Origin Bancorp, Inc. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number 001-38487
Origin Bancorp, Inc.
(Exact name of registrant as specified in its charter)
| Louisiana | 72-1192928 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
500 South Service Road East
Ruston, Louisiana 71270
(318) 255-2222
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Exchange on which registered | ||||||
| Common Stock, par value $5.00 per share | OBK | New York Stock Exchange | ||||||
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| 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 Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 30,906,716 shares of Common Stock, par value $5.00 per share, were issued and outstanding at October 31, 2023.
ORIGIN BANCORP, INC.
FORM 10-Q
SEPTEMBER 30, 2023
INDEX
| Page | |||||
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains 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. Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “estimates,” “expects,” “foresees,” “intends,” “plans,” “projects,” and similar expressions or future or conditional verbs such as “could,” “may,” “might,” “should,” “will,” and “would,” or variations or negatives of such terms are generally forward-looking in nature and not historical facts, although not all forward-looking statements include the foregoing words. Forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
•economic uncertainty or a deterioration in economic conditions or slowdowns in economic growth in the United States generally, and particularly in the market areas in which we operate and in which our loans are concentrated, including declines in home sale volumes and financial stress on borrowers (consumers and businesses) as a result of higher interest rates or an uncertain economic environment;
•adverse developments in the banking industry highlighted by high-profile bank failures and the impact of such developments on customer confidence, liquidity and regulatory responses to these developments (including increases in the cost of our deposit insurance assessments), our ability to effectively manage our liquidity risk and any growth plans and the availability of capital and funding;
•our ability to comply with applicable capital and liquidity requirements, including our ability to generate liquidity internally or raise capital on favorable terms, including continued access to the debt and equity capital markets;
•fluctuating and/or volatile interest rates, capital markets and the impact of inflation on our business and financial results, as well as the impact on our customers (including the velocity of loan repayment);
•changes in the interest rate environment may reduce interest margins;
•prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period;
•global business and economic conditions and in the financial services industry, nationally and within our local market areas;
•an increase in unemployment levels, slowdowns in economic growth and threats of recession;
•customer income, creditworthiness and confidence, spending and savings that may affect customer bankruptcies, defaults, charge-offs and deposit activity;
•the credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial loans in our loan portfolio;
•the credit risks of lending activities, including our ability to estimate credit losses and the allowance for credit losses, as well as the effects of changes in the level of, and trends in, loan delinquencies and write-offs.
•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in merger/acquisition transactions;
•changes in the prices, values and sales volumes of residential and commercial real estate, especially as they relate to the value of collateral supporting the Company’s loans;
3
•natural disasters and adverse weather events (including hurricanes), acts of terrorism, an outbreak of hostilities, (including the impacts related to or resulting from Russia’s military action in Ukraine, and the ongoing conflict in Israel and the surrounding region, including the imposition of additional sanctions and export controls, as well as the broader impacts to financial markets and the global macroeconomic and geopolitical environments), regional or national protests and civil unrest (including any resulting branch closures or property damage), widespread illness or public health outbreaks or other international or domestic calamities, and other matters beyond our control;
•system failures, cybersecurity threats and/or security breaches and the cost of defending against them and any reputational or other financial risks following such a cybersecurity incident;
•the discontinuation of LIBOR (and its replacement with alternatives) could result in financial, operational, legal, reputational or compliance risks to us;
•deterioration of our asset quality;
•risks associated with widespread inflation or deflation;
•the risks of mergers, acquisitions and divestitures, including our ability to continue to identify acquisition or merger targets and successfully acquire and integrate desirable financial institutions;
•changes in the value of collateral securing our loans;
•our ability to anticipate interest rate changes and manage interest rate risk;
•the effectiveness of our risk management framework and quantitative models;
•our inability to receive dividends from our bank subsidiary and to service debt, pay dividends to our common stockholders, repurchase our shares of common stock and satisfy obligations as they become due;
•changes in our operation or expansion strategy or our ability to prudently manage our growth and execute our strategy;
•changes in management personnel;
•our ability to maintain important deposit customer relationships, our reputation or otherwise avoid liquidity risks;
•increasing costs as we grow and compete for deposits;
•operational risks associated with our business;
•increased competition in the financial services industry, particularly from regional and national institutions, as well as fintech companies, may accelerate due to the current economic environment;
•our level of nonperforming assets and the costs associated with resolving any problem loans, including litigation and other costs;
•potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings or enforcement actions;
•risks related to environmental, social and governance (“ESG”) strategies and initiatives, the scope and pace of which could alter our reputation and shareholder, associate, customer and third-party affiliations;
•changes in the utility of our non-GAAP measurements and their underlying assumptions or estimates;
•changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, as well as tax, trade, monetary and fiscal matters;
•periodic changes to the extensive body of accounting rules and best practices, may change the treatment and recognition of critical financial line items and affect our profitability;
4
•further government intervention in the U.S. financial system;
•compliance with governmental and regulatory requirements, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and others relating to banking, consumer protection, securities and tax matters;
•a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;
• the risk that the regulatory environment may not be conducive to or may prohibit the consummation of future mergers and/or business combinations, may increase the length of time and amount of resources required to consummate such transactions, and may reduce the anticipated benefit; and
•our ability to manage the risks involved in the foregoing.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. In addition, as a result of these and other factors, our past financial performance should not be relied upon as an indication of future performance. Accordingly, you should not place undue reliance on any forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties emerge from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
5
ORIGIN BANCORP, INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets | (Unaudited) | ||||||||||
| Cash and due from banks | $ | 141,705 | $ | 150,180 | |||||||
| Interest-bearing deposits in banks | 163,573 | 208,792 | |||||||||
| Total cash and cash equivalents | 305,278 | 358,972 | |||||||||
| Securities: | |||||||||||
| Available for sale | 1,290,839 | 1,641,484 | |||||||||
Held to maturity, net allowance for credit losses of $890 and $899 at September 30, 2023, and December 31, 2022, respectively (fair value of $11,005 and $11,970 at September 30, 2023, and December 31, 2022, respectively) | 10,790 | 11,275 | |||||||||
| Securities carried at fair value through income | 6,772 | 6,368 | |||||||||
| Total securities | 1,308,401 | 1,659,127 | |||||||||
| Non-marketable equity securities held in other financial institutions | 63,842 | 67,378 | |||||||||
Loans held for sale ($14,944 and $25,389 at fair value at September 30, 2023, and December 31, 2022, respectively) | 14,944 | 49,957 | |||||||||
Loans, net of allowance for credit losses of $95,177 and $87,161 at September 30, 2023, and December 31, 2022, respectively | 7,472,886 | 7,002,861 | |||||||||
| Premises and equipment, net | 111,700 | 100,201 | |||||||||
| Mortgage servicing rights | 19,189 | 20,824 | |||||||||
| Cash surrender value of bank-owned life insurance | 39,688 | 39,040 | |||||||||
| Goodwill | 128,679 | 128,679 | |||||||||
| Other intangible assets, net | 42,460 | 49,829 | |||||||||
| Accrued interest receivable and other assets | 226,236 | 209,199 | |||||||||
| Total assets | $ | 9,733,303 | $ | 9,686,067 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Noninterest-bearing deposits | $ | 2,008,671 | $ | 2,482,475 | |||||||
| Interest-bearing deposits | 4,728,263 | 4,505,940 | |||||||||
| Time deposits | 1,637,554 | 787,287 | |||||||||
| Total deposits | 8,374,488 | 7,775,702 | |||||||||
| Federal Home Loan Bank (“FHLB”) advances, repurchase obligations and other borrowings | 12,213 | 639,230 | |||||||||
| Subordinated indebtedness, net | 196,825 | 201,765 | |||||||||
| Accrued expenses and other liabilities | 150,832 | 119,427 | |||||||||
| Total liabilities | 8,734,358 | 8,736,124 | |||||||||
| Stockholders’ equity: | |||||||||||
Common stock ($5.00 par value; 50,000,000 shares authorized; 30,906,716 and 30,746,600 shares issued at September 30, 2023, and December 31, 2022, respectively) | 154,534 | 153,733 | |||||||||
| Additional paid‑in capital | 525,434 | 520,669 | |||||||||
| Retained earnings | 491,706 | 435,416 | |||||||||
| Accumulated other comprehensive loss | (172,729) | (159,875) | |||||||||
| Total stockholders’ equity | 998,945 | 949,943 | |||||||||
| Total liabilities and stockholders’ equity | $ | 9,733,303 | $ | 9,686,067 | |||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
6
ORIGIN BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Interest and dividend income | |||||||||||||||||||||||
| Interest and fees on loans | $ | 121,204 | $ | 79,803 | $ | 343,142 | $ | 186,972 | |||||||||||||||
| Investment securities-taxable | 8,194 | 7,801 | 24,658 | 20,030 | |||||||||||||||||||
| Investment securities-nontaxable | 1,281 | 2,151 | 3,974 | 5,044 | |||||||||||||||||||
| Interest and dividend income on assets held in other financial institutions | 4,772 | 1,482 | 16,132 | 3,262 | |||||||||||||||||||
| Total interest and dividend income | 135,451 | 91,237 | 387,906 | 215,308 | |||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest-bearing deposits | 55,599 | 7,734 | 136,686 | 13,689 | |||||||||||||||||||
| FHLB advances and other borrowings | 3,207 | 2,717 | 17,038 | 5,203 | |||||||||||||||||||
| Subordinated indebtedness | 2,515 | 2,263 | 7,614 | 5,887 | |||||||||||||||||||
| Total interest expense | 61,321 | 12,714 | 161,338 | 24,779 | |||||||||||||||||||
Net interest income | 74,130 | 78,523 | 226,568 | 190,529 | |||||||||||||||||||
| Provision for credit losses | 3,515 | 16,942 | 14,018 | 20,067 | |||||||||||||||||||
| Net interest income after provision for credit losses | 70,615 | 61,581 | 212,550 | 170,462 | |||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Insurance commission and fee income | 6,443 | 5,666 | 19,639 | 17,815 | |||||||||||||||||||
| Service charges and fees | 4,621 | 4,734 | 13,914 | 13,006 | |||||||||||||||||||
| Mortgage banking revenue (loss) | 892 | (929) | 4,075 | 5,521 | |||||||||||||||||||
| Other fee income | 944 | 1,162 | 2,856 | 2,398 | |||||||||||||||||||
| Swap fee income | 366 | 25 | 1,081 | 165 | |||||||||||||||||||
| (Loss) gain on sales of securities, net | (7,173) | 1,664 | (7,029) | 1,664 | |||||||||||||||||||
| Limited partnership investment (loss) income | (425) | 112 | (128) | 31 | |||||||||||||||||||
| Gain (loss) on sales and disposals of other assets, net | 45 | 70 | (3) | (209) | |||||||||||||||||||
| Other income | 12,406 | 1,219 | 15,734 | 3,454 | |||||||||||||||||||
| Total noninterest income | 18,119 | 13,723 | 50,139 | 43,845 | |||||||||||||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
7
ORIGIN BANCORP, INC.
Consolidated Statements of Income - Continued
(Unaudited)
(Dollars in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 34,624 | $ | 31,834 | $ | 102,888 | $ | 85,632 | |||||||||||||||
| Occupancy and equipment, net | 6,790 | 5,399 | 19,871 | 14,340 | |||||||||||||||||||
| Data processing | 2,775 | 2,689 | 8,528 | 7,588 | |||||||||||||||||||
| Intangible asset amortization | 2,264 | 1,872 | 7,369 | 2,934 | |||||||||||||||||||
| Office and operations | 2,868 | 2,121 | 7,887 | 5,843 | |||||||||||||||||||
| Professional services | 1,409 | 1,188 | 4,491 | 2,668 | |||||||||||||||||||
| Loan-related expenses | 1,220 | 1,599 | 3,941 | 4,421 | |||||||||||||||||||
| Advertising and marketing | 1,371 | 1,196 | 4,296 | 2,926 | |||||||||||||||||||
| Electronic banking | 1,384 | 1,087 | 3,609 | 2,900 | |||||||||||||||||||
| Franchise tax expense | 520 | 957 | 2,392 | 2,565 | |||||||||||||||||||
| Regulatory assessments | 1,913 | 877 | 4,596 | 2,305 | |||||||||||||||||||
| Communications | 390 | 279 | 1,181 | 812 | |||||||||||||||||||
| Merger-related expense | — | 3,614 | — | 4,992 | |||||||||||||||||||
| Other expenses | 1,135 | 1,529 | 3,261 | 3,239 | |||||||||||||||||||
| Total noninterest expense | 58,663 | 56,241 | 174,310 | 143,165 | |||||||||||||||||||
| Income before income tax expense | 30,071 | 19,063 | 88,379 | 71,142 | |||||||||||||||||||
| Income tax expense | 5,758 | 2,820 | 18,004 | 12,905 | |||||||||||||||||||
| Net income | $ | 24,313 | $ | 16,243 | $ | 70,375 | $ | 58,237 | |||||||||||||||
| Basic earnings per common share | $ | 0.79 | $ | 0.57 | $ | 2.29 | $ | 2.31 | |||||||||||||||
| Diluted earnings per common share | 0.79 | 0.57 | 2.28 | 2.30 | |||||||||||||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
8
ORIGIN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 24,313 | $ | 16,243 | $ | 70,375 | $ | 58,237 | |||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Securities available for sale and transferred securities: | |||||||||||||||||||||||
| Net unrealized holding gain (loss) arising during the period | (32,357) | (73,757) | (23,355) | (228,605) | |||||||||||||||||||
| Reclassification adjustment for net (gain) loss included in net income | 7,173 | (1,664) | 7,029 | (1,664) | |||||||||||||||||||
| Change in the net unrealized gain (loss) on available for sale investment securities, before tax | (25,184) | (75,421) | (16,326) | (230,269) | |||||||||||||||||||
| Net gain realized as a yield adjustment in interest on transferred investment securities | (3) | (3) | (8) | (9) | |||||||||||||||||||
| Change in the net unrealized gain (loss) on investment securities, before tax | (25,187) | (75,424) | (16,334) | (230,278) | |||||||||||||||||||
| Income tax expense (benefit) related to net unrealized gain (loss) arising during the period | (5,289) | (15,839) | (3,430) | (48,359) | |||||||||||||||||||
| Change in the net unrealized gain (loss) on investment securities, net of tax | (19,898) | (59,585) | (12,904) | (181,919) | |||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||
| Net unrealized gain arising during the period | 167 | 438 | 1,078 | 1,167 | |||||||||||||||||||
| Reclassification adjustment for net (gain) loss included in net income | (106) | 19 | (1,014) | (45) | |||||||||||||||||||
| Change in the net unrealized gain on cash flow hedges, before tax | 61 | 419 | 64 | 1,212 | |||||||||||||||||||
| Income tax expense related to net unrealized gain on cash flow hedges | 13 | 88 | 14 | 255 | |||||||||||||||||||
| Change in net unrealized net gain on cash flow hedges, net of tax | 48 | 331 | 50 | 957 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (19,850) | (59,254) | (12,854) | (180,962) | |||||||||||||||||||
| Comprehensive income (loss) | $ | 4,463 | $ | (43,011) | $ | 57,521 | $ | (122,725) | |||||||||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
9
ORIGIN BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(Dollars in thousands, except per share amounts)
| Common Shares Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 23,746,502 | $ | 118,733 | $ | 242,114 | $ | 363,635 | $ | 5,729 | $ | 730,211 | ||||||||||||||||||||||||
| Net income | — | — | — | 20,683 | — | 20,683 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (71,619) | (71,619) | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 737 | — | — | 737 | |||||||||||||||||||||||||||||
| Exercise of stock options, net of shares withheld | 2,246 | 11 | (62) | — | — | (51) | |||||||||||||||||||||||||||||
Dividends declared - common stock ($0.13 per share) | — | — | — | (3,096) | — | (3,096) | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 23,748,748 | 118,744 | 242,789 | 381,222 | (65,890) | 676,865 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 21,311 | — | 21,311 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (50,089) | (50,089) | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 841 | — | — | 841 | |||||||||||||||||||||||||||||
| Stock based compensation shares vested and distributed, net of shares withheld | 12,840 | 64 | (64) | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options, net of shares withheld | 20,000 | 100 | 65 | — | — | 165 | |||||||||||||||||||||||||||||
| Shares issued under employee stock purchase program | 26,089 | 130 | 737 | — | — | 867 | |||||||||||||||||||||||||||||
Dividends declared - common stock ($0.15 per share) | — | — | — | (3,587) | — | (3,587) | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 23,807,677 | 119,038 | 244,368 | 398,946 | (115,979) | 646,373 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 16,243 | — | 16,243 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (59,254) | (59,254) | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 970 | — | — | 970 | |||||||||||||||||||||||||||||
| Stock based compensation shares vested and distributed, net of shares withheld | 23,260 | 116 | (116) | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options, net of shares withheld | 35,887 | 180 | 785 | — | — | 965 | |||||||||||||||||||||||||||||
| Options assumed - BTH Merger | — | — | 13,687 | — | — | 13,687 | |||||||||||||||||||||||||||||
| Stock issuance - BTH Merger | 6,794,910 | 33,975 | 258,682 | — | — | 292,657 | |||||||||||||||||||||||||||||
Dividends declared - common stock ($0.15 per share) | — | — | — | (4,617) | — | (4,617) | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 30,661,734 | $ | 153,309 | $ | 518,376 | $ | 410,572 | $ | (175,233) | $ | 907,024 | ||||||||||||||||||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
10
ORIGIN BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity - Continued
(unaudited)
(Dollars in thousands, except per share amounts)
| Common Shares Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | 30,746,600 | $ | 153,733 | $ | 520,669 | $ | 435,416 | $ | (159,875) | $ | 949,943 | ||||||||||||||||||||||||
| Net income | — | — | — | 24,302 | — | 24,302 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 21,394 | 21,394 | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 1,391 | — | — | 1,391 | |||||||||||||||||||||||||||||
| Stock based compensation shares vested and distributed, net of shares withheld | 9,750 | 49 | (138) | — | — | (89) | |||||||||||||||||||||||||||||
| Exercise of stock options, net of shares withheld | 24,503 | 122 | 202 | — | — | 324 | |||||||||||||||||||||||||||||
Dividends declared - common stock ($0.15 per share) | — | — | — | (4,678) | — | (4,678) | |||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 30,780,853 | 153,904 | 522,124 | 455,040 | (138,481) | 992,587 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 21,760 | — | 21,760 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (14,398) | (14,398) | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 1,160 | — | — | 1,160 | |||||||||||||||||||||||||||||
| Stock based compensation shares vested and distributed, net of shares withheld | 23,647 | 118 | (118) | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options, net of shares withheld | 15,492 | 78 | 249 | — | — | 327 | |||||||||||||||||||||||||||||
| Shares issued under employee stock purchase program | 46,213 | 231 | 887 | — | — | 1,118 | |||||||||||||||||||||||||||||
Dividends declared - common stock ($0.15 per share) | — | — | — | (4,695) | — | (4,695) | |||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 30,866,205 | 154,331 | 524,302 | 472,105 | (152,879) | 997,859 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 24,313 | — | 24,313 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (19,850) | (19,850) | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 1,335 | — | — | 1,335 | |||||||||||||||||||||||||||||
| Stock based compensation shares vested and distributed, net of shares withheld | 27,388 | 137 | (354) | — | — | (217) | |||||||||||||||||||||||||||||
| Exercise of stock options, net of shares withheld | 13,123 | 66 | 151 | — | — | 217 | |||||||||||||||||||||||||||||
Dividends declared - common stock ($0.15 per share) | — | — | — | (4,712) | — | (4,712) | |||||||||||||||||||||||||||||
| Balance at September 30, 2023 | 30,906,716 | $ | 154,534 | $ | 525,434 | $ | 491,706 | $ | (172,729) | $ | 998,945 | ||||||||||||||||||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
11
ORIGIN BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| Nine Months Ended September 30, | |||||||||||
| Cash flows from operating activities: | 2023 | 2022 | |||||||||
| Net income | $ | 70,375 | $ | 58,237 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Provision for credit losses | 14,018 | 20,067 | |||||||||
| Depreciation and amortization | 13,333 | 7,809 | |||||||||
| Net amortization on securities | 5,309 | 7,079 | |||||||||
| Accretion of net premium/discount on purchased loans | (2,067) | (1,187) | |||||||||
| Amortization of investments in tax credit funds | 1,368 | 951 | |||||||||
| Loss (gain) on sale of securities, net | 7,029 | (1,664) | |||||||||
| Deferred income tax expense | 14,499 | 11,356 | |||||||||
| Stock-based compensation expense | 3,886 | 2,548 | |||||||||
| Originations of mortgage loans held for sale | (148,866) | (224,093) | |||||||||
| Proceeds from mortgage loans held for sale | 127,574 | 222,638 | |||||||||
| Gain on mortgage loans held for sale, including origination of mortgage servicing rights | (3,036) | (6,403) | |||||||||
| Mortgage servicing rights valuation adjustment | 485 | (2,409) | |||||||||
| Net loss on disposals of premises and equipment and sale of other real estate owned | 2 | 3 | |||||||||
| Increase in the cash surrender value of life insurance | (648) | (533) | |||||||||
| Gain on equity securities without a readily determinable fair value | (10,097) | — | |||||||||
| Net losses on sales and write-downs of other real estate owned | 1 | 206 | |||||||||
| Net change in operating leases | (793) | 24 | |||||||||
| Increase in other assets | (8,718) | (7,535) | |||||||||
| Increase in other liabilities | 16,821 | 6,717 | |||||||||
| Net cash provided by operating activities | 100,475 | 93,811 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Cash acquired in business combination | — | 69,953 | |||||||||
| Purchases of securities available for sale | (751) | (557,151) | |||||||||
| Maturities and pay downs of securities available for sale | 107,679 | 118,189 | |||||||||
| Proceeds from sales and calls of securities available for sale | 214,302 | 484,421 | |||||||||
| Purchase of securities held to maturity | — | (7,000) | |||||||||
| Maturities, pay downs and calls of securities held to maturity | 486 | 17,750 | |||||||||
| Pay downs of securities carried at fair value | 285 | 275 | |||||||||
| Net redemption (purchases) of non-marketable equity securities held in other financial institutions | 15,025 | (2,664) | |||||||||
| Originations of mortgage warehouse loans | (5,048,595) | (7,638,507) | |||||||||
| Proceeds from pay-offs of mortgage warehouse loans | 5,047,169 | 7,846,760 | |||||||||
| Net increase in loans, excluding mortgage warehouse and loans held for sale | (449,804) | (609,608) | |||||||||
| Return of capital and other distributions from limited partnership investments | 1,591 | 6,657 | |||||||||
| Capital calls on limited partnership investments | (2,156) | (97) | |||||||||
| Purchase of low-income housing tax credit investments | (538) | — | |||||||||
| Purchases of premises and equipment | (17,514) | (5,636) | |||||||||
| Proceeds from sales of premises and equipment | 49 | — | |||||||||
| Net cash used in investing activities | (132,772) | (276,658) | |||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
12
ORIGIN BANCORP, INC.
Consolidated Statements of Cash Flows - Continued
(Unaudited)
(Dollars in thousands)
| Nine Months Ended September 30, | |||||||||||
| Cash flows from financing activities: | 2023 | 2022 | |||||||||
| Net increase (decrease) in deposits | $ | 598,786 | $ | (359,825) | |||||||
| Repayments on long-term FHLB advances | (199) | (193) | |||||||||
| Proceeds from short-term FHLB advances | 5,890,000 | 5,960,000 | |||||||||
| Repayments on short-term FHLB advances | (6,440,000) | (5,810,000) | |||||||||
| Repurchase of subordinated debentures, net | (4,729) | — | |||||||||
| Net decrease in other short-term borrowings | (30,000) | — | |||||||||
| Net decrease in securities sold under agreements to repurchase | (22,250) | (2,151) | |||||||||
| Dividends paid | (13,912) | (11,263) | |||||||||
| Cash received from exercise of stock options | 907 | 1,131 | |||||||||
| Net cash used in financing activities | (21,397) | (222,301) | |||||||||
| Net decrease in cash and cash equivalents | (53,694) | (405,148) | |||||||||
| Cash and cash equivalents at beginning of period | 358,972 | 705,618 | |||||||||
| Cash and cash equivalents at end of period | $ | 305,278 | $ | 300,470 | |||||||
| Interest paid | $ | 151,130 | $ | 21,123 | |||||||
| Income taxes paid | 483 | 1,204 | |||||||||
| Significant non-cash transactions: | |||||||||||
| Real estate acquired in settlement of loans | 3,243 | 665 | |||||||||
| Decrease in GNMA repurchase obligation | (24,569) | (17,134) | |||||||||
| Recognition of operating right-of-use assets | 16,225 | 14,009 | |||||||||
| Recognition of operating lease liabilities | 16,187 | 14,213 | |||||||||
| Total assets acquired in BTH merger | — | 1,840,340 | |||||||||
| Total liabilities assumed in BTH merger | — | 1,635,196 | |||||||||
| Common stock issued in BTH merger as consideration | — | 292,657 | |||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
13
Note 1 — Significant Accounting Policies
Nature of Operations. Origin Bancorp, Inc. (“Company”) is a financial holding company headquartered in Ruston, Louisiana. The Company’s wholly-owned bank subsidiary, Origin Bank (“Bank”), was founded in 1912 in Choudrant, Louisiana. Deeply rooted in Origin’s history is a culture committed to providing personalized, relationship banking to businesses, municipalities, and personal clients to enrich the lives of the people in the communities it serves. Origin provides a broad range of financial services and currently operates 60 banking centers located in Dallas/Fort Worth, East Texas, Houston, North Louisiana and Mississippi. The Company principally operates in one business segment, community banking.
Basis of Presentation. The consolidated financial statements in this quarterly report on Form 10-Q include the accounts of the Company and all other entities in which Origin Bancorp, Inc. has a controlling financial interest, including the Bank and Davison Insurance Agency, LLC, doing business as Lincoln Agency, LLC, Lincoln Agency Transportation Insurance, Pulley-White Insurance Agency, Reeves, Coon and Funderburg, Simoneaux & Wallace Agency and Thomas & Farr Agency. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s accounting and financial reporting policies conform, in all material respects, to generally accepted accounting principles in the United States (“U.S. GAAP”) and to general practices within the financial services industry. The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.
The consolidated financial statements in this quarterly report on Form 10-Q have not been audited by an independent registered public accounting firm, excluding the figures as of December 31, 2022, but in the opinion of management, reflect all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the Company’s financial position and results of operations for the periods presented. These consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP and with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2022, included in the Company’s annual report on Form 10-K (“2022 Form 10-K”) filed with the SEC. Operating results for the interim periods disclosed herein are not necessarily indicative of results that may be expected for a full year. Certain prior period amounts have been reclassified to conform to the current year financial statement presentations. These reclassifications did not impact previously reported net income or comprehensive income (loss).
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions based on available information that affect the amounts reported in the financial statements and disclosures provided, including the accompanying notes, and actual results could differ. Material estimates that are particularly susceptible to change include the allowance for credit losses for loans, off-balance sheet commitments and available for sale securities; fair value measurements of assets and liabilities; and income taxes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the Company’s consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual results could differ from those estimates.
Allowance for Credit Losses. Accounting Standards Update (“ASU”) No. 2022-02 eliminated the accounting guidance for troubled debt restructurings (“TDRs”) and enhanced disclosure requirements for certain loan modifications. The Company may provide modifications to borrowers experiencing financial difficulty in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, or term extensions. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. In some cases, the Company may provide multiple types of concessions on one loan. The Company will evaluate whether the modification represents a new loan or a continuation of an existing loan. The Company assesses all loan modifications to determine whether they were made to borrowers experiencing financial difficulty.
Reclassifications. Certain amounts previously reported have been reclassified to conform to the current presentation. Such reclassifications had no effect on prior year net income or stockholders’ equity.
14
Effect of Recently Adopted Accounting Standards
ASU No. 2021-06, Presentation of Financial Statements (Topic 205), Financial Services —Depository and Lending (Topic 942), and Financial Services — Investment Companies (Topic 946) —Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants amends the Accounting Standards Codification (“ASC”) in order to codify to the new SEC releases 33-10786 and 33-10835 (the “Releases”). The Releases clearly define whether an acquired or disposed business subsidiary is significant; update, expand and eliminate certain disclosures; eliminate overlap with certain SEC and U.S. GAAP rules; and add a new subpart of Regulation S-K. The ASU is effective upon issuance; however, the SEC release on which the ASU is based is effective for registrants with the first fiscal year ending after December 15, 2021, while Guide 3 was rescinded effective January 1, 2023. Implementation of this ASU did not materially impact the Company’s financial statement disclosures.
ASU No. 2021-08, Business Combinations (Topic 805) — Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this Update affect accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Implementation of this ASU did not materially impact the Company’s financial statements or disclosures.
ASU No. 2022-01, Derivatives and Hedging (Topic 815) — Fair Value Hedging - Portfolio Layer Method. The amendments in this Update clarify the accounting for and promote consistency in the reporting of hedge basis adjustments applicable to both a single hedged layer and multiple hedged layers. Additionally, this Update allows entities to elect to apply the portfolio layer method of hedge accounting in accordance with Topic 815. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Implementation of this ASU did not materially impact the Company’s financial statements or disclosures.
ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326) — Troubled Debt Restructurings and Vintage Disclosures. The amendments in this Update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Implementation of this ASU did not materially impact the Company’s financial statements or disclosures.
ASU No. 2022-06, Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848 — The amendments in this Update provide temporary relief during the transition period in complying with Update No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022 - 12 months after the expected cessation date of all currencies and tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848.
Because the relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in this Update defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective immediately. Implementation of this ASU did not materially impact the Company's financial statements or disclosures.
15
Effect of Newly Issued But Not Yet Effective Accounting Standards
ASU No. 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method — The amendments in this Update allow entities to elect to account for equity investments made primarily for the purpose of receiving income tax credits using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, if certain conditions are met. The amendments in this Update also eliminate certain low income housing tax credits (“LIHTC”)-specific guidance to align the accounting more closely for LIHTCs with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance apply only to tax equity investments accounted for using the proportional amortization method. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Implementation of this ASU is not expected to materially impact the Company's financial statements or disclosures.
Note 2 — Earnings Per Share
Basic and diluted earnings per common share are calculated using the treasury method. Under the treasury method, basic earnings per share is calculated as net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under the Company’s stock and incentive compensation plans. Information regarding the Company’s basic and diluted earnings per common share is presented in the following table:
| (Dollars in thousands, except per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| Numerator: | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income | $ | 24,313 | $ | 16,243 | $ | 70,375 | $ | 58,237 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares outstanding | 30,856,649 | 28,298,984 | 30,797,399 | 25,263,681 | |||||||||||||||||||
| Dilutive effect of stock-based awards | 87,211 | 182,635 | 105,823 | 103,126 | |||||||||||||||||||
| Weighted average diluted common shares outstanding | 30,943,860 | 28,481,619 | 30,903,222 | 25,366,807 | |||||||||||||||||||
| Basic earnings per common share | $ | 0.79 | $ | 0.57 | $ | 2.29 | $ | 2.31 | |||||||||||||||
| Diluted earnings per common share | 0.79 | 0.57 | 2.28 | 2.30 | |||||||||||||||||||
There were 613,010 and 459,434 shares of anti-dilutive stock-based awards excluded from calculation of earnings per share for the three and nine months ended September 30, 2023, respectively, primarily due to the stock price of the stock awards exceeding the average market price of the Company’s stock during the respective periods. There were 12,486 and 13,412 shares of anti-dilutive stock-based awards excluded from the earnings per share calculation for the three and nine months ended September 30, 2022, respectively, primarily due to the stock price of the awards exceeding the average market price of the Company’s stock during the period.
16
Note 3 — Securities
The following table is a summary of the amortized cost and estimated fair value, including the allowance for credit losses and gross unrealized gains and losses, of available for sale, held to maturity and securities carried at fair value through income for the dates indicated:
(Dollars in thousands) September 30, 2023 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Allowance for Credit Losses | Net Carrying Amount | |||||||||||||||||||||||||||||
| Available for sale: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 382,677 | $ | 148 | $ | (66,474) | $ | 316,351 | $ | — | $ | 316,351 | |||||||||||||||||||||||
| Corporate bonds | 84,221 | — | (9,931) | 74,290 | — | 74,290 | |||||||||||||||||||||||||||||
| U.S. government and agency securities | 111,812 | 3 | (9,024) | 102,791 | — | 102,791 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 104,745 | — | (14,725) | 90,020 | — | 90,020 | |||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 588,373 | — | (87,625) | 500,748 | — | 500,748 | |||||||||||||||||||||||||||||
| Commercial collateralized mortgage obligations | 39,672 | — | (5,723) | 33,949 | — | 33,949 | |||||||||||||||||||||||||||||
| Residential collateralized mortgage obligations | 154,301 | — | (25,868) | 128,433 | — | 128,433 | |||||||||||||||||||||||||||||
| Asset-backed securities | 44,855 | 1 | (599) | 44,257 | — | 44,257 | |||||||||||||||||||||||||||||
| Total | $ | 1,510,656 | $ | 152 | $ | (219,969) | $ | 1,290,839 | $ | — | $ | 1,290,839 | |||||||||||||||||||||||
| Held to maturity: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 11,680 | $ | — | $ | (675) | $ | 11,005 | $ | (890) | $ | 10,790 | |||||||||||||||||||||||
| Securities carried at fair value through income: | |||||||||||||||||||||||||||||||||||
State and municipal securities(1) | $ | 6,815 | $ | — | $ | — | $ | 6,772 | $ | — | $ | 6,772 | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Available for sale: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 447,086 | $ | 996 | $ | (58,605) | $ | 389,477 | $ | — | $ | 389,477 | |||||||||||||||||||||||
| Corporate bonds | 89,449 | — | (7,191) | 82,258 | — | 82,258 | |||||||||||||||||||||||||||||
| U.S. government and agency securities | 264,755 | 4 | (16,339) | 248,420 | — | 248,420 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 105,536 | — | (13,593) | 91,943 | — | 91,943 | |||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 649,765 | — | (77,462) | 572,303 | — | 572,303 | |||||||||||||||||||||||||||||
| Commercial collateralized mortgage obligations | 44,330 | — | (5,517) | 38,813 | — | 38,813 | |||||||||||||||||||||||||||||
| Residential collateralized mortgage obligations | 170,136 | — | (23,766) | 146,370 | — | 146,370 | |||||||||||||||||||||||||||||
| Asset-backed securities | 73,918 | — | (2,018) | 71,900 | — | 71,900 | |||||||||||||||||||||||||||||
| Total | $ | 1,844,975 | $ | 1,000 | $ | (204,491) | $ | 1,641,484 | $ | — | $ | 1,641,484 | |||||||||||||||||||||||
| Held to maturity: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 12,174 | $ | 278 | $ | (482) | $ | 11,970 | $ | (899) | $ | 11,275 | |||||||||||||||||||||||
| Securities carried at fair value through income: | |||||||||||||||||||||||||||||||||||
State and municipal securities(1) | $ | 7,100 | $ | — | $ | — | $ | 6,368 | $ | — | $ | 6,368 | |||||||||||||||||||||||
________________________
(1)Securities carried at fair value through income have no unrealized gains or losses at the consolidated balance sheet dates as all changes in value have been recognized in the consolidated statements of income. See Note 5 — Fair Value of Financial Instruments for more information.
17
Securities with unrealized losses at September 30, 2023, and December 31, 2022, aggregated by investment category and those individual securities that have been in a continuous unrealized loss position for less than 12 months, and for 12 months or more, were as follows.
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
(Dollars in thousands) September 30, 2023 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||||||||||||
| Available for sale: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 8,335 | $ | (493) | $ | 281,606 | $ | (65,981) | $ | 289,941 | $ | (66,474) | |||||||||||||||||||||||
| Corporate bonds | 5,624 | (376) | 67,667 | (9,555) | 73,291 | (9,931) | |||||||||||||||||||||||||||||
| U.S. government and agency securities | — | — | 102,465 | (9,024) | 102,465 | (9,024) | |||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | — | — | 90,020 | (14,725) | 90,020 | (14,725) | |||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 59 | (8) | 500,689 | (87,617) | 500,748 | (87,625) | |||||||||||||||||||||||||||||
Commercial collateralized mortgage obligations | — | — | 33,949 | (5,723) | 33,949 | (5,723) | |||||||||||||||||||||||||||||
Residential collateralized mortgage obligations | — | — | 128,433 | (25,868) | 128,433 | (25,868) | |||||||||||||||||||||||||||||
| Asset-backed securities | 5,222 | (34) | 36,626 | (565) | 41,848 | (599) | |||||||||||||||||||||||||||||
| Total | $ | 19,240 | $ | (911) | $ | 1,241,455 | $ | (219,058) | $ | 1,260,695 | $ | (219,969) | |||||||||||||||||||||||
| Held to maturity: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 5,105 | $ | (62) | $ | 5,900 | $ | (613) | $ | 11,005 | $ | (675) | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Available for sale: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 171,079 | $ | (14,947) | $ | 175,011 | $ | (43,658) | $ | 346,090 | $ | (58,605) | |||||||||||||||||||||||
| Corporate bonds | 69,618 | (5,581) | 11,640 | (1,610) | 81,258 | (7,191) | |||||||||||||||||||||||||||||
| U.S. government and agency securities | 152,471 | (7,373) | 95,576 | (8,966) | 248,047 | (16,339) | |||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 37,083 | (3,416) | 54,860 | (10,177) | 91,943 | (13,593) | |||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 231,848 | (20,465) | 340,455 | (56,997) | 572,303 | (77,462) | |||||||||||||||||||||||||||||
| Commercial collateralized mortgage obligations | 21,999 | (2,516) | 16,814 | (3,001) | 38,813 | (5,517) | |||||||||||||||||||||||||||||
| Residential collateralized mortgage obligations | 48,749 | (3,928) | 97,621 | (19,838) | 146,370 | (23,766) | |||||||||||||||||||||||||||||
| Asset-backed securities | 62,047 | (1,528) | 9,853 | (490) | 71,900 | (2,018) | |||||||||||||||||||||||||||||
| Total | $ | 794,894 | $ | (59,754) | $ | 801,830 | $ | (144,737) | $ | 1,596,724 | $ | (204,491) | |||||||||||||||||||||||
| Held to maturity: | |||||||||||||||||||||||||||||||||||
| State and municipal securities | $ | 6,518 | $ | (482) | $ | — | $ | — | $ | 6,518 | $ | (482) | |||||||||||||||||||||||
At September 30, 2023, the Company had 647 individual securities that were in an unrealized loss position. Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than the cost, and (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Management does not currently intend to sell any securities in an unrealized loss position and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, at September 30, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions.
18
The following table presents the activity in the allowance for credit losses for held-to-maturity debt securities.
| (Dollars in thousands) | Municipal Securities | ||||
| Allowance for credit losses: | 2023 | ||||
| Balance at January 1, 2023 | $ | 899 | |||
| Credit loss expense | (9) | ||||
Balance at September 30, 2023 | $ | 890 | |||
| Balance at January 1, 2022 | $ | 167 | |||
| Credit loss expense | 725 | ||||
Balance at September 30, 2022 | $ | 892 | |||
Accrued interest of $6.4 million and $8.2 million was not included in the calculation of the allowance or the amortized cost basis of the debt securities at September 30, 2023 or 2022, respectively. There were no past due held-to-maturity securities or held-to-maturity securities in nonaccrual status at September 30, 2023, or December 31, 2022.
Proceeds from sales and calls, and related gross gains and losses of securities available for sale, are shown below.
| Nine Months Ended September 30, | |||||||||||
| (Dollars in thousands) | 2023 | 2022 | |||||||||
| Proceeds from sales/calls | $ | 214,302 | $ | 484,421 | |||||||
| Gross realized gains | 596 | 3,766 | |||||||||
| Gross realized losses | (7,625) | (2,102) | |||||||||
The following table presents the amortized cost and fair value of securities available for sale and held to maturity at September 30, 2023, grouped by contractual maturity. Mortgage-backed securities, collateralized mortgage obligations and asset-backed securities, which do not have contractual payments due at a single maturity date, are shown separately. Actual maturities for mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities will differ from contractual maturities as a result of prepayments made on the underlying loans.
| (Dollars in thousands) | Held to Maturity | Available for Sale | |||||||||||||||||||||
| September 30, 2023 | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| Due in one year or less | $ | — | $ | — | $ | 64,008 | $ | 63,004 | |||||||||||||||
| Due after one year through five years | — | — | 96,426 | 87,840 | |||||||||||||||||||
| Due after five years through ten years | 5,167 | 5,105 | 197,466 | 169,927 | |||||||||||||||||||
| Due after ten years | 6,513 | 5,900 | 220,810 | 172,661 | |||||||||||||||||||
| Commercial mortgage-backed securities | — | — | 104,745 | 90,020 | |||||||||||||||||||
| Residential mortgage-backed securities | — | — | 588,373 | 500,748 | |||||||||||||||||||
| Commercial collateralized mortgage obligations | — | — | 39,672 | 33,949 | |||||||||||||||||||
| Residential collateralized mortgage obligations | — | — | 154,301 | 128,433 | |||||||||||||||||||
| Asset-backed securities | — | — | 44,855 | 44,257 | |||||||||||||||||||
| Total | $ | 11,680 | $ | 11,005 | $ | 1,510,656 | $ | 1,290,839 | |||||||||||||||
The following table presents carrying amounts of securities pledged as collateral for deposits and repurchase agreements at the periods presented.
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Carrying value of securities pledged to secure public deposits | $ | 412,829 | $ | 769,691 | |||||||
| Carrying value of securities pledged to repurchase agreements | 5,530 | 6,797 | |||||||||
19
Note 4 — Loans
Loans consist of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Loans held for sale | $ | 14,944 | $ | 49,957 | |||||||
| LHFI: | |||||||||||
| Loans secured by real estate: | |||||||||||
| Owner occupied commercial real estate | $ | 932,109 | $ | 843,006 | |||||||
| Non-owner occupied commercial real estate | 1,503,782 | 1,461,672 | |||||||||
| Total commercial real estate | 2,435,891 | 2,304,678 | |||||||||
| Construction/land/land development | 1,076,756 | 945,625 | |||||||||
| Residential real estate | 1,688,169 | 1,477,538 | |||||||||
| Total real estate | 5,200,816 | 4,727,841 | |||||||||
| Commercial and industrial | 2,058,073 | 2,051,161 | |||||||||
| Mortgage warehouse lines of credit | 286,293 | 284,867 | |||||||||
| Consumer | 22,881 | 26,153 | |||||||||
Total LHFI(1) | 7,568,063 | 7,090,022 | |||||||||
Less: Allowance for loan credit losses (“ALCL”) | 95,177 | 87,161 | |||||||||
| LHFI, net | $ | 7,472,886 | $ | 7,002,861 | |||||||
____________________________
(1)Includes unamortized purchase accounting adjustment and net deferred loan fees of $11.5 million and $14.2 million at September 30, 2023, and December 31, 2022, respectively. As of September 30, 2023, and December 31, 2022, the remaining purchase accounting net loan discount was $179,000 and $2.2 million, respectively.
Credit quality indicators. As part of the Company’s commitment to managing the credit quality of its loan portfolio, management annually and periodically updates and evaluates certain credit quality indicators, which include but are not limited to (i) weighted-average risk rating of the loan portfolio, (ii) net charge-offs, (iii) level of non-performing loans, (iv) level of classified loans (defined as substandard, doubtful and loss), and (v) the general economic conditions in the cities and states in which the Company operates. The Company maintains an internal risk rating system where ratings are assigned to individual loans based on assessed risk. Loan risk ratings are the primary indicator of credit quality for the loan portfolio and are continually evaluated to ensure they are appropriate based on currently available information.
20
The following is a summary description of the Company’s internal risk ratings:
| • Pass (1-6) | Loans within this risk rating are further categorized as follows: | ||||
| Minimal risk (1) | Well-collateralized by cash equivalent instruments held by the Banks. | ||||
| Moderate risk (2) | Borrowers with excellent asset quality and liquidity. Borrowers’ capitalization and liquidity exceed industry norms. Borrowers in this category have significant levels of liquid assets and have a low level of leverage. | ||||
| Better than average risk (3) | Borrowers with strong financial strength and excellent liquidity that consistently demonstrate strong operating performance. Borrowers in this category generally have a sizable net worth that can be converted into liquid assets within 12 months. | ||||
| Average risk (4) | Borrowers with sound credit quality and financial performance, including liquidity. Borrowers are supported by sufficient cash flow coverage generated through operations across the full business cycle. | ||||
| Marginally acceptable risk (5) | Loans generally meet minimum requirements for an acceptable loan in accordance with lending policy, but possess one or more attributes that cause the overall risk profile to be higher than the majority of newly approved loans. | ||||
| Watch (6) | A passing loan with one or more factors that identify a potential weakness in the overall ability of the borrower to repay the loan. These weaknesses are generally mitigated by other factors that reduce the risk of delinquency or loss. | ||||
| • Special Mention (7) | This grade is intended to be temporary and includes borrowers whose credit quality has deteriorated and is at risk of further decline. | ||||
| • Substandard (8) | This grade includes “Substandard” loans under regulatory guidelines. Substandard loans exhibit a well-defined weakness that jeopardizes debt repayment in accordance with contractual agreements, even though the loan may be performing. These obligations are characterized by the distinct possibility that a loss may be incurred if these weaknesses are not corrected and repayment may be dependent upon collateral liquidation or secondary source of repayment. | ||||
| • Doubtful (9) | This grade includes “Doubtful” loans under regulatory guidelines. Such loans are placed on nonaccrual status and repayment may be dependent upon collateral with no readily determinable valuation or valuations that are highly subjective in nature. Repayment for these loans is considered improbable based on currently existing facts and circumstances. | ||||
| • Loss (0) | This grade includes “Loss” loans under regulatory guidelines. Loss loans are charged-off or written down when repayment is not expected. | ||||
In connection with the review of the loan portfolio, the Company considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans. The list of loans to be reviewed for possible individual evaluation consists of nonaccrual commercial loans over $100,000 with direct exposure, unsecured loans over 90 days past due, commercial loans classified as substandard or worse over $100,000 with direct exposure, modified loans to borrowers experiencing financial difficulty, consumer loans greater than $100,000 with a FICO score under 625, loans greater than $100,000 in which the borrower has filed bankruptcy, and all loans 180 days or more past due. Loans under $50,000 will be evaluated collectively in designated pools unless a loss exposure has been identified. Some additional risk elements considered by loan type include:
•for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;
•for construction, land and land development loans, the perceived feasibility of the project, including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio;
•for residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and
21
•for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral.
Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An allowance for credit losses is determined using the same methodology as other individually evaluated loans. As a result of the merger with BT Holdings, Inc., (“BTH”), the Company held approximately $36.8 million and $48.1 million of unpaid principal balance PCD loans at September 30, 2023, and December 31, 2022, respectively.
Please see Note 1 — Significant Accounting Policies included in the 2022 Form 10-K, filed with the SEC for a description of our accounting policies related to purchased financial assets with credit deterioration.
22
The following table reflects recorded investments in loans by credit quality indicator and origination year at September 30, 2023, and gross charge-offs for the nine months ended September 30, 2023, excluding loans held for sale. Loans acquired are shown in the table by origination year, not merger date. The Company had an immaterial amount of revolving loans converted to term loans at September 30, 2023.
| Term Loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total | |||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 269,854 | $ | 888,014 | $ | 485,198 | $ | 257,683 | $ | 223,348 | $ | 209,716 | $ | 76,329 | $ | 2,410,142 | |||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | — | 7,996 | — | 7,996 | |||||||||||||||||||||||||||||||||||||||
| Classified | 745 | 1,916 | 3,239 | 1,595 | 587 | 9,671 | — | 17,753 | |||||||||||||||||||||||||||||||||||||||
| Total commercial real estate loans | $ | 270,599 | $ | 889,930 | $ | 488,437 | $ | 259,278 | $ | 223,935 | $ | 227,383 | $ | 76,329 | $ | 2,435,891 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 42 | $ | — | $ | 42 | |||||||||||||||||||||||||||||||
| Construction/land/land development: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 203,868 | $ | 492,097 | $ | 235,360 | $ | 30,838 | $ | 17,281 | $ | 25,621 | $ | 35,821 | $ | 1,040,886 | |||||||||||||||||||||||||||||||
| Special mention | — | 10,718 | 20,932 | — | — | — | — | 31,650 | |||||||||||||||||||||||||||||||||||||||
| Classified | 1 | 180 | 54 | 245 | 667 | 754 | 2,319 | 4,220 | |||||||||||||||||||||||||||||||||||||||
| Total construction/land/land development loans | $ | 203,869 | $ | 502,995 | $ | 256,346 | $ | 31,083 | $ | 17,948 | $ | 26,375 | $ | 38,140 | $ | 1,076,756 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 279,903 | $ | 517,755 | $ | 305,358 | $ | 242,179 | $ | 99,778 | $ | 149,748 | $ | 83,182 | $ | 1,677,903 | |||||||||||||||||||||||||||||||
| Special mention | 250 | — | — | 145 | — | 309 | — | 704 | |||||||||||||||||||||||||||||||||||||||
| Classified | 342 | 1,988 | 1,471 | 420 | 1,378 | 3,853 | 110 | 9,562 | |||||||||||||||||||||||||||||||||||||||
| Total residential real estate loans | $ | 280,495 | $ | 519,743 | $ | 306,829 | $ | 242,744 | $ | 101,156 | $ | 153,910 | $ | 83,292 | $ | 1,688,169 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | 5 | $ | — | $ | 22 | $ | — | $ | 27 | |||||||||||||||||||||||||||||||
| Commercial and industrial: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 252,933 | $ | 328,833 | $ | 183,124 | $ | 40,747 | $ | 61,655 | $ | 53,379 | $ | 1,091,475 | $ | 2,012,146 | |||||||||||||||||||||||||||||||
| Special mention | 524 | 9,918 | — | 96 | — | — | 3,026 | 13,564 | |||||||||||||||||||||||||||||||||||||||
| Classified | 2,492 | 1,488 | 8,724 | 313 | 1,005 | 430 | 17,911 | 32,363 | |||||||||||||||||||||||||||||||||||||||
| Total commercial and industrial loans | $ | 255,949 | $ | 340,239 | $ | 191,848 | $ | 41,156 | $ | 62,660 | $ | 53,809 | $ | 1,112,412 | $ | 2,058,073 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | 111 | $ | 263 | $ | 40 | $ | 141 | $ | — | $ | 411 | $ | 7,104 | $ | 8,070 | |||||||||||||||||||||||||||||||
| Mortgage Warehouse Lines of Credit: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 286,293 | $ | 286,293 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 8,423 | $ | 4,473 | $ | 1,659 | $ | 510 | $ | 522 | $ | 58 | $ | 7,113 | $ | 22,758 | |||||||||||||||||||||||||||||||
| Classified | 20 | 72 | 27 | — | 3 | — | 1 | 123 | |||||||||||||||||||||||||||||||||||||||
| Total consumer loans | $ | 8,443 | $ | 4,545 | $ | 1,686 | $ | 510 | $ | 525 | $ | 58 | $ | 7,114 | $ | 22,881 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | 90 | $ | 7 | $ | — | $ | — | $ | — | $ | 10 | $ | 107 | |||||||||||||||||||||||||||||||
23
The following table reflects recorded investments in loans by credit quality indicator and origination year at December 31, 2022, and gross charge-offs for the year ended December 31, 2022, excluding loans held for sale. Loans acquired are shown in the table by origination year, not merger date. The Company had an immaterial amount of revolving loans converted to term loans at December 31, 2022.
| Term Loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total | |||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 885,244 | $ | 502,287 | $ | 283,368 | $ | 230,040 | $ | 168,079 | $ | 131,411 | $ | 69,952 | $ | 2,270,381 | |||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 8,174 | 1,359 | 1,558 | 11,091 | |||||||||||||||||||||||||||||||||||||||
| Classified | 930 | 1,795 | 1,551 | 4,014 | 2,965 | 11,901 | 50 | 23,206 | |||||||||||||||||||||||||||||||||||||||
| Total commercial real estate loans | $ | 886,174 | $ | 504,082 | $ | 284,919 | $ | 234,054 | $ | 179,218 | $ | 144,671 | $ | 71,560 | $ | 2,304,678 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 166 | $ | — | $ | 166 | |||||||||||||||||||||||||||||||
| Construction/land/land development: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 445,943 | $ | 320,951 | $ | 58,880 | $ | 27,381 | $ | 27,753 | $ | 5,253 | $ | 48,436 | $ | 934,597 | |||||||||||||||||||||||||||||||
| Special mention | 6,217 | — | — | — | — | — | — | 6,217 | |||||||||||||||||||||||||||||||||||||||
| Classified | 180 | 100 | 286 | 38 | 160 | 1,708 | 2,339 | 4,811 | |||||||||||||||||||||||||||||||||||||||
| Total construction/land/land development loans | $ | 452,340 | $ | 321,051 | $ | 59,166 | $ | 27,419 | $ | 27,913 | $ | 6,961 | $ | 50,775 | $ | 945,625 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 535,739 | $ | 308,070 | $ | 261,293 | $ | 107,530 | $ | 48,652 | $ | 123,052 | $ | 80,375 | $ | 1,464,711 | |||||||||||||||||||||||||||||||
| Special mention | — | — | 390 | — | — | — | — | 390 | |||||||||||||||||||||||||||||||||||||||
| Classified | 2,227 | 2,764 | 90 | 1,494 | 1,064 | 4,653 | 145 | 12,437 | |||||||||||||||||||||||||||||||||||||||
| Total residential real estate loans | $ | 537,966 | $ | 310,834 | $ | 261,773 | $ | 109,024 | $ | 49,716 | $ | 127,705 | $ | 80,520 | $ | 1,477,538 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 91 | $ | — | $ | 91 | |||||||||||||||||||||||||||||||
| Commercial and industrial: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 454,813 | $ | 239,411 | $ | 82,168 | $ | 75,043 | $ | 40,534 | $ | 29,745 | $ | 1,083,221 | $ | 2,004,935 | |||||||||||||||||||||||||||||||
| Special mention | 8,683 | 2,563 | — | — | 187 | — | 1,620 | 13,053 | |||||||||||||||||||||||||||||||||||||||
| Classified | 3,641 | 11,455 | 188 | 1,978 | 1,224 | 3 | 14,684 | 33,173 | |||||||||||||||||||||||||||||||||||||||
| Total commercial and industrial loans | $ | 467,137 | $ | 253,429 | $ | 82,356 | $ | 77,021 | $ | 41,945 | $ | 29,748 | $ | 1,099,525 | $ | 2,051,161 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | 28 | $ | 726 | $ | 48 | $ | 869 | $ | 337 | $ | 1,103 | $ | 5,348 | $ | 8,459 | |||||||||||||||||||||||||||||||
24
| Term Loans | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total | |||||||||||||||||||||||||||||||||||||||
| Mortgage Warehouse Lines of Credit: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 282,298 | $ | 282,298 | |||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | — | — | 2,042 | 2,042 | |||||||||||||||||||||||||||||||||||||||
| Classified | — | — | — | — | — | — | 527 | 527 | |||||||||||||||||||||||||||||||||||||||
| Total mortgage warehouse lines of credit | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 284,867 | $ | 284,867 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 9,730 | $ | 3,822 | $ | 1,210 | $ | 784 | $ | 135 | $ | 15 | $ | 10,408 | $ | 26,104 | |||||||||||||||||||||||||||||||
| Classified | 22 | 19 | — | 6 | — | — | 2 | 49 | |||||||||||||||||||||||||||||||||||||||
| Total consumer loans | $ | 9,752 | $ | 3,841 | $ | 1,210 | $ | 790 | $ | 135 | $ | 15 | $ | 10,410 | $ | 26,153 | |||||||||||||||||||||||||||||||
| Current period year-to-date gross charge-offs | $ | 3 | $ | 27 | $ | 7 | $ | 2 | $ | 1 | $ | 1 | $ | 2 | $ | 43 | |||||||||||||||||||||||||||||||
The following tables present the Company’s loan portfolio aging analysis at the dates indicated:
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Loans Past Due 90 Days or More | Total Past Due | Current Loans | Total Loans Receivable | Accruing Loans 90 or More Days Past Due | ||||||||||||||||||||||||||||||||||
| Loans secured by real estate: | |||||||||||||||||||||||||||||||||||||||||
Commercial real estate | $ | — | $ | — | $ | 136 | $ | 136 | $ | 2,435,755 | $ | 2,435,891 | $ | — | |||||||||||||||||||||||||||
Construction/land/land development | 1,085 | 23 | 55 | 1,163 | 1,075,593 | 1,076,756 | — | ||||||||||||||||||||||||||||||||||
| Residential real estate | 261 | 3,076 | 4,425 | 7,762 | 1,680,407 | 1,688,169 | — | ||||||||||||||||||||||||||||||||||
| Total real estate | 1,346 | 3,099 | 4,616 | 9,061 | 5,191,755 | 5,200,816 | — | ||||||||||||||||||||||||||||||||||
| Commercial and industrial | 918 | 6,746 | 3,509 | 11,173 | 2,046,900 | 2,058,073 | — | ||||||||||||||||||||||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | 286,293 | 286,293 | — | ||||||||||||||||||||||||||||||||||
| Consumer | 88 | 10 | 15 | 113 | 22,768 | 22,881 | — | ||||||||||||||||||||||||||||||||||
| Total LHFI | $ | 2,352 | $ | 9,855 | $ | 8,140 | $ | 20,347 | $ | 7,547,716 | $ | 7,568,063 | $ | — | |||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Loans Past Due 90 Days or More | Total Past Due | Current Loans | Total Loans Receivable | Accruing Loans 90 or More Days Past Due | ||||||||||||||||||||||||||||||||||
| Loans secured by real estate: | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 31 | $ | — | $ | 104 | $ | 135 | $ | 2,304,543 | $ | 2,304,678 | $ | — | |||||||||||||||||||||||||||
Construction/land/land development | 854 | — | 17 | 871 | 944,754 | 945,625 | — | ||||||||||||||||||||||||||||||||||
| Residential real estate | 1,814 | 891 | 450 | 3,155 | 1,474,383 | 1,477,538 | — | ||||||||||||||||||||||||||||||||||
| Total real estate | 2,699 | 891 | 571 | 4,161 | 4,723,680 | 4,727,841 | — | ||||||||||||||||||||||||||||||||||
| Commercial and industrial | 3,878 | 1,972 | 544 | 6,394 | 2,044,767 | 2,051,161 | — | ||||||||||||||||||||||||||||||||||
| Mortgage warehouse lines of credit | — | — | — | — | 284,867 | 284,867 | — | ||||||||||||||||||||||||||||||||||
| Consumer | 350 | 16 | 11 | 377 | 25,776 | 26,153 | — | ||||||||||||||||||||||||||||||||||
| Total LHFI | $ | 6,927 | $ | 2,879 | $ | 1,126 | $ | 10,932 | $ | 7,079,090 | $ | 7,090,022 | $ | — | |||||||||||||||||||||||||||
25
The following tables detail activity in the ALCL by portfolio segment. Accrued interest of $33.0 million and $21.9 million was not included in the book value for the purposes of calculating the allowance at September 30, 2023 and 2022, respectively. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | Construction/ Land/ Land Development | Residential Real Estate | Commercial and Industrial | Mortgage Warehouse Lines of Credit | Consumer | Total | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 20,839 | $ | 8,729 | $ | 9,018 | $ | 54,173 | $ | 817 | $ | 777 | $ | 94,353 | |||||||||||||||||||||||||||
| Charge-offs | — | — | — | 3,187 | — | 15 | 3,202 | ||||||||||||||||||||||||||||||||||
| Recoveries | 28 | 3 | 3 | 477 | — | 5 | 516 | ||||||||||||||||||||||||||||||||||
Provision(1) | (1,758) | 613 | 1,048 | 3,990 | (359) | (24) | 3,510 | ||||||||||||||||||||||||||||||||||
| Ending balance | $ | 19,109 | $ | 9,345 | $ | 10,069 | $ | 55,453 | $ | 458 | $ | 743 | $ | 95,177 | |||||||||||||||||||||||||||
| Average balance | $ | 2,428,969 | $ | 1,044,180 | $ | 1,663,291 | $ | 2,024,675 | $ | 376,275 | $ | 23,704 | $ | 7,561,094 | |||||||||||||||||||||||||||
| Net charge-offs to loan average balance (annualized) | — | % | — | % | — | % | 0.53 | % | — | % | 0.17 | % | 0.14 | % | |||||||||||||||||||||||||||
__________________________ (1)The $3.5 million provision for credit losses on the consolidated statements of income includes a $3.5 million provision for loan credit losses, a $50,000 provision for off-balance sheet commitments and $45,000 net benefit provision for held to maturity securities credit losses for the three months ended September 30, 2023. | |||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | Construction/ Land/ Land Development | Residential Real Estate | Commercial and Industrial | Mortgage Warehouse Lines of Credit | Consumer | Total | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 16,112 | $ | 4,707 | $ | 5,851 | $ | 35,477 | $ | 459 | $ | 517 | $ | 63,123 | |||||||||||||||||||||||||||
Allowance for loan credit losses - BTH merger(1) | 1 | — | — | 5,525 | — | 1 | 5,527 | ||||||||||||||||||||||||||||||||||
| Charge-offs | — | — | — | 1,618 | — | 10 | 1,628 | ||||||||||||||||||||||||||||||||||
| Recoveries | 17 | 200 | 6 | 325 | — | 2 | 550 | ||||||||||||||||||||||||||||||||||
Provision(2) | 1,901 | 2,159 | 1,898 | 9,349 | 97 | 383 | 15,787 | ||||||||||||||||||||||||||||||||||
| Ending balance | $ | 18,031 | $ | 7,066 | $ | 7,755 | $ | 49,058 | $ | 556 | $ | 893 | $ | 83,359 | |||||||||||||||||||||||||||
| Average balance | $ | 2,046,411 | $ | 760,682 | $ | 1,249,746 | $ | 1,816,912 | $ | 491,584 | $ | 24,137 | $ | 6,389,472 | |||||||||||||||||||||||||||
| Net charge-offs to loan average balance (annualized) | — | % | (0.10) | % | — | % | 0.28 | % | — | % | 0.13 | % | 0.07 | % | |||||||||||||||||||||||||||
____________________________ (1)Excluded from the allowance is $10.8 million in PCD loans that were acquired in the merger with BTH that were added to the allowance and immediately written off. (2)The $16.9 million provision for credit losses on the consolidated statements of income includes a $15.8 million provision for loan losses, a $1.2 million provision for off-balance sheet commitments and no provision for held to maturity securities credit losses for the three months ended September 30, 2022. | |||||||||||||||||||||||||||||||||||||||||
26
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | Construction/ Land/ Land Development | Residential Real Estate | Commercial and Industrial | Mortgage Warehouse Lines of Credit | Consumer | Total | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 19,772 | $ | 7,776 | $ | 8,230 | $ | 50,148 | $ | 379 | $ | 856 | $ | 87,161 | |||||||||||||||||||||||||||
| Charge-offs | 42 | — | 27 | 8,070 | — | 107 | 8,246 | ||||||||||||||||||||||||||||||||||
| Recoveries | 113 | 3 | 13 | 2,189 | — | 12 | 2,330 | ||||||||||||||||||||||||||||||||||
Provision(1) | (734) | 1,566 | 1,853 | 11,186 | 79 | (18) | 13,932 | ||||||||||||||||||||||||||||||||||
| Ending balance | $ | 19,109 | $ | 9,345 | $ | 10,069 | $ | 55,453 | $ | 458 | $ | 743 | $ | 95,177 | |||||||||||||||||||||||||||
| Average balance | $ | 2,393,028 | $ | 997,296 | $ | 1,599,803 | $ | 2,051,272 | $ | 329,205 | $ | 24,836 | $ | 7,395,440 | |||||||||||||||||||||||||||
| Net charge-offs to loan average balance (annualized) | — | % | — | % | — | % | 0.38 | % | — | % | 0.51 | % | 0.11 | % | |||||||||||||||||||||||||||
_________________________ (1)The $14.0 million provision for credit losses on the consolidated statement of income includes a $13.9 million provision for loan losses, a $95,000 provision for off-balance sheet commitments and a $9,000 net benefit provision for held to maturity securities credit losses for the nine months ended September 30, 2023. | |||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | Construction/ Land/ Land Development | Residential Real Estate | Commercial and Industrial | Mortgage Warehouse Lines of Credit | Consumer | Total | |||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 13,425 | $ | 4,011 | $ | 6,116 | $ | 40,146 | $ | 340 | $ | 548 | $ | 64,586 | |||||||||||||||||||||||||||
Allowance for loan credit losses - BTH merger(1) | 1 | — | — | 5,525 | — | 1 | 5,527 | ||||||||||||||||||||||||||||||||||
| Charge-offs | 166 | — | 75 | 5,943 | — | 38 | 6,222 | ||||||||||||||||||||||||||||||||||
| Recoveries | 19 | 200 | 98 | 1,505 | — | 15 | 1,837 | ||||||||||||||||||||||||||||||||||
Provision(2) | 4,752 | 2,855 | 1,616 | 7,825 | 216 | 367 | 17,631 | ||||||||||||||||||||||||||||||||||
| Ending balance | $ | 18,031 | $ | 7,066 | $ | 7,755 | $ | 49,058 | $ | 556 | $ | 893 | $ | 83,359 | |||||||||||||||||||||||||||
| Average balance | $ | 1,865,658 | $ | 638,683 | $ | 1,042,397 | $ | 1,548,419 | $ | 453,658 | $ | 18,887 | $ | 5,567,702 | |||||||||||||||||||||||||||
| Net charge-offs to loan average balance (annualized) | 0.01 | % | (0.04) | % | — | % | 0.38 | % | — | % | 0.16 | % | 0.11 | % | |||||||||||||||||||||||||||
_________________________ (1)Excluded from the allowance is $10.8 million in PCD loans that were acquired in the merger with BTH that were added to the allowance and immediately written off. (2)The $20.1 million provision for credit losses on the consolidated statements of income includes a $17.6 million provision for loan losses, a $1.7 million provision for off-balance sheet commitments and a $725,000 provision for held to maturity securities credit losses for the nine months ended September 30, 2022. | |||||||||||||||||||||||||||||||||||||||||
The decrease in provision expense during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to the provision expense increase associated with the BTH merger which occurred on August 1, 2022, offset by an increase in loan provision primarily due to loan growth during the intervening period, as well as an increase in the provision for individually evaluated loan balances at September 30, 2023, compared to September 30, 2022.
The Company’s credit quality profile in relation to the ALCL drove an increase of $7.3 million in the collectively evaluated portion of the reserve at September 30, 2023, when compared to September 30, 2022, primarily due to qualitative factor changes across the Company’s risk pools. The individually evaluated portion of the reserve increased $4.5 million at September 30, 2023, when compared to September 30, 2022.
27
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ALCL allocated to these loans.
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial Real Estate | Construction/ Land/ Land Development | Residential Real Estate | Commercial and Industrial | Mortgage Warehouse Lines of Credit | Consumer | Total | ||||||||||||||||||||||||||||||||||
| Real Estate | $ | 752 | $ | — | $ | 3,799 | $ | — | $ | — | $ | — | $ | 4,551 | |||||||||||||||||||||||||||
| Equipment | — | — | — | 152 | — | — | 152 | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | 529 | — | — | 529 | ||||||||||||||||||||||||||||||||||
| Total | $ | 752 | $ | — | $ | 3,799 | $ | 681 | $ | — | $ | — | $ | 5,232 | |||||||||||||||||||||||||||
| ALCL Allocation | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial Real Estate | Construction/ Land/ Land Development | Residential Real Estate | Commercial and Industrial | Mortgage Warehouse Lines of Credit | Consumer | Total | ||||||||||||||||||||||||||||||||||
| Real Estate | $ | 273 | $ | 97 | $ | 6,731 | $ | — | $ | — | $ | — | $ | 7,101 | |||||||||||||||||||||||||||
| Accounts Receivable | — | — | — | 831 | — | — | 831 | ||||||||||||||||||||||||||||||||||
| Equipment | — | — | — | 285 | — | — | 285 | ||||||||||||||||||||||||||||||||||
| Total | $ | 273 | $ | 97 | $ | 6,731 | $ | 1,116 | $ | — | $ | — | $ | 8,217 | |||||||||||||||||||||||||||
| ALCL Allocation | $ | — | $ | — | $ | — | $ | 738 | $ | — | $ | — | $ | 738 | |||||||||||||||||||||||||||
Collateral-dependent loans consist primarily of residential real estate, commercial real estate and commercial and industrial loans. These loans are individually evaluated when foreclosure is probable or when the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral. In the case of commercial and industrial loans secured by equipment, the fair value of the collateral is estimated by third-party valuation experts. Loan balances are charged down to the underlying collateral value when they are deemed uncollectible. Note that the Company did not elect to use the collateral maintenance agreement practical expedient available under CECL.
Nonaccrual LHFI was as follows:
| Nonaccrual With No Allowance for Credit Loss | Total Nonaccrual | ||||||||||||||||||||||
(Dollars in thousands) Loans secured by real estate: | September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||||||||
| Commercial real estate | $ | 900 | $ | 435 | $ | 942 | $ | 526 | |||||||||||||||
Construction/land/land development | — | 59 | 235 | 270 | |||||||||||||||||||
| Residential real estate | 5,363 | 7,023 | 13,236 | 7,712 | |||||||||||||||||||
| Total real estate | 6,263 | 7,517 | 14,413 | 8,508 | |||||||||||||||||||
Commercial and industrial | 4,592 | 527 | 17,072 | 1,383 | |||||||||||||||||||
| Consumer | — | — | 123 | 49 | |||||||||||||||||||
| Total nonaccrual loans | $ | 10,855 | $ | 8,044 | $ | 31,608 | $ | 9,940 | |||||||||||||||
All interest formerly accrued but not received for loans placed on nonaccrual status is reversed from interest income. Subsequent receipts on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. At September 30, 2023, and December 31, 2022, the Company had $682,000 and zero funding commitments for loans in which the terms were modified as a result of the borrowers experiencing financial difficulty, respectively.
28
For the nine months ended September 30, 2023 and 2022, gross interest income that would have been recorded had the nonaccruing loans been current in accordance with their original terms, was $884,000 and $799,000, respectively. No interest income was recorded on these loans while they were considered nonaccrual during the nine months ended September 30, 2023 and 2022.
The Company elects the fair value option for recording residential mortgage loans held for sale in accordance with U.S. GAAP. The Company transferred $7.1 million of nonperforming mortgage loans from the held for sale portfolio to the held for investment portfolio during the three months ended June 30, 2023. As a result, the company had zero nonaccrual mortgage loans held for sale that were recorded using the fair value option election at September 30, 2023, compared to $3.9 million at December 31, 2022.
The tables below summarize modifications made to borrowers experiencing financial difficulty by loan and modification type during the dates indicated.
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Term Extension | Combination: Term Extension and Interest Rate Reduction | Other-Than-Insignificant Payment Delay | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amortized Cost | % of Loans | Amortized Cost | % of Loans | Amortized Cost | % of Loans | |||||||||||||||||||||||||||||
| Loans secured by real estate: | |||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 7,507 | 0.31 | % | $ | — | — | % | $ | 427 | 0.02 | % | |||||||||||||||||||||||
| Construction/land/land development | 3,807 | 0.35 | — | — | — | — | |||||||||||||||||||||||||||||
| Residential real estate | 745 | 0.04 | — | — | — | — | |||||||||||||||||||||||||||||
| Total real estate | 12,059 | 0.23 | — | — | 427 | 0.01 | |||||||||||||||||||||||||||||
| Commercial and industrial | 13,935 | 0.68 | 923 | 0.04 | 53 | — | |||||||||||||||||||||||||||||
| Total | $ | 25,994 | 0.34 | $ | 923 | 0.01 | $ | 480 | 0.01 | ||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Term Extension | Combination: Term Extension and Interest Rate Reduction | Other-Than-Insignificant Payment Delay | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amortized Cost | % of Loans | Amortized Cost | % of Loans | Amortized Cost | % of Loans | |||||||||||||||||||||||||||||
| Loans secured by real estate: | |||||||||||||||||||||||||||||||||||
| Commercial real estate | $ | 7,853 | 0.32 | % | $ | — | — | % | $ | 427 | 0.02 | % | |||||||||||||||||||||||
| Construction/land/land development | 3,808 | 0.35 | — | — | — | — | |||||||||||||||||||||||||||||
| Residential real estate | 2,477 | 0.15 | — | — | — | — | |||||||||||||||||||||||||||||
| Total real estate | 14,138 | 0.27 | — | — | 427 | 0.01 | |||||||||||||||||||||||||||||
| Commercial and industrial | 15,562 | 0.76 | 1,091 | 0.05 | 53 | — | |||||||||||||||||||||||||||||
| Total | $ | 29,700 | 0.39 | $ | 1,091 | 0.01 | $ | 480 | 0.01 | ||||||||||||||||||||||||||
29
The following table describes the financial effect of the modification made to borrowers experiencing financial difficulty during three and nine months ended September 30, 2023, respectively.
| Three Months Ended September 30, 2023 | |||||||||||||||||
| Interest Rate Reduction | Term Extension | Other-Than-Insignificant Payment Delay | |||||||||||||||
| Commercial real estate | N/A | Added a weighted average 10.1 months to the life of the modified loans | Delayed payment of weighted average 6 months | ||||||||||||||
| Construction/land/land development | N/A | Added a weighted average 8.6 months to the life of the modified loans | N/A | ||||||||||||||
| Residential real estate | N/A | Added a weighted average 18.4 months to the life of the modified loans | N/A | ||||||||||||||
| Commercial and industrial | Reduced weighted average contractual interest rate from 10.1% to 9.5% | Added a weighted average 6.7 months to the life of the modified loans | Delayed payment of weighted average 6 months | ||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||
| Interest Rate Reduction | Term Extension | Other-Than-Insignificant Payment Delay | |||||||||||||||
| Commercial real estate | N/A | Added a weighted average 12.1 months to the life of the modified loans | Delayed payment of weighted average 6 months | ||||||||||||||
| Construction/land/land development | N/A | Added a weighted average 13.1 months to the life of the modified loans | N/A | ||||||||||||||
| Residential real estate | N/A | Added a weighted average 9.3 months to the life of the modified loans | N/A | ||||||||||||||
| Commercial and industrial | Reduced weighted average contractual interest rate from 9.9% to 9.0% | Added a weighted average 9.0 months to the life of the modified loans | Delayed payment of weighted average 6 months | ||||||||||||||
The following table depicts the performance of loans that have been modified during the nine months ended September 30, 2023.
| Payment Status (Amortized Cost Basis) | |||||||||||||||||
| September 30, 2023 | |||||||||||||||||
| (Dollars in thousands) | Current | 30-89 Days Past Due | 90 Days or More Past Due | ||||||||||||||
| Loans secured by real estate: | |||||||||||||||||
Commercial real estate | $ | 8,280 | $ | — | $ | — | |||||||||||
Construction/land/land development | 3,808 | — | — | ||||||||||||||
| Residential real estate | 2,195 | 282 | — | ||||||||||||||
| Total real estate | 14,283 | 282 | — | ||||||||||||||
| Commercial and industrial | 16,705 | — | — | ||||||||||||||
| Total LHFI | $ | 30,988 | $ | 282 | $ | — | |||||||||||
There were no loans to borrowers experiencing financial difficulty that defaulted during the nine months ended September 30, 2023, that were modified within the last nine months. A payment default is defined as a loan that was 90 or more days past due. The Company monitors the performance of modified loans on an ongoing basis. In the event of subsequent default, the ALCL is assessed on the basis of an individual evaluation of each loan. The modifications made during the periods presented did not significantly impact the Company’s determination of the allowance for credit losses.
30
Note 5 — Fair Value of Financial Instruments
Fair value is the exchange price that is expected to be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain assets and liabilities are recorded in the Company’s consolidated financial statements at fair value. Some are recorded on a recurring basis and some on a non-recurring basis.
The Company utilizes fair value measurement to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach to estimate the fair values of its financial instruments. Such valuation techniques are consistently applied.
A hierarchy for fair value has been established, which categorizes the valuation techniques into three levels used to measure fair value. The three levels are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Fair value is based on significant other observable inputs that are generally determined based on a single price for each financial instrument provided to the Company by an unrelated third-party pricing service and is based on one or more of the following:
•Quoted prices for similar, but not identical, assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in markets that are not active;
•Inputs other than quoted prices that are observable, such as interest rate and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and
•Other inputs derived from or corroborated by observable market inputs.
Level 3 - Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects the Company’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use. These estimates can be inherently uncertain.
There were no transfers between fair value reporting levels for any period presented.
31
Fair Values of Assets and Liabilities Recorded on a Recurring Basis
The following tables summarize financial assets and financial liabilities recorded at fair value on a recurring basis at September 30, 2023, and December 31, 2022, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value. There were no changes in the valuation techniques during 2023 or 2022.
| September 30, 2023 | |||||||||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| State and municipal securities | $ | — | $ | 264,912 | $ | 51,439 | $ | 316,351 | |||||||||||||||
| Corporate bonds | — | 73,290 | 1,000 | 74,290 | |||||||||||||||||||
| U.S. treasury securities | 78,963 | — | — | 78,963 | |||||||||||||||||||
| U.S. government agency securities | — | 23,828 | — | 23,828 | |||||||||||||||||||
| Commercial mortgage-backed securities | — | 90,020 | — | 90,020 | |||||||||||||||||||
| Residential mortgage-backed securities | — | 500,748 | — | 500,748 | |||||||||||||||||||
| Commercial collateralized mortgage obligations | — | 33,949 | — | 33,949 | |||||||||||||||||||
| Residential collateralized mortgage obligations | — | 128,433 | — | 128,433 | |||||||||||||||||||
| Asset-backed securities | — | 44,257 | — | 44,257 | |||||||||||||||||||
| Securities available for sale | 78,963 | 1,159,437 | 52,439 | 1,290,839 | |||||||||||||||||||
| Securities carried at fair value through income | — | — | 6,772 | 6,772 | |||||||||||||||||||
| Loans held for sale | — | 14,944 | — | 14,944 | |||||||||||||||||||
| Mortgage servicing rights | — | — | 19,189 | 19,189 | |||||||||||||||||||
| Other assets - derivatives | — | 29,493 | — | 29,493 | |||||||||||||||||||
| Total recurring fair value measurements - assets | $ | 78,963 | $ | 1,203,874 | $ | 78,400 | $ | 1,361,237 | |||||||||||||||
| Other liabilities - derivatives | $ | — | $ | (28,035) | $ | — | $ | (28,035) | |||||||||||||||
| Total recurring fair value measurements - liabilities | $ | — | $ | (28,035) | $ | — | $ | (28,035) | |||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| State and municipal securities | $ | — | $ | 334,708 | $ | 54,769 | $ | 389,477 | |||||||||||||||
| Corporate bonds | — | 81,258 | 1,000 | 82,258 | |||||||||||||||||||
| U.S. treasury securities | 110,645 | — | — | 110,645 | |||||||||||||||||||
| U.S. government agency securities | — | 137,775 | — | 137,775 | |||||||||||||||||||
| Commercial mortgage-backed securities | — | 91,943 | — | 91,943 | |||||||||||||||||||
| Residential mortgage-backed securities | — | 572,303 | — | 572,303 | |||||||||||||||||||
| Commercial collateralized mortgage obligations | — | 38,813 | — | 38,813 | |||||||||||||||||||
| Residential collateralized mortgage obligations | — | 146,370 | — | 146,370 | |||||||||||||||||||
| Asset-backed securities | — | 71,900 | — | 71,900 | |||||||||||||||||||
| Securities available for sale | 110,645 | 1,475,070 | 55,769 | 1,641,484 | |||||||||||||||||||
| Securities carried at fair value through income | — | — | 6,368 | 6,368 | |||||||||||||||||||
| Loans held for sale | — | 25,389 | — | 25,389 | |||||||||||||||||||
| Mortgage servicing rights | — | — | 20,824 | 20,824 | |||||||||||||||||||
| Other assets - derivatives | — | 26,733 | — | 26,733 | |||||||||||||||||||
| Total recurring fair value measurements - assets | $ | 110,645 | $ | 1,527,192 | $ | 82,961 | $ | 1,720,798 | |||||||||||||||
| Other liabilities - derivatives | $ | — | $ | (25,275) | $ | — | $ | (25,275) | |||||||||||||||
| Total recurring fair value measurements - liabilities | $ | — | $ | (25,275) | $ | — | $ | (25,275) | |||||||||||||||
32
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2023 and 2022, are summarized as follows:
| (Dollars in thousands) | MSRs | Securities Available for Sale | Securities at Fair Value Through Income | ||||||||||||||
| Balance at January 1, 2023 | $ | 20,824 | $ | 55,769 | $ | 6,368 | |||||||||||
| Gain (loss) recognized in earnings: | |||||||||||||||||
Mortgage banking revenue(1) | (485) | — | — | ||||||||||||||
| Other noninterest income | — | — | 689 | ||||||||||||||
| Loss recognized in AOCI | — | (703) | — | ||||||||||||||
| Purchases, issuances, sales and settlements: | |||||||||||||||||
| Originations | 656 | — | — | ||||||||||||||
| Sales | (1,806) | — | — | ||||||||||||||
| Settlements | — | (2,627) | (285) | ||||||||||||||
Balance at September 30, 2023 | $ | 19,189 | $ | 52,439 | $ | 6,772 | |||||||||||
___________________________
(1)Total mortgage banking revenue includes changes in fair value due to market changes and run-off.
| (Dollars in thousands) | MSRs | Securities Available for Sale | Securities at Fair Value Through Income | ||||||||||||||
| Balance at January 1, 2022 | $ | 16,220 | $ | 41,461 | $ | 7,497 | |||||||||||
| Gain (loss) recognized in earnings: | |||||||||||||||||
Mortgage banking revenue(1) | 2,409 | — | — | ||||||||||||||
| Other noninterest income | — | — | (875) | ||||||||||||||
| Loss recognized in AOCI | — | (5,048) | — | ||||||||||||||
| Purchases, issuances, sales and settlements: | |||||||||||||||||
| Originations | 1,926 | — | — | ||||||||||||||
| Purchases | — | 25,112 | — | ||||||||||||||
| Acquired in BTH merger | 1,099 | 5,000 | — | ||||||||||||||
| Settlements | — | (3,323) | (275) | ||||||||||||||
Balance at September 30, 2022 | $ | 21,654 | $ | 63,202 | $ | 6,347 | |||||||||||
(1)Total mortgage banking revenue includes changes in fair value due to market changes and run-off.
The Company obtains fair value measurements for loans at fair value, securities available for sale and securities at fair value through income from an independent pricing service; therefore, quantitative unobservable inputs are unknown.
33
The following methodologies were used to measure the fair value of financial assets and liabilities valued on a recurring basis:
Securities Available for Sale
Securities classified as available for sale are reported at fair value utilizing Level 1, Level 2 or Level 3 inputs. For Level 1 securities, the Company obtains the fair value measurements for those identical assets from an independent pricing service. For Level 2 securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, market consensus prepayment speeds, credit information and the security's terms and conditions, among other things. In order to ensure the fair values are consistent with ASC 820, Fair Value Measurements and Disclosures, the Company periodically checks the fair value by comparing them to other pricing sources, such as Bloomberg LP. The third-party pricing service is subject to an annual review of internal controls in accordance with the Statement on Standards for Attestation Engagements No. 16, which was made available to the Company. In certain cases where Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. For level 3 securities, the Company determines the fair value of the instruments based on their callability, putability and prepay optionality. Putable instruments are valued at book value, non-putable instruments are priced mainly using a present value calculation based on the spread to the yield curve.
Mortgage Servicing Rights (“MSRs”)
The carrying amounts of the MSRs equal fair value, which are determined using a discounted cash flow valuation model. The significant assumptions used to value MSRs were as follows:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Range | Weighted Average(1) | Range | Weighted Average(1) | ||||||||||||||||||||
| Prepayment speeds | 7.31% - 7.89% | 7.64 | % | 7.65% - 9.20% | 8.11 | % | |||||||||||||||||
| Discount rates | 10.25 - 12.75 | 10.31 | 9.50 - 22.07 | 12.55 | |||||||||||||||||||
__________________________
(1)The weighted average was calculated with reference to the principal balance of the underlying mortgages.
Recently there have been significant market-driven fluctuations in the assumptions listed above. These fluctuations can be rapid and may continue to be significant. Typically, loans with higher average coupon rates have a greater likelihood of prepayment during comparatively low interest rate environments, while loans with lower average coupon rates have a lower likelihood of prepayment. The recent increase in rates has caused a decrease in the weighted average prepayment speed. Estimating these assumptions within ranges that market participants would use in determining the fair value of MSRs requires significant management judgment.
Derivatives
Fair values for interest rate swap agreements and interest rate lock commitments are based upon the amounts that would be required to settle the contracts. Fair values for risk participations, forward mortgage backed security purchases or loan sale commitments and future contracts to purchase United States treasury notes are based on the fair values of the underlying mortgage loans or securities and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements.
34
Fair Values of Assets Recorded on a Recurring Basis for which the Fair Value Option has been Elected
Certain assets are measured at fair value on a recurring basis due to the Company’s election to adopt fair value accounting treatment for those assets. This election allows for a more effective offset of the changes in fair values of the assets and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC Topic 815, Derivatives and Hedging. For assets for which the fair value has been elected, the earned current contractual interest payment is recognized in interest income, loan origination costs and fees on fair value option loans are recognized in earnings as incurred and not deferred. At September 30, 2023, and December 31, 2022, there were no gains or losses recorded attributable to changes in instrument-specific credit risk. The following tables summarize the difference between the fair value and the unpaid principal balance for financial instruments for which the fair value option has been elected:
| September 30, 2023 | |||||||||||||||||
| (Dollars in thousands) | Aggregate Fair Value | Principal Balance/Amortized Cost | Difference | ||||||||||||||
Loans held for sale(1) | $ | 14,944 | $ | 14,715 | $ | 229 | |||||||||||
| Securities carried at fair value through income | 6,772 | 6,815 | (43) | ||||||||||||||
| Total | $ | 21,716 | $ | 21,530 | $ | 186 | |||||||||||
____________________________
(1)There were no loans held for sale that were designated as nonaccrual or 90 days or more past due at September 30, 2023.
| December 31, 2022 | |||||||||||||||||
| (Dollars in thousands) | Aggregate Fair Value | Principal Balance/Amortized Cost | Difference | ||||||||||||||
Loans held for sale(1) | $ | 25,389 | $ | 24,946 | $ | 443 | |||||||||||
| Securities carried at fair value through income | 6,368 | 7,100 | (732) | ||||||||||||||
| Total | $ | 31,757 | $ | 32,046 | $ | (289) | |||||||||||
____________________________
(1)$3.9 million of loans held for sale were designated as nonaccrual or 90 days or more past due at December 31, 2022. Of this balance, $3.3 million was guaranteed by U.S. Government agencies.
Changes in the fair value of assets for which the Company elected the fair value option are classified in the consolidated statements of income line items reflected in the following table:
| (Dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| Changes in fair value included in noninterest income: | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Mortgage banking revenue (loans held for sale) | $ | (22) | $ | (309) | $ | (214) | $ | (741) | |||||||||||||||
| Other income: | |||||||||||||||||||||||
| Securities carried at fair value through income | 666 | (282) | 689 | (875) | |||||||||||||||||||
Total fair value option impact on noninterest income (1) | $ | 644 | $ | (591) | $ | 475 | $ | (1,616) | |||||||||||||||
____________________________
(1)The fair value option impact on noninterest income is offset by the derivative gain/loss recognized in noninterest income. Please see Note 6 — Mortgage Banking for more detail.
The following methodologies were used to measure the fair value of financial assets valued on a recurring basis for which the fair value option was elected:
Securities at Fair Value through Income
Securities carried at fair value through income are valued using a discounted cash flow with a credit spread applied to each instrument based on the creditworthiness of each issuer. Credit spreads ranged from 83 to 227 basis points at both September 30, 2023, and December 31, 2022. The Company believes the fair value approximates an exit price.
35
Loans Held for Sale
Fair values for loans held for sale are established using anticipated sale prices for loans allocated to a sale commitment, and those unallocated to a commitment are valued based on the interest rate and term for similar loans allocated. The Company believes the fair value approximates an exit price.
Fair Value of Assets Recorded on a Nonrecurring Basis
Equity Securities without Readily Determinable Fair Values
Equity securities without readily determinable fair values totaled $63.8 million and $67.4 million at September 30, 2023, and December 31, 2022, respectively, and are shown on the face of the consolidated balance sheets. The majority of the Company’s equity investments qualify for the practical expedient allowed for equity securities without a readily determinable fair value, such that the Company has elected to carry these securities at cost adjusted for any observable transactions during the period, less any impairment. To date, no impairment has been recorded on the Company's investments in equity securities that do not have readily determinable fair values. During the three months ended September 30, 2023, the Company observed a price change in multiple orderly transactions for identical equity securities and adjusted the Company’s basis upwards in one of the Company’s equity securities by $10.1 million.
Government National Mortgage Association Repurchase Asset
The Company had zero and $24.6 million Government National Mortgage Association (“GNMA”) repurchase assets included in loans held for sale on the consolidated balance sheets at September 30, 2023, and December 31, 2022, respectively. The assets were valued at the lower of cost or market and, where market is lower than cost, valued using anticipated sale prices for loans allocated to a sale commitment, and those unallocated to a commitment are valued based on the interest rate and term for similar loans.
During the second half of 2022, the Company entered into an agreement to sell its GNMA MSR portfolio, which met all final sale conditions in early 2023. The Company sold $1.8 million in GNMA MSR, with no significant additional gain or loss realized, and derecognized the related GNMA repurchase asset and offsetting liability during the quarter ended March 31, 2023.
Individually Evaluated Loans with Credit Losses
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured to determine if any credit loss exists. Allowable methods for determining the amount of credit loss include estimating the fair value using the fair value of the collateral for collateral-dependent loans and a discounted cash flow methodology for other evaluated loans that are not collateral dependent. If the loan is identified as collateral-dependent, the fair value method of measuring the amount of credit loss is utilized. Evaluating the fair value of the collateral for collateral-dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the loan is not collateral-dependent, the discounted cash flow method is utilized, which involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate. Loans that have experienced a credit loss with specific allocated losses are within Level 3 of the fair value hierarchy when the credit loss is determined using the fair value method. The fair value of loans that have experienced a credit loss with specific allocated losses was approximately $15.9 million and $20.7 million at September 30, 2023, and December 31, 2022, respectively.
Non-Financial Assets
Foreclosed assets held for sale are the only non-financial assets valued on a non-recurring basis that are initially recorded by the Company at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the ALCL. Additionally, valuations are periodically performed by management, and any subsequent reduction in value is recognized by a charge to income. The carrying value and fair value of foreclosed assets held for sale was estimated using Level 3 inputs based on observable market data and was $3.9 million and $806,000 at September 30, 2023, and December 31, 2022, respectively. At September 30, 2023, and December 31, 2022, the Company had zero and $10,000, respectively, in principal amount of residential mortgage loans in the process of foreclosure.
36
Fair Values of Financial Instruments Not Recorded at Fair Value
Loans
The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with no significant change in credit risk. The fair value of fixed rate loans and variable-rate loans, which reprice on an infrequent basis, is estimated by discounting future cash flows using exit level pricing, which combines the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality and an estimated additional rate to reflect a liquidity premium. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.
Deposits
The estimated fair value approximates carrying value for demand deposits. The fair value of fixed rate deposit liabilities with defined maturities is estimated by discounting future cash flows using the interest rates currently available for funding from the FHLB. The estimated fair value of deposits does not take into account the value of our long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, the Company would likely realize a core deposit premium if the deposit portfolio were sold in the principal market for such deposits.
Borrowed Funds
The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed rate and fixed-to-floating-rate borrowings is estimated using quoted market prices, if available, or by discounting future cash flows using current interest rates for similar financial instruments. The estimated fair value approximates carrying value for variable-rate junior subordinated debentures that reprice quarterly.
The carrying value and estimated fair values of financial instruments not recorded at fair value are as follows:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||
Financial assets: Level 1 inputs: | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||||||||
| Cash and cash equivalents | $ | 305,278 | $ | 305,278 | $ | 358,972 | $ | 358,972 | |||||||||||||||
| Level 2 inputs: | |||||||||||||||||||||||
Non-marketable equity securities held in other financial institutions | 63,842 | 63,842 | 67,378 | 67,378 | |||||||||||||||||||
| GNMA repurchase asset | — | — | 24,569 | 24,569 | |||||||||||||||||||
| Accrued interest and loan fees receivable | 41,231 | 41,231 | 38,136 | 38,136 | |||||||||||||||||||
| Level 3 inputs: | |||||||||||||||||||||||
| Securities held to maturity | 10,790 | 11,005 | 11,275 | 11,970 | |||||||||||||||||||
| LHFI, net | 7,472,886 | 7,094,772 | 7,002,861 | 6,835,770 | |||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Level 2 inputs: | |||||||||||||||||||||||
| Deposits | 8,374,488 | 8,358,211 | 7,775,702 | 7,753,966 | |||||||||||||||||||
| FHLB advances and other borrowings | 12,213 | 11,679 | 639,230 | 639,103 | |||||||||||||||||||
| Subordinated indebtedness | 196,825 | 187,369 | 201,765 | 181,624 | |||||||||||||||||||
| Accrued interest payable | 14,126 | 14,126 | 3,917 | 3,917 | |||||||||||||||||||
37
Note 6 — Mortgage Banking
The following table presents the Company’s revenue from mortgage banking operations:
| (Dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
Mortgage banking revenue | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Origination | $ | 124 | $ | 207 | $ | 384 | $ | 641 | |||||||||||||||
| Gain on sale of loans held for sale | 757 | 636 | 2,380 | 4,477 | |||||||||||||||||||
| Originations of MSRs | 225 | 462 | 656 | 1,926 | |||||||||||||||||||
| Servicing | 915 | 1,446 | 2,840 | 4,306 | |||||||||||||||||||
| Total gross mortgage revenue | 2,021 | 2,751 | 6,260 | 11,350 | |||||||||||||||||||
MSR valuation adjustments, net (1) | (122) | (2,034) | (485) | 2,409 | |||||||||||||||||||
| Mortgage HFS and pipeline fair value adjustment | (110) | (410) | (27) | (971) | |||||||||||||||||||
| MSR hedge impact | (897) | (1,236) | (1,673) | (7,267) | |||||||||||||||||||
| Mortgage banking revenue | $ | 892 | $ | (929) | $ | 4,075 | $ | 5,521 | |||||||||||||||
(1)Based upon broker estimate, the Company recorded a $2.0 million impairment on the held for sale GNMA MSR portfolio during the quarter ended September 30, 2022.
Management uses forward-settling mortgage-backed securities and U.S. Treasury futures to mitigate the impact of changes in fair value of MSRs. See Note 8 — Derivative Financial Instruments for further information.
Mortgage Servicing Rights
Activity in MSRs was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Balance at beginning of period | $ | 19,086 | $ | 22,127 | $ | 20,824 | $ | 16,220 | |||||||||||||||
| Servicing acquired in BTH merger | — | 1,099 | — | 1,099 | |||||||||||||||||||
| Addition of servicing rights | 225 | 462 | 656 | 1,926 | |||||||||||||||||||
| Settlement of sale of GNMA MSR | — | — | (1,806) | — | |||||||||||||||||||
| Valuation adjustment, net of amortization | (122) | (2,034) | (485) | 2,409 | |||||||||||||||||||
| Balance at end of period | $ | 19,189 | $ | 21,654 | $ | 19,189 | $ | 21,654 | |||||||||||||||
During the second half of 2022, the Company entered into an agreement to sell its GNMA MSR portfolio, which met all final sale conditions in early 2023. The Company sold $1.8 million in GNMA MSR, with no significant additional gain or loss realized, and derecognized the related GNMA repurchase asset and offsetting liability during the quarter ended March 31, 2023.
The Company receives annual servicing fee income approximating 0.25% of the outstanding balance of the underlying loans. In connection with the Company's activities as a servicer of mortgage loans, the investors and the securitization trusts have no recourse to the Company’s assets for failure of debtors to pay when due.
The Company is potentially subject to losses in its loan servicing portfolio due to loan foreclosures. The Company has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loan sold violated representations or warranties made by the Company and/or the borrower at the time of the sale, which the Company refers to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation and/or loans obtained through fraud by borrowers or other third parties. Putback claims may be made until the loan is paid in full. When a putback claim is received, the Company evaluates the claim and takes appropriate actions based on the nature of the claim. The Company is required by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to provide a response to putback claims within 60 days of the date of receipt.
38
At September 30, 2023, and December 31, 2022, the reserve for mortgage loan servicing putback expenses totaled $146,000 and $217,000, respectively. There is inherent uncertainty in reasonably estimating the requirement for reserves against future mortgage loan servicing putback expenses. Future putback expenses depend on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold with servicing released and the subsequent consequences under the representations and warranties.
GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. At the servicer’s option, and without GNMA's prior authorization, the servicer may repurchase a delinquent loan for an amount equal to 100% of the remaining principal balance of the loan. This buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When a financial institution is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be included in the consolidated balance sheets as mortgage loans held for sale, regardless of whether the institution intends to exercise the buy-back option. These loans totaled $24.6 million at December 31, 2022, and were recorded as mortgage loans held for sale at the lower of cost or fair value with a corresponding liability in FHLB advances and other borrowings on the Company’s consolidated balance sheets. The final sale conditions of the GNMA MSR portfolio were met during the quarter ended March 31, 2023, and, accordingly, there were no GNMA repurchase program loans on the balance sheet at September 30, 2023.
Note 7 — Borrowings
Borrowed funds are summarized as follows:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Short-term FHLB advances | $ | — | $ | 550,000 | |||||||
| Long-term FHLB advances | 6,541 | 6,740 | |||||||||
| GNMA repurchase liability | — | 24,569 | |||||||||
| Overnight repurchase agreements with depositors | 5,672 | 27,921 | |||||||||
| Correspondent short-term borrowings | — | 30,000 | |||||||||
| Total FHLB advances and other borrowings | $ | 12,213 | $ | 639,230 | |||||||
| Subordinated indebtedness, net | $ | 196,825 | $ | 201,765 | |||||||
39
| Debt Security | Issue Year | Interest Rate | Outstanding Amount | |||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Floating rate subordinated promissory notes due June 2025 | 2015 | Prime +175 bps Min: 3.875% Max: 6.375% | $ | 5,500 | ||||||||||||||||
| Floating rate subordinated promissory notes due December 2023 | 2016 | Prime +125 bps Min: 3.875% Max: 6.375% | 3,000 | |||||||||||||||||
| Floating rate subordinated promissory notes due December 2026 | 2016 | Prime +175 bps Min: 3.875% Max: 6.375% | 6,750 | |||||||||||||||||
| Floating rate subordinated promissory notes due December 2024 | 2017 | Prime +125 bps Min: 3.875% Max: 6.375% | 10,850 | |||||||||||||||||
| Floating rate subordinated promissory notes due December 2027 | 2017 | Prime +175 bps Min: 3.875% Max: 6.375% | 5,200 | |||||||||||||||||
| Floating rate subordinated promissory notes due December 2025 | 2018 | Prime +50 bps Min: 3.875% Max: 6.125% | 3,200 | |||||||||||||||||
| Floating rate subordinated promissory notes due December 2028 | 2018 | Prime +75 bps Min: 3.875% Max: 6.125% | 1,900 | |||||||||||||||||
| Fixed to floating rate subordinated promissory notes due June 2031 | 2021 | Through 6/30/26: 4.00% After 6/30/26: Prime +75 bps Min: 3.875% Max: 6.125% | 1,000 | |||||||||||||||||
Remaining unamortized merger-related fair value adjustment at September 30, 2023 | (38) | |||||||||||||||||||
| Total assumed subordinated notes | 37,362 | |||||||||||||||||||
| Legacy subordinated indebtedness | 143,129 | |||||||||||||||||||
| Total subordinated indebtedness, excluding junior subordinated debt | $ | 180,491 | ||||||||||||||||||
The following table is a summary of the terms of the current junior subordinated debentures at September 30, 2023:
(Dollars in thousands) Issuance Trust | Issuance Date | Maturity Date | Amount Outstanding | Rate Type | Current Rate | Maximum Rate | ||||||||||||||||||||||||||||||||
| CTB Statutory Trust I | 07/2001 | 07/2031 | $ | 6,702 | Variable (1) | 8.37 | % | 12.50 | % | |||||||||||||||||||||||||||||
First Louisiana Statutory Trust I | 09/2006 | 12/2036 | 4,124 | Variable (2) | 7.47 | 16.00 | ||||||||||||||||||||||||||||||||
| BT Holdings Trust I | 05/2007 | 09/2037 | 7,217 | Variable (3) | 7.30 | N/A | ||||||||||||||||||||||||||||||||
| Par amount | 18,043 | |||||||||||||||||||||||||||||||||||||
| Unamortized original issue discount | (1,026) | |||||||||||||||||||||||||||||||||||||
| Unamortized purchase accounting discount | (683) | |||||||||||||||||||||||||||||||||||||
| Total junior subordinated debt at September 30, 2023 | $ | 16,334 | ||||||||||||||||||||||||||||||||||||
____________________________
(1)The trust preferred securities reprice quarterly based on the three-month average SOFR plus 3.30%, with the last reprice date on July 27, 2023.
(2)The trust preferred securities reprice quarterly based on the three-month CME Term SOFR plus 1.80%, plus 0.26161% SOFR spread adjustment, with the last reprice date on September 13, 2023.
(3)The trust preferred securities reprice quarterly based on the three-month CME Term SOFR plus 1.64%, plus 0.26161% SOFR spread adjustment, with the last reprice date on September 1, 2023.
40
Note 8 — Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company enters into derivative financial instruments to manage risks related to differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments, as well as to manage changes in fair values of some assets which are marked at fair value through the consolidated statement of income on a recurring basis.
Cash Flow Hedges of Interest Rate Risk
The Company is a party to interest rate swap agreements under which the Company receives interest at a variable rate and pays at a fixed rate. The derivative instruments represented by these swap agreements are designated as cash flow hedges of the Company’s forecasted variable cash flows under a variable-rate term borrowing agreements. During the terms of the swap agreements, the effective portion of changes in the fair value of the derivative instruments are recorded in accumulated other comprehensive (loss) income and subsequently reclassified into earnings in the periods that the hedged forecasted variable-rate interest payments affected earnings. There was no ineffective portion of the change in fair value of the derivatives recognized directly in earnings. The entire swap fair value will be reclassified into earnings before the expiration dates of the swap agreements.
Derivatives Not Designated as Hedges
Customer interest rate derivative program
The Company offers certain derivatives products, primarily interest rate swaps, directly to qualified commercial banking customers to facilitate their risk management strategies. In most instances, the Company acts only as an intermediary, simultaneously entering into offsetting agreements with unrelated financial institutions, thereby mitigating its net risk exposure resulting from such transactions without significantly impacting its results of operations. Because the interest rate derivatives associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer derivatives and any offsetting derivatives are recognized directly in earnings as a component of noninterest income.
From time to time, the Company shares in credit risk on interest rate swap arrangements, by entering into risk participation agreements with syndication partners. These are accounted for at fair value and disclosed as risk participation derivatives.
Mortgage banking derivatives
The Company enters into certain derivative agreements as part of its mortgage banking and related risk management activities. These agreements include interest rate lock commitments on prospective residential mortgage loans and forward commitments to sell these loans to investors on a mandatory delivery basis. The Company also economically hedges the value of MSRs by entering into a series of commitments to purchase mortgage-backed securities in the future and U.S. Treasury future contracts.
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Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The following tables disclose the fair value of derivative instruments in the Company’s consolidated balance sheets at September 30, 2023, and December 31, 2022, as well as the effect of these derivative instruments on the Company’s consolidated statements of income for the nine months ended September 30, 2023 and 2022. Derivative instruments and their related gains and losses are reported in other operating activities, net in the statements of cash flows.
| (Dollars in thousands) | Notional Amounts(1) | Fair Values | |||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: | September 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||||||||
| Interest rate swaps included in other assets | $ | 10,500 | $ | 10,500 | $ | 1,106 | $ | 1,043 | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Interest rate swaps included in other assets | $ | 366,934 | $ | 352,842 | $ | 27,991 | $ | 25,482 | |||||||||||||||
Interest rate swaps included in other liabilities | 360,119 | 345,742 | (27,517) | (25,175) | |||||||||||||||||||
| Risk participation agreements included in other assets | 20,000 | 59,738 | 1 | — | |||||||||||||||||||
| Forward commitments to purchase forward-settling mortgage-backed securities included in other liabilities | 10,000 | 7,000 | (153) | (100) | |||||||||||||||||||
| Forward commitments to purchase treasury notes in other liabilities | 23,500 | 31,500 | (365) | — | |||||||||||||||||||
| Forward commitments to sell residential mortgage loans included in other assets | 4,500 | 8,500 | 53 | 7 | |||||||||||||||||||
Interest rate-lock commitments on residential mortgage loans included in other assets | 14,154 | 9,544 | 342 | 201 | |||||||||||||||||||
| $ | 799,207 | $ | 814,866 | $ | 352 | $ | 415 | ||||||||||||||||
____________________________
(1)Notional or contractual amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets.
The weighted-average rates paid and received for interest rate swaps at September 30, 2023, and December 31, 2022, were as follows:
| Weighted-Average Interest Rate | |||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Interest rate swaps: | Paid | Received | Paid | Received | |||||||||||||||||||
| Cash flow hedges | 4.24 | % | 8.25 | % | 4.98 | % | 5.72 | % | |||||||||||||||
| Non-hedging interest rate swaps - financial institution counterparties | 4.77 | 7.87 | 3.72 | 5.75 | |||||||||||||||||||
| Non-hedging interest rate swaps - customer counterparties | 7.87 | 4.77 | 5.75 | 3.72 | |||||||||||||||||||
Gains and losses recognized on derivative instruments not designated as hedging instruments are as follows:
| (Dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| Derivatives not designated as hedging instruments: | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
Amount of loss recognized in mortgage banking revenue (1) | $ | (1,102) | $ | (1,317) | $ | (1,613) | $ | (3,537) | |||||||||||||||
| Amount of gain recognized in other non-interest income | 82 | 210 | 167 | 652 | |||||||||||||||||||
____________________________
(1)Gains and losses on these instruments are largely offset by market fluctuations in mortgage servicing rights. See Note 6 — Mortgage Banking for more information on components of mortgage banking revenue.
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Some interest rate swaps included in other assets were subject to a master netting arrangement with the counterparty in all periods presented and could be offset against some amounts included in interest rate swaps included in other liabilities. The Company has chosen not to net these exposures in the consolidated balance sheets, and any impact of netting these amounts would not be significant.
At September 30, 2023, and December 31, 2022, the Company had cash collateral on deposit with swap counterparties totaling $4.0 million and $7.6 million, respectively. These amounts are included in interest-bearing deposits in banks in the consolidated balance sheets and are considered restricted cash until such time as the underlying swaps are settled.
Note 9 — Stock and Incentive Compensation Plans
The Company has granted, and currently has outstanding, stock and incentive compensation awards subject to the provisions of the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan is designed to provide flexibility to the Company regarding its ability to motivate, attract and retain the services of key officers, employees and directors. The 2012 Plan allows the Company to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards (“RSA”), restricted stock units (“RSU”), dividend equivalent rights, performance stock units (“PSU”) or any combination thereof. At September 30, 2023, the maximum number of shares of the Company’s common stock available for issuance under the 2012 Plan was 33,097 shares.
Additionally, the Company’s stockholders approved an employee stock purchase plan (“ESPP”) which qualified as an ESPP under IRS guidelines. The ESPP provides for the purchase of up to an aggregate one million shares of the Company’s common stock by employees. Under the ESPP, employees of the Company, who elect to participate, have the right to purchase a limited number of shares of the Company’s common stock at a 15% discount from the lower of the market value of the common stock at the beginning or the end of each one year offering period, beginning on June 1st. The ESPP benefit is treated as compensation to the employee, and the compensation expense will be recognized over the service period based on the grant date fair value of the rights determined at the beginning of the purchase period, adjusted for forfeitures and certain modifications. At September 30, 2023, there was $312,000 of total unrecognized compensation cost related to estimated ESPP shares for the June 1, 2023, ESPP purchase period. These costs are expected to be recognized over a period of 0.67 year.
The table below includes the weighted-average assumptions used to calculate the grant date fair value of the ESPP rights for the periods indicated using the Black-Scholes option pricing model:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Expected term (in years) | 1.00 | 1.00 | 1.00 | 1.00 | |||||||||||||||||||
| Dividend yield | $ | 2.08 | $ | 1.52 | $ | 1.81 | $ | 1.38 | |||||||||||||||
| Risk-free interest rate | 4.94 | % | 2.00 | % | 3.52 | % | 0.98 | % | |||||||||||||||
| Expected volatility | 31.12 | 32.56 | 31.81 | 39.75 | |||||||||||||||||||
The ESPP shares purchased are as follows for the dates indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| ESPP shares purchased | — | — | 46,213 | 26,089 | |||||||||||||||||||
| Shares available for issuance under the ESPP | 927,698 | 973,911 | 927,698 | 973,911 | |||||||||||||||||||
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The Compensation Committee (“Committee”) has approved and the Company has granted PSUs to select officers and employees under the 2012 Plan. Each PSU represents a right for the participant to receive shares of Company common stock or cash equal to the fair market value of such stock, as determined by the Committee. The number of PSUs to which the participant may be entitled will vary from 0% to 150% of the target number of PSUs, based on the Company’s achievement of specified performance criteria during the performance period compared to performance benchmarks adopted by the Committee and, further, the participant’s continuous service with the Company through the third anniversary of the date of the grant. Each performance period commences on January 1 and ends three years later on December 31, (“Performance Period”).
Share-based compensation cost charged to income for the three and nine months ended September 30, 2023 and 2022, is presented below. There was no stock option expense for any of the periods shown.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| RSA & RSU | $ | 1,180 | $ | 753 | $ | 3,236 | $ | 2,030 | |||||||||||||||
| PSU | 41 | 134 | 336 | 283 | |||||||||||||||||||
| ESPP | 114 | 83 | 314 | 235 | |||||||||||||||||||
| Total stock compensation expense | $ | 1,335 | $ | 970 | $ | 3,886 | $ | 2,548 | |||||||||||||||
| Related tax benefits recognized in net income | $ | 280 | $ | 204 | $ | 816 | $ | 535 | |||||||||||||||
Restricted Stock and Performance Stock Grants
The Company’s RSAs and RSUs are time-vested awards and are granted to the Company’s Board of Directors, executives and senior management team. The service period in which time-vested awards are earned ranges from to seven years. Time-vested awards are valued utilizing the fair value of the Company’s stock at the grant date. These awards are recognized on the straight-line method over the requisite service period, with forfeitures recognized as they occur.
The Company’s PSU awards, excluding the CEO PSUs, are three-year cliff-vested awards, with each unit divided into two categories (“ROAA Unit Group” and “ROAE Unit Group”), composed of an equivalent number of initial PSUs granted. The PSUs do not reflect potential increases or decreases resulting from the interim performance results until the final performance results are determined at the end of the three-year period. The ROAA Unit Group is based upon the Company’s Performance Period Return on Average Assets performance, and the ROAE Unit Group is based upon the Company’s Performance Period Return on Average Equity performance. The PSUs are initially valued utilizing the fair value of the Company’s stock at the grant date, assuming 100% of the target number of units are achieved. Subsequent valuation of the PSUs is determined using the ratio of the actual Company’s Performance Period ROAA or ROAE to the Company’s targeted Performance Period ROAA or ROAE, applied to the PSUs awarded times the Company’s closing month end stock price for the month immediately preceding the period end date. Forfeitures are recognized as they occur.
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The following table summarizes the Company’s award activity:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Shares | Weighted Average Grant-Date Fair Value | Shares | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||
| Nonvested RSAs, January 1, | 27,391 | $ | 35.37 | 48,048 | $ | 35.27 | |||||||||||||||||
| Granted RSAs | 16,788 | 28.61 | 12,840 | 37.39 | |||||||||||||||||||
| Vested RSAs | (17,237) | 34.33 | (22,682) | 35.73 | |||||||||||||||||||
Nonvested RSAs, September 30, | 26,942 | 31.82 | 38,206 | 35.71 | |||||||||||||||||||
| Nonvested RSUs, January 1, | 270,390 | $ | 39.63 | 73,977 | $ | 40.64 | |||||||||||||||||
| Granted RSUs | 113,674 | 35.70 | 87,795 | 43.09 | |||||||||||||||||||
| Vested RSUs | (53,263) | 41.94 | (23,260) | 40.40 | |||||||||||||||||||
| Forfeited RSUs | (10,014) | 43.44 | (1,841) | 43.48 | |||||||||||||||||||
Nonvested RSUs, September 30, | 320,787 | 37.73 | 136,671 | 42.21 | |||||||||||||||||||
| Nonvested PSUs, January 1, | 157,367 | $ | 29.06 | — | $ | — | |||||||||||||||||
| Granted PSUs | 43,591 | 30.69 | 27,632 | 40.85 | |||||||||||||||||||
| Forfeited PSUs | (3,116) | 30.69 | — | — | |||||||||||||||||||
Nonvested PSUs, September 30, | 197,842 | 27.96 | 27,632 | 40.85 | |||||||||||||||||||
At September 30, 2023, there was $342,000, $10.6 million and $2.8 million of total unrecognized compensation cost related to nonvested RSA shares, RSU shares and PSU shares under the 2012 Plan, respectively. Those costs are expected to be recognized over a weighted-average period of 0.4, 3.8 and 2.1 years for RSA, RSU and PSU shares, respectively.
Stock Option Grants
The Company has previously issued common stock options to select officers and employees primarily through individual agreements. The exercise price of each option varies by agreement and is based on the fair value of the stock at the date of the grant. No outstanding stock option has a term that exceeds twenty years, and all of the outstanding options are fully vested. The Company recognized compensation cost for stock option grants over the required service period based upon the grant date fair value, which is established using a Black-Scholes valuation model. The Black-Scholes valuation model uses assumptions of risk-free interest rate, expected term of stock options, expected stock price volatility and expected dividends. Forfeitures are recognized as they occur.
In conjunction with the BTH merger, the Company assumed the BTH 2012 Equity Incentive Plan and converted all outstanding options to purchase BTH common stock into options to purchase an aggregate of 611,676 shares of the Company’s common stock. Under the terms of applicable change in control provisions within the BTH 2012 Equity Incentive Plan and BTH Notice Of Stock Option Award, all BTH stock options fully vested immediately prior to the closing of the merger that occurred on August 1, 2022. BTH converted options have no expiration dates past August 16, 2031, and no further grants will be made under the BTH 2012 Equity Incentive Plan.
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The table below summarizes the status of the Company’s stock options and changes during the nine months ended September 30, 2023 and 2022.
| (Dollars in thousands, except per share amounts) | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Outstanding at January 1, 2023 | 504,437 | $ | 29.46 | 5.13 | $ | 3,736 | |||||||||||||||||
| Exercised | (55,897) | 17.35 | — | 918 | |||||||||||||||||||
| Expired | (11,081) | 33.63 | — | — | |||||||||||||||||||
Outstanding and exercisable at September 30, 2023 | 437,459 | 30.90 | 3.88 | 917 | |||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Outstanding at January 1, 2022 | 39,200 | $ | 10.73 | 2.28 | $ | 1,262 | |||||||||||||||||
| BTH options converted to OBNK options | 611,676 | 28.62 | — | — | |||||||||||||||||||
| Exercised | (60,687) | 19.67 | — | 1,373 | |||||||||||||||||||
| Expired | (331) | 37.01 | — | — | |||||||||||||||||||
Outstanding and exercisable at September 30, 2022 | 589,858 | 28.05 | 4.96 | 5,971 | |||||||||||||||||||
Note 10 — Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income (“AOCI”) includes the after-tax change in unrealized gains and losses on AFS securities and cash flow hedging activities.
| (Dollars in thousands) | Unrealized (Loss) Gain on AFS Securities | Unrealized Gain (Loss) on Cash Flow Hedges | Accumulated Other Comprehensive (Loss) Income | ||||||||||||||
| Balance at January 1, 2023 | $ | (160,700) | $ | 825 | $ | (159,875) | |||||||||||
| Net change | (12,904) | 50 | (12,854) | ||||||||||||||
Balance at September 30, 2023 | $ | (173,604) | $ | 875 | $ | (172,729) | |||||||||||
| Balance at January 1, 2022 | $ | 5,809 | $ | (80) | $ | 5,729 | |||||||||||
| Net change | (181,919) | 957 | (180,962) | ||||||||||||||
Balance at September 30, 2022 | $ | (176,110) | $ | 877 | $ | (175,233) | |||||||||||
Note 11 — Capital and Regulatory Matters
The Company (on a consolidated basis) and the Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank 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 capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Company is subject to the Basel III regulatory capital framework (“Basel III Capital Rules”), which includes a 2.5% capital conservation buffer. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, which include dividend payments, stock repurchases and to pay discretionary bonuses to executive officers.
46
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, common equity Tier 1 capital, Tier 1 capital, Tier 1 capital, and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average total consolidated assets (as defined). Management believes, at September 30, 2023, and December 31, 2022, that the Company and the Bank met all capital adequacy requirements to which they are subject, including the capital buffer requirement.
At September 30, 2023, and December 31, 2022, Origin’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” Origin must maintain minimum total risk-based, common equity Tier 1 capital, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. A final rule adopted by the federal banking agencies in February 2019 provides banking organizations with the option to phase in, over a three-year period, the adverse day-one regulatory capital effects of the adoption of CECL. In addition, on March 27, 2020, the federal banking agencies issued an interim final rule that gives banking organizations that were required to implement CECL before the end of 2020 the option to delay for two years CECL’s adverse effects on regulatory capital. Origin elected to adopt CECL in the first quarter of 2020 and exercised the option to delay the estimated impact of the adoption of CECL on the Company’s regulatory capital for two years (from January 2020 through December 31, 2021). The two-year delay is followed by a three-year transition period of CECL’s initial impact on the Company’s regulatory capital (from January 1, 2022, through December 31, 2024). The amount representing the CECL impact to the Company’s regulatory capital that will be ratably transitioning back into regulatory capital over the transition period is $3.2 million and $5.1 million at September 30, 2023, and December 31, 2022, respectively.
47
The actual capital amounts and ratios of the Company and the Bank at September 30, 2023, and December 31, 2022, are presented in the following table:
(Dollars in thousands) September 30, 2023 | Actual | Minimum Capital Required - Basel III | To be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||
Origin Bancorp, Inc. | $ | 988,951 | 11.46 | % | $ | 604,324 | 7.00 | % | N/A | N/A | |||||||||||||||||||||||||
Origin Bank | 1,034,519 | 12.02 | 602,430 | 7.00 | $ | 559,399 | 6.50 | % | |||||||||||||||||||||||||||
Tier 1 Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
Origin Bancorp, Inc. | 1,004,742 | 11.64 | 733,823 | 8.50 | N/A | N/A | |||||||||||||||||||||||||||||
| Origin Bank | 1,034,519 | 12.02 | 731,522 | 8.50 | 688,492 | 8.00 | |||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
Origin Bancorp, Inc. | 1,261,080 | 14.61 | 906,488 | 10.50 | N/A | N/A | |||||||||||||||||||||||||||||
| Origin Bank | 1,201,282 | 13.96 | 903,647 | 10.50 | 860,616 | 10.00 | |||||||||||||||||||||||||||||
Leverage Ratio | |||||||||||||||||||||||||||||||||||
Origin Bancorp, Inc. | 1,004,742 | 10.00 | 402,029 | 4.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Origin Bank | 1,034,519 | 10.33 | 400,778 | 4.00 | 500,973 | 5.00 | |||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
Origin Bancorp, Inc. | 906,859 | 10.93 | 580,857 | 7.00 | N/A | N/A | |||||||||||||||||||||||||||||
Origin Bank | 952,579 | 11.50 | 579,775 | 7.00 | 538,363 | 6.50 | |||||||||||||||||||||||||||||
Tier 1 Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
Origin Bancorp, Inc. | 922,584 | 11.12 | 705,327 | 8.50 | N/A | N/A | |||||||||||||||||||||||||||||
| Origin Bank | 952,579 | 11.50 | 704,013 | 8.50 | 662,600 | 8.00 | |||||||||||||||||||||||||||||
Total Capital to Risk-Weighted Assets | |||||||||||||||||||||||||||||||||||
Origin Bancorp, Inc. | 1,180,665 | 14.23 | 871,290 | 10.50 | N/A | N/A | |||||||||||||||||||||||||||||
| Origin Bank | 1,109,257 | 13.39 | 869,661 | 10.50 | 828,249 | 10.00 | |||||||||||||||||||||||||||||
Leverage Ratio | |||||||||||||||||||||||||||||||||||
Origin Bancorp, Inc. | 922,584 | 9.66 | 381,955 | 4.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Origin Bank | 952,579 | 9.94 | 383,359 | 4.00 | 479,198 | 5.00 | |||||||||||||||||||||||||||||
In the ordinary course of business, the Company depends on dividends from the Bank to provide funds for the payment of dividends to stockholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared and paid exceed the Bank’s year-to-date net income combined with the retained net income for the preceding year, which was $141.4 million at September 30, 2023.
Stock Repurchases
In July 2022, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company may, from time to time, purchase up to $50 million of its outstanding common stock. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the SEC. The stock repurchase program is intended to expire in three years but may be terminated or amended by the Board of Directors at any time. The stock repurchase program does not obligate the Company to purchase any shares at any time.
There have been no stock repurchases during the nine months ended September 30, 2023 or 2022.
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Note 12 — Commitments and Contingencies
Credit-Related Commitments
In the ordinary course of business, the Company enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of its customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Company to varying degrees of credit risk and interest rate risk in much the same way as funded loans.
Commitments to extend credit include revolving commercial credit lines, non-revolving loan commitments issued mainly to finance the merger and development or construction of real property or equipment, and credit card and personal credit lines. The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract and has not violated other contractual conditions. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Credit card and personal credit lines are generally subject to cancellation if the borrower’s credit quality deteriorates. A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent future cash requirements of the Company.
A substantial majority of the letters of credit are standby agreements that obligate the Company to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Company issues standby letters of credit primarily to provide credit enhancement to its customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services.
The contract amounts of these instruments reflect the Company’s exposure to credit risk. The Company undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support.
The table below presents the Company’s commitments to extend credit by commitment expiration date for the dates indicated:
(Dollars in thousands) September 30, 2023 | |||||||||||||||||||||||||||||
| Less than One Year | One-Three Years | Three-Five Years | Greater than Five Years | Total | |||||||||||||||||||||||||
Commitments to extend credit(1) | $ | 921,782 | $ | 961,365 | $ | 447,769 | $ | 101,953 | $ | 2,432,869 | |||||||||||||||||||
Standby letters of credit | 102,449 | 6,958 | 32,957 | — | 142,364 | ||||||||||||||||||||||||
Total off-balance sheet commitments | $ | 1,024,231 | $ | 968,323 | $ | 480,726 | $ | 101,953 | $ | 2,575,233 | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
Commitments to extend credit(1) | $ | 1,093,744 | $ | 988,212 | $ | 553,069 | $ | 96,783 | $ | 2,731,808 | |||||||||||||||||||
Standby letters of credit | 86,922 | 2,264 | — | — | 89,186 | ||||||||||||||||||||||||
Total off-balance sheet commitments | $ | 1,180,666 | $ | 990,476 | $ | 553,069 | $ | 96,783 | $ | 2,820,994 | |||||||||||||||||||
____________________________
(1)Includes $723.3 million and $594.6 million of unconditionally cancellable commitments at September 30, 2023, and December 31, 2022, respectively.
At September 30, 2023, the Company held 29 unfunded letters of credit from the FHLB totaling $584.1 million, with expiration dates ranging from October 2, 2023, to September 22, 2027. At December 31, 2022, the Company held 28 unfunded letters of credit from the FHLB totaling $277.4 million, with expiration dates ranging from January 14, 2023, to September 22, 2027.
The Company has a total contingent liability of $1.8 million as of September 30, 2023, for retention bonuses and guaranteed minimum incentives associated with the BTH merger. The retention bonuses for former BTH employees total $846,000, with $423,000, or 50%, due at December 31, 2023, and the remaining $423,000, or 50%, due at December 31, 2024. The guaranteed minimum incentives for former BTH employees total $950,000, with approximately 50% due at February 28, 2024, and the remaining 50% due at February 28, 2025. In all cases, continued employment through the payout date is required in order to receive the compensation.
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In conjunction with the December 31, 2021, acquisitions of the Lincoln Agency, LLC and Pulley-White Insurance Agency, Inc., the Company has a total estimated fair value contingent liability of $1.5 million as of September 30, 2023. The Company expects 30% of the estimated fair value contingent liability will be payable on or about December 31, 2023, with the remaining 70% payable on or about December 31, 2024, if Davison Insurance Agency, LLC, the acquirer and surviving wholly-owned subsidiary of the Company, meets certain revenue growth objectives over three years. The fair value and probability of payout of this liability is reassessed annually at the fiscal year end of the Company.
Management establishes an asset-specific allowance for certain lending-related commitments and computes a formula-based allowance for performing consumer and commercial lending-related commitments. These are computed using a methodology similar to that used for the commercial loan portfolio, modified for expected maturities and probabilities of drawdown. The reserve for lending-related commitments was $4.7 million and $4.6 million at September 30, 2023, and December 31, 2022, respectively, and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Loss Contingencies
From time to time, the Company is also party to various legal actions arising in the ordinary course of business. At this time, management does not expect that loss contingencies, if any, arising from any such proceedings, either individually or in the aggregate, would have a material adverse effect on the consolidated financial position or liquidity of the Company.
Note 13 — Business Combinations
BT Holdings, Inc.
On August 1, 2022, the Company completed its merger with BT Holdings, Inc. (“BTH”), a Texas corporation and the registered bank holding company of BTH Bank, acquiring 100% of the voting equity interests of BTH. The Company issued 6,794,910 shares of its common stock, and all outstanding BTH common stock options were converted into options to purchase an aggregate of 611,676 shares of Origin common stock. Based on the closing price of the Company’s common stock on July 29, 2022, of $43.07 per share, the aggregate consideration to be paid to holders of BTH common stock in connection with the merger is valued at approximately $307.8 million. Goodwill of $94.5 million was recorded as a result of the transaction. The merger added new markets for expansion and brings complementary businesses together to drive synergies and growth, which are the factors that gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.
Including the effects of the known purchase accounting adjustments, as of the merger date, Origin had approximately $9.84 billion in assets, $6.77 billion in loans and $7.99 billion in deposits on a consolidated basis. Origin Bank and BTH Bank, N.A. operated as separate banking subsidiaries of the Company until the merger of the banks, which Origin completed on October 7, 2022, concurrently with the data processing conversion. BTH formerly operated its banking business from 13 locations in East Texas, Dallas and Fort Worth, Texas, each of which now operates as a banking location of Origin Bank.
The Company has determined that the merger of the net assets of BTH constitutes a business combination as defined by the ASC Topic 805. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of ASC Topic 820. The Company has finalized its analysis of the loans acquired along with the other acquired assets and assumed liabilities related to the merger with BT Holdings, Inc.
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The following schedule is a breakdown of the assets acquired and liabilities assumed as of the merger date:
| BT Holdings, Inc. | |||||
| (Dollars in thousands) | As Recorded by Origin | ||||
| Assets Acquired: | |||||
| Cash and cash equivalents | $ | 69,953 | |||
| Investment securities | 456,808 | ||||
| Loans acquired | 1,239,532 | ||||
| Allowance for credit losses on loans | (5,527) | ||||
| Loans receivable, net | 1,234,005 | ||||
| Premises and equipment | 17,825 | ||||
| Non-marketable equity securities held in other financial institutions | 5,873 | ||||
| Core deposit intangible | 38,356 | ||||
| Other assets | 23,778 | ||||
| Total assets acquired | $ | 1,846,598 | |||
| Liabilities Assumed: | |||||
| Noninterest-bearing deposits | $ | 398,089 | |||
| Interest-bearing deposits | 865,864 | ||||
| Time deposits | 302,506 | ||||
| Total deposits | 1,566,459 | ||||
| Securities sold under agreements to repurchase | 10,133 | ||||
| Subordinated indebtedness, net | 44,074 | ||||
| Accrued expenses and other liabilities | 12,674 | ||||
| Total liabilities assumed | 1,633,340 | ||||
| Net assets acquired | 213,258 | ||||
| Purchase price | 307,784 | ||||
| Goodwill | $ | 94,526 | |||
The Company’s operating results include the operating results of the acquired assets and assumed liabilities of BTH subsequent to the merger date.
Acquisition Accounting. The following is a description of the methods used to determine the fair values of significant assets and liabilities acquired as part of a merger or acquisition. The Company elected to use the pushdown accounting method to record the merger.
Loans acquired – Fair values for PCD loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates except when a fair value of collateral approach was applied. The discount rates used for PCD loans were based on current market rates and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses, as that has been included in the estimated cash flows. Non-PCD loans were grouped together according to similar characteristics and were treated in the aggregate when applying valuation techniques. See Note 4 — Loans in these condensed notes to the consolidated financial statements for more information related to loans acquired.
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Loan Acquisition Accounting – The Company accounts for its acquisitions/mergers under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. The fair value for acquired loans at the time of acquisition or merger is based on a variety of factors, including discounted expected cash flows, adjusted for estimated prepayments and credit losses. In accordance with ASC 326, the fair value adjustment is recorded as premium or discount to the unpaid principal balance of each acquired loan. Loans that have been identified as having experienced a more-than-insignificant deterioration in credit quality since origination are PCD loans. The net premium or discount on PCD loans is adjusted by the Company’s allowance for credit losses recorded at the time of merger/acquisition. The remaining net premium or discount is accreted or amortized into interest income over the remaining life of the loan using the effective interest rate method. The net premium or discount on loans that are not classified as PCD (“non-PCD”), that includes credit and non-credit components, is accreted or amortized into interest income over the remaining life of the loan using a constant yield method. The Company then records the necessary allowance for credit losses on the non-PCD loans through provision for credit losses expense.
Purchased loans that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. For PCD loans, the initial estimate of expected credit losses is recognized in the allowance for credit loss on the date of the merger using the same methodology as other loans held for investment as discussed in Note 4 — Loans in these condensed notes to the consolidated financial statements. The following table provides a summary of loans purchased with credit deterioration at the merger transaction date with BTH:
| August 1, 2022 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Commercial Real Estate | Construction/ Land/ Land Development | Residential Real Estate | Commercial and Industrial | Mortgage Warehouse Lines of Credit | Consumer | Total | ||||||||||||||||||||||||||||||||||
| Unpaid principal balance | $ | 10,731 | $ | 1,315 | $ | 2,880 | $ | 37,117 | $ | — | $ | 169 | $ | 52,212 | |||||||||||||||||||||||||||
| PCD allowance for credit loss at merger | 1 | — | — | 5,525 | — | 1 | 5,527 | ||||||||||||||||||||||||||||||||||
| Non-credit related (premium)/discount | (277) | (92) | 3 | (77) | — | 1 | (442) | ||||||||||||||||||||||||||||||||||
| Fair value of PCD loans | $ | 11,007 | $ | 1,407 | $ | 2,877 | $ | 31,669 | $ | — | $ | 167 | $ | 47,127 | |||||||||||||||||||||||||||
Revenue and earnings of BTH since the acquisition date have not been disclosed as the acquired company was merged into the Company and separate financial information is not readily available.
The following table presents unaudited pro-forma information as if the merger with BTH had occurred on January 1, 2022. This pro-forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit intangible and related income tax effects and is based on our historical results for the periods presented. Transaction-related costs related to the merger are not reflected in the pro-forma amounts. The pro-forma information does not necessarily reflect the results of operations that would have occurred had the Company acquired BTH at the beginning of fiscal year 2021. Cost savings are also not reflected in the unaudited pro-forma amounts.
| (Dollars in thousands except share and per share data) | Pro-Forma for the Nine Months Ended September 30, 2022 | ||||
| Net interest income | $ | 243,932 | |||
| Noninterest income | 49,425 | ||||
| Net income | 76,286 | ||||
| Pro-forma earnings per share: | |||||
| Basic | $ | 2.50 | |||
| Diluted | 2.48 | ||||
| Weighted average shares outstanding | 32,092,071 | ||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, references in this report to “we,” “us,” “our,” “our company,” “the Company” or “Origin” refer to Origin Bancorp, Inc., a Louisiana corporation, and its consolidated subsidiaries. All references to “Origin Bank” or “the Bank” refer to Origin Bank our wholly-owned bank subsidiary.
The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, we conduct all of our material business operations through our wholly-owned bank subsidiary, Origin Bank, the discussion and analysis that follows primarily relates to activities conducted at the Bank level.
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related condensed notes contained in Item 1 of this report. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” and in the section titled “Risk Factors” in our 2022 Form 10-K. We assume no obligation to update any of these forward-looking statements.
General
We are a financial holding company headquartered in Ruston, Louisiana. Origin’s wholly owned bank subsidiary, Origin Bank, was founded in 1912 in Choudrant, Louisiana. Deeply rooted in Origin’s history is a culture committed to providing personalized, relationship banking to businesses, municipalities, and personal clients to enrich the lives of the people in the communities it serves. Origin provides a broad range of financial services and currently operates 60 banking centers located from Dallas/Fort Worth, East Texas and Houston, across North Louisiana and into Mississippi. As a financial holding company operating through one segment, we generate the majority of our revenue from interest earned on loans and investments, service charges and fees on deposit accounts.
We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize the income generated from interest-earning assets and minimize expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans, securities and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, and stockholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income.
2023 Third Quarter Highlights
•Net income was $24.3 million for the quarter ended September 30, 2023, reflecting an increase of $8.1 million, or 49.7%, compared to September 30, 2022.
•Diluted earnings per share (“EPS”) were $0.79 for the quarter ended September 30, 2023, reflecting an increase of $0.22, or 38.6%, compared to September 30, 2022.
•During September 2023, we sold $181.9 million of available-for-sale investment securities at a loss of $7.2 million, and used the proceeds to pay down Federal Home Loan Bank (“FHLB”) advances, which negatively impacted our basic and diluted EPS by $0.18 for the quarter ended September 30, 2023.
•During September 2023, we recorded a $10.1 million positive valuation adjustment on one of our non-marketable equity securities, which positively impacted our basic and diluted EPS by $0.26 for the quarter ended September 30, 2023.
•Book value per common share was $32.32 at September 30, 2023, reflecting an increase of $1.42, or 4.6%, compared to December 31, 2022.
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•LHFI, excluding mortgage warehouse lines of credit, to deposits was 87.0% at September 30, 2023, compared to 87.5% at December 31, 2022. Cash and liquid securities as a percentage of total assets was 11.6% at September 30, 2023, compared to 12.1% at December 31, 2022.
•At September 30, 2023, and December 31, 2022, Company level common equity Tier 1 capital to risk-weighted assets was 11.46%, and 10.93%, respectively, the Tier 1 leverage ratio was 10.00% and 9.66%, respectively, and the total capital ratio was 14.61% and 14.23%, respectively.
•Total deposits were $8.37 billion at September 30, 2023, reflecting an increase of $598.8 million, or 7.7%, compared to December 31, 2022.
Comparison of Results of Operations for the Three Months Ended September 30, 2023 and 2022
Our net income increased $8.1 million, or 49.7%, to $24.3 million for the three months ended September 30, 2023, from $16.2 million for the three months ended September 30, 2022. On a diluted EPS basis, we reported $0.79 per share for the three months ended September 30, 2023, compared to $0.57 per share for the three months ended September 30, 2022.
Net Interest Income and Net Interest Margin
Net interest income for the three months ended September 30, 2023, was $74.1 million, a decrease of $4.4 million, or 5.6%, compared to the three months ended September 30, 2022. The decrease was primarily due to increases of $32.2 million and $15.7 million in savings and interest-bearing transaction accounts and time deposits, respectively, partially offset by increases of $27.2 million and $13.1 million in real estate loans and commercial and industrial loans, respectively.
The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the loan and deposit rates offered by financial institutions. The Federal Funds target rate range has increased 525 basis points starting with the Federal Reserve Board’s first rate increase in 2022, and in order to remain competitive as market interest rates increased, we increased interest rates paid on our deposits. Increases in interest rates contributed $27.2 million to the total increase in interest income earned on total LHFI during the three months ended September 30, 2023, while rising interest rates increased our total deposit interest expense by $45.7 million during the same period.
Interest income earned on LHFI during the three months ended September 30, 2023, increased in all loan categories, when compared to the three months ended September 30, 2022. Interest income earned on commercial and industrial loans and commercial real estate loans contributed $13.1 million and $11.2 million, respectively, of the $41.5 million total increase in interest income earned on LHFI when compared to the three months ended September 30, 2022. Increases in interest rates drove $10.1 million of the $13.1 million increase in interest income earned on commercial and industrial loans, while increases in interest rates drove $6.7 million of the $11.2 million increase in interest income earned on commercial real estate loans, for the comparable periods.
The net interest margin (“NIM”), fully tax-equivalent (“FTE”) was impacted by margin compression as rates on interest-bearing liabilities rose faster than yields on interest-earning assets during the current quarter and year-to-date. The NIM-FTE was 3.14% for the three months ended September 30, 2023, a fifty-four basis point decrease from the three months ended September 30, 2022. The yield earned on interest-earning assets for the three months ended September 30, 2023, was 5.69%, a 146 basis point increase from 4.23% for the three months ended September 30, 2022. The rate paid on total deposits for the quarter ended September 30, 2023, was 2.61%, a 220 basis point increase from 0.41% for the quarter ended September 30, 2022. The rate paid on FHLB advances and other borrowings also increased to 5.51%, reflecting a 351 basis point increase compared to the three months ended September 30, 2022. There was minimal impact to the fully tax-equivalent NIM as a result of purchase accounting amortization due to the BT Holdings, Inc. (“BTH”) merger for the three months ended September 30, 2023, compared to a seven basis points increase as a result of accretion income due to the BTH merger for the three months ended September 30, 2022.
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During the quarter ended September 30, 2023, we made a strategic decision to sell available for sale investment securities with a current book value of $181.9 million, and realized a loss of $7.2 million, in order to use the proceeds of $174.7 million to pay down FHLB advances. Due to the timing of this transaction, it had no impact on the fully tax-equivalent NIM for the quarter ended September 30, 2023. While the associated loss resulted in an $0.18 negative impact to EPS for the quarter ended September 30, 2023, the difference between the relatively low yield on securities sold and the higher cost of FHLB advances was an attractive trade-off, with an estimated annualized positive forward impact to fully tax-equivalent NIM of 11 basis points, an estimated annualized forward diluted EPS benefit of approximately $0.11 and an estimated earn-back period of 1.7 years. The estimated metrics above use our annualized third quarter 2023 net income, less any non-operating items, and added the estimated annualized tax-effected net interest income using a weighted average tax-effected yield of 3.08% on the securities sold and an expected interest rate of 5.62% on the FHLB advances paid off.
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The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended September 30, 2023 and 2022.
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) Assets | Average Balance(1) | Income/Expense | Yield/Rate | Average Balance(1) | Income/Expense | Yield/Rate | |||||||||||||||||||||||||||||
| Commercial real estate | $ | 2,428,969 | $ | 35,090 | 5.73 | % | $ | 2,046,411 | $ | 23,938 | 4.64 | % | |||||||||||||||||||||||
| Construction/land/land development | 1,044,180 | 18,539 | 7.04 | 760,682 | 9,969 | 5.20 | |||||||||||||||||||||||||||||
| Residential real estate | 1,663,291 | 21,195 | 5.06 | 1,249,746 | 13,742 | 4.36 | |||||||||||||||||||||||||||||
| Commercial and industrial | 2,024,675 | 38,907 | 7.62 | 1,816,912 | 25,815 | 5.64 | |||||||||||||||||||||||||||||
| Mortgage warehouse lines of credit | 376,275 | 6,838 | 7.21 | 491,584 | 5,614 | 4.53 | |||||||||||||||||||||||||||||
| Consumer | 23,704 | 462 | 7.74 | 24,137 | 414 | 6.80 | |||||||||||||||||||||||||||||
| LHFI | 7,561,094 | 121,031 | 6.35 | 6,389,472 | 79,492 | 4.94 | |||||||||||||||||||||||||||||
| Loans held for sale | 11,829 | 173 | 5.81 | 29,927 | 311 | 4.12 | |||||||||||||||||||||||||||||
| Loans receivable | 7,572,923 | 121,204 | 6.35 | 6,419,399 | 79,803 | 4.93 | |||||||||||||||||||||||||||||
| Investment securities-taxable | 1,310,459 | 8,194 | 2.48 | 1,547,848 | 7,801 | 2.00 | |||||||||||||||||||||||||||||
| Investment securities-non-taxable | 216,700 | 1,281 | 2.35 | 317,175 | 2,151 | 2.69 | |||||||||||||||||||||||||||||
| Non-marketable equity securities held in other financial institutions | 58,421 | 952 | 6.47 | 73,819 | 390 | 2.10 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in banks | 279,383 | 3,820 | 5.42 | 206,781 | 1,092 | 2.09 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 9,437,886 | 135,451 | 5.69 | 8,565,022 | 91,237 | 4.23 | |||||||||||||||||||||||||||||
Noninterest-earning assets(2) | 597,678 | 637,399 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 10,035,564 | $ | 9,202,421 | |||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||
| Savings and interest-bearing transaction accounts | $ | 4,728,211 | $ | 39,042 | 3.28 | % | $ | 4,157,092 | $ | 6,878 | 0.66 | % | |||||||||||||||||||||||
| Time deposits | 1,626,935 | 16,557 | 4.04 | 669,900 | 856 | 0.51 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 6,355,146 | 55,599 | 3.47 | 4,826,992 | 7,734 | 0.64 | |||||||||||||||||||||||||||||
| FHLB advances & other borrowings | 230,815 | 3,207 | 5.51 | 538,020 | 2,717 | 2.00 | |||||||||||||||||||||||||||||
| Subordinated indebtedness | 196,792 | 2,515 | 5.07 | 186,803 | 2,263 | 4.81 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 6,782,753 | 61,321 | 3.59 | 5,551,815 | 12,714 | 0.91 | |||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | |||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 2,088,183 | 2,582,500 | |||||||||||||||||||||||||||||||||
Other liabilities(2) | 151,716 | 129,354 | |||||||||||||||||||||||||||||||||
| Total liabilities | 9,022,652 | 8,263,669 | |||||||||||||||||||||||||||||||||
| Stockholders’ Equity | 1,012,912 | 938,752 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 10,035,564 | $ | 9,202,421 | |||||||||||||||||||||||||||||||
| Net interest spread | 2.10 | % | 3.32 | % | |||||||||||||||||||||||||||||||
| Net interest income and margin | $ | 74,130 | 3.12 | $ | 78,523 | 3.64 | |||||||||||||||||||||||||||||
Net interest income and margin - (tax equivalent)(3) | $ | 74,775 | 3.14 | $ | 79,399 | 3.68 | |||||||||||||||||||||||||||||
(1)Nonaccrual loans are included in their respective loan category for the purpose of calculating the yield earned. All average balances are daily average balances.
(2)Includes Government National Mortgage Association (“GNMA”) repurchase average balance of $29.1 million for the three months ended September 30, 2022. The GNMA repurchase asset and liability are recorded as equal offsetting amounts in the consolidated balance sheets, with the asset included in loans held for sale and the liability included in FHLB advances and other borrowings. During the second half of 2022, the Company entered into an agreement to sell its GNMA MSR portfolio, which met all final sale conditions in early 2023. The Company derecognized the related GNMA repurchase asset and offsetting liability during the quarter ended March 31, 2023, and accordingly the GNMA repurchase average balance was zero for the three months ended September 30, 2023. For more information on the GNMA repurchase option, see Note 6 — Mortgage Banking in the condensed notes to our consolidated financial statements.
(3)In order to present pre-tax income and resulting yields on tax-exempt investments comparable to those on taxable investments, a tax-equivalent adjustment has been computed. This adjustment also includes income tax credits received on Qualified School Construction Bonds and income from tax-exempt investments, and tax credits were computed using a federal income tax rate of 21%.
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Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate changes has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. For purposes of this table, changes attributable to both rate and volume that cannot be segregated, including the difference in day count, have been allocated to rate.
Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022 | |||||||||||||||||
(Dollars in thousands) Interest-earning assets | Increase (Decrease) Due To Change In | ||||||||||||||||
| Loans: | Volume | Yield/Rate | Total Change | ||||||||||||||
| Commercial real estate | $ | 4,475 | $ | 6,677 | $ | 11,152 | |||||||||||
| Construction/land/land development | 3,715 | 4,855 | 8,570 | ||||||||||||||
| Residential real estate | 4,547 | 2,906 | 7,453 | ||||||||||||||
| Commercial and industrial | 2,952 | 10,140 | 13,092 | ||||||||||||||
| Mortgage warehouse lines of credit | (1,317) | 2,541 | 1,224 | ||||||||||||||
| Consumer | (7) | 55 | 48 | ||||||||||||||
| Loans held for sale | (188) | 50 | (138) | ||||||||||||||
| Loans receivable | 14,177 | 27,224 | 41,401 | ||||||||||||||
| Investment securities-taxable | (1,196) | 1,589 | 393 | ||||||||||||||
| Investment securities-non-taxable | (681) | (189) | (870) | ||||||||||||||
| Non-marketable equity securities held in other financial institutions | (81) | 643 | 562 | ||||||||||||||
| Interest-bearing deposits in banks | 383 | 2,345 | 2,728 | ||||||||||||||
| Total interest-earning assets | 12,602 | 31,612 | 44,214 | ||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||
| Savings and interest-bearing transaction accounts | 945 | 31,219 | 32,164 | ||||||||||||||
| Time deposits | 1,223 | 14,478 | 15,701 | ||||||||||||||
| FHLB advances & other borrowings | (1,551) | 2,041 | 490 | ||||||||||||||
| Subordinated indebtedness | 121 | 131 | 252 | ||||||||||||||
| Total interest-bearing liabilities | 738 | 47,869 | 48,607 | ||||||||||||||
| Net interest income | $ | 11,864 | $ | (16,257) | $ | (4,393) | |||||||||||
Provision for Credit Losses
The provision for credit losses, which includes the provisions for loan credit losses, off-balance sheet commitments credit losses and security credit losses, is based on management’s assessment of the adequacy of our allowance for credit losses (“ACL”) for loans, securities, and our reserve for off-balance-sheet lending commitments. Factors impacting the provision include inherent risk characteristics in our loan portfolio, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of the change in collateral values, reasonable and supportable forecasts, and the funding probability on unfunded lending commitments. The provision for credit losses is charged against earnings in order to maintain our ACL, which reflects management’s best estimate of the life of loan credit losses inherent in our loan portfolio at the balance sheet date, and our reserve for off-balance-sheet lending commitments, which reflects management’s best estimate of losses inherent in our legally binding lending-related commitments. The allowance is increased by the provision for loan credit losses and decreased by charge-offs, net of recoveries.
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We recorded a provision expense of $3.5 million for the three months ended September 30, 2023, a decrease of $13.4 million from $16.9 million for the three months ended September 30, 2022. The decrease was primarily due the $14.9 million provision for loan credit losses on non-PCD (purchase credit deteriorated) loans associated with the BTH merger that occurred on August 1, 2022. Net charge-offs were $2.7 million for the three months ended September 30, 2023, compared to $1.1 million during the three months ended September 30, 2022. The allowance for loan credit losses (“ALCL”) to nonperforming LHFI was 301.12% at September 30, 2023, compared to 594.11% at September 30, 2022, primarily driven by an increase of $17.6 million in our nonperforming LHFI compared to September 30, 2022. The increase in nonperforming loans for the comparative periods was driven by increases of $11.9 million and $5.6 million in nonperforming commercial and industrial loans and residential real estate loans, respectively. Net charge-offs to total average LHFI (annualized) increased to 0.14% for the three months ended September 30, 2023, from 0.07% for the three months ended September 30, 2022.
Noninterest Income
Our primary sources of recurring noninterest income are service charges on deposit accounts, mortgage banking revenue, insurance commission and fee income, and other fee income.
The table below presents the various components of and changes in our noninterest income for the periods indicated.
| (Dollars in thousands) | Three Months Ended September 30, | ||||||||||||||||||||||
| Noninterest income: | 2023 | 2022 | $ Change | % Change | |||||||||||||||||||
| Insurance commission and fee income | $ | 6,443 | $ | 5,666 | $ | 777 | 13.7 | % | |||||||||||||||
| Service charges and fees | 4,621 | 4,734 | (113) | (2.4) | |||||||||||||||||||
| Mortgage banking revenue (loss) | 892 | (929) | 1,821 | 196.0 | |||||||||||||||||||
| Other fee income | 944 | 1,162 | (218) | (18.8) | |||||||||||||||||||
| Swap fee income | 366 | 25 | 341 | N/M | |||||||||||||||||||
| (Loss) gain on sales of securities, net | (7,173) | 1,664 | (8,837) | 531.1 | |||||||||||||||||||
| Limited partnership investment (loss) income | (425) | 112 | (537) | N/M | |||||||||||||||||||
| Gain on sales and disposals of other assets, net | 45 | 70 | (25) | (35.7) | |||||||||||||||||||
| Other income | 12,406 | 1,219 | 11,187 | N/M | |||||||||||||||||||
| Total noninterest income | $ | 18,119 | $ | 13,723 | $ | 4,396 | 32.0 | ||||||||||||||||
____________________________ N/M = Not meaningful. | |||||||||||||||||||||||
Noninterest income for the three months ended September 30, 2023, increased by $4.4 million, or 32.0%, to $18.1 million, compared to $13.7 million for the three months ended September 30, 2022, primarily due to increases of $11.2 million and $1.8 million in other income and mortgage banking revenue (loss), respectively. The increases were partially offset by an $8.8 million decrease in (loss) gain on sales of securities, net.
Mortgage banking revenue. The $1.8 million increase in mortgage banking revenue during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, was primarily due to a $2.0 million impairment on the held for sale GNMA MSR portfolio during three months ended September 30, 2022, with no such impairment experienced during the three months ended September 30, 2023.
(Loss) gain on sales of securities, net. The $8.8 million decrease in (loss) gain on sales of securities, net was due to the sale of available for sale investment securities with a book value of $181.9 million, which realized a loss on sale of $7.2 million during the three months ended September 30, 2023. We used the proceeds from the sale to pay down FHLB advances.
Other noninterest income. The $11.2 million increase in other noninterest income was primarily due to a $10.1 million gain realized from a positive valuation adjustment on one of our non-marketable equity securities, which qualified for the practical expedient under which we carry these securities at cost adjusted for any observable transactions during the period, less any impairment. During the three months ended September 30, 2023, we observed multiple orderly transactions for identical equity securities indicating a price change had occurred and adjusted our basis upwards accordingly.
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Noninterest Expense
The following table presents the significant components of noninterest expense for the periods indicated:
| (Dollars in thousands) | Three Months Ended September 30, | ||||||||||||||||||||||
| Noninterest expense: | 2023 | 2022 | $ Change | % Change | |||||||||||||||||||
| Salaries and employee benefits | $ | 34,624 | $ | 31,834 | $ | 2,790 | 8.8 | % | |||||||||||||||
| Occupancy and equipment, net | 6,790 | 5,399 | 1,391 | 25.8 | |||||||||||||||||||
| Data processing | 2,775 | 2,689 | 86 | 3.2 | |||||||||||||||||||
| Intangible asset amortization | 2,264 | 1,872 | 392 | 20.9 | |||||||||||||||||||
| Office and operations | 2,868 | 2,121 | 747 | 35.2 | |||||||||||||||||||
| Professional services | 1,409 | 1,188 | 221 | 18.6 | |||||||||||||||||||
| Loan-related expenses | 1,220 | 1,599 | (379) | (23.7) | |||||||||||||||||||
| Advertising and marketing | 1,371 | 1,196 | 175 | 14.6 | |||||||||||||||||||
| Electronic banking | 1,384 | 1,087 | 297 | 27.3 | |||||||||||||||||||
| Franchise tax expense | 520 | 957 | (437) | (45.7) | |||||||||||||||||||
| Regulatory assessments | 1,913 | 877 | 1,036 | 118.1 | |||||||||||||||||||
| Communications | 390 | 279 | 111 | 39.8 | |||||||||||||||||||
| Merger-related expense | — | 3,614 | (3,614) | (100.0) | |||||||||||||||||||
| Other expenses | 1,135 | 1,529 | (394) | (25.8) | |||||||||||||||||||
| Total noninterest expense | $ | 58,663 | $ | 56,241 | $ | 2,422 | 4.3 | ||||||||||||||||
N/M = Not meaningful.
Noninterest expense for the three months ended September 30, 2023, increased by $2.4 million, or 4.3%, to $58.7 million, compared to $56.2 million for the three months ended September 30, 2022, primarily due to increases of $2.8 million, and $1.4 million in salaries and employee benefits and occupancy and equipment, net, respectively. These increases were partially offset by a decrease in merger-related expenses of $3.6 million.
Salaries and employee benefits. The $2.8 million increase in salaries and employee benefits expenses was primarily driven by an increase in full-time equivalent employees to 1,037 at September 30, 2023, from 994 at September 30, 2022.
Occupancy and equipment, net. The $1.4 million increase in occupancy and equipment expense was primarily due to the addition of two new banking center locations and two mortgage production offices being added during the intervening period.
Merger-related expense. The $3.6 million merger-related expenses were associated with the BTH merger that was closed on August 1, 2022, while no comparable expense occurred during the three months ended September 30, 2023.
Income Tax Expense
For the three months ended September 30, 2023, we recognized income tax expense of $5.8 million, compared to $2.8 million for the three months ended September 30, 2022. The effective tax rate for the three months ended September 30, 2023, was 19.1%, compared to 14.8% for the three months ended September 30, 2022. The increase was due to tax exempt items having a larger than proportional effect on our effective income tax rate as income before taxes was lower during the three months ended September 30, 2022, primarily due to merger-related expenses during the three months ended September 30, 2022.
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Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022
Net Interest Income and Net Interest Margin
Net interest income for the nine months ended September 30, 2023, was $226.6 million, an increase of $36.0 million, or 18.9%, compared to the nine months ended September 30, 2022. Increases in interest rates and average interest-earning assets drove increases of $114.4 million and $58.2 million, respectively, in total interest income. The increase in total interest income was partially offset by a $136.6 million increase in interest expense, of which, $130.1 million of the increase was driven by increases in interest rates.
Purchase accounting accretion on acquired loans was $2.1 million for the nine months ended September 30, 2023, with remaining purchase accounting net loan discounts totaling $179,000 at September 30, 2023. Net purchase accounting accretion was $1.4 million during the nine months ended September 30, 2022. Net purchase accounting accretion income on deposits and subordinated indebtedness totaled $128,000 for the nine months ended September 30, 2023, bringing the impact from purchase accounting treatment on total net interest income to $2.2 million for the nine months ended September 30, 2023.
During the nine months ended September 30, 2023, increases in interest rates contributed $94.7 million to the total increase in interest income earned on total LHFI, while interest rates increased our total deposit interest expense and FHLB and advances and other borrowings interest expense by $118.0 million and $11.5 million, respectively, during the same period.
Interest income earned on LHFI during the nine months ended September 30, 2023, increased in all loan categories when compared to the nine months ended September 30, 2022. Interest income earned on real estate loans and commercial and industrial loans contributed $93.5 million and $60.1 million, respectively, of the $156.4 million total increase in interest income earned on LHFI when compared to the nine months ended September 30, 2022. Increases in average balances and interest rates drove $47.2 million and $46.3 million, respectively, of the total increase in interest income earned on real estate loans, while increases in interest rates drove $42.1 million of the $60.1 million increase in interest income earned on commercial and industrial loans for the comparable periods.
During March 2023, we strategically borrowed and held approximately $700.0 million in excess cash for contingency liquidity. This excess liquidity was held at a weighted-average rate of 5.09% and added $173.8 million in average interest-bearing assets for the nine months ended September 30, 2023, which negatively impacted the fully tax-equivalent net interest margin by six basis points. The excess liquidity was repaid by June 30, 2023.
The fully tax-equivalent net interest margin was 3.24% for the nine months ended September 30, 2023, a four basis point decrease from the nine months ended September 30, 2022. The decrease was primarily due to a 259 basis point increase in interest rates paid on total interest-bearing liabilities to 3.24% for the nine months ended September 30, 2023, from 0.65% for the nine months ended September 30, 2022, partially offset by a 184 basis point increase in the yield earned on interest-earning assets for the nine months ended September 30, 2023, to 5.50%, from 3.66% for the nine months ended September 30, 2022.
During the quarter ended September 30, 2023, we made a strategic decision to sell available for sale investment securities with a book value of $181.9 million, and realized a loss of $7.2 million, in order to use the proceeds to pay down FHLB advances. Due to the timing of this transaction, it had no impact on the fully tax-equivalent NIM for the nine months ended September 30, 2023. While the associated loss resulted in an $0.18 negative impact to EPS for the nine months ended September 30, 2023, the difference between the relatively low yield on securities sold and the higher cost of FHLB advances was an attractive trade-off, with an estimated annualized positive forward impact to fully tax-equivalent NIM of 11 basis points, an estimated annualized forward diluted EPS benefit of approximately $0.11 and an estimated earn-back period of 1.7 years. The estimated metrics above use our annualized third quarter net income, less any non-operating income items, and added the estimated annualized tax-effected net interest income using a weighted average tax-effected yield of 3.08% on the securities sold and an expected interest rate of 5.62% on the FHLB advances paid off.
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The following table presents average consolidated balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the nine months ended September 30, 2023 and 2022.
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) Assets | Average Balance(1) | Income/Expense | Yield/Rate | Average Balance(1) | Income/Expense | Yield/Rate | |||||||||||||||||||||||||||||
| Commercial real estate | $ | 2,393,028 | $ | 99,497 | 5.56 | % | $ | 1,865,658 | $ | 60,010 | 4.30 | % | |||||||||||||||||||||||
| Construction/land/land development | 997,296 | 50,354 | 6.75 | 638,683 | 22,466 | 4.70 | |||||||||||||||||||||||||||||
| Residential real estate | 1,599,803 | 59,155 | 4.94 | 1,042,397 | 33,008 | 4.23 | |||||||||||||||||||||||||||||
| Commercial and industrial | 2,051,272 | 115,750 | 7.54 | 1,548,419 | 55,623 | 4.80 | |||||||||||||||||||||||||||||
| Mortgage warehouse lines of credit | 329,205 | 16,262 | 6.60 | 453,658 | 14,055 | 4.14 | |||||||||||||||||||||||||||||
| Consumer | 24,836 | 1,431 | 7.71 | 18,887 | 889 | 6.29 | |||||||||||||||||||||||||||||
| LHFI | 7,395,440 | 342,449 | 6.19 | 5,567,702 | 186,051 | 4.47 | |||||||||||||||||||||||||||||
| Loans held for sale | 20,105 | 693 | 4.61 | 33,428 | 921 | 3.68 | |||||||||||||||||||||||||||||
| Loans receivable | 7,415,545 | 343,142 | 6.19 | 5,601,130 | 186,972 | 4.46 | |||||||||||||||||||||||||||||
| Investment securities-taxable | 1,358,913 | 24,658 | 2.43 | 1,522,631 | 20,030 | 1.76 | |||||||||||||||||||||||||||||
| Investment securities-non-taxable | 224,985 | 3,974 | 2.36 | 276,641 | 5,044 | 2.44 | |||||||||||||||||||||||||||||
| Non-marketable equity securities held in other financial institutions | 69,505 | 2,772 | 5.33 | 56,797 | 1,214 | 2.86 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in banks | 352,166 | 13,360 | 5.07 | 408,237 | 2,048 | 0.67 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 9,421,114 | 387,906 | 5.50 | 7,865,436 | 215,308 | 3.66 | |||||||||||||||||||||||||||||
Noninterest-earning assets(2) | 582,983 | 536,265 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 10,004,097 | $ | 8,401,701 | |||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||||||||||||||||
| Savings and interest-bearing transaction accounts | $ | 4,706,150 | $ | 101,674 | 2.89 | % | $ | 3,967,253 | $ | 11,514 | 0.39 | % | |||||||||||||||||||||||
| Time deposits | 1,329,881 | 35,012 | 3.52 | 569,917 | 2,175 | 0.51 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 6,036,031 | 136,686 | 3.03 | 4,537,170 | 13,689 | 0.40 | |||||||||||||||||||||||||||||
| FHLB advances & other borrowings | 430,650 | 17,038 | 5.29 | 407,869 | 5,203 | 1.71 | |||||||||||||||||||||||||||||
| Subordinated indebtedness | 199,568 | 7,614 | 5.10 | 167,366 | 5,887 | 4.70 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 6,666,249 | 161,338 | 3.24 | 5,112,405 | 24,779 | 0.65 | |||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | |||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 2,205,664 | 2,364,443 | |||||||||||||||||||||||||||||||||
Other liabilities(2) | 136,789 | 147,868 | |||||||||||||||||||||||||||||||||
| Total liabilities | 9,008,702 | 7,624,716 | |||||||||||||||||||||||||||||||||
| Stockholders’ Equity | 995,395 | 776,985 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 10,004,097 | $ | 8,401,701 | |||||||||||||||||||||||||||||||
| Net interest spread | 2.26 | % | 3.01 | % | |||||||||||||||||||||||||||||||
| Net interest income and margin | $ | 226,568 | 3.22 | $ | 190,529 | 3.24 | |||||||||||||||||||||||||||||
Net interest income and margin - (tax equivalent)(3) | $ | 228,538 | 3.24 | $ | 192,784 | 3.28 | |||||||||||||||||||||||||||||
____________________________
(1)Nonaccrual loans are included in their respective loan category for the purpose of calculating the yield earned. All average balances are daily average balances.
(2)Includes Government National Mortgage Association ("GNMA") repurchase average balances of $1.4 million and $36.2 million for the nine months ended September 30, 2023 and 2022, respectively. The GNMA repurchase asset and liability are recorded as equal offsetting amounts in the consolidated balance sheets, with the asset included in loans held for sale and the liability included in FHLB advances and other borrowings. During the second half of 2022, the Company entered into an agreement to sell its GNMA MSR portfolio, which met all final sale conditions in early 2023. The Company derecognized the related GNMA repurchase asset and offsetting liability during the quarter ended March 31, 2023. For more information on the GNMA repurchase option, see Note 6 — Mortgage Banking in the condensed notes to our consolidated financial statements.
(3)In order to present pre-tax income and resulting yields on tax-exempt investments comparable to those on taxable investments, a tax-equivalent adjustment has been computed. This adjustment also includes income tax credits received on Qualified School Construction Bonds and income from tax-exempt investments, and tax credits were computed using a federal income tax rate of 21%.
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Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate changes has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. For purposes of the below table, changes attributable to both rate and volume that cannot be segregated, including the difference in day count, have been allocated to rate.
Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022 | |||||||||||||||||
(Dollars in thousands) Interest-earning assets | Increase (Decrease) due to Change in | ||||||||||||||||
| Loans: | Volume | Yield/Rate | Total Change | ||||||||||||||
| Commercial real estate | $ | 16,963 | $ | 22,524 | $ | 39,487 | |||||||||||
| Construction/land/land development | 12,614 | 15,274 | 27,888 | ||||||||||||||
| Residential real estate | 17,650 | 8,497 | 26,147 | ||||||||||||||
| Commercial and industrial | 18,064 | 42,063 | 60,127 | ||||||||||||||
| Mortgage warehouse lines of credit | (3,856) | 6,063 | 2,207 | ||||||||||||||
| Consumer | 280 | 262 | 542 | ||||||||||||||
| Loans held for sale | (367) | 139 | (228) | ||||||||||||||
| Loans receivable | 61,348 | 94,822 | 156,170 | ||||||||||||||
| Investment securities-taxable | (2,154) | 6,782 | 4,628 | ||||||||||||||
| Investment securities-non-taxable | (942) | (128) | (1,070) | ||||||||||||||
| Non-marketable equity securities held in other financial institutions | 272 | 1,286 | 1,558 | ||||||||||||||
| Interest-bearing deposits in banks | (281) | 11,593 | 11,312 | ||||||||||||||
| Total interest-earning assets | 58,243 | 114,355 | 172,598 | ||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||
| Savings and interest-bearing transaction accounts | 2,145 | 88,015 | 90,160 | ||||||||||||||
| Time deposits | 2,900 | 29,937 | 32,837 | ||||||||||||||
| FHLB advances & other borrowings | 291 | 11,544 | 11,835 | ||||||||||||||
| Subordinated indebtedness | 1,133 | 594 | 1,727 | ||||||||||||||
| Total interest-bearing liabilities | 6,469 | 130,090 | 136,559 | ||||||||||||||
| Net interest income | $ | 51,774 | $ | (15,735) | $ | 36,039 | |||||||||||
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Provision for Credit Losses
We recorded a provision expense of $14.0 million for the nine months ended September 30, 2023, a $6.0 million decrease from $20.1 million for the nine months ended September 30, 2022. The decrease was primarily due the $14.9 million provision for loan credit losses on non-PCD loans associated with the BTH merger that occurred on August 1, 2023, offset by an increase in loan provision primarily due to loan growth during the intervening period, as well as increases in required reserves on individually evaluated credits at September 30, 2023, compared to September 30, 2022. Net charge-offs were $5.9 million during the nine months ended September 30, 2023, compared to $4.4 million during the nine months ended September 30, 2022. The ALCL to nonperforming LHFI was 301.12% at September 30, 2023, compared to 594.11% at September 30, 2022, primarily driven by a $17.6 million increase in nonperforming LHFI compared to September 30, 2022. As explained more fully in Provision for Credit Losses under the quarterly Results of Operations above, the increase in nonperforming loans was driven by increases of $11.9 million and $5.6 million in commercial and industrial and nonperforming residential real estate loans, respectively.
Noninterest Income
The table below presents the various components of and changes in our noninterest income for the periods indicated.
| (Dollars in thousands) | Nine Months Ended September 30, | ||||||||||||||||||||||
| Noninterest income: | 2023 | 2022 | $ Change | % Change | |||||||||||||||||||
| Insurance commission and fee income | $ | 19,639 | $ | 17,815 | $ | 1,824 | 10.2 | % | |||||||||||||||
| Service charges and fees | 13,914 | 13,006 | 908 | 7.0 | |||||||||||||||||||
| Mortgage banking revenue | 4,075 | 5,521 | (1,446) | (26.2) | |||||||||||||||||||
| Other fee income | 2,856 | 2,398 | 458 | 19.1 | |||||||||||||||||||
| Swap fee income | 1,081 | 165 | 916 | N/M | |||||||||||||||||||
| (Loss) gain on sales of securities, net | (7,029) | 1,664 | (8,693) | N/M | |||||||||||||||||||
| Limited partnership investment (loss) income | (128) | 31 | (159) | N/M | |||||||||||||||||||
| Loss on sales and disposals of other assets, net | (3) | (209) | 206 | 98.6 | |||||||||||||||||||
| Other income | 15,734 | 3,454 | 12,280 | N/M | |||||||||||||||||||
| Total noninterest income | $ | 50,139 | $ | 43,845 | $ | 6,294 | 14.4 | ||||||||||||||||
____________________________ N/M = Not meaningful. | |||||||||||||||||||||||
Noninterest income for the nine months ended September 30, 2023, increased by $6.3 million, or 14.4%, to $50.1 million, compared to $43.8 million for the nine months ended September 30, 2022. The increase was primarily due to increases of $12.3 million and $1.8 million in other noninterest income and insurance commission and fee income, respectively. The increases were partially offset by decreases of $8.7 million and $1.4 million in gain on sales of securities, net, and mortgage banking revenue, respectively. The majority of our noninterest income categories reflected increases during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to the BTH merger.
Insurance commission and fee income. The $1.8 million increase in insurance commission and fee income was mainly due to increases in new commercial accounts combined with higher contingency income earned due to lower claims for catastrophic events experienced by our insurance agency counterparties during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Mortgage banking revenue. The $1.4 million decrease in mortgage banking revenue compared to the nine months ended September 30, 2022, was primarily due to a slow down in the residential housing market brought on by higher mortgage interest rates, and in some key markets, continued housing supply shortages, leading to overall lower lending during the period. This negative impact was partially offset by a $2.0 million impairment on the held for sale GNMA MSR portfolio during nine months ended September 30, 2022, with no such impairment experienced during the nine months ended September 30, 2023.
(Loss) gain on sales of securities, net. The loss on sales of securities was due to the sale of available for sale investment securities with a current book value of $181.9 million, which realized a loss on sale of $7.2 million. We used the proceeds from the sale to pay down FHLB advances. Please see the Net Interest Income and Net Interest Margin section above for more information on this transaction.
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Other noninterest income. The $12.3 million increase in other noninterest income was primarily due to a $10.1 million gain realized from a positive valuation adjustment on one of our non-marketable equity securities, which qualified for the practical expedient under which we carry these securities at cost adjusted for any observable transactions during the period, less any impairment. During the nine months ended September 30, 2023, we observed multiple orderly transactions for identical equity securities indicating a price change had occurred and adjusted our basis upwards accordingly.
Noninterest Expense
The following table presents the significant components of noninterest expense for the periods indicated:
| (Dollars in thousands) | Nine Months Ended September 30, | ||||||||||||||||||||||
| Noninterest expense: | 2023 | 2022 | $ Change | % Change | |||||||||||||||||||
| Salaries and employee benefits | $ | 102,888 | $ | 85,632 | $ | 17,256 | 20.2 | % | |||||||||||||||
| Occupancy and equipment, net | 19,871 | 14,340 | 5,531 | 38.6 | |||||||||||||||||||
| Data processing | 8,528 | 7,588 | 940 | 12.4 | |||||||||||||||||||
| Intangible asset amortization | 7,369 | 2,934 | 4,435 | N/M | |||||||||||||||||||
| Office and operations | 7,887 | 5,843 | 2,044 | 35.0 | |||||||||||||||||||
| Professional services | 4,491 | 2,668 | 1,823 | 68.3 | |||||||||||||||||||
| Loan-related expenses | 3,941 | 4,421 | (480) | (10.9) | |||||||||||||||||||
| Advertising and marketing | 4,296 | 2,926 | 1,370 | 46.8 | |||||||||||||||||||
| Electronic banking | 3,609 | 2,900 | 709 | 24.4 | |||||||||||||||||||
| Franchise tax expense | 2,392 | 2,565 | (173) | (6.7) | |||||||||||||||||||
| Regulatory assessments | 4,596 | 2,305 | 2,291 | 99.4 | |||||||||||||||||||
| Communications | 1,181 | 812 | 369 | 45.4 | |||||||||||||||||||
| Merger-related expense | — | 4,992 | (4,992) | (100.0) | |||||||||||||||||||
| Other expenses | 3,261 | 3,239 | 22 | 0.7 | |||||||||||||||||||
| Total noninterest expense | $ | 174,310 | $ | 143,165 | $ | 31,145 | 21.8 | ||||||||||||||||
____________________________
N/M = Not meaningful.
Noninterest expense for the nine months ended September 30, 2023, increased by $31.1 million, or 21.8%, to $174.3 million, compared to $143.2 million for the nine months ended September 30, 2022. The majority of our noninterest expense categories increased during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, primarily due to the BTH merger.
Salaries and employee benefits. The $17.3 million increase in salaries and employee benefits expenses was primarily driven by increases of $13.5 million and $1.8 million in salary expense and incentive compensation, respectively, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
•The BTH merger contributed $5.7 million to the total salaries and employee benefits increase, primarily due to an additional seven months of BTH expense during the nine months ended September 30, 2023, compared to two months of BTH expense during the nine months ended September 30, 2022.
•The impact of the cost of living increases made in August 2022 and annual cost of living adjustments and raises made on March 1, 2023, increased the comparative change in salaries and employee benefits between the two periods.
Occupancy and equipment, net. The $5.5 million increase was primarily due to the BTH merger that closed on August 1, 2022, which contributed $2.5 million to the total increase. Additionally, the increase was due to the addition of two new banking locations and two mortgage production offices being added during the intervening period.
Intangible asset amortization expense. The $4.4 million increase was due to the core deposit intangible established in conjunction with the BTH merger, which contributed $4.5 million to the total increase.
Office and operations and Professional Services. These increases were mainly due to various increases, with no individually significant increase other than the BTH merger.
64
Advertising and marketing. The $1.4 million increase was mainly due to new projects and campaigns launched during the nine months ended September 30, 2023.
Regulatory assessment. The $2.3 million increase in regulatory assessments was driven primarily by an increase in the blended FDIC’s Uniform Assessment rate to 6.04% at September 30, 2023, from 4.09% at September 30, 2022, as well as growth in our average assets during the intervening period.
Merger-related expense. The $5.0 million merger-related expenses were associated with the BTH merger that was closed on August 1, 2022, while no comparable expense occurred during the nine months ended September 30, 2023.
Income Tax Expense
For the nine months ended September 30, 2023, we recognized income tax expense of $18.0 million, compared to $12.9 million for the nine months ended September 30, 2022. Our effective tax rate was 20.4% for the nine months ended September 30, 2023, compared to 18.1% for the nine months ended September 30, 2022. The effective tax rate was higher for the nine months ended September 30, 2023, compared to the rate for the nine months ended September 30, 2022, primarily due to higher state income tax due to higher state income during the nine months ended September 30, 2023.
Comparison of Financial Condition at September 30, 2023, and December 31, 2022
General
Total assets increased by $47.2 million, or 0.5%, to $9.73 billion at September 30, 2023, from $9.69 billion at December 31, 2022. The increase in total assets is primarily due to an increase of $478.0 million, or 6.7%, in our loans held for investment (“LHFI”). LHFI was $7.57 billion at September 30, 2023, compared to $7.09 billion at December 31, 2022. The increase was partially offset by decreases of $350.6 million and $53.7 million in available for sale securities and cash and cash equivalents. Available for sale securities and cash and cash equivalents were $1.29 billion and $305.3 million at September 30, 2023, respectively compared to $1.64 billion and $359.0 million at December 31, 2022, respectively.
Federal Home Loan Bank advances, repurchase obligations and other borrowings decreased $627.0 million, or 98.1%, to $12.2 million at September 30, 2023, from $639.2 million at December 31, 2022, offset by a $598.8 million, or 7.7%, increase in total deposits to $8.37 billion at September 30, 2023, from $7.78 billion at December 31, 2022. Total deposits increased at September 30, 2023, compared to December 31, 2022, primarily due to increases in brokered time deposits and money market deposits.
Loan Portfolio
Our loan portfolio is our largest category of interest-earning assets, and interest income earned on our loan portfolio is our primary source of income. At September 30, 2023, 77.4% of the loan portfolio held for investment was comprised of commercial and industrial loans, including mortgage warehouse lines of credit, commercial real estate and construction/land/land development loans, which were primarily originated within our market areas of Texas, North Louisiana, and Mississippi, compared to 78.8% at December 31, 2022.
The following table presents the ending balance of our loan portfolio held for investment at the dates indicated.
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | 2023 vs. 2022 | ||||||||||||||||||||||||||||||||
| Real estate: | Amount | Percent | Amount | Percent | $ Change | % Change | |||||||||||||||||||||||||||||
| Commercial real estate | $ | 2,435,891 | 32.2 | % | $ | 2,304,678 | 32.6 | % | $ | 131,213 | 5.7 | % | |||||||||||||||||||||||
Construction/land/land development | 1,076,756 | 14.2 | 945,625 | 13.3 | 131,131 | 13.9 | |||||||||||||||||||||||||||||
| Residential real estate | 1,688,169 | 22.3 | 1,477,538 | 20.8 | 210,631 | 14.3 | |||||||||||||||||||||||||||||
| Total real estate | 5,200,816 | 68.7 | 4,727,841 | 66.7 | 472,975 | 10.0 | |||||||||||||||||||||||||||||
| Commercial and industrial | 2,058,073 | 27.2 | 2,051,161 | 28.9 | 6,912 | 0.3 | |||||||||||||||||||||||||||||
| Mortgage warehouse lines of credit | 286,293 | 3.8 | 284,867 | 4.0 | 1,426 | 0.5 | |||||||||||||||||||||||||||||
| Consumer | 22,881 | 0.3 | 26,153 | 0.4 | (3,272) | (12.5) | |||||||||||||||||||||||||||||
| Total LHFI | $ | 7,568,063 | 100.0 | % | $ | 7,090,022 | 100.0 | % | $ | 478,041 | 6.7 | ||||||||||||||||||||||||
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At September 30, 2023, total LHFI were $7.57 billion, an increase of $478.0 million, or 6.7%, compared to $7.09 billion at December 31, 2022. The increase was primarily driven by loan growth of $473.0 million in real estate loans. Total LHFI at September 30, 2023, excluding mortgage warehouse lines of credit, was $7.28 billion, reflecting an increase of $476.6 million, or 7.0%, compared to December 31, 2022. Our lending focus continues to be on operating companies, including commercial loans and lines of credit, as well as owner-occupied commercial real estate loans.
Loan Portfolio Maturity Analysis
The table below presents the maturity distribution of our LHFI at September 30, 2023. The table also presents the portion of our loans that have fixed interest rates, rather than interest rates that fluctuate over the life of the loans, based on changes in the interest rate environment.
| September 30, 2023 | |||||||||||||||||||||||||||||
| (Dollars in thousands) | One Year or Less | After One Year Through Five Years | After Five Years Through Fifteen Years | After Fifteen Years | Total | ||||||||||||||||||||||||
| Real estate: | |||||||||||||||||||||||||||||
| Commercial real estate | $ | 326,499 | $ | 1,579,298 | $ | 512,107 | $ | 17,987 | $ | 2,435,891 | |||||||||||||||||||
| Construction/land/land development | 283,449 | 611,089 | 142,063 | 40,155 | 1,076,756 | ||||||||||||||||||||||||
| Residential real estate | 70,872 | 717,635 | 138,064 | 761,598 | 1,688,169 | ||||||||||||||||||||||||
| Total real estate | 680,820 | 2,908,022 | 792,234 | 819,740 | 5,200,816 | ||||||||||||||||||||||||
| Commercial and industrial | 798,255 | 1,163,112 | 96,573 | 133 | 2,058,073 | ||||||||||||||||||||||||
| Mortgage warehouse lines of credit | 284,367 | 1,926 | — | — | 286,293 | ||||||||||||||||||||||||
| Consumer | 8,638 | 13,298 | 513 | 432 | 22,881 | ||||||||||||||||||||||||
| Total LHFI | $ | 1,772,080 | $ | 4,086,358 | $ | 889,320 | $ | 820,305 | $ | 7,568,063 | |||||||||||||||||||
| Amounts with fixed rates | $ | 397,071 | $ | 2,344,324 | $ | 564,638 | $ | 135,280 | $ | 3,441,313 | |||||||||||||||||||
| Amounts with variable rates | 1,375,009 | 1,742,034 | 324,682 | 685,025 | 4,126,750 | ||||||||||||||||||||||||
| Total | $ | 1,772,080 | $ | 4,086,358 | $ | 889,320 | $ | 820,305 | $ | 7,568,063 | |||||||||||||||||||
Nonperforming Assets
Nonperforming assets consist of nonperforming/nonaccrual loans and property acquired through foreclosures or repossession, as well as bank-owned property not in use and listed for sale.
Loans are placed on nonaccrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions, and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans may be placed on nonaccrual status even if the contractual payments are not past due if information becomes available that causes substantial doubt about the borrower’s ability to meet the contractual obligations of the loan. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Past due status is based on the contractual terms of the loan. Interest income on nonaccrual loans may be recognized to the extent cash payments are received, but payments received are usually applied to principal. Nonaccrual loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. If a loan is determined by management to be uncollectible, regardless of size, the portion of the loan determined to be uncollectible is then charged to the ALCL.
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Purchased loans that have experienced more than insignificant credit deterioration since origination are purchased credit deteriorated (“PCD”) loans. The Company evaluates acquired loans for deterioration in credit quality based on any of, but not limited to, the following: (1) nonaccrual status; (2) borrowers are experiencing financial difficulty which results in modification to the loan terms; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on merger/acquisition date, but had previously been 60 days delinquent twice. An allowance for credit losses is determined using the same methodology as other individually evaluated loans. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. We held approximately $36.8 million of unpaid principal balance PCD loans at September 30, 2023, and $48.1 million of unpaid principal balance PCD loans at December 31, 2022.
We manage the quality of our lending portfolio in part through a disciplined underwriting policy and through continual monitoring of loan performance and borrowers’ financial condition. There can be no assurance, however, that our loan portfolio will not become subject to losses due to declines in economic conditions or deterioration in the financial condition of our borrowers.
The following table shows our nonperforming loans and nonperforming assets at the dates indicated:
(Dollars in thousands) | |||||||||||
Nonperforming LHFI: | September 30, 2023 | December 31, 2022 | |||||||||
| Commercial real estate | $ | 942 | $ | 526 | |||||||
| Construction/land/land development | 235 | 270 | |||||||||
| Residential real estate | 13,236 | 7,712 | |||||||||
| Commercial and industrial | 17,072 | 1,383 | |||||||||
| Consumer | 123 | 49 | |||||||||
Total nonperforming LHFI | 31,608 | 9,940 | |||||||||
Nonperforming loans held for sale | — | 3,933 | |||||||||
Total nonperforming loans | 31,608 | 13,873 | |||||||||
Other real estate owned: | |||||||||||
| Commercial real estate, construction/land/land development | 3,031 | — | |||||||||
| Residential real estate | 908 | 806 | |||||||||
Total repossessed assets owned | 3,939 | 806 | |||||||||
Total nonperforming assets | $ | 35,547 | $ | 14,679 | |||||||
Loan modifications made to borrowers experiencing financial difficulty - nonaccrual(1) | $ | 6,397 | $ | 4,389 | |||||||
Loan modifications made to borrowers experiencing financial difficulty - accruing(1) | 24,873 | 3,248 | |||||||||
Total LHFI | 7,568,063 | 7,090,022 | |||||||||
Ratio of nonperforming LHFI to total LHFI | 0.42 | % | 0.14 | % | |||||||
Ratio of nonperforming assets to total assets | 0.37 | 0.15 | |||||||||
______________________
(1)December 31, 2022, amounts were previously disclosed as troubled debt restructured (“TDR”) loans under Accounting Standards Codification 310-40. Accounting Standards Update 2022-02 eliminated the TDR guidance effective for public business entities on January 1, 2023.
At September 30, 2023, total nonperforming LHFI increased by $21.7 million from December 31, 2022. The increase in nonperforming LHFI was driven by increases of $15.7 million and $5.5 million in nonperforming commercial and industrial loans and residential real estate loans, respectively. The net increase in nonperforming commercial and industrial loans was mainly due to two relationships totaling $13.2 million, which maintained reserves of $7.2 million as of September 30, 2023. The increase in nonperforming residential real estate loans was driven by the reclassification of nonperforming mortgage loans from the held for sale portfolio to the held for investment portfolio during the nine months ended September 30, 2023. These residential real estate loans carry government guarantees and considering the guaranty as well as the value of the underlying collateral, resulted in an immaterial impact to the ALCL. Please see Note 4 — Loans to our consolidated financial statements contained in Part I, Item 1 of this report for more information on nonperforming loans.
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Potential Problem Loans
From a credit risk standpoint, we classify loans using risk grades which fall into one of five categories: pass, special mention, substandard, doubtful or loss. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on loans and adjust them to reflect the degree of risk and loss that is felt to be inherent or expected in each loan. The methodology is structured, so that reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss). Loans rated special mention reflect borrowers who exhibit credit weaknesses or downward trends deserving close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date. While potentially weak, no loss of principal or interest is envisioned, and these borrowers currently do not pose sufficient risk to warrant adverse classification. Loans rated substandard are those borrowers with deteriorating trends and well-defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any, and where normal repayment from the borrower might be in jeopardy.
Loans rated as doubtful have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable, and there is a high probability of loss based on currently existing facts, conditions and values. Loans classified as loss are charged-off, and we have no expectation of the recovery of any payments with respect to loans rated as loss. Information regarding the internal risk ratings of our loans at September 30, 2023, is included in Note 4 — Loans to our consolidated financial statements contained in Item 1 of this report.
Allowance for Loan Credit Losses
The ALCL represents the estimated losses for loans accounted for on an amortized cost basis. Expected losses are calculated using relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We evaluate LHFI on a pool basis with pools of loans characterized by loan type, collateral, industry, internal credit risk rating and FICO score. We apply a probability of default, loss given default loss methodology, to the loan pools at September 30, 2023. Historical loss rates for each pool are calculated based on charge-off and recovery data beginning with the second quarter of 2012. These loss rates are adjusted for the effects of certain economic variables forecast over a one-year period, particularly for differences between current period conditions and the conditions existing during the historical loss period. Subsequent to the forecast effects, historical loss rates are used to estimate losses over the estimated remaining lives of the loans. The estimated remaining lives consist of the contractual lives, adjusted for estimated prepayments. Loans that exhibit characteristics different from their pool characteristics are evaluated on an individual basis. Certain of these loans are considered to be collateral dependent, with the borrower experiencing financial difficulty. For these loans, the fair value of collateral practical expedient is elected whereby the allowance is calculated as the amount by which the amortized cost exceeds the fair value of collateral, less costs to sell (if applicable). Those individual loans that are not collateral dependent are evaluated based on a discounted cash flow methodology.
The amount of the ALCL is affected by loan charge-offs, which decrease the allowance, recoveries on loans previously charged off, which increase the allowance, as well as the provision for loan credit losses charged to income, which increases the allowance. In determining the provision for loan credit losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries and periodically reviews the size and composition of the loan portfolio in light of current and forecasted economic conditions. If actual losses exceed the amount of the ALCL, it would materially and adversely affect our earnings.
As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or at 90 days past due, we will reflect that loan as nonperforming. It will remain nonperforming until it performs in a manner that it is reasonable to expect that we will collect principal and accrued interest in full. When the amount or likelihood of a loss on a loan has been confirmed, a charge-off will be taken in the period it is determined.
We establish general allocations for each major loan category and credit quality. The general allocation is based, in part, on historical charge-off experience and loss given default methodology, derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. We give consideration to trends, changes in loan mix, delinquencies, prior losses, reasonable and supportable forecasts and other related information.
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In connection with the review of our loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:
•for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;
•for construction, land and land development loans, the perceived feasibility of the project, including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio;
•for residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and
•for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral.
Acquisition Accounting and Acquired Loans. We account for our mergers/acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, we record a discount or premium, and also an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An ALCL is determined using the same methodology as other individually evaluated loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized or accreted into interest income over the life of the loan. Subsequent changes to the ALCL are recorded through the provision for credit losses.
The ALCL to nonperforming LHFI decreased to 301.12% at September 30, 2023, compared to 876.87% at December 31, 2022, primarily driven by an increase of $21.7 million in the Company’s nonperforming LHFI as explained in the preceding Nonperforming Assets section, offset by an increase of $8.0 million in the ALCL during the nine months ended September 30, 2023, primarily due to loan growth during the same period of time.
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The following table presents an analysis of the allowance for credit losses and other related data at the periods indicated.
| (Dollars in thousands) | Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||
| ALCL | 2023 | 2022 | 2022 | ||||||||||||||
| Balance at beginning of period | $ | 87,161 | $ | 64,586 | $ | 64,586 | |||||||||||
| ALCL - BTH merger | — | 5,527 | 5,527 | ||||||||||||||
Provision for loan credit losses(1) | 13,932 | 17,631 | 21,613 | ||||||||||||||
| Charge-offs: | |||||||||||||||||
| Commercial real estate | 42 | 166 | 166 | ||||||||||||||
| Residential real estate | 27 | 75 | 91 | ||||||||||||||
| Commercial and industrial | 8,070 | 5,943 | 8,459 | ||||||||||||||
| Consumer | 107 | 38 | 43 | ||||||||||||||
| Total charge-offs | 8,246 | 6,222 | 8,759 | ||||||||||||||
| Recoveries: | |||||||||||||||||
| Commercial real estate | 113 | 19 | 40 | ||||||||||||||
| Construction/land/land development | 3 | 200 | 211 | ||||||||||||||
| Residential real estate | 13 | 98 | 102 | ||||||||||||||
| Commercial and industrial | 2,189 | 1,505 | 3,825 | ||||||||||||||
| Consumer | 12 | 15 | 16 | ||||||||||||||
| Total recoveries | 2,330 | 1,837 | 4,194 | ||||||||||||||
| Net charge-offs | 5,916 | 4,385 | 4,565 | ||||||||||||||
| Balance at end of period | $ | 95,177 | $ | 83,359 | $ | 87,161 | |||||||||||
| Ratio of allowance for loan credit losses to: | |||||||||||||||||
| Nonperforming LHFI | 301.12 | % | 594.11 | % | 876.87 | % | |||||||||||
| LHFI | 1.26 | 1.21 | 1.23 | ||||||||||||||
| Net charge-offs (annualized) as a percentage of: | |||||||||||||||||
| Provision for loan credit loss | 42.46 | 24.87 | 21.12 | ||||||||||||||
| ALCL | 8.31 | 7.03 | 5.24 | ||||||||||||||
| Average LHFI | 0.11 | 0.11 | 0.08 | ||||||||||||||
(1)Includes $14.9 million provision for loan credit losses for the CECL requirement on non-PCD loans from the BTH merger during the nine months ended September 30, 2022, and the year ended December 31, 2022.
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Securities
Our securities portfolio totaled $1.31 billion at September 30, 2023, representing a decrease of $350.7 million, or 21.1%, from $1.66 billion at December 31, 2022. The decrease was primarily due to sales, maturities and calls, as well as normal principal paydowns during the nine months ended September 30, 2023. Securities of $38.7 million, primarily municipal securities, were sold during the first quarter of 2023, and we realized a net gain of $144,000 on the sale. During the last few days of the quarter ended September 30, 2023, we made a strategic decision to sell available for sale investment securities with a book value of $181.9 million and realized a loss of $7.2 million, the proceeds of which were used to pay down FHLB advances.
Our available for sale portfolio totaled $1.29 billion at September 30, 2023, and represented 98.7% of our total security portfolio and is comprised of 45.8% mortgage-backed, 24.4% municipal, 8.0% treasury/agency, 12.6% collateralized mortgage obligations and 9.2% corporate/asset-backed securities. Our available for sale portfolio totaled $1.64 billion at December 31, 2022, and represented 98.9% of our total security portfolio and is comprised of 40.5% mortgage-backed, 23.7% municipal, 15.1% treasury/agency, 11.3% collateralized mortgage obligations and 9.4% corporate/asset-backed securities.
All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities. We do not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of September 30, 2023, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.
The securities portfolio had a weighted average effective duration of 4.49 years at September 30, 2023, compared to 4.24 years at December 31, 2022. For additional information regarding our securities portfolio, please see Note 3 — Securities in the condensed notes to our consolidated financial statements contained in Part I, Item 1 of this report.
Deposits
Deposits are the primary funding source used to fund our loans, investments and operating needs. We offer a variety of products designed to attract and retain both consumer and commercial deposit customers. These products consist of noninterest and interest-bearing checking accounts, savings deposits, money market accounts and time deposits. Deposits are primarily gathered from individuals, partnerships and corporations in our market areas. We also obtain deposits from local municipalities and state agencies.
Total deposits increased at September 30, 2023, compared to December 31, 2022, primarily due to increases in brokered time deposits and money market deposits, which increased by $663.8 million and $255.0 million, respectively, partially offset by a decrease in noninterest-bearing demand deposits of $473.8 million, compared to December 31, 2022. Typically, higher interest rates and sustained inflation will cause customers to move liquid asset balances into higher interest-earning vehicles such as money market funds.
The following table presents our deposit mix at the dates indicated:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Balance | % of Total | Balance | % of Total | $ Change | % Change | |||||||||||||||||||||||||||||
Noninterest-bearing demand | $ | 2,008,671 | 24.0 | % | $ | 2,482,475 | 32.0 | % | $ | (473,804) | (19.1) | % | |||||||||||||||||||||||
Money market | 2,697,540 | 32.1 | 2,442,559 | 31.4 | 254,981 | 10.4 | |||||||||||||||||||||||||||||
Interest-bearing demand | 1,748,261 | 20.9 | 1,737,158 | 22.3 | 11,103 | 0.6 | |||||||||||||||||||||||||||||
Time deposits | 968,352 | 11.6 | 781,880 | 10.0 | 186,472 | 23.8 | |||||||||||||||||||||||||||||
| Brokered time deposits | 669,202 | 8.0 | 5,407 | 0.1 | 663,795 | N/M | |||||||||||||||||||||||||||||
Savings | 282,462 | 3.4 | 326,223 | 4.2 | (43,761) | (13.4) | |||||||||||||||||||||||||||||
Total deposits | $ | 8,374,488 | 100.0 | % | $ | 7,775,702 | 100.0 | % | $ | 598,786 | 7.7 | ||||||||||||||||||||||||
__________________ N/M = Not meaningful. | |||||||||||||||||||||||||||||||||||
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We manage our interest expense on deposits through specific deposit product pricing that is based on competitive pricing, economic conditions and current and anticipated funding needs. We may use interest rates as a mechanism to attract or deter additional deposits based on our anticipated funding needs and liquidity position. We also consider potential interest rate risk caused by extended maturities of time deposits when setting the interest rates in periods of future economic uncertainty.
The following table reflects the classification of our average deposits and the average rate paid on each deposit category for the periods indicated:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Interest Expense | Average Rate Paid | Average Balance | Interest Expense | Average Rate Paid | |||||||||||||||||||||||||||||
Interest-bearing demand | $ | 1,797,370 | $ | 35,480 | 2.64 | % | $ | 1,519,327 | $ | 4,688 | 0.41 | % | |||||||||||||||||||||||
Money market | 2,612,275 | 64,332 | 3.29 | 2,167,616 | 6,670 | 0.41 | |||||||||||||||||||||||||||||
Time deposits | 898,227 | 18,738 | 2.79 | 569,917 | 2,175 | 0.51 | |||||||||||||||||||||||||||||
| Brokered time deposits | 431,654 | 16,274 | 5.04 | — | — | ||||||||||||||||||||||||||||||
Savings | 296,505 | 1,862 | 0.84 | 280,310 | 156 | 0.07 | |||||||||||||||||||||||||||||
Total interest-bearing | 6,036,031 | 136,686 | 3.03 | 4,537,170 | 13,689 | 0.40 | |||||||||||||||||||||||||||||
Noninterest-bearing demand | 2,205,664 | — | 2,364,443 | — | |||||||||||||||||||||||||||||||
Total average deposits | $ | 8,241,695 | $ | 136,686 | 2.22 | $ | 6,901,613 | $ | 13,689 | 0.27 | |||||||||||||||||||||||||
Our average deposit balance was $8.24 billion for the nine months ended September 30, 2023, an increase of $1.34 billion, or 19.4%, from $6.90 billion for the nine months ended September 30, 2022. The average annualized rate paid on our interest-bearing deposits for the nine months ended September 30, 2023, was 3.03%, compared to 0.40% for the nine months ended September 30, 2022.
The increase in the average cost of our deposits was primarily the result of the rapidly rising interest rate environment experienced since March 17, 2022, when the Federal Reserve Board started a series of eleven Federal Funds target range rate increases cumulating in a 525 basis point increase to the current target range of 5.25% to 5.50%. There may be further Federal Funds target range rate increases during the remainder of 2023. Our current deposit rates have not yet completely absorbed all of the market interest rate increases that have occurred during the nine months ended September 30, 2023.
Average noninterest-bearing deposits during the nine months ended September 30, 2023, were $2.21 billion, compared to $2.36 billion at September 30, 2022, a decrease of $158.8 million, or 6.7%, and represented 26.8% and 34.3% of average total deposits for the nine months ended September 30, 2023 and 2022, respectively.
The following table reflects the estimated total amount of uninsured and uncollateralized deposits for the periods indicated:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Total deposits | $ | 8,374,488 | $ | 7,775,702 | |||||||
| Estimated insured deposits: | |||||||||||
| FDIC insured | (3,434,530) | (3,331,724) | |||||||||
| FDIC insured reciprocal | (781,054) | (245,621) | |||||||||
| FDIC insured brokered time deposits and CDARS | (669,202) | (5,407) | |||||||||
| Total estimated FDIC insured deposits | (4,884,786) | (3,582,752) | |||||||||
| Estimated FDIC uninsured deposits | 3,489,702 | 4,192,950 | |||||||||
| Collateralized public funds | (739,329) | (762,366) | |||||||||
| Estimated uninsured/uncollateralized deposits | $ | 2,750,373 | $ | 3,430,584 | |||||||
| Percentage of estimated uninsured/uncollateralized deposits to total deposits | 32.8 | % | 44.1 | % | |||||||
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Borrowings
Borrowed funds are summarized as follows:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Short-term FHLB advances | $ | — | $ | 550,000 | |||||||
| Long-term FHLB advances | 6,541 | 6,740 | |||||||||
| GNMA repurchase liability | — | 24,569 | |||||||||
| Overnight repurchase agreements with depositors | 5,672 | 27,921 | |||||||||
| Correspondent short-term borrowings | — | 30,000 | |||||||||
| Total FHLB advances and other borrowings | $ | 12,213 | $ | 639,230 | |||||||
| Subordinated indebtedness, net | $ | 196,825 | $ | 201,765 | |||||||
Average short-term FHLB advances for the nine months ended September 30, 2023, were $411.0 million compared to $196.5 million for the year ended December 31, 2022. During March 2023, we strategically borrowed and held approximately $700.0 million in excess cash for contingency liquidity. This excess liquidity was held at a weighted-average rate of 5.09% and was repaid by June 30, 2023, which added $173.8 million in average short-term FHLB advances for the nine months ended September 30, 2023. During the last few days of the quarter ended September 30, 2023, we made a strategic decision to sell available for sale investment securities with proceeds of $174.7 million to pay down FHLB advances. Due to the timing of this transaction, it only decreased our average short-term FHLB advances by $1.9 million for the nine months ended September 30, 2023. Please see the Net Interest Income and Net Interest Margin section above for more information on this transaction.
At September 30, 2023, we were eligible to borrow an additional $2.27 billion from the FHLB.
Liquidity and Capital Resources
Overview
Management oversees our liquidity position to ensure adequate cash and liquid assets are available to support our operations and satisfy current and future financial obligations, including demand for loan funding and deposit withdrawals. Management continually monitors, forecasts and tests our liquidity and non-core dependency ratios to ensure compliance with targets established by our Asset-Liability Management Committee and approved by our board of directors.
Management measures our liquidity position by giving consideration to both on-balance sheet and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.
The Company, which is a separate legal entity apart from the Bank, must provide for its own liquidity, including payment of any dividends that may be declared for its common stockholders and interest and principal on any outstanding debt or trust preferred securities incurred by the Company. The cash held at the holding Company is available for general corporate purposes described above, as well as providing capital support to the Bank. In addition, the Company has a line of credit under the terms of which the loan amount shall not exceed an aggregate principal balance of $100 million, consisting of an initial $50 million extension of credit and any one or more potential incremental revolving loan amounts that the lender may make in its sole discretion, up to an aggregate principal of $50 million, upon the request of the Company.
The table below shows the liquidity measures for the Company at the dates indicated:
(Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
Available cash balances at the holding company (unconsolidated) | $ | 55,490 | $ | 99,810 | |||||||
Cash and liquid securities as a percentage of total assets | 11.6 | % | 12.1 | % | |||||||
There are regulatory restrictions on the ability of the Bank to pay dividends under federal and state laws, regulations and policies; please see Note 11 — Capital and Regulatory Matters in the condensed notes to our consolidated financial statements for more information on the availability of Bank dividends.
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Liquidity Sources
In addition to cash generated from operations, we utilize a number of funding sources to manage our liquidity, including core deposits, investment securities, cash and cash equivalents, loan repayments, federal funds lines of credit available from other financial institutions, as well as advances from the FHLB. We also have access to the discount window and the Bank Term Funding Program (“BTFP”) at the Federal Reserve Bank (“FRB”) as sources of short-term funding.
Core deposits, which are total deposits excluding time deposits greater than $250,000 and brokered deposits, are a major source of funds used to meet our cash flow needs. Maintaining the ability to acquire these funds as needed in a variety of markets is the key to assuring our liquidity.
Our investment portfolio is another source for meeting our liquidity needs. Monthly payments on mortgage-backed securities are used for short-term liquidity, and our investments are generally traded in active markets that offer a readily available source of cash liquidity through sales, if needed. Securities in our investment portfolio are also used to secure certain deposit types, such as deposits from state and local municipalities, and can be pledged as collateral for other borrowing sources.
Other sources available for meeting liquidity needs include long- and short-term advances from the FHLB and unsecured federal funds lines of credit. Long-term funds obtained from the FHLB are primarily used as an alternative source to fund long-term growth of the balance sheet by supporting growth in loans and other long-term interest-earning assets. We typically rely on such funding when the cost of such borrowings compares favorably to the rates that we would be required to pay for other funding sources, including certain deposits.
We also had unsecured federal funds lines of credit available to us, with no amounts outstanding at either September 30, 2023, or December 31, 2022. These lines of credit primarily provide short-term liquidity and, in order to ensure the availability of these funds, we test these lines of credit at least annually. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances.
Additionally, at September 30, 2023, we had the ability to borrow $1.69 billion from the discount window at the Federal Reserve Bank of Dallas (“FRB”), with $1.43 billion in commercial and industrial loans pledged as collateral. There were no borrowings against this line at September 30, 2023, or December 31, 2022. We also have a line of credit through the FRB’s BTFP, with approximately $627.1 million of investment securities eligible to be pledged at September 30, 2023.
Our primary and secondary sources of liquidity totaled $5.09 billion at September 30, 2023, compared to $4.34 billion at December 31, 2022. Primary sources of liquidity, which were 79.3% and 77.7% of our total primary and secondary sources of liquidity at September 30, 2023, and December 31, 2022, respectively, can typically be obtained with 24 hours, while secondary liquidity sources can usually be obtained within seven days.
Our loan to deposit ratio was 90.4% at September 30, 2023, compared to 91.2% at December 31, 2022.
In the normal course of business as a financial services provider, we enter into financial instruments, such as certain contractual obligations and commitments to extend credit and letters of credit, to meet the financing needs of our customers. These commitments involve elements of credit risk, interest rate risk and liquidity risk. Some instruments may not be reflected in our consolidated financial statements until they are funded, and a significant portion of commitments to extend credit may expire without being drawn, although they expose us to varying degrees of credit risk and interest rate risk in much the same way as funded loans. Please see Note 12 — Commitments and Contingencies in the condensed notes to our consolidated financial statements for more information on our off balance sheet commitments.
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Stockholders’ Equity
Stockholders’ equity provides a source of permanent funding, allows for future growth and provides a degree of protection to withstand unforeseen adverse developments. Changes in stockholders’ equity is reflected below:
| (Dollars in thousands) | Total Stockholders’ Equity | ||||
| Balance at January 1, 2023 | $ | 949,943 | |||
| Net income | 70,375 | ||||
| Other comprehensive loss, net of tax | (12,854) | ||||
Dividends declared - common stock ($0.45 per share) | (14,085) | ||||
| Stock compensation, net | 5,566 | ||||
Balance at September 30, 2023 | $ | 998,945 | |||
Please see Part II, Item 2. “Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities” below for information on the Company’s stock repurchase program.
Regulatory Capital Requirements
Together with the Bank, we are subject to various regulatory capital requirements administered by federal banking agencies. For further information, these requirements are discussed in greater detail in “Item 1. Business - Regulation and Supervision” included in our 2022 Form 10-K, filed with the SEC. Failure to meet minimum capital requirements may result in certain actions by regulators that, if enforced, could have a direct material effect on our financial statements. At September 30, 2023, and December 31, 2022, we and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations of the Federal Reserve. As we deploy capital and continue to grow operations, regulatory capital levels may decrease depending on the level of earnings. However, we expect to monitor and control growth in order to remain “well capitalized” under applicable regulatory guidelines and in compliance with all applicable regulatory capital standards. While we are currently classified as “well capitalized,” an extended economic recession could adversely impact our reported and regulatory capital ratios.
The following table presents our regulatory capital ratios, as well as those of the Bank, at the dates indicated:
(Dollars in thousands) | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||
Origin Bancorp, Inc. | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Common equity Tier 1 capital (to risk-weighted assets) | $ | 988,951 | 11.46 | % | $ | 906,859 | 10.93 | % | |||||||||||||||
Tier 1 capital (to risk-weighted assets) | 1,004,742 | 11.64 | 922,584 | 11.12 | |||||||||||||||||||
Total capital (to risk-weighted assets) | 1,261,080 | 14.61 | 1,180,665 | 14.23 | |||||||||||||||||||
Tier 1 capital (to average total consolidated assets) | 1,004,742 | 10.00 | 922,584 | 9.66 | |||||||||||||||||||
Origin Bank | |||||||||||||||||||||||
Common equity Tier 1 capital (to risk-weighted assets) | $ | 1,034,519 | 12.02 | % | $ | 952,579 | 11.50 | % | |||||||||||||||
Tier 1 capital (to risk-weighted assets) | 1,034,519 | 12.02 | 952,579 | 11.50 | |||||||||||||||||||
Total capital (to risk-weighted assets) | 1,201,282 | 13.96 | 1,109,257 | 13.39 | |||||||||||||||||||
Tier 1 capital (to average total consolidated assets) | 1,034,519 | 10.33 | 952,579 | 9.94 | |||||||||||||||||||
Critical Accounting Policies and Estimates
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
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Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. Please see Note 1 — Significant Accounting Policies in the condensed notes to our consolidated financial statements included in the Company's 2022 Form 10-K filed with the SEC for more information about our critical accounting policies and use of estimates.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our financial management policy provides management with guidelines for effective funds management and we have established a measurement system for monitoring the net interest rate sensitivity position.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the consolidated balance sheets to minimize the inherent risk while at the same time maximizing income.
We manage exposure to interest rates by structuring the consolidated balance sheets in the ordinary course of business. Additionally, from time to time, we enter into derivatives and futures contracts to mitigate interest rate risk from specific transactions. Based on the nature of operations, we are not subject to foreign exchange or commodity price risk. We have entered into interest rate swaps to mitigate interest rate risk in limited circumstances, but it is not our policy to enter into such transactions on a regular basis.
Our exposure to interest rate risk is managed by the Bank’s Asset-Liability Management Committee in accordance with policies approved by the Bank’s board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors.
The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. We employ methodologies to manage interest rate risk, which includes an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. The average life of non-maturity deposit accounts is based on our balance retention rates using a vintage study methodology. The assumptions used are inherently uncertain, and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
On a quarterly basis, we run various simulation models, including a static balance sheet and a dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously and ramped rates change over a twelve-month and twenty-four-month horizon based upon parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Additionally, we run a non-parallel simulation involving analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding interest rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 8.0% for a 100 basis point shift, 15.0% for a 200 basis point shift, 20.0% for a 300 basis point shift, and 25.0% for a 400 basis point shift. We continue to monitor our asset sensitivity and evaluate strategies to prevent being significantly impacted by future changes in interest rates.
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The following table summarizes the impact of an instantaneous, sustained simulated change in net interest income and fair value of equity over a 12-month horizon at the date indicated. At September 30, 2023, we aggressively stressed the deposit beta assumptions for the 100 basis points shocks.
| September 30, 2023 | |||||||||||
Change in Interest Rates (basis points) | % Change in Net Interest Income | % Change in Fair Value of Equity | |||||||||
| +400 | 9.6 | % | (7.1) | % | |||||||
| +300 | 7.2 | (5.9) | |||||||||
| +200 | 5.0 | (3.5) | |||||||||
| +100 | (1.2) | (3.9) | |||||||||
Base | |||||||||||
| -100 | 0.8 | 2.8 | |||||||||
| -200 | 1.6 | 5.6 | |||||||||
| -300 | 2.5 | 8.6 | |||||||||
| -400 | 3.1 | 9.3 | |||||||||
We have found that, historically, interest rates on deposits do not change completely in tandem with the changes in the discount and federal funds rates. Overall, interest rates on deposits typically experience lower rate increases than a cumulative full-cycle rising-rate environment exhibits. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis, meaning that process by which we measure the gap between interest rate sensitive assets versus interest rate sensitive liabilities. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and the application and timing of various strategies.
Economic conditions and growth prospects are currently impacted by record inflation and recessionary concerns. Increasing interest rates and rising building costs have caused some slowing in the single family housing market. Furthermore, worker shortages especially in the restaurant, hospitality and retail industries, combined with supply chain disruptions impacting numerous industries, and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers.
The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the loan and deposit rates offered by financial institutions and the fair value of our available for sale securities. The Federal Funds target rate range has increased 525 basis points starting with the Federal Reserve Board’s first rate increase in 2022, and in order to remain competitive as market interest rates increased, we increased interest rates paid on our deposits.
Impact of Inflation
Our financial statements included herein have been prepared in accordance with U.S. GAAP, which presently requires us to measure the majority of our financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered.
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Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and stockholders’ equity. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.
Market Risk
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR). Publication of the one week and two month LIBOR offered rates ceased on December 31, 2021, and the publication of the remaining LIBOR offered rates ceased to be representative on June 30, 2023. The Company discontinued the use of LIBOR for new contracts after December 31, 2021, with limited exceptions as permitted by regulatory guidance and internal policy.
Regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee (ARRC)) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., AMERIBOR or the Secured Overnight Financing Rate (SOFR) as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. Further, the Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S. dollar LIBOR with a benchmark rate based on the SOFR for contracts governed by U.S. law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules. In addition, where fallback language allows the Bank to select a benchmark rate, the statutory framework grants the authority to select the Board-selected benchmark replacement as the benchmark replacement, including the safe harbor provisions that, among other things, generally provide that such selection or use will not discharge or excuse performance under, give any person the right to unilaterally terminate or suspend performance under, or constitute a breach, of the contract.
Effective July 1, 2023, all remaining LIBOR instruments were transitioned in accordance with the statutory framework established by the Federal Reserve with no material financial impact to the Company. In general, the Company converted the index rate of variable rate loans based on 1-Month LIBOR to an index rate equal to 1-Month Term SOFR as of June 30, 2023. In addition, the Company converted the index rates of variable rate loans based on 3-Month LIBOR and 12-Month LIBOR to index rates equal to 3-Month Term SOFR and 12-Month Term SOFR, respectively, as of June 30, 2023, plus the incremental differences between the corresponding LIBOR and Term SOFR index rates on June 30, 2023. Likewise, all LIBOR-based indexes in the Bank’s swap agreements were converted to appropriate SOFR-based indexes. While we have not had any material issues to-date, the discontinuance of LIBOR could result in customer uncertainty and disputes arising as a consequence of the transition, and could result in damage to our reputation and loss of customers. Please see “Item 1A Risk Factors – Risks Related to Our Business” included in the Company’s 2022 Form 10-K filed with the SEC for further discussion regarding risks relating to the transition away from the use of LIBOR in variable rate contracts.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures — As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report.
Our management, including the Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during the three month period ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 12 — Commitments and Contingencies - Loss Contingencies in the Condensed Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding legal proceedings not reportable under this Item.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, in evaluating an investment in the Company’s securities, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our 2022 Form 10-K, and as disclosed in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023, or June 30, 2023, which could materially affect the Company's business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.
There are no material changes during the period covered by this Report to the risk factors previously disclosed in our 2022 Form 10-K or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023, or June 30, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
In July 2022, the Board of Directors of the Company authorized a stock repurchase program pursuant to which the Company may, from time to time, purchase up to $50 million of its outstanding common stock. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the SEC. The stock repurchase program is intended to expire in three years but may be terminated or amended by the Board of Directors at any time. The stock repurchase program does not obligate the Company to purchase any shares at any time.
There were no stock repurchases during the quarter ended September 30, 2023.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Pursuant to Item 408(a) of Regulation S-K, none of our directors or executive officers adopted, terminated or
modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023.
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Item 6. Exhibits
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | The following financial information from Origin Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, is formatted in Inline XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income (Loss), (iv) the Unaudited Consolidated Statements of Changes in Stockholders' Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Condensed Notes to Unaudited Consolidated Financial Statements | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Origin Bancorp, Inc. | ||||||||
| Date: | November 7, 2023 | By: | /s/ Drake Mills | ||||||||
| Drake Mills | |||||||||||
| Chairman, President and Chief Executive Officer | |||||||||||
| Date: | November 7, 2023 | By: | /s/ William J. Wallace, IV | ||||||||
| William J. Wallace, IV | |||||||||||
| Senior Executive Officer and Chief Financial Officer | |||||||||||
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