $ | 34.57 | $ | 32.36 | |||||||||||
Tangible book value per common share1 | $ | 25.92 | 25.48 | $ | 23.38 | ||||||||||||
| ASSET QUALITY | |||||||||||||||||
| Net charge-offs (recoveries) | $ | 5,647 | $ | (612) | $ | 1,183 | |||||||||||
| Nonperforming loans | 36,659 | 38,507 | 37,204 | ||||||||||||||
| Classified assets | 114,713 | 123,808 | 104,754 | ||||||||||||||
| Nonperforming loans to total loans | 0.50 | % | 0.53 | % | 0.68 | % | |||||||||||
| Nonperforming assets to total assets | 0.42 | % | 0.45 | 0.56 | % | ||||||||||||
| ACL on loans to total loans | 1.80 | % | 1.89 | 1.69 | % | ||||||||||||
| Net charge-offs (recoveries) to average loans (annualized) | 0.32 | % | (0.04) | 0.09 | % | ||||||||||||
| (1) A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.” | |||||||||||||||||
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For the three months ended March 31, 2021 compared to the three months ended December 31, 2020, and March 31, 2020, the Company notes the following trends:
•The Company was active in continuing to support its customers in the PPP. Details of the PPP loans are noted in the following table:
| Quarter ended | |||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| PPP loans outstanding, net of deferred fees | $ | 737,660 | $ | 698,645 | |||||||
| Average PPP loans outstanding, net | 692,161 | 806,697 | |||||||||
| PPP average loan size | 220 | 187 | |||||||||
| PPP interest and fee income | 8,475 | 10,261 | |||||||||
| PPP deferred fees | 16,676 | 11,304 | |||||||||
| PPP average yield | 4.97 | % | 5.06 | % | |||||||
PPP has impacted the Company’s financial metrics in all periods since the quarter ending June 30, 2020 due to the Company’s participation that started in April 2020. Loan and deposit growth, earnings per share, and return on assets all increased due to the PPP. Conversely, net interest margin, the allowance coverage ratio, the leverage ratio and the ratio of tangible common equity to tangible assets all decreased. Since the PPP loans are guaranteed by the SBA, CET1, Tier 1 and total risk-based capital are not impacted by the PPP loan balances.
•Net income in the first quarter 2021 was $29.9 million, an increase of $1.0 million compared to the linked quarter and an increase of $17.1 million from the prior year quarter. EPS was $0.96 per diluted share for the first quarter 2021, compared to $1.00 and $0.48 per diluted share for the linked and prior year quarter, respectively. Merger-related expenses from the Seacoast transaction reduced net income $2.4 million in the current quarter, or $0.07 per share. The increase in net income and EPS from the prior year quarter was primarily due to a decrease in the provision for credit losses.
•Pre-provision net revenue1 (“PPNR”) of $40.7 million in the first quarter 2021 decreased $6.8 million and increased $2.6 million from the linked and prior year quarters, respectively. The decrease from the linked quarter was primarily due to a decline in tax credit revenue and PPP fees. The increase from the prior year quarter was primarily from the Seacoast acquisition that was completed in the fourth quarter and income from PPP that started in the second quarter of 2020.
1 PPNR is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.
•Net interest income of $79.1 million for the first quarter 2021 increased $1.7 million and $15.8 million from the linked quarter and prior year quarter, respectively. Net interest margin (“NIM”) was 3.50% for the first quarter 2021, compared to 3.66% and 3.79% for the linked quarter and prior year quarter, respectively.
•Noninterest income of $11.3 million for the first quarter 2021 decreased $7.2 million and $2.1 million from the linked quarter and prior year quarter, respectively. The decrease was primarily due to a decline in tax credit activity, which declined $5.1 million from the linked quarter and $3.1 million from the prior year quarter.
Balance sheet highlights:
•Loans – Total loans increased $63.8 million, or 3.6% on an annualized basis, from the linked quarter to $7.3 billion as of March 31, 2021. Year-over-year, loans grew 33.6% from $5.5 billion as of March 31, 2020, primarily due to Seacoast loans of $1.2 billion upon acquisition and PPP loans of $737.7 million. Average loans totaled $7.2 billion for the quarter ended March 31, 2021 compared to $6.8 billion and $5.4 billion for the linked and prior year quarters, respectively.
27
•Deposits – Total deposits increased $530.1 million, or 6.6%, from the linked quarter to $8.5 billion as of March 31, 2021. Year-over-year, deposits grew $2.5 billion, or 42.2%, from $6.0 billion as of March 31, 2020. Average deposits totaled $8.2 billion for the quarter ended March 31, 2021 compared to $7.3 billion and $5.8 billion for the linked and prior year quarters, respectively. Deposits from the Seacoast acquisition and PPP loans contributed to the increase over the prior year period. Specialty deposits increased $163.4 million over the linked quarter primarily attributable to community associations and sponsor finance. The St. Louis, Kansas City, and New Mexico regions also experienced significant growth of $132.5 million, $129.3 million, and $77.5 million, respectively, over the linked quarter. Noninterest deposit accounts represented 34.2% of total deposits and the loan to deposit ratio was 85.6% at March 31, 2021.
•Asset quality – The allowance for credit losses on loans to total loans was 1.80% at March 31, 2021, compared to 1.89% and 1.69% at December 31, 2020 and March 31, 2020, respectively. Nonperforming assets to total assets was 0.50% at March 31, 2021 compared to 0.45% and 0.56% at December 31, 2020 and March 31, 2020, respectively. The decline in the allowance to total loans ratio in the the first quarter 2021 was primarily due to loan charge-offs of $6.5 million, the majority of which had been reserved in a prior period. High-quality credit metrics, continued improvement in economic forecasts and relatively stable loan volumes resulted in a nominal provision for credit losses in the current quarter.
•Shareholders’ equity – Total shareholders’ equity was $1.1 billion and the tangible common equity to tangible assets ratio was 8.2% at March 31, 2021, compared to 8.4% at December 31, 2020. Balance sheet growth from the PPP was the primary cause of the decline in the tangible common equity to tangible assets ratio. The Bank’s regulatory capital ratios remain “well-capitalized,” with a common equity tier 1 ratio of 12.4% and a total risk-based capital ratio of 13.6% as of March 31, 2021. The Company’s common equity tier 1 ratio and total risk-based capital ratio was 11.0% and 15.1%, respectively, at March 31, 2021.
The Company has 95,907 shares available for repurchase under the existing common stock repurchase authorization.
The Company’s Board of Directors approved a quarterly dividend of $0.18 per common share, payable on June 30, 2021 to shareholders of record as of June 15, 2021.
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RESULTS OF OPERATIONS
Net Interest Income
Average Balance Sheet
The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis. Non-core acquired loans noted in the table below were acquired from the FDIC and were previously covered by shared-loss agreements.
| Three months ended March 31, | Three months ended December 31, | Three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Average Balance | Interest Income/Expense | Average Yield/ Rate | Average Balance | Interest Income/Expense | Average Yield/ Rate | Average Balance | Interest Income/Expense | Average Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable loans (1) | $ | 7,157,961 | $ | 76,674 | 4.34 | % | $ | 6,745,388 | $ | 75,638 | 4.46 | % | $ | 5,315,068 | $ | 66,799 | 5.05 | % | |||||||||||||||||||||||||||||||||||
| Tax-exempt loans (2) | 34,815 | 399 | 4.65 | 35,314 | 406 | 4.57 | 37,175 | 491 | 5.31 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans | 7,192,776 | 77,073 | 4.35 | 6,780,702 | 76,044 | 4.46 | 5,352,243 | 67,290 | 5.06 | ||||||||||||||||||||||||||||||||||||||||||||
| Taxable debt and equity investments | 849,123 | 4,719 | 2.25 | 885,484 | 5,195 | 2.33 | 1,117,249 | 7,730 | 2.78 | ||||||||||||||||||||||||||||||||||||||||||||
| Non-taxable debt and equity investments (2) | 568,182 | 4,099 | 2.93 | 510,322 | 3,791 | 2.96 | 239,719 | 1,978 | 3.46 | ||||||||||||||||||||||||||||||||||||||||||||
| Short-term investments | 679,659 | 189 | 0.11 | 347,629 | 120 | 0.14 | 92,248 | 300 | 1.31 | ||||||||||||||||||||||||||||||||||||||||||||
| Total securities and short-term investments | 2,096,964 | 9,007 | 1.74 | 1,743,435 | 9,106 | 2.08 | 1,449,216 | 10,008 | 2.80 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 9,289,740 | 86,080 | 3.76 | 8,524,137 | 85,150 | 3.97 | 6,801,459 | 77,298 | 4.58 | ||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-earning assets | 650,312 | 617,022 | 572,146 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 9,940,052 | $ | 9,141,159 | $ | 7,373,605 | |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 1,887,059 | $ | 328 | 0.07 | % | $ | 1,584,369 | $ | 265 | 0.07 | % | $ | 1,375,154 | $ | 1,338 | 0.39 | % | |||||||||||||||||||||||||||||||||||
| Money market accounts | 2,350,592 | 975 | 0.17 | 2,175,111 | 1,016 | 0.19 | 1,811,090 | 4,740 | 1.05 | ||||||||||||||||||||||||||||||||||||||||||||
| Savings | 654,662 | 48 | 0.03 | 620,248 | 46 | 0.03 | 542,993 | 143 | 0.11 | ||||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 537,166 | 1,312 | 0.99 | 567,456 | 1,739 | 1.22 | 793,213 | 3,667 | 1.86 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 5,429,479 | 2,663 | 0.20 | 4,947,184 | 3,066 | 0.25 | 4,522,450 | 9,888 | 0.88 | ||||||||||||||||||||||||||||||||||||||||||||
| Subordinated debentures | 203,694 | 2,819 | 5.61 | 203,564 | 2,824 | 5.52 | 141,295 | 1,919 | 5.46 | ||||||||||||||||||||||||||||||||||||||||||||
| FHLB advances | 50,000 | 195 | 1.58 | 244,730 | 603 | 0.98 | 220,453 | 895 | 1.63 | ||||||||||||||||||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase | 231,527 | 60 | 0.11 | 231,836 | 64 | 0.11 | 201,887 | 343 | 0.68 | ||||||||||||||||||||||||||||||||||||||||||||
| Other borrowed funds | 28,650 | 100 | 1.42 | 30,095 | 110 | 1.45 | 34,270 | 275 | 3.23 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 5,943,350 | 5,837 | 0.40 | 5,657,409 | 6,667 | 0.47 | 5,120,355 | 13,320 | 1.05 | ||||||||||||||||||||||||||||||||||||||||||||
| Noninterest bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Demand deposits | 2,777,900 | 2,363,890 | 1,315,267 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 122,321 | 127,843 | 62,948 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 8,843,571 | 8,149,142 | 6,498,570 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' equity | 1,096,481 | 992,017 | 865,035 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities & shareholders' equity | $ | 9,940,052 | $ | 9,141,159 | $ | 7,363,605 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 80,243 | $ | 78,483 | $ | 63,978 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread | 3.36 | % | 3.50 | % | 3.53 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin | 3.50 | % | 3.66 | % | 3.79 | % | |||||||||||||||||||||||||||||||||||||||||||||||
(1)Average balances include nonaccrual loans. Interest income includes loan fees of $8.1 million, $9.5 million, and $1.3 million for the three months ended March 31, 2021, December 31, 2020, and March 31, 2020 respectively.
(2)Interest income and yields have been adjusted to reflect a tax-equivalent basis.
29
Rate/Volume
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
| Quarter ended March 31, 2021 | Quarter ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| compared to | compared to | ||||||||||||||||||||||||||||||||||
| Quarter ended December 31, 2020 | Quarter ended March 31, 2020 | ||||||||||||||||||||||||||||||||||
| Increase (decrease) due to | Increase (decrease) due to | ||||||||||||||||||||||||||||||||||
| (in thousands) | Volume(1) | Rate(2) | Net | Volume(1) | Rate(2) | Net | |||||||||||||||||||||||||||||
| Interest earned on: | |||||||||||||||||||||||||||||||||||
| Taxable loans | $ | 3,492 | $ | (2,456) | $ | 1,036 | $ | 19,904 | $ | (10,030) | $ | 9,874 | |||||||||||||||||||||||
| Tax-exempt loans (3) | (10) | 3 | (7) | (31) | (61) | (92) | |||||||||||||||||||||||||||||
| Taxable debt and equity investments | (259) | (217) | (476) | (1,678) | (1,333) | (3,011) | |||||||||||||||||||||||||||||
| Non-taxable debt and equity investments (3) | 352 | (44) | 308 | 2,464 | (342) | 2,122 | |||||||||||||||||||||||||||||
| Short-term investments | 99 | (30) | 69 | 379 | (490) | (111) | |||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 3,674 | $ | (2,744) | $ | 930 | $ | 21,038 | $ | (12,256) | $ | 8,782 | |||||||||||||||||||||||
| Interest paid on: | |||||||||||||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 63 | $ | — | $ | 63 | $ | 360 | $ | (1,370) | $ | (1,010) | |||||||||||||||||||||||
| Money market accounts | 75 | (116) | (41) | 1,068 | (4,833) | (3,765) | |||||||||||||||||||||||||||||
| Savings | 2 | — | 2 | 26 | (121) | (95) | |||||||||||||||||||||||||||||
| Certificates of deposit | (94) | (333) | (427) | (962) | (1,393) | (2,355) | |||||||||||||||||||||||||||||
| Subordinated debentures | — | (5) | (5) | 847 | 53 | 900 | |||||||||||||||||||||||||||||
| FHLB advances | (640) | 232 | (408) | (673) | (27) | (700) | |||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase | (4) | — | (4) | 45 | (344) | (299) | |||||||||||||||||||||||||||||
| Other borrowings | (7) | (3) | (10) | (37) | (122) | (159) | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | (605) | (225) | (830) | 674 | (8,157) | (7,483) | |||||||||||||||||||||||||||||
| Net interest income | $ | 4,279 | $ | (2,519) | $ | 1,760 | $ | 20,364 | $ | (4,099) | $ | 16,265 | |||||||||||||||||||||||
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a tax equivalent basis.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Net interest income (on a tax equivalent basis) for the three months ended March 31, 2021 increased 2% over the linked quarter prior primarily due to the full quarter of earnings on acquired Seacoast assets and lower interest expense on paying liabilities, partially offset by reduced income from PPP loans and purchase accounting accretion. The decrease in interest expense was primarily due to the repayment of FHLB advances in the fourth quarter 2020 and a continued run-off of higher yielding certificates of deposit. Loan yields declined 11 basis points for the three months ended March 31, 2021 compared to the linked quarter primarily due to the decline in PPP fees accelerated on forgiveness and lower accretion on purchase accounting discounts due to reduced prepayments on acquired loans. An increase in short-term investment balances also negatively impacted the yield on earning assets, as the average balance increased $332.0 million in the linked quarter due to continued deposit growth and PPP loan forgiveness.
Compared to the prior year quarter, net interest income increased $16.3 million, primarily due to the Seacoast acquisition and income from PPP. These increases were partially offset by a decline in the yield on earning assets from 4.58% in the first quarter 2020 to 3.76% in the first quarter 2021, as the Federal Open Markets Committee reduced the target federal funds rate by 150 basis points in the first quarter of 2020.
30
NIM was 3.50% for the first quarter 2021, compared to 3.66% and 3.79% in the linked and prior year quarters, respectively. NIM decreased 16 basis points from the linked quarter primarily due to a 21 basis point decrease in earning asset yields. The decrease in the earning asset yield was primarily due to higher levels of cash related to PPP funds and deposit growth (13 bps), reduced income from PPP forgiveness (11 bps) and lower levels of income from purchase accounting (5 bps), partially offset by the full-quarter impact of acquired Seacoast assets (8 bps).
Compared to the prior year, NIM was impacted by the decline in short-term rates as approximately 60% of the loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR. LIBOR has declined significantly over the past year in conjunction with the decrease in the target federal funds rate discussed above. Higher levels of low-yielding, short-term investments also contributed to the decline in NIM, as the average balance increased $587.4 million.
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income for the periods indicated.
| Linked quarter comparison | Prior year comparison | ||||||||||||||||||||||||||||||||||||||||
| Quarter ended | Quarter ended | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | Increase (decrease) | March 31, 2020 | Increase (decrease) | ||||||||||||||||||||||||||||||||||||
| Service charges on deposit accounts | $ | 3,084 | $ | 3,160 | $ | (76) | (2) | % | $ | 3,143 | $ | (59) | (2) | % | |||||||||||||||||||||||||||
| Wealth management revenue | 2,483 | 2,449 | 34 | 1 | % | 2,501 | (18) | (1) | % | ||||||||||||||||||||||||||||||||
| Card services revenue | 2,496 | 2,511 | (15) | (1) | % | 2,247 | 249 | 11 | % | ||||||||||||||||||||||||||||||||
| Tax credit income (expense) | (1,041) | 4,048 | (5,089) | (126) | % | 2,036 | (3,077) | (151) | % | ||||||||||||||||||||||||||||||||
| Miscellaneous income | 4,268 | 6,338 | (2,070) | (33) | % | 3,481 | 787 | 23 | % | ||||||||||||||||||||||||||||||||
| Total noninterest income | $ | 11,290 | $ | 18,506 | $ | (7,216) | (39) | % | $ | 13,408 | $ | (2,118) | (16) | % | |||||||||||||||||||||||||||
Total noninterest income for the first quarter 2021 was $11.3 million, a decrease of $7.2 million from the linked quarter and a decrease of $2.1 million from the prior year quarter. The decrease from the linked quarter and prior year quarter was primarily due to a decline in tax credit income. Several tax credit projects that were expected to close in the first quarter 2021 were delayed and did not close. In addition, projects carried at fair value recognized a reduced valuation during the quarter due to an increase in the longer-term LIBOR swap rates used in the valuation process. The decline in miscellaneous income from the linked quarter was due to income earned on community development investments in the fourth quarter 2020 that did not reoccur in the current period.
Compared to the prior year quarter, the decline of $2.1 million in noninterest income was primarily due to the decline in tax credit income discussed above, partially offset by noninterest income contributions from the Seacoast acquisition of $1.1 million.
31
Noninterest Expense
The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.
| Linked quarter comparison | Prior year comparison | ||||||||||||||||||||||||||||||||||||||||
| Quarter ended | Quarter ended | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | Increase (decrease) | March 31, 2020 | Increase (decrease) | ||||||||||||||||||||||||||||||||||||
| Employee compensation and benefits | $ | 29,562 | $ | 26,174 | $ | 3,388 | 13 | % | $ | 21,685 | $ | 7,877 | 36 | % | |||||||||||||||||||||||||||
| Occupancy | 3,751 | $ | 3,517 | 234 | 7 | % | 3,347 | 404 | 12 | % | |||||||||||||||||||||||||||||||
| Data processing | 2,890 | $ | 2,657 | 233 | 9 | % | 2,082 | 808 | 39 | % | |||||||||||||||||||||||||||||||
| Professional fees | 988 | $ | 1,036 | (48) | (5) | % | 862 | 126 | 15 | % | |||||||||||||||||||||||||||||||
| Merger-related expenses | 3,142 | $ | 2,611 | 531 | 20 | % | — | 3,142 | — | % | |||||||||||||||||||||||||||||||
| Other | 12,551 | $ | 15,055 | (2,504) | (17) | % | 10,697 | 1,854 | 17 | % | |||||||||||||||||||||||||||||||
| Total noninterest expense | $ | 52,884 | $ | 51,050 | $ | 1,834 | 4 | % | $ | 38,673 | $ | 14,211 | 37 | % | |||||||||||||||||||||||||||
| Efficiency ratio | 58.49 | % | 53.20 | % | 5.29 | % | 50.37 | % | 8.12 | % | |||||||||||||||||||||||||||||||
Core efficiency ratio1 | 55.02 | % | 50.93 | % | 4.09 | % | 51.21 | % | 3.81 | % | |||||||||||||||||||||||||||||||
1A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.” | |||||||||||||||||||||||||||||||||||||||||
Noninterest expense was $52.9 million for the first quarter 2021, compared to $51.1 million for the linked quarter, and $38.7 million for the first quarter 2020. The increase from the linked quarter and prior year quarter was primarily due to having a full quarter of Seacoast operations, which totaled $10.2 million in the first quarter 2021. Merger-related expenses were $3.1 million and $2.6 million in the current and linked quarters, respectively. The Company does not expect to recognize any additional material merger expenses related to the Seacoast transaction.
For the first quarter 2021, the Company’s efficiency ratio was 58.5% compared to 53.2% and 50.4% for the linked quarter and prior year quarter, respectively. The Company’s core efficiency ratio2 was 55.0% for the quarter ended March 31, 2021, compared to 50.9% for the linked quarter and 51.2% for the prior year quarter.
2 Core efficiency ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.
Income Taxes
The Company’s effective tax rate was 20.2% for the first quarter 2021, compared to 18.4% and 18.8% for the linked and prior year quarters, respectively. The effective tax rate in the linked and prior year quarters was lower due to higher tax credits from tax planning activities and excess tax benefits on share-based compensation.
Summary Balance Sheet
| (in thousands) | March 31, 2021 | December 31, 2020 | Increase (decrease) | March 31, 2020 | Increase (decrease) | ||||||||||||||||||||||||||||||||||||
| Total cash and cash equivalents | $ | 883,815 | $ | 537,703 | $ | 346,112 | 64 | % | $ | 183,683 | $ | 700,132 | 381 | % | |||||||||||||||||||||||||||
| Securities | 1,412,719 | 1,400,039 | 12,680 | 1 | % | 1,340,446 | 72,273 | 5 | % | ||||||||||||||||||||||||||||||||
| Loans (excluding PPP) | 6,469,681 | 6,526,290 | (56,609) | (1) | % | 5,457,517 | 1,012,164 | 19 | % | ||||||||||||||||||||||||||||||||
| PPP loans, net | 737,660 | 698,645 | 39,015 | 6 | % | — | 737,660 | NM | |||||||||||||||||||||||||||||||||
| Total assets | 10,190,699 | 9,751,571 | 439,128 | 5 | % | 7,500,643 | 2,690,056 | 36 | % | ||||||||||||||||||||||||||||||||
| Deposits | 8,515,444 | 7,985,389 | 530,055 | 7 | % | 5,989,906 | 2,525,538 | 42 | % | ||||||||||||||||||||||||||||||||
| Total liabilities | 9,098,202 | 8,672,596 | 425,606 | 5 | % | 6,654,207 | 2,443,995 | 37 | % | ||||||||||||||||||||||||||||||||
| Total shareholders’ equity | 1,092,497 | 1,078,975 | 13,522 | 1 | % | 846,436 | 246,061 | 29 | % | ||||||||||||||||||||||||||||||||
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Assets
Loans by Type
The Company has a diversified loan portfolio, with no concentration of credit in any one economic sector; however, a substantial portion of the portfolio, including the C&I category, is secured by real estate. The ability of the Company’s borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market.
The following table summarizes the composition of the Company’s loan portfolio:
| (in thousands) | March 31, 2021 | December 31, 2020 | Increase (decrease) | ||||||||||||||||||||
| Commercial and industrial | $ | 3,079,643 | $ | 3,088,995 | $ | (9,352) | — | % | |||||||||||||||
| Commercial real estate - investor owned | 1,669,215 | 1,589,419 | 79,796 | 5 | % | ||||||||||||||||||
| Commercial real estate - owner occupied | 1,517,755 | 1,498,408 | 19,347 | 1 | % | ||||||||||||||||||
| Construction and land development | 510,501 | 546,686 | (36,185) | (7) | % | ||||||||||||||||||
| Residential real estate | 303,047 | 319,179 | (16,132) | (5) | % | ||||||||||||||||||
| Other | 208,620 | 182,248 | 26,372 | 14 | % | ||||||||||||||||||
| Loans held for investment | $ | 7,288,781 | $ | 7,224,935 | $ | 63,846 | 1 | % | |||||||||||||||
The following table illustrates the change in loans:
| (in thousands) | March 31, 2021 | December 31, 2020 | Increase (decrease) | ||||||||||||||||||||
| C&I | $ | 1,048,839 | $ | 1,103,060 | $ | (54,221) | (5) | % | |||||||||||||||
| CRE investor owned | 1,491,244 | 1,420,905 | 70,339 | 5 | % | ||||||||||||||||||
| CRE owner occupied | 805,581 | 825,846 | (20,265) | (2) | % | ||||||||||||||||||
| SBA Loans | 941,075 | 895,930 | 45,145 | 5 | % | ||||||||||||||||||
| SBA PPP loans | 737,660 | 698,645 | 39,015 | 6 | % | ||||||||||||||||||
| Sponsor finance | 394,207 | 396,487 | (2,280) | (1) | % | ||||||||||||||||||
| Life insurance premium financing | 543,084 | 534,092 | 8,992 | 2 | % | ||||||||||||||||||
| Residential real estate | 299,517 | 318,091 | (18,574) | (6) | % | ||||||||||||||||||
| Construction and land development | 438,303 | 474,399 | (36,096) | (8) | % | ||||||||||||||||||
| Tax credits | 387,968 | 382,602 | 5,366 | 1 | % | ||||||||||||||||||
| Other | 201,303 | 174,878 | 26,425 | 15 | % | ||||||||||||||||||
| Total loans | $ | 7,288,781 | $ | 7,224,935 | $ | 63,846 | 1 | % | |||||||||||||||
| Note: Certain prior period amounts have been reclassified among the categories to conform to the current period presentation. | |||||||||||||||||||||||
Loans totaled $7.3 billion at March 31, 2021, increasing $63.8 million, or 3.6% on an annualized basis, compared to the linked quarter. Year-over-year, loans increased $1.8 billion, or 33.6%. The year-over-year increase was primarily due to the Seacoast acquisition and PPP loans. The largest growth categories, excluding PPP, compared to the linked quarter were CRE, other, life insurance premium finance, and tax credits. Line draw utilization continues to decline. At March 31, 2021 line draw utilization was 37.6% compared to 38.1% and 47.3% at December 30, 2020 and March 31, 2020, respectively.
Specialized lending products, especially sponsor finance, life insurance premium financing, and tax credits, consist primarily of C&I loans. These loans are sourced through relationships developed with estate planning firms and private equity funds and are not bound geographically by our four markets. These specialized loan products offer opportunities to expand and diversify geographically by entering new markets. The Company continues to focus on originating high-quality C&I relationships, as they typically have variable interest rates and allow for cross selling
33
opportunities involving other banking products. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans. SBA loans are also generated on a national basis, and primarily consist of loans collateralized by first lien, owner-occupied real estate properties. These loans typically have a 75% guarantee from the SBA. Occasionally, the Company may sell the guaranteed portion of the loan and retain servicing rights. At March 31, 2021, the Company was servicing $288.6 million of SBA loans sold to third parties. Guaranteed portions of SBA loans totaled $617.1 million at March 31, 2021.
In response to the COVID-19 pandemic, the Company provided short-term payment deferrals to certain customers in 2020, primarily for 90 days or less. As of March 31, 2021, nearly all of these loans of have resumed payments and are no longer on deferral status.
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Provision and Allowance for Credit Losses
The adoption of CECL on January 1, 2020 increased the ACL on loans by $28.4 million, or 65%, and the allowance for unfunded commitments by $2.4 million. These increases were primarily offset in retained earnings and did not impact the consolidated statement of operations. The following table summarizes changes in the ACL on loans arising from CECL adoption; loan charge-offs and recoveries by loan category, and additions to the allowance charged to expense.
| Quarter ended | |||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Allowance, at beginning of period | $ | 136,671 | $ | 123,270 | $ | 43,288 | |||||||||||
| CECL adoption | — | — | 28,387 | ||||||||||||||
| PCD loans immediately charged-off | — | — | (1,680) | ||||||||||||||
| Allowance at beginning of period, adjusted for adoption of CECL | 136,671 | 123,270 | 69,995 | ||||||||||||||
| Initial allowance on acquired PCD loans | — | 3,524 | — | ||||||||||||||
| Provision for credit losses | 503 | 9,266 | 21,695 | ||||||||||||||
| Charge-offs: | |||||||||||||||||
| Commercial and industrial | (3,739) | (9) | (63) | ||||||||||||||
| Real estate: | |||||||||||||||||
| Commercial | (2,400) | — | (2) | ||||||||||||||
| Construction and land development | — | — | (31) | ||||||||||||||
| Residential | (271) | (81) | (122) | ||||||||||||||
| Other | (64) | (97) | (86) | ||||||||||||||
| Total charge-offs | (6,474) | (187) | (304) | ||||||||||||||
| Recoveries: | |||||||||||||||||
| Commercial and industrial | 327 | 243 | 504 | ||||||||||||||
| Real estate: | |||||||||||||||||
| Commercial | 43 | 28 | 83 | ||||||||||||||
| Construction and land development | 235 | 232 | 40 | ||||||||||||||
| Residential | 143 | 281 | 157 | ||||||||||||||
| Other | 79 | 14 | 17 | ||||||||||||||
| Total recoveries | 827 | 798 | 801 | ||||||||||||||
| Net charge-offs (recoveries) | (5,647) | 611 | 497 | ||||||||||||||
| Allowance, at end of period | $ | 131,527 | $ | 136,671 | $ | 92,187 | |||||||||||
The following table presents the components of the provision for credit losses:
| Quarter ended | |||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Provision for loan losses | $ | 503 | $ | 709 | $ | 21,695 | |||||||||||
| Day 2 provision on Seacoast acquired loans | — | 8,557 | — | ||||||||||||||
| Provision for off-balance sheet commitments | (370) | 527 | 849 | ||||||||||||||
| Provision for held-to-maturity securities | — | (195) | — | ||||||||||||||
| Recovery of accrued interest | (87) | (135) | (280) | ||||||||||||||
| Provision for credit losses | $ | 46 | $ | 9,463 | $ | 22,264 | |||||||||||
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The following table summarizes the allocation of the ACL:
| March 31, 2021 | December 31, 2020 | March 31, 2020 | |||||||||||||||||||||||||||||||||
| (in thousands) | Allowance | Percent | Allowance | Percent | Allowance | Percent | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 55,941 | 42.5 | % | $ | 58,812 | 43.0 | % | $ | 45,981 | 49.9 | % | |||||||||||||||||||||||
| Real estate: | |||||||||||||||||||||||||||||||||||
| Commercial | 53,324 | 40.5 | % | 49,074 | 35.9 | % | 29,369 | 31.9 | % | ||||||||||||||||||||||||||
| Construction and land development | 14,557 | 11.1 | % | 21,413 | 15.7 | % | 9,895 | 10.7 | % | ||||||||||||||||||||||||||
| Residential | 4,305 | 3.3 | % | 4,585 | 3.4 | % | 5,395 | 5.8 | % | ||||||||||||||||||||||||||
| Other | 3,400 | 2.6 | % | 2,787 | 2.0 | % | 1,547 | 1.7 | % | ||||||||||||||||||||||||||
| Total | $131,527 | 100.0 | % | $136,671 | 100.0 | % | $92,187 | 100.0 | % | ||||||||||||||||||||||||||
The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly through the provision of credit losses.
The provision for credit losses was $46 thousand in the first quarter 2020, compared to $9.5 million and $22.3 million in the linked and prior year quarters, respectively. While the majority of the $6.5 million of charge-offs in the first quarter 2021 were reserved in a prior period, a provision of approximately $3.0 million was recognized on a retail loan that defaulted and was partially charged-off in the quarter. The impact on the provision for credit losses of this loan was offset by an improvement in the economic forecast, net of qualitative adjustments. Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and unemployment. Forecasts of these metrics improved in both the fourth quarter 2020 and the first quarter 2021, which reduces the ACL and the provision for credit losses. In the first quarter 2021, a $2.3 million charge-off on a hotel loan was recognized. The Company qualitatively increased its reserve on hospitality loans as a result of this loss, partially offsetting the improvement in the economic forecast.
The $9.5 million provision for credit losses in the fourth quarter 2020 primarily consisted of the ACL recorded on the loans acquired in the Seacoast acquisition, commonly referred to as the “CECL double-count”. The $22.3 million provision for credit losses in the first quarter 2020 was primarily due to the dramatic decline in economic forecasts at the start of the COVID-19 pandemic.
To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize a reversal of provision for credit losses. Conversely, if economic conditions and the Company’s forecast worsens, the Company could recognize elevated levels of provision for credit losses. The provision is also reflective of charge-offs in the period.
The ACL on loans was 1.80% of loans at March 31, 2021, compared to 1.89% at December 31, 2020 and 1.69% at March 31, 2020.
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Nonperforming assets
The following table presents the categories of nonperforming assets and other ratios, excluding government guaranteed portions, as of the dates indicated.
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Nonaccrual loans | $ | 32,225 | $ | 34,818 | $ | 33,268 | |||||||||||
| Loans past due 90 days or more and still accruing interest | 1,114 | 130 | 126 | ||||||||||||||
| Troubled debt restructurings | 3,320 | 3,559 | 3,810 | ||||||||||||||
| Total nonperforming loans | 36,659 | 38,507 | 37,204 | ||||||||||||||
| Other real estate | 6,164 | 5,330 | 5,072 | ||||||||||||||
| Total nonperforming assets | $ | 42,823 | $ | 43,837 | $ | 42,276 | |||||||||||
| Total assets | $ | 10,190,699 | $ | 9,751,571 | $ | 7,500,643 | |||||||||||
| Total loans | 7,288,781 | 7,224,935 | 5,457,517 | ||||||||||||||
| Nonperforming loans to total loans | 0.50 | % | 0.53 | % | 0.68 | % | |||||||||||
| Nonperforming assets to total assets | 0.42 | % | 0.45 | % | 0.56 | % | |||||||||||
| ACL on loans to nonperforming loans | 359 | % | 355 | % | 248 | % | |||||||||||
Nonperforming loans decreased $1.8 million to $36.7 million at March 31, 2021 from $38.5 million at December 31, 2020. The addition of a $1.5 million nonaccrual retail loan was offset by nonaccrual charge-offs of $3.3 million. The increase in loans past due 90 days or more and still accruing interest was due to one C&I loan of $0.9 million in process of renewal. The increase in other real estate of $0.9 million in the first quarter 2021 was primarily due to the addition of a $1.2 million property in California that has a 75% SBA guarantee.
Nonperforming loans
Nonperforming loans based on loan type were as follows:
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Commercial and industrial | $ | 22,508 | $ | 21,770 | $ | 26,531 | |||||||||||
| Commercial real estate | 9,968 | 12,519 | 6,225 | ||||||||||||||
| Construction and land development | — | — | 214 | ||||||||||||||
| Residential real estate | 3,945 | 4,189 | 4,154 | ||||||||||||||
| Other | 238 | 29 | 80 | ||||||||||||||
| Total | $ | 36,659 | $ | 38,507 | $ | 37,204 | |||||||||||
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The following table summarizes the changes in nonperforming loans:
| Quarter ended | |||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Nonperforming loans, beginning of period | $ | 38,507 | $ | 39,623 | $ | 26,425 | |||||||||||
| CECL adoption | — | — | 8,462 | ||||||||||||||
| PCD loans immediately charged off | — | — | (1,680) | ||||||||||||||
| Nonperforming loans, beginning of period | $ | 38,507 | $ | 39,623 | $ | 33,207 | |||||||||||
| Additions to nonaccrual loans | 5,226 | 3,150 | 2,569 | ||||||||||||||
| Additions to restructured loans | — | — | 3,750 | ||||||||||||||
| Charge-offs | (6,474) | (187) | (390) | ||||||||||||||
| Other principal reductions | (1,584) | (2,388) | (1,808) | ||||||||||||||
| Moved to other real estate | — | (537) | — | ||||||||||||||
| Moved to performing | — | (355) | — | ||||||||||||||
| Change in loans past due 90 days or more and still accruing interest | 984 | (799) | (124) | ||||||||||||||
| Nonperforming loans, end of period | $ | 36,659 | $ | 38,507 | $ | 37,204 | |||||||||||
Other real estate
Other real estate was $6.2 million at March 31, 2021 compared to $5.3 million at December 31, 2020.
The following table summarizes the changes in other real estate:
| Three months ended | |||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Other real estate beginning of period | $ | 5,330 | $ | 4,835 | |||||||
| Additions and expenses capitalized to prepare property for sale | 1,236 | 495 | |||||||||
| Sales | (402) | — | |||||||||
| Other real estate end of period | $ | 6,164 | $ | 5,330 | |||||||
Writedowns in fair value are recorded in other noninterest expense based on current market activity shown in the appraisals.
Deposits
| (in thousands) | March 31, 2021 | December 31, 2020 | Increase (decrease) | ||||||||||||||||||||
| Noninterest-bearing deposit accounts | $ | 2,910,216 | $ | 2,711,828 | $ | 198,388 | 7 | % | |||||||||||||||
| Interest-bearing transaction accounts | 1,990,308 | 1,768,497 | 221,811 | 13 | % | ||||||||||||||||||
| Money market accounts | 2,405,451 | 2,327,066 | 78,385 | 3 | % | ||||||||||||||||||
| Savings accounts | 688,118 | 627,903 | 60,215 | 10 | % | ||||||||||||||||||
| Certificates of deposit: | |||||||||||||||||||||||
| Brokered | 50,209 | 50,209 | — | — | % | ||||||||||||||||||
| Other | 471,142 | 499,886 | (28,744) | (6) | % | ||||||||||||||||||
| Total deposits | $ | 8,515,444 | $ | 7,985,389 | $ | 530,055 | 7 | % | |||||||||||||||
| Core deposits / total deposits | 94 | % | 93 | % | |||||||||||||||||||
| Demand deposits / total deposits | 34 | % | 34 | % | |||||||||||||||||||
38
Total deposits at March 31, 2021 were $8.5 billion, an increase of $530.1 million from December 31, 2020, and an increase of $2.5 billion from March 31, 2020.
Core deposits, defined as total deposits excluding certificates of deposits, were $8.0 billion at March 31, 2021, an increase of $558.8 million from the linked quarter. Money market and savings accounts increased $138.6 million compared to the linked quarter, while interest-bearing and noninterest-bearing deposits increased $221.8 million and $198.4 million, respectively. Noninterest-bearing deposits were $2.9 billion at March 31, 2021, or 34.2% of total deposits. Certificates of deposit decreased $28.7 million from the linked quarter and $244.6 million from the prior year quarter. The Company has a specialty deposit portfolio focusing on property management, community associations, 1031 exchange and escrow industries, in addition to deposits related to its specialty lending products. These deposits totaled $1.3 billion at March 31, 2021 and $1.1 billion at December 31, 2020.
The total cost of deposits was 0.13% for the current quarter compared to 0.17% and 0.68% for the linked quarter and prior year quarter, respectively.
Shareholders’ Equity
Shareholders’ equity totaled $1.1 billion at March 31, 2021, an increase of $13.5 million from December 31, 2020. Significant activity during the first three months of 2021 was as follows:
•increase from net income of $29.9 million,
•net decrease in fair value of securities and cash flow hedges of $10.9 million, and
•decrease from dividends paid on common shares of $5.6 million.
Liquidity and Capital Resources
Liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are changes in deposit levels, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as the core deposit base and loans and securities repayments and maturities.
Additionally, liquidity is provided from lines of credit with the FHLB, the Federal Reserve, and correspondent banks; the ability to acquire large and brokered deposits, sales of the securities portfolio, and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.
The Company’s Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank’s Board of Directors. Our liquidity position is monitored daily. Our liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.
Liquidity from asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $883.8 million at March 31, 2021, compared to $537.7 million at December 31, 2020. The low interest rate environment, coupled with an uncertain outlook and government stimulus, such as the PPP, have increased liquidity for the banking industry, including the Company. Investment securities are another important tool to the Company’s liquidity objectives. Securities totaled $1.4 billion at March 31, 2021, and included $466 million pledged as
39
collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $950 million could be pledged or sold to enhance liquidity, if necessary.
Liability liquidity funding sources are available to increase financial flexibility. In addition to amounts currently borrowed, at March 31, 2021, the Bank could borrow an additional $819 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $923 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $90 million.
In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $2.1 billion in unused commitments as of March 31, 2021. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.
At the holding company level, our primary funding sources are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings) and debt instruments. The main use of this liquidity is to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The holding company maintains a revolving line of credit for an aggregate amount up to $25 million, all of which is available at March 31, 2021. The line of credit has a one-year term and matures in February 2022. The proceeds can be used for general corporate purposes.
The Company has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and debt securities. The Company’s ability to offer securities pursuant to the registration statement depends on market conditions and the Company’s continuing eligibility to use the Form S-3 under rules of the SEC.
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have a negative impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process. The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the Company’s shareholders or for other cash needs.
Capital Resources
EFSC and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require EFSC and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of March 31, 2021, and December 31, 2020, EFSC and the Bank met all capital adequacy requirements to which they are subject.
40
The Bank met the definition of “well-capitalized” at March 31, 2021.
The following table summarizes EFSC’s various capital ratios at the dates indicated:
| (in thousands) | March 31, 2021 | December 31, 2020 | Minimum Capital Requirement Including Capital Conservation Buffer | ||||||||||||||
| Total capital to risk-weighted assets | 15.1 | % | 14.9 | % | 10.5 | % | |||||||||||
| Tier 1 capital to risk-weighted assets | 12.3 | % | 12.1 | % | 8.5 | % | |||||||||||
| Common equity tier 1 capital to risk-weighted assets | 11.0 | % | 10.9 | % | 7.0 | % | |||||||||||
| Leverage ratio (Tier 1 capital to average assets) | 9.5 | % | 10.0 | % | 4.0 | % | |||||||||||
Tangible common equity to tangible assets1 | 8.2 | % | 8.4 | % | |||||||||||||
| Total risk-based capital | $ | 1,120,678 | $ | 1,094,601 | |||||||||||||
| Tier 1 capital | 914,459 | 889,527 | |||||||||||||||
| Common equity tier 1 capital | 820,806 | 795,873 | |||||||||||||||
1 Not a required regulatory capital ratio | |||||||||||||||||
The following table summarizes the Bank’s various capital ratios at the dates indicated:
| (in thousands) | March 31, 2021 | December 31, 2020 | Well Capitalized Minimum % | Minimum Capital Requirement Including Capital Conservation Buffer | |||||||||||||||||||
| Total capital to risk-weighted assets | 13.6 | % | 13.7 | % | 10.0 | % | 10.5 | % | |||||||||||||||
| Tier 1 capital to risk-weighted assets | 12.4 | % | 12.5 | % | 8.0 | % | 8.5 | % | |||||||||||||||
| Common equity tier 1 capital to risk-weighted assets | 12.4 | % | 12.5 | % | 6.5 | % | 7.0 | % | |||||||||||||||
| Leverage ratio (Tier 1 capital to average assets) | 9.5 | % | 10.3 | % | 5.0 | % | 4.0 | % | |||||||||||||||
| Total risk-based capital | $ | 1,008,945 | $ | 1,004,839 | |||||||||||||||||||
| Tier 1 capital | 916,253 | 913,169 | |||||||||||||||||||||
| Common equity tier 1 capital | 916,200 | 913,116 | |||||||||||||||||||||
In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital followed by a three-year transition period. The Company adopted CECL on January 1, 2020. For additional information regarding the adoption of CECL, see “Item 1. Note 1 – Summary of Significant Accounting Policies.” The Company has elected the transition provisions provided by the U.S. banking agencies’ rule. Accordingly, the regulatory capital effects resulting from adoption of the CECL methodology will not be fully reflected in the Company’s regulatory capital until January 1, 2025. Based on the Company’s regulatory capital position as of March 31, 2021, the estimated impact of adopting CECL would reduce the Common Equity Tier 1 Capital ratio by approximately 45 basis points. The actual impact of adopting CECL on the regulatory capital ratios may change as the final impact is not determined until the end of the second year of the transition period.
The Company believes the tangible common equity ratio is an important measure of capital strength, even though it is considered a non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”
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Use of Non-GAAP Financial Measures:
The Company’s accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as tangible common equity, PPNR, PPNR ROAA, financial metrics adjusted for PPP impact, core efficiency ratio, and the tangible common equity ratio, in this release that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.
The Company considers its tangible common equity, PPNR, PPNR ROAA, financial metrics adjusted for PPP impact, core efficiency ratio, and the tangible common equity ratio, collectively “core performance measures,” presented in this earnings release and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures exclude certain other income and expense items, such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.
The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company’s performance and capital strength. The Company’s management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company’s operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the attached tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measures for the periods indicated.
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Core Performance Measures
| For the three months ended | |||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Net interest income | $ | 79,123 | $ | 77,446 | $ | 63,368 | |||||||||||
| Less: Incremental accretion income | — | 856 | 1,273 | ||||||||||||||
| Core net interest income | 79,123 | 76,590 | 62,095 | ||||||||||||||
| Total noninterest income | 11,290 | 18,506 | 13,408 | ||||||||||||||
| Less: Gain on sale of investment securities | — | — | 4 | ||||||||||||||
| Core noninterest income | 11,290 | 18,506 | 13,404 | ||||||||||||||
| Total core revenue | 90,413 | 95,096 | 75,499 | ||||||||||||||
| Total noninterest expense | 52,884 | 51,050 | 38,673 | ||||||||||||||
| Less: Other expenses related to non-core acquired loans | — | 8 | 12 | ||||||||||||||
| Less: Merger related expenses | 3,142 | 2,611 | — | ||||||||||||||
| Core noninterest expense | 49,742 | 48,431 | 38,661 | ||||||||||||||
| Core efficiency ratio | 55.02 | % | 50.93 | % | 51.21 | % | |||||||||||
Tangible Common Equity Ratio
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Total shareholders' equity | $ | 1,092,497 | $ | 1,078,975 | |||||||
| Less: Goodwill | 260,567 | 260,567 | |||||||||
| Less: Intangible assets | 21,670 | 23,084 | |||||||||
| Tangible common equity | $ | 810,260 | $ | 795,324 | |||||||
| Total assets | $ | 10,190,699 | $ | 9,751,571 | |||||||
| Less: Goodwill | 260,567 | 260,567 | |||||||||
| Less: Intangible assets, net | 21,670 | 23,084 | |||||||||
| Tangible assets | $ | 9,908,462 | $ | 9,467,920 | |||||||
| Tangible common equity to tangible assets | 8.18 | % | 8.40 | % | |||||||
Average Shareholders’ Equity and Average Tangible Common Equity
| For the three months ended | |||||||||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | ||||||||||||||
| Average shareholder’s equity | $ | 1,096,481 | $ | 992,017 | $ | 865,035 | |||||||||||
| Less: Average goodwill | 260,567 | 237,639 | 210,344 | ||||||||||||||
| Less: Average intangible assets, net | 22,346 | 22,565 | 25,301 | ||||||||||||||
| Average tangible common equity | $ | 813,568 | $ | 731,813 | $ | 629,390 | |||||||||||
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Critical Accounting Policies
The impact and any associated risks related to the Company’s critical accounting policies on business operations are described throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed description on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures set forth in this item are qualified by the section captioned “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” included in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Interest Rate Risk
Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against deterioration that could be caused by certain interest rate scenarios. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to minimize or eliminate any impact from market interest rate changes. In order to measure earnings sensitivity to changing rates, the Company uses an earnings simulation model.
The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling. The simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. The Company uses an earning sensitivity model to track earnings sensitivity to a positive or negative 100 basis points parallel rate shock.
The following table summarizes the expected impact of interest rate shocks on net interest income:
Rate Shock1 | Annual % change in net interest income | ||||
| + 300 bp | 12.2% | ||||
| + 200 bp | 7.1% | ||||
| + 100 bp | 2.3% | ||||
1 Due to the current levels of interest rates, the downward shock scenarios are not shown. | |||||
In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic interest rate scenarios. In general, changes in interest rates are positively correlated with changes in net interest income.
The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources. At March 31, 2021, the Company had $62.0 million in derivative
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contracts used to manage interest rate risk. Derivative financial instruments are also discussed in “Item 1. Note 6 – Derivative Financial Instruments.”
At March 31, 2021, the Company had $4.1 billion in variable rate loans including $2.4 billion based on LIBOR and $1.3 billion based on Prime. Approximately 87% of the LIBOR based loans are indexed to one-month LIBOR. Of the total variable rate loans, $1.7 billion, or 23%, had a rate floor of which approximately $1.6 billion, or 92%, were currently priced at the floor.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of March 31, 2021. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of March 31, 2021 to provide reasonable assurance of the achievement of the objectives described above.
Changes to Internal Controls
There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such legal proceedings pending or threatened against the Company or its subsidiaries, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
ITEM 1A: RISK FACTORS
For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2020. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
On April 29, 2021, the Company’s Board of Directors approved a new share repurchase program, which will replace and supersede the prior share repurchase program initially announced on May 4, 2015. Pursuant to the new share repurchase program, the Company will be authorized to repurchase up to 2,000,000 shares of its common stock from time to time in the open market or through privately negotiated transactions. The amount approved for repurchase pursuant to the new share repurchase program represents approximately 6% of the Company’s issued and outstanding shares of common stock as of March 31, 2021, and approximately 5% of the Company’s pro forma issued and outstanding shares of common stock as of March 31, 2021, taking into account the anticipated number of shares issuable to FCBP’s shareholders based upon FCBP’s issued and outstanding shares of capital stock as of that date.
ITEM 6: EXHIBITS
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated April 26, 2021, by and among Enterprise Financial Services Corp, Enterprise Bank & Trust, First Choice Bancorp and First Choice Bank (incorporated herein by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on April 26, 2021 (File No. 001-15373)).
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4.1 Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Securities and Exchange Commission upon request.
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definitions Linkbase Document.
104 The cover page of Enterprise Financial Services Corp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (contained in Exhibit 101).
* Filed herewith
** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with two (**) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on the day of April 30, 2021.
| ENTERPRISE FINANCIAL SERVICES CORP | |||||||||||
| By: | /s/ James B. Lally | ||||||||||
| James B. Lally | |||||||||||
| Chief Executive Officer | |||||||||||
| By: | /s/ Keene S. Turner | ||||||||||
| Keene S. Turner | |||||||||||
| Chief Financial Officer | |||||||||||
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