S | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023
£ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
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: 001-38280
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Texas | 20-8339782 | |||||
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(State or other jurisdiction of |
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incorporation or organization) |
(I.R.S. Employer Identification No.) |
(713) offices, including zip code)
CBTX, Inc.
9 Greenway Plaza, Suite 110
Houston, Texas 77046
(Former name, former address and former fiscal year, if changed since last report)
Title of each class |
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Common |
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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☒ SNo ☐£
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 ☒S No ☐£
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Stellar Bancorp, Inc. and Subsidiary
Condensed Consolidated Balance Sheets INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except par value and share amounts)
| | | | | | |
| | | ||||
|
| September 30, 2022 |
| December 31, 2021 | ||
Assets: |
| |
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| |
|
Cash and due from banks | | $ | 41,219 | | $ | 27,689 |
Interest-bearing deposits at other financial institutions | |
| 329,229 | |
| 922,457 |
Total cash and cash equivalents | |
| 370,448 | |
| 950,146 |
Securities | |
| 511,282 | |
| 425,046 |
Equity investments | |
| 17,835 | |
| 17,727 |
Loans held for sale | |
| — | |
| 164 |
Loans, net of allowance for credit losses of $32,577 and $31,345 at September 30, 2022 and December 31, 2021, respectively | |
| 3,093,844 | |
| 2,836,179 |
Premises and equipment, net of accumulated depreciation of $40,493 and $39,196 at September 30, 2022 and December 31, 2021, respectively | |
| 55,594 | |
| 58,417 |
Goodwill | |
| 80,950 | |
| 80,950 |
Other intangible assets, net of accumulated amortization of $17,863 and $17,345 at September 30, 2022 and December 31, 2021, respectively | |
| 3,188 | |
| 3,658 |
Bank-owned life insurance | |
| 74,274 | |
| 73,156 |
Operating lease right-to-use assets | | | 10,992 | | | 11,191 |
Deferred tax assets, net | |
| 29,581 | |
| 9,973 |
Other assets | |
| 23,843 | |
| 19,394 |
Total assets | | $ | 4,271,831 | | $ | 4,486,001 |
| | | | | | |
Liabilities: | |
|
| |
|
|
Noninterest-bearing deposits | | $ | 1,780,473 | | $ | 1,784,981 |
Interest-bearing deposits | |
| 1,943,301 | |
| 2,046,303 |
Total deposits | |
| 3,723,774 | |
| 3,831,284 |
Federal Home Loan Bank advances | | | — | | | 50,000 |
Operating lease liabilities | | | 13,748 | | | 14,142 |
Other liabilities | |
| 32,884 | |
| 28,450 |
Total liabilities | |
| 3,770,406 | |
| 3,923,876 |
Commitments and contingencies (Note 16) | |
|
| |
|
|
Shareholders’ equity: | |
|
| |
|
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued | |
| — | |
| — |
Common stock, $0.01 par value, 90,000,000 shares authorized, 24,015,272 and 25,323,558 shares issued at September 30, 2022 and December 31, 2021, respectively; 24,015,272 and 24,487,730 shares outstanding at September 30, 2022 and December 31, 2021, respectively | |
| 240 | |
| 253 |
Additional paid-in capital | |
| 308,197 | |
| 335,846 |
Retained earnings | |
| 262,804 | |
| 237,165 |
Treasury stock, at cost, 835,828 shares held at December 31, 2021 | |
| — | |
| (14,196) |
Accumulated other comprehensive income (loss), net of tax of $(18,559) and $813 at September 30, 2022 and December 31, 2021, respectively | |
| (69,816) | |
| 3,057 |
Total shareholders’ equity | |
| 501,425 | |
| 562,125 |
Total liabilities and shareholders’ equity | | $ | 4,271,831 | | $ | 4,486,001 |
June 30, 2023 | December 31, 2022 | ||||||||||
(In thousands, except shares and par value) | |||||||||||
ASSETS | |||||||||||
Cash and due from banks | $ | 105,913 | $ | 67,063 | |||||||
Interest-bearing deposits at other financial institutions | 198,176 | 304,642 | |||||||||
Total cash and cash equivalents | 304,089 | 371,705 | |||||||||
Available for sale securities, at fair value | 1,478,222 | 1,807,586 | |||||||||
Loans held for investment | 8,068,718 | 7,754,751 | |||||||||
Less: allowance for credit losses on loans | (100,195) | (93,180) | |||||||||
Loans, net | 7,968,523 | 7,661,571 | |||||||||
Accrued interest receivable | 42,051 | 44,743 | |||||||||
Premises and equipment, net | 119,142 | 126,803 | |||||||||
Federal Home Loan Bank stock | 24,478 | 15,058 | |||||||||
Bank-owned life insurance | 104,148 | 103,094 | |||||||||
Goodwill | 497,260 | 497,260 | |||||||||
Core deposit intangibles, net | 129,805 | 143,525 | |||||||||
Other assets | 110,633 | 129,092 | |||||||||
TOTAL ASSETS | $ | 10,778,351 | $ | 10,900,437 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
LIABILITIES: | |||||||||||
Deposits: | |||||||||||
Noninterest-bearing | $ | 3,713,536 | $ | 4,230,169 | |||||||
Interest-bearing | |||||||||||
Demand | 1,437,509 | 1,591,828 | |||||||||
Money market and savings | 2,174,073 | 2,575,923 | |||||||||
Certificates and other time | 1,441,251 | 869,712 | |||||||||
Total interest-bearing deposits | 5,052,833 | 5,037,463 | |||||||||
Total deposits | 8,766,369 | 9,267,632 | |||||||||
Accrued interest payable | 4,555 | 2,098 | |||||||||
Borrowed funds | 369,963 | 63,925 | |||||||||
Subordinated debt | 109,566 | 109,367 | |||||||||
Other liabilities | 69,218 | 74,239 | |||||||||
Total liabilities | 9,319,671 | 9,517,261 | |||||||||
COMMITMENTS AND CONTINGENCIES (See Note 14) | |||||||||||
SHAREHOLDERS’ EQUITY: | |||||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2023 and December 31, 2022 | — | — | |||||||||
Common stock, $0.01 par value; 140,000,000 shares authorized; 53,302,734 shares issued and outstanding at June 30, 2023 and 52,954,985 shares issued and outstanding at December 31, 2022 | 533 | 530 | |||||||||
Capital surplus | 1,228,532 | 1,222,761 | |||||||||
Retained earnings | 361,619 | 303,146 | |||||||||
Accumulated other comprehensive loss | (132,004) | (143,261) | |||||||||
Total shareholders’ equity | 1,458,680 | 1,383,176 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 10,778,351 | $ | 10,900,437 |
1
(Dollars in thousands, except per share amounts)
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
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| 2022 |
| 2021 | | 2022 | | 2021 | ||||
Interest income: |
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Interest and fees on loans | | $ | 39,058 | | $ | 30,765 | | $ | 102,047 | | $ | 94,723 |
Securities | |
| 3,046 | |
| 1,435 | |
| 8,275 | | | 3,940 |
Interest-bearing deposits at other financial institutions | |
| 2,408 | |
| 340 | |
| 3,994 | | | 740 |
Equity investments | | | 161 | | | 157 | | | 473 | | | 461 |
Total interest income | |
| 44,673 | |
| 32,697 | |
| 114,789 | | | 99,864 |
Interest expense: | |
|
| |
|
| |
| | | | |
Deposits | |
| 1,661 | |
| 1,227 | |
| 4,003 | | | 3,844 |
Federal Home Loan Bank advances | |
| — | |
| 221 | |
| 272 | | | 663 |
Total interest expense | |
| 1,661 | |
| 1,448 | |
| 4,275 | | | 4,507 |
Net interest income | |
| 43,012 | |
| 31,249 | |
| 110,514 | | | 95,357 |
Provision (recapture) for credit losses: | |
| | |
| | |
| | | | |
Provision (recapture) for credit losses for loans | | | 523 | | | (5,057) | | | 1,022 | | | (8,961) |
Provision (recapture) for credit losses for unfunded commitments | | | 489 | | | 162 | | | 551 | | | (605) |
Total provision (recapture) for credit losses | | | 1,012 | | | (4,895) | | | 1,573 | | | (9,566) |
Net interest income after provision (recapture) for credit losses | |
| 42,000 | |
| 36,144 | |
| 108,941 | | | 104,923 |
Noninterest income: | |
|
| |
|
| |
| | | | |
Deposit account service charges | |
| 1,320 | |
| 1,352 | |
| 4,076 | | | 3,712 |
Card interchange fees | |
| 1,056 | |
| 1,048 | |
| 3,228 | | | 3,119 |
Earnings on bank-owned life insurance | |
| 376 | |
| 2,323 | |
| 1,118 | | | 3,103 |
Net gain on sales of assets | |
| 85 | |
| 360 | |
| 673 | | | 918 |
Other | |
| 612 | |
| 479 | |
| 3,229 | | | 1,312 |
Total noninterest income | |
| 3,449 | |
| 5,562 | |
| 12,324 | | | 12,164 |
Noninterest expense: | |
|
| |
|
| |
| | | | |
Salaries and employee benefits | |
| 16,453 | |
| 15,000 | |
| 46,405 | | | 43,922 |
Occupancy expense | |
| 2,595 | |
| 2,660 | |
| 7,362 | | | 7,778 |
Professional and director fees | |
| 942 | |
| 1,567 | |
| 2,963 | | | 5,711 |
Data processing and software | | | 1,502 | | | 1,629 | | | 4,723 | | | 4,866 |
Regulatory fees | | | 599 | | | 478 | | | 2,016 | | | 1,535 |
Advertising, marketing and business development | |
| 350 | |
| 493 | |
| 965 | | | 1,288 |
Telephone and communications | | | 348 | | | 516 | | | 1,151 | | | 1,529 |
Security and protection expense | |
| 386 | |
| 425 | |
| 880 | | | 1,352 |
Amortization of intangibles | |
| 165 | |
| 182 | |
| 518 | | | 559 |
Other expenses | |
| 5,981 | |
| 1,422 | |
| 10,748 | | | 4,314 |
Total noninterest expense | |
| 29,321 | |
| 24,372 | |
| 77,731 | | | 72,854 |
Net income before income tax expense | |
| 16,128 | |
| 17,334 | |
| 43,534 | | | 44,233 |
Income tax expense | |
| 3,381 | |
| 2,913 | |
| 8,485 | | | 8,090 |
Net income | | $ | 12,747 | | $ | 14,421 | | $ | 35,049 | | $ | 36,143 |
Earnings per common share | |
|
| |
|
| | | | | | |
Basic | | $ | 0.52 | | $ | 0.59 | | $ | 1.43 | | $ | 1.48 |
Diluted | | $ | 0.52 | | $ | 0.59 | | $ | 1.43 | | $ | 1.47 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(Dollars in thousands, except per share data) | |||||||||||||||||||||||
INTEREST INCOME: | |||||||||||||||||||||||
Loans, including fees | $ | 133,931 | $ | 53,835 | $ | 259,660 | $ | 106,205 | |||||||||||||||
Securities: | |||||||||||||||||||||||
Taxable | 9,726 | 5,571 | 19,379 | 10,639 | |||||||||||||||||||
Tax-exempt | 436 | 2,557 | 1,698 | 5,082 | |||||||||||||||||||
Deposits in other financial institutions | 2,865 | 877 | 6,636 | 1,217 | |||||||||||||||||||
Total interest income | 146,958 | 62,840 | 287,373 | 123,143 | |||||||||||||||||||
INTEREST EXPENSE: | |||||||||||||||||||||||
Demand, money market and savings deposits | 20,708 | 1,859 | 38,745 | 3,206 | |||||||||||||||||||
Certificates and other time deposits | 9,622 | 1,922 | 12,929 | 4,078 | |||||||||||||||||||
Borrowed funds | 6,535 | 114 | 7,852 | 300 | |||||||||||||||||||
Subordinated debt | 1,812 | 1,463 | 3,739 | 2,905 | |||||||||||||||||||
Total interest expense | 38,677 | 5,358 | 63,265 | 10,489 | |||||||||||||||||||
NET INTEREST INCOME | 108,281 | 57,482 | 224,108 | 112,654 | |||||||||||||||||||
Provision for credit losses | 1,915 | 2,143 | 5,581 | 3,957 | |||||||||||||||||||
Net interest income after provision for credit losses | 106,366 | 55,339 | 218,527 | 108,697 | |||||||||||||||||||
NONINTEREST INCOME: | |||||||||||||||||||||||
Nonsufficient funds fees | 418 | 126 | 824 | 242 | |||||||||||||||||||
Service charges on deposit accounts | 1,157 | 560 | 2,100 | 1,087 | |||||||||||||||||||
(Loss) gain on sale of assets | (6) | (17) | 192 | (17) | |||||||||||||||||||
Bank-owned life insurance income | 532 | 342 | 1,054 | 475 | |||||||||||||||||||
Debit card and ATM card income | 1,821 | 880 | 3,519 | 1,699 | |||||||||||||||||||
Other | 1,561 | 813 | 5,292 | 3,236 | |||||||||||||||||||
Total noninterest income | 5,483 | 2,704 | 12,981 | 6,722 | |||||||||||||||||||
NONINTEREST EXPENSE: | |||||||||||||||||||||||
Salaries and employee benefits | 37,300 | 21,864 | 77,075 | 44,592 | |||||||||||||||||||
Net occupancy and equipment | 3,817 | 2,220 | 7,905 | 4,425 | |||||||||||||||||||
Depreciation | 1,841 | 1,012 | 3,677 | 2,045 | |||||||||||||||||||
Data processing and software amortization | 4,674 | 2,522 | 9,728 | 5,020 | |||||||||||||||||||
Professional fees | 1,564 | 662 | 3,091 | 800 | |||||||||||||||||||
Regulatory assessments and FDIC insurance | 2,755 | 1,256 | 4,049 | 2,517 | |||||||||||||||||||
Amortization of intangibles | 6,881 | 751 | 13,760 | 1,502 | |||||||||||||||||||
Communications | 689 | 363 | 1,390 | 704 | |||||||||||||||||||
Advertising | 907 | 483 | 1,746 | 945 | |||||||||||||||||||
Acquisition and merger-related expenses | 2,897 | 1,667 | 9,062 | 2,118 | |||||||||||||||||||
Other | 5,882 | 5,104 | 10,322 | 7,753 | |||||||||||||||||||
Total noninterest expense | 69,207 | 37,904 | 141,805 | 72,421 | |||||||||||||||||||
INCOME BEFORE INCOME TAXES | 42,642 | 20,139 | 89,703 | 42,998 | |||||||||||||||||||
Provision for income taxes | 7,467 | 3,702 | 17,380 | 7,904 | |||||||||||||||||||
NET INCOME | $ | 35,175 | $ | 16,437 | $ | 72,323 | $ | 35,094 | |||||||||||||||
EARNINGS PER SHARE: | |||||||||||||||||||||||
Basic | $ | 0.66 | $ | 0.57 | $ | 1.36 | $ | 1.22 | |||||||||||||||
Diluted | $ | 0.66 | $ | 0.56 | $ | 1.36 | $ | 1.21 | |||||||||||||||
DIVIDENDS PER SHARE | $ | 0.13 | $ | 0.10 | $ | 0.26 | $ | 0.20 |
2
(Dollars in thousands)
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 | | 2021 | ||||
Net income | | $ | 12,747 |
| $ | 14,421 | | $ | 35,049 | | $ | 36,143 |
| | | | | | | | | | | | |
Change in unrealized gains (losses) on securities available for sale arising during the period | |
| (29,119) | |
| (3,446) | | | (92,244) | | | (5,493) |
Change in related deferred income tax | |
| 6,115 | |
| 723 | | | 19,371 | | | 1,154 |
Other comprehensive loss, net of tax | |
| (23,004) | |
| (2,723) | | | (72,873) | | | (4,339) |
Total comprehensive income (loss) | | $ | (10,257) | | $ | 11,698 | | $ | (37,824) | | $ | 31,804 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Net income | $ | 35,175 | $ | 16,437 | $ | 72,323 | $ | 35,094 | |||||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||||||
Unrealized gain (loss) on securities: | |||||||||||||||||||||||
Change in unrealized holding (loss) gain on available for sale securities during the period | (23,717) | (65,648) | 14,249 | (169,269) | |||||||||||||||||||
Reclassification of loss (gain) realized on securities | — | 17 | (234) | 17 | |||||||||||||||||||
Total other comprehensive (loss) income | (23,717) | (65,631) | 14,015 | (169,252) | |||||||||||||||||||
Deferred tax benefit (expense) related to other comprehensive loss | 4,994 | 13,782 | (2,758) | 35,543 | |||||||||||||||||||
Other comprehensive (loss) income, net of tax | (18,723) | (51,849) | 11,257 | (133,709) | |||||||||||||||||||
Comprehensive income (loss) | $ | 16,452 | $ | (35,412) | $ | 83,580 | $ | (98,615) |
3
(Dollars in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | Additional | | | | | | | | | | Other | | | | ||
| | Common Stock | | Paid-In | | Retained | | Treasury Stock | | Comprehensive | | | | |||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Income (Loss) |
| Total | ||||||
Nine Months Ended September 30, 2021: | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | 25,458,816 | | $ | 255 | | $ | 339,334 | | $ | 214,456 |
| (845,988) | | $ | (14,369) | | $ | 6,775 | | $ | 546,451 |
Net income |
| — | |
| — | |
| — | |
| 36,143 |
| — | |
| — | |
| — | |
| 36,143 |
Dividends on common stock, $0.39 per share |
| — | |
| — | |
| — | |
| (9,587) |
| — | |
| — | |
| — | |
| (9,587) |
Stock-based compensation expense |
| — | |
| — | |
| 1,813 | |
| — |
| — | |
| — | |
| — | |
| 1,813 |
Vesting of restricted stock, net of shares withheld for employee tax liabilities | | 18,997 | |
| — | |
| (87) | | | — | | — | | | — | | | — | | | (87) |
Exercise of stock options, net of shares withheld for employee tax liabilities | | — | | | — | | | (11) | | | — | | 2,032 | | | 35 | | | — | | | 24 |
Shares repurchased | | (214,219) | | | (2) | | | (5,823) | | | — | | — | | | — | | | — | | | (5,825) |
Other comprehensive loss, net of tax |
| — | |
| — | |
| — | |
| — |
| — | |
| — | |
| (4,339) | |
| (4,339) |
Balance at September 30, 2021 | | 25,263,594 | | $ | 253 | | $ | 335,226 | | $ | 241,012 |
| (843,956) | | $ | (14,334) | | $ | 2,436 | | $ | 564,593 |
| | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2022: | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2021 | | 25,323,558 | | $ | 253 | | $ | 335,846 | | $ | 237,165 |
| (835,828) | | $ | (14,196) | | $ | 3,057 | | $ | 562,125 |
Net income |
| — | |
| — | |
| — | |
| 35,049 |
| — | |
| — | |
| — | |
| 35,049 |
Dividends on common stock, $0.39 per share |
| — | |
| — | |
| — | |
| (9,410) |
| — | |
| — | |
| — | |
| (9,410) |
Stock-based compensation expense |
| — | |
| — | |
| 1,537 | |
| — |
| — | |
| — | |
| — | |
| 1,537 |
Vesting of restricted stock, net of shares withheld for employee tax liabilities | | 22,463 | |
| — | |
| (135) | | | — | | — | | | — | | | — | | | (135) |
Exercise of stock options, net of shares withheld for employee tax liabilities | | 6,407 | | | — | | | 23 | | | — | | 8,833 | | | 150 | | | — | | | 173 |
Shares repurchased | | (510,161) | | | (5) | | | (15,036) | | | — | | — | | | — | | | — | | | (15,041) |
Retirement of Treasury Stock | | (826,995) | | | (8) | | | (14,038) | | | — | | 826,995 | | | 14,046 | | | — | | | — |
Other comprehensive loss, net of tax |
| — | |
| — | |
| — | |
| — |
| — | |
| — | |
| (72,873) | |
| (72,873) |
Balance at September 30, 2022 | | 24,015,272 | | $ | 240 | | $ | 308,197 | | $ | 262,804 |
| — | | $ | — | | $ | (69,816) | | $ | 501,425 |
Common Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
BALANCE AT MARCH 31, 2022 | 28,903,910 | $ | 290 | $ | 532,372 | $ | 282,896 | $ | (63,618) | $ | 751,940 | ||||||||||||||||||||||||
Net income | — | — | — | 16,437 | — | 16,437 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (51,849) | (51,849) | |||||||||||||||||||||||||||||
Cash dividends declared, $0.10 per share | — | — | — | (2,856) | — | (2,856) | |||||||||||||||||||||||||||||
Common stock issued in connection with the exercise of stock options and restricted stock awards | 32,789 | — | 416 | — | — | 416 | |||||||||||||||||||||||||||||
Repurchase of common stock | (350,273) | (4) | (9,686) | — | — | (9,690) | |||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 931 | — | — | 931 | |||||||||||||||||||||||||||||
BALANCE AT JUNE 30, 2022 | 28,586,426 | $ | 286 | $ | 524,033 | $ | 296,477 | $ | (115,467) | $ | 705,329 | ||||||||||||||||||||||||
BALANCE AT MARCH 31, 2023 | 53,296,038 | $ | 533 | $ | 1,225,596 | $ | 333,368 | $ | (113,281) | $ | 1,446,216 | ||||||||||||||||||||||||
Net income | — | — | — | 35,175 | — | 35,175 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (18,723) | (18,723) | |||||||||||||||||||||||||||||
Cash dividends declared, $0.13 per share | — | — | — | (6,924) | — | (6,924) | |||||||||||||||||||||||||||||
Common stock issued in connection with the exercise of stock options and restricted stock awards | 6,696 | — | 94 | — | — | 94 | |||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 2,842 | — | — | 2,842 | |||||||||||||||||||||||||||||
BALANCE AT JUNE 30, 2023 | 53,302,734 | $ | 533 | $ | 1,228,532 | $ | 361,619 | $ | (132,004) | $ | 1,458,680 | ||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2021 | 28,845,903 | $ | 289 | $ | 530,845 | $ | 267,092 | $ | 18,242 | $ | 816,468 | ||||||||||||||||||||||||
Net income | — | — | — | 35,094 | — | 35,094 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (133,709) | (133,709) | |||||||||||||||||||||||||||||
Cash dividends declared $0.20 per share | — | — | — | (5,709) | — | (5,709) | |||||||||||||||||||||||||||||
Common stock issued in connection with the exercise of stock options and restricted stock awards | 90,796 | 1 | 984 | — | — | 985 | |||||||||||||||||||||||||||||
Repurchase of common stock | (350,273) | (4) | (9,686) | — | — | (9,690) | |||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 1,890 | — | — | 1,890 | |||||||||||||||||||||||||||||
BALANCE AT JUNE 30, 2022 | 28,586,426 | $ | 286 | $ | 524,033 | $ | 296,477 | $ | (115,467) | $ | 705,329 | ||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2022 | 52,954,985 | $ | 530 | $ | 1,222,761 | $ | 303,146 | $ | (143,261) | $ | 1,383,176 | ||||||||||||||||||||||||
Net income | — | — | — | 72,323 | — | 72,323 | |||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 11,257 | 11,257 | |||||||||||||||||||||||||||||
Cash dividends declared $0.26 per share | — | — | — | (13,850) | — | (13,850) | |||||||||||||||||||||||||||||
Common stock issued in connection with the exercise of stock options and restricted stock awards | 347,749 | 3 | 348 | — | — | 351 | |||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 5,423 | — | — | 5,423 | |||||||||||||||||||||||||||||
BALANCE AT JUNE 30, 2023 | 53,302,734 | $ | 533 | $ | 1,228,532 | $ | 361,619 | $ | (132,004) | $ | 1,458,680 |
4
Stellar Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Quarterly Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | Additional | | | | | | | | | | Other | | | | ||
| | Common Stock | | Paid-In | | Retained | | Treasury Stock | | Comprehensive | | | | |||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Income |
| Total | ||||||
Three Months Ended September 30, 2021: | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | 25,296,385 | | $ | 253 | | $ | 335,399 | | $ | 229,785 |
| (845,988) | | $ | (14,369) | | $ | 5,159 | | $ | 556,227 |
Net income |
| — | |
| — | |
| — | |
| 14,421 |
| — | |
| — | |
| — | |
| 14,421 |
Dividends on common stock, $0.13 per share |
| — | |
| — | |
| — | |
| (3,194) |
| — | |
| — | |
| — | |
| (3,194) |
Stock-based compensation expense |
| — | |
| — | |
| 698 | |
| — |
| — | |
| — | |
| — | |
| 698 |
Vesting of restricted stock, net of shares withheld for employee tax liabilities | | 339 | | | — | | | (3) | | | — | | — | | | — | | | — | | | (3) |
Exercise of stock options, net of shares withheld for employee tax liabilities | | — | | | — | | | (11) | | | — | | 2,032 | | | 35 | | | — | | | 24 |
Shares repurchased | | (33,130) | | | — | | | (857) | | | — | | — | | | — | | | — | | | (857) |
Other comprehensive income, net of tax |
| — | |
| — | |
| — | |
| — |
| — | |
| — | |
| (2,723) | |
| (2,723) |
Balance at September 30, 2021 |
| 25,263,594 | | $ | 253 | | $ | 335,226 | | $ | 241,012 |
| (843,956) | | $ | (14,334) | | $ | 2,436 | | $ | 564,593 |
| | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2022: | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | | 25,252,256 | | $ | 253 | | $ | 334,104 | | $ | 253,180 |
| (826,995) | | $ | (14,046) | | $ | (46,812) | | $ | 526,679 |
Net income |
| — | |
| — | |
| — | |
| 12,747 |
| — | |
| — | |
| — | |
| 12,747 |
Dividends on common stock, $0.13 per share |
| — | |
| — | |
| — | |
| (3,123) |
| — | |
| — | |
| — | |
| (3,123) |
Stock-based compensation expense |
| — | |
| — | |
| 515 | |
| — |
| — | |
| — | |
| — | |
| 515 |
Vesting of restricted stock, net of shares withheld for employee tax liabilities | | 350 | |
| — | |
| (4) | | | — | | — | | | — | | | — | | | (4) |
Exercise of stock options, net of shares withheld for employee tax liabilities | | 6,407 | | | — | | | 73 | | | — | | — | | | — | | | — | | | 73 |
Shares repurchased | | (416,746) | | | (5) | | | (12,453) | | | — | | — | | | — | | | — | | | (12,458) |
Retirement of Treasury Stock | | (826,995) | | | (8) | | | (14,038) | | | — | | 826,995 | | | 14,046 | | | — | | | — |
Other comprehensive loss, net of tax |
| — | |
| — | |
| — | |
| — |
| — | |
| — | |
| (23,004) | |
| (23,004) |
Balance at September 30, 2022 |
| 24,015,272 | | $ | 240 | | $ | 308,197 | | $ | 262,804 |
| — | | $ | — | | $ | (69,816) | | $ | 501,425 |
Six Months Ended June 30, | |||||||||||
2023 | 2022 | ||||||||||
(In thousands) | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net income | $ | 72,323 | $ | 35,094 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and core deposit intangibles amortization | 17,437 | 3,547 | |||||||||
Provision for credit losses | 5,581 | 3,957 | |||||||||
Deferred income tax benefit | 11,961 | (97) | |||||||||
Net amortization of premium on investments | 1,564 | 5,558 | |||||||||
Excess tax benefit from stock-based compensation | (47) | (154) | |||||||||
Bank-owned life insurance income | (1,054) | (475) | |||||||||
Net accretion of discount on loans | (22,665) | (139) | |||||||||
Net amortization of discount on subordinated debt | 59 | 58 | |||||||||
Net accretion of discount on certificates of deposit | (19) | (31) | |||||||||
Net (gain) loss on sale of assets | (192) | 17 | |||||||||
Federal Home Loan Bank stock dividends | (400) | (35) | |||||||||
Stock-based compensation expense | 5,423 | 1,890 | |||||||||
Net change in operating leases | 2,088 | 1,515 | |||||||||
Decrease (increase) in accrued interest receivable and other assets | 6,453 | (4,153) | |||||||||
Decrease in accrued interest payable and other liabilities | (524) | (5,694) | |||||||||
Net cash provided by operating activities | 97,988 | 40,858 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Proceeds from maturities and principal paydowns of available for sale securities | 55,312 | 2,283,396 | |||||||||
Proceeds from sales and calls of available for sale securities | 320,691 | 5,056 | |||||||||
Purchase of available for sale securities | (33,287) | (2,398,416) | |||||||||
Net change in total loans | (291,730) | (129,096) | |||||||||
Purchase of bank premises and equipment | (2,479) | (395) | |||||||||
Proceeds from sale of bank premises, equipment and other real estate | 3,652 | — | |||||||||
Net (purchase) redemption of Federal Home Loan Bank stock | (9,020) | 5,315 | |||||||||
Net cash provided by (used in) investing activities | 43,139 | (234,140) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Net (decrease) increase in noninterest-bearing deposits | (516,633) | 151,634 | |||||||||
Net increase (decrease) in interest-bearing deposits | 15,389 | (318,610) | |||||||||
Net change in short-term other borrowed funds | 306,000 | (90,000) | |||||||||
Dividends paid to common shareholders | (13,850) | (5,709) | |||||||||
Proceeds from the issuance of common stock and stock option exercises | 351 | 985 | |||||||||
Repurchase of common stock | — | (9,690) | |||||||||
Net cash used in financing activities | (208,743) | (271,390) | |||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (67,616) | (464,672) | |||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 371,705 | 757,509 | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 304,089 | $ | 292,837 | |||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||||
Income taxes paid | $ | — | $ | 6,900 | |||||||
Interest paid | 60,808 | 10,742 | |||||||||
Cash paid for operating lease liabilities | 2,230 | 1,723 | |||||||||
SUPPLEMENTAL NONCASH DISCLOSURE: | |||||||||||
Lease right-of-use asset obtained in exchange for lessee operating lease liabilities | $ | — | $ | 76 | |||||||
Branch assets transferred to assets held for sale | 3,819 | 2,137 |
5
Stellar Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2022 | | 2021 | ||
Cash flows from operating activities: |
| |
| | | |
Net income | | $ | 35,049 | | $ | 36,143 |
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | |
|
| | | |
Provision (recapture) for credit losses | |
| 1,573 | | | (9,566) |
Depreciation expense | |
| 2,520 | | | 2,602 |
Amortization of intangibles | |
| 518 | | | 559 |
Amortization of premiums on securities | |
| 480 | | | 1,181 |
Amortization of lease right-to-use assets | | | 1,008 | | | 1,141 |
Accretion of lease liabilities | | | 260 | | | 294 |
Earnings on bank-owned life insurance | | | (1,118) | | | (3,103) |
Stock-based compensation expense | |
| 1,537 | | | 1,813 |
Deferred income tax (benefit) provision | |
| (76) | | | 2,094 |
Net gain on sales of assets | |
| (673) | | | (918) |
Net loss on securities | |
| 128 | | | 12 |
Change in operating assets and liabilities: | |
| | | | |
Loans held for sale | |
| 539 | | | 3,191 |
Other assets | |
| (4,451) | | | 8,061 |
Other liabilities | |
| 2,429 | | | 11,476 |
Total adjustments | |
| 4,674 | |
| 18,837 |
Net cash provided by operating activities | |
| 39,723 | |
| 54,980 |
Cash flows from investing activities: | |
|
| | | |
Purchases of securities | |
| (662,554) | | | (630,233) |
Proceeds from sales, calls and maturities of securities | |
| 451,400 | | | 453,260 |
Principal repayments of securities | |
| 32,066 | | | 48,029 |
Net (increase) decrease in loans | |
| (204,893) | | | 312,736 |
Net (purchases) sales of loan participations | |
| (56,596) | | | (208) |
Proceeds from sales of Small Business Administration loans | |
| 2,802 | | | 3,719 |
Net return of capital from equity investments | |
| 1,302 | | | 1,303 |
Redemptions of bank-owned life insurance | |
| — | | | 2,670 |
Net purchases of premises and equipment | |
| (857) | | | (710) |
Proceeds from sales of repossessed real estate and other assets | | | — | | | 112 |
Net cash (used in) provided by investing activities | |
| (437,330) | | | 190,678 |
Cash flows from financing activities: | |
|
| | | |
Net (decrease) increase in noninterest-bearing deposits | |
| (4,508) | | | 151,719 |
Net (decrease) increase in interest-bearing deposits | |
| (103,002) | | | 78,122 |
Repayment of Federal Home Loan advances | | | (50,000) | | | — |
Dividends paid on common stock | |
| (9,578) | | | (8,833) |
Payments to tax authorities for stock-based compensation | | | (135) | | | (87) |
Proceeds from exercise of stock options | | | 173 | | | 24 |
Repurchase of common stock | | | (15,041) | | | (5,825) |
Net cash (used in) provided by financing activities | |
| (182,091) | | | 215,120 |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| (579,698) | | | 460,778 |
Cash, cash equivalents and restricted cash, beginning | |
| 950,146 | | | 538,007 |
Cash, cash equivalents and restricted cash, ending | | $ | 370,448 | | $ | 998,785 |
See accompanying notes to condensed consolidated financial statements.
6
Stellar Bancorp, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1:1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Effective October 1, 2022, the Beaumont region (“Beaumont region”). The Company completed its previously announced mergeris focused on delivering a
The Bank provides relationship-driven commercial banking products and community-oriented services primarilytailored to small andmeet the needs of small-to medium-sized businesses, professionals and professionalsindividuals through its 55 banking centers with operations within38 banking centers in the Bank’s Houston
The
Accounting measurements at interim dates inherently involve greater reliance on estimates than at year endnature. Transactions between Stellar and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These interim unauditedBank have been eliminated. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notesfootnotes thereto for the year ended December 31, 2021 included withinin the Company’s Annual Report on Form 10-K.
Treasury Stock – During10-K for the fiscal year ended December 31, 2022. Operating results for the three and six months ended SeptemberJune 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Share Repurchase Program—the Merger.
Accounting Standards Not Yet Adopted—Accounting Standards Update, orCompany’s financial statements. ASU 2022-02 eliminates the troubled debt receivable, or TDR,restructuring ("TDR") accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss or CECL model. The FASB’s decision to eliminate the TDR accounting model is in response to feedback that the allowance under CECL already incorporates credit losses from loans modified as TDRs and, consequently, the related accounting and disclosures, which preparers often find onerous to apply, no longer provide the same level of benefit to users.
In lieu of the TDR accounting model, creditors will applythe Company applies the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty.difficulty on a prospective basis. Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met:
7
(i) (1) the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks; and (ii)(2) modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate.
This update will become– Nature of Operations and Summary of Significant Accounting and Reporting Policies, the Merger was completed on October 1, 2022.
Cash Flow Reporting—Asnumber of December 31, 2021,equity interests the Companylegal acquiree would have had $1.8 millionto issue to give the owners of the legal acquirer the same percentage equity interest in cash held as collateral on deposit with other financial institution counterparties related to interest rate swap transactionsthe combined entity that are considered restricted cash. Asresults from the reverse acquisition.
Stellar Bancorp, Inc. Ownership | |||||||||||
Number of CBTX Outstanding Shares | Percentage Ownership | ||||||||||
CBTX shareholders | 24,015 | 46.0 | % | ||||||||
Allegiance shareholders | 28,137 | 54.0 | % | ||||||||
Total | 52,152 | 100.0 | % | ||||||||
Supplemental disclosureshave acquired CBTX in the Merger, even though CBTX was the legal acquirer. Accordingly, Allegiance's historical financial statements are the historical financial statements of cash flow information were as followsthe combined company for all periods prior to the Merger Date.
| | | | | | |
| | Nine Months Ended September 30, | ||||
(Dollars in thousands) |
| 2022 | | 2021 | ||
Supplemental disclosures of cash flow information: |
| |
| | | |
Cash paid for taxes | | $ | 6,750 | | $ | 4,559 |
Cash paid for interest | | | 4,171 | | | 4,694 |
Supplemental disclosures of non-cash flow information: | | | | | | |
Operating lease right-to-use asset increased (decreased) in exchange for lease liabilities | | | 809 | | | (617) |
Change in liability for dividends accrued | | | 167 | | | (755) |
NOTE 2: SECURITIES
The amortized cost, related gross unrealized gainsthree months ended June 30, 2023 and losses2022 were $2.9 million and fair values$1.7 million, respectively, and $9.1 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively.
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | | ||||
(Dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
|
State and municipal securities | | $ | 175,763 | | $ | — | | $ | (40,665) | | $ | 135,098 |
U.S. Treasury securities | | | 111,045 | | | — | | | (3,786) | | | 107,259 |
U.S. agency securities: | |
| | | | | | | | |
|
|
Callable debentures | | | 3,000 | | | — | | | (436) | | | 2,564 |
Collateralized mortgage obligations | |
| 97,307 | | | — | | | (12,909) | |
| 84,398 |
Mortgage-backed securities | |
| 211,497 | | | — | | | (30,579) | |
| 180,918 |
Equity securities | |
| 1,201 | | | — | | | (156) | |
| 1,045 |
Total | | $ | 599,813 | | $ | — | | $ | (88,531) | | $ | 511,282 |
December 31, 2021 | | | | | | | | | | | | |
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
|
State and municipal securities | | $ | 168,541 | | $ | 4,451 | | $ | (392) | | $ | 172,600 |
U.S. Treasury securities | | | 11,888 | | | — | | | (91) | | | 11,797 |
U.S. agency securities: | |
| | |
| | |
| | |
|
|
Callable debentures | | | 3,000 | | | — | | | (27) | | | 2,973 |
Collateralized mortgage obligations | |
| 63,129 | |
| 115 | |
| (862) | |
| 62,382 |
Mortgage-backed securities | |
| 173,446 | |
| 1,805 | |
| (1,130) | |
| 174,121 |
Equity securities | |
| 1,189 | |
| — | |
| (16) | |
| 1,173 |
Total | | $ | 421,193 | | $ | 6,371 | | $ | (2,518) | | $ | 425,046 |
Goodwill | Core Deposit Intangibles | Servicing Assets | |||||||||||||||
(In thousands) | |||||||||||||||||
Balance as of December 31, 2021 | $ | 223,642 | $ | 14,658 | $ | — | |||||||||||
Acquired intangibles | 273,618 | 138,150 | 329 | ||||||||||||||
Amortization | — | (9,283) | (20) | ||||||||||||||
Balance as of December 31, 2022 | 497,260 | 143,525 | 309 | ||||||||||||||
Amortization | — | (13,720) | (40) | ||||||||||||||
Decrease due to payoff of serviced loans | — | — | (18) | ||||||||||||||
Balance as of June 30, 2023 | $ | 497,260 | $ | 129,805 | $ | 251 |
8
Remaining 2023 | $ | 13,093 | |||
2024 | 24,166 | ||||
2025 | 21,528 | ||||
2026 | 18,896 | ||||
Thereafter | 52,122 | ||||
Total | $ | 129,805 |
The amortized cost and estimated fair value of investment securities by contractual maturities, as of the dates indicated below were as follows:
| | | | | | | | | | | | | | | |
(Dollars in thousands) |
| 1 Year or Less |
| After 1 Year to 5 Years |
| After 5 Years to 10 Years |
| After 10 Years | | Total | |||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
| | |
|
Amortized cost: | | | | | | | | | | | | | | | |
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
| | |
|
State and municipal securities | | $ | — | | $ | 506 | | $ | 21,400 | | $ | 153,857 | | $ | 175,763 |
U.S. Treasury securities | | | 69,486 | | | 38,655 | | | 2,904 | | | — | | | 111,045 |
U.S. agency securities: | |
| | | | | | | | | | | | | |
Callable debentures | | | — | | | — | | | 3,000 | | | — | | | 3,000 |
Collateralized mortgage obligations | |
| — | | | — | | | 2,487 | | | 94,820 | | | 97,307 |
Mortgage-backed securities | |
| 2 | | | 593 | | | 24,013 | | | 186,889 | | | 211,497 |
Equity securities | |
| 1,201 | | | — | | | — | | | — | | | 1,201 |
Total | | $ | 70,689 | | $ | 39,754 | | $ | 53,804 | | $ | 435,566 | | $ | 599,813 |
Fair value: | | | | | | | | | | | | | | | |
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
| | |
|
State and municipal securities | | $ | — | | $ | 484 | | $ | 19,797 | | $ | 114,817 | | $ | 135,098 |
U.S. Treasury securities | | | 68,069 | | | 36,672 | | | 2,518 | | | — | | | 107,259 |
U.S. agency securities: | |
| | | | | | | | | | | | | |
Callable debentures | | | — | | | — | | | 2,564 | | | — | | | 2,564 |
Collateralized mortgage obligations | |
| — | | | — | | | 2,408 | | | 81,990 | | | 84,398 |
Mortgage-backed securities | |
| 2 | | | 575 | | | 22,280 | | | 158,061 | | | 180,918 |
Equity securities | |
| 1,045 | | | — | | | — | | | — | | | 1,045 |
Total | | $ | 69,116 | | $ | 37,731 | | $ | 49,567 | | $ | 354,868 | | $ | 511,282 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(Dollars in thousands) |
| 1 Year or Less |
| After 1 Year to 5 Years |
| After 5 Years to 10 Years |
| After 10 Years | | Total | |||||
December 31, 2021 |
| |
|
| |
|
| |
|
| |
| | |
|
Amortized cost: | | | | | | | | | | | | | | | |
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
| | |
|
State and municipal securities | | $ | 881 | | $ | — | | $ | 12,339 | | $ | 155,321 | | $ | 168,541 |
U.S. Treasury securities | | | — | | | 6,138 | | | 5,750 | | | — | | | 11,888 |
U.S. agency securities: | |
| | |
| | |
| | |
| | |
| |
Callable debentures | | | — | | | — | | | 3,000 | | | — | | | 3,000 |
Collateralized mortgage obligations | |
| — | |
| — | |
| 4,528 | |
| 58,601 | |
| 63,129 |
Mortgage-backed securities | |
| — | |
| 953 | |
| 4,056 | |
| 168,437 | |
| 173,446 |
Equity securities | |
| 1,189 | |
| — | |
| — | |
| — | |
| 1,189 |
Total | | $ | 2,070 | | $ | 7,091 | | $ | 29,673 | | $ | 382,359 | | $ | 421,193 |
Fair value: | | | | | | | | | | | | | | | |
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
| | |
|
State and municipal securities | | $ | 883 | | $ | — | | $ | 12,905 | | $ | 158,812 | | $ | 172,600 |
U.S. Treasury securities | | | — | | | 6,072 | | | 5,725 | | | — | | | 11,797 |
U.S. agency securities: | |
| | |
| | |
| | |
| | |
| |
Callable debentures | | | — | | | — | | | 2,973 | | | — | | | 2,973 |
Collateralized mortgage obligations | |
| — | |
| — | |
| 4,591 | |
| 57,791 | |
| 62,382 |
Mortgage-backed securities | |
| — | |
| 994 | |
| 4,166 | |
| 168,961 | |
| 174,121 |
Equity securities | |
| 1,173 | |
| — | |
| — | |
| — | |
| 1,173 |
Total | | $ | 2,056 | | $ | 7,066 | | $ | 30,360 | | $ | 385,564 | | $ | 425,046 |
| | | | | | | | | | | | | | | |
Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2023 | |||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||
U.S. government and agency securities | $ | 420,321 | $ | 156 | $ | (15,595) | $ | 404,882 | |||||||||||||||
Municipal securities | 259,423 | 2,177 | (32,402) | 229,198 | |||||||||||||||||||
Agency mortgage-backed pass-through securities | 385,780 | 272 | (41,671) | 344,381 | |||||||||||||||||||
Agency collateralized mortgage obligations | 455,153 | 1 | (66,382) | 388,772 | |||||||||||||||||||
Corporate bonds and other | 124,626 | 53 | (13,690) | 110,989 | |||||||||||||||||||
Total | $ | 1,645,303 | $ | 2,659 | $ | (169,740) | $ | 1,478,222 |
9
December 31, 2022 | |||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||
U.S. government and agency securities | $ | 433,417 | $ | 90 | $ | (19,227) | $ | 414,280 | |||||||||||||||
Municipal securities | 580,076 | 4,319 | (43,826) | 540,569 | |||||||||||||||||||
Agency mortgage-backed pass-through securities | 370,471 | 362 | (42,032) | 328,801 | |||||||||||||||||||
Agency collateralized mortgage obligations | 461,760 | — | (67,630) | 394,130 | |||||||||||||||||||
Corporate bonds and other | 143,192 | 2 | (13,388) | 129,806 | |||||||||||||||||||
Total | $ | 1,988,916 | $ | 4,773 | $ | (186,103) | $ | 1,807,586 |
Management did not believe that any of the securities the Company held at September 30, 2022 or December 31, 2021 were impaired due to credit quality. Accordingly,2023, no allowance for credit losses or ACL, was recordedhas been recognized on available for sale securities in an unrealized loss position as management does not believe any of the Company’s condensed consolidated balance sheets at September 30, 2022 or during 2021.securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. 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.
Accrued interest receivable for securities was $1.7 million
The Company held 472 and 115fair value of investment securities at SeptemberJune 30, 2022 and December 31, 2021, respectively, that were in a gross unrealized loss position.
2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or without call or prepayment penalties.
Amortized Cost | Fair Value | ||||||||||
(In thousands) | |||||||||||
Due in one year or less | $ | 77,538 | $ | 76,185 | |||||||
Due after one year through five years | 179,555 | 167,715 | |||||||||
Due after five years through ten years | 133,247 | 121,458 | |||||||||
Due after ten years | 414,030 | 379,711 | |||||||||
Subtotal | 804,370 | 745,069 | |||||||||
Agency mortgage-backed pass-through securities and collateralized mortgage obligations | 840,933 | 733,153 | |||||||||
Total | $ | 1,645,303 | $ | 1,478,222 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Less than Twelve Months | | Twelve Months or More | ||||||||
| | | | Gross | | | | Gross | ||||
| | Fair | | Unrealized | | Fair | | Unrealized | ||||
(Dollars in thousands) |
| Value |
| Losses |
| Value |
| Losses | ||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
|
State and municipal securities | | $ | 110,933 | | $ | (28,504) | | $ | 24,165 | | $ | (12,161) |
U.S. Treasury securities | | | 104,544 | | | (3,427) | | | 2,715 | | | (359) |
U.S. agency securities: | |
| | |
|
| |
|
| |
|
|
Callable debentures | | | 2,564 | | | (436) | | | — | | | — |
Collateralized mortgage obligations | |
| 62,830 | |
| (8,187) | |
| 21,568 | |
| (4,722) |
Mortgage-backed securities | |
| 138,312 | |
| (20,371) | |
| 42,529 | |
| (10,208) |
Equity securities | |
| — | |
| — | |
| 1,045 | |
| (156) |
| | $ | 419,183 | | $ | (60,925) | | $ | 92,022 | | $ | (27,606) |
December 31, 2021 | |
|
| |
|
| |
|
| |
|
|
Debt securities available for sale: | |
|
| |
|
| |
|
| |
|
|
State and municipal securities | | $ | 36,962 | | $ | (387) | | $ | 257 | | $ | (5) |
U.S. Treasury securities | | | 11,797 | | | (91) | | | — | | | — |
U.S. agency securities: | |
| | |
|
| |
|
| |
|
|
Callable debentures | | | 2,973 | | | (27) | | | — | | | — |
Collateralized mortgage obligations | |
| 40,776 | |
| (860) | |
| 241 | |
| (2) |
Mortgage-backed securities | |
| 87,220 | |
| (1,130) | |
| — | |
| — |
Equity securities | |
| 1,173 | |
| (16) | |
| — | |
| — |
| | $ | 180,901 | | $ | (2,511) | | $ | 498 | | $ | (7) |
10
June 30, 2023 | |||||||||||||||||||||||||||||||||||
Less than 12 Months | More than 12 Months | Total | |||||||||||||||||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||||||||||||||
U.S. government and agency securities | $ | 114,612 | $ | (1,871) | $ | 260,133 | $ | (13,724) | $ | 374,745 | $ | (15,595) | |||||||||||||||||||||||
Municipal securities | 9,423 | (193) | 173,602 | (32,209) | 183,025 | (32,402) | |||||||||||||||||||||||||||||
Agency mortgage-backed pass-through securities | 73,644 | (2,529) | 247,615 | (39,142) | 321,259 | (41,671) | |||||||||||||||||||||||||||||
Agency collateralized mortgage obligations | 11,239 | (36) | 374,339 | (66,346) | 385,578 | (66,382) | |||||||||||||||||||||||||||||
Corporate bonds and other | 33,323 | (2,830) | 60,977 | (10,860) | 94,300 | (13,690) | |||||||||||||||||||||||||||||
Total | $ | 242,241 | $ | (7,459) | $ | 1,116,666 | $ | (162,281) | $ | 1,358,907 | $ | (169,740) |
December 31, 2022 | |||||||||||||||||||||||||||||||||||
Less than 12 Months | More than 12 Months | Total | |||||||||||||||||||||||||||||||||
Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | Estimated Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||||||||||||||
U.S. government and agency securities | $ | 99,732 | $ | (1,427) | $ | 305,256 | $ | (17,800) | $ | 404,988 | $ | (19,227) | |||||||||||||||||||||||
Municipal securities | 228,192 | (14,473) | 134,640 | (29,353) | 362,832 | (43,826) | |||||||||||||||||||||||||||||
Agency mortgage-backed pass-through securities | 95,291 | (7,612) | 199,836 | (34,420) | 295,127 | (42,032) | |||||||||||||||||||||||||||||
Agency collateralized mortgage obligations | 117,147 | (14,426) | 276,925 | (53,204) | 394,072 | (67,630) | |||||||||||||||||||||||||||||
Corporate bonds and other | 72,913 | (5,704) | 49,893 | (7,684) | 122,806 | (13,388) | |||||||||||||||||||||||||||||
Total | $ | 613,275 | $ | (43,642) | $ | 966,550 | $ | (142,461) | $ | 1,579,825 | $ | (186,103) |
NOTE 3: EQUITY INVESTMENTS
The Company’s unconsolidated investments that are considered equity securities as they represent ownership interests, such as common or preferred stock asrecording gross gains of $234 thousand. There were no securities sold during the dates indicated below were as follows:
| | | | | | |
| | | | | ||
(Dollars in thousands) |
| September 30, 2022 | | December 31, 2021 | ||
Federal Reserve Bank stock | | $ | 9,271 | | $ | 9,271 |
Federal Home Loan Bank stock | |
| 3,991 | |
| 3,967 |
The Independent Bankers Financial Corporation stock | |
| 141 | |
| 141 |
Community Reinvestment Act investments | |
| 4,432 | |
| 4,348 |
| | $ | 17,835 | | $ | 17,727 |
Banks that are members of the Federal Home Loan Bank are required to maintain a stock investment in the Federal Home Loan Bank calculated as a percentage of aggregate outstanding mortgages, outstanding Federal Home Loan Bank advances and other financial instruments. As a member of the Federal Reserve, the Bank is required to annually subscribe to Federal Reserve Bank stock in specific ratios to the Bank’s equity. Although Federal Home Loan Bank and Federal Reserve Bank stock are considered equity securities, they do not have readily determinable fair values because ownership is restricted, and they lack a readily-available market. These investments can be sold back only at their par value of $100 per share and can only be sold to the Federal Home Loan Banks or the Federal Reserve Banks or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by regulators in the process of budgeting and approving dividends. As a result, these investments are carried at cost and evaluated for impairment.
The Company also holds an investment in the stock of The Independent Bankers Financial Corporation, which has limited marketability. As a result, this investment is carried at cost and evaluated for impairment.
The Company has investments in investment funds and limited partnerships that are qualified Community Reinvestment Act, or CRA, investments and investments under the Small Business Investment Company program of the Small Business Administration, or SBA. There are limited to no observable price changes in orderly transactions for identical investments or similar investments from the same issuers that are actively traded and, as a result, these investments are stated at cost.six months ended June 30, 2022. At SeptemberJune 30, 20222023 and December 31, 2021,2022, the Company had $7.9did not own securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.
During the nine months ended September 30, 2022, two of these investment funds sold underlying investments for more than their book value and the Company recorded a total gain of $1.4 million, which is included in net gains on sales of assets in the condensed consolidated income statement.
at December 31, 2022. The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators, which include, but are not limited to: (i) a significant deterioration in the earnings, performance, credit rating, asset quality or business prospectsmajority of the investee; (ii) a significant adverse changesecurities in the regulatory, economic or technological environment of the investee; (iii) a significant adverse change in the general market conditions of either the geographical area or the industry in which the investee operates; and (iv) a bona fide offereach case were pledged to purchase, an offer by the investee to sell, or completed auction process for the same or similar investment for an amount less than the carrying amount of the investment. There were no such qualitative indicators as of September 30, 2022.
11
Loans AND ALLOWANCE FOR CREDIT LOSSES
| | | | | | | | | | |
|
| | | | ||||||
(Dollars in thousands) |
| September 30, 2022 | | December 31, 2021 | ||||||
Commercial and industrial | | $ | 568,071 |
| 18.1% | | $ | 634,384 |
| 22.0% |
Real estate: | |
| |
| | |
| |
| |
Commercial real estate | |
| 1,242,118 |
| 39.6% | |
| 1,091,969 |
| 38.0% |
Construction and development | |
| 507,570 |
| 16.2% | |
| 460,719 |
| 16.0% |
1-4 family residential | |
| 288,456 |
| 9.2% | |
| 277,273 |
| 9.6% |
Multi-family residential | |
| 370,391 |
| 11.8% | |
| 286,396 |
| 10.0% |
Consumer | |
| 24,509 |
| 0.8% | |
| 28,090 |
| 1.0% |
Agriculture | |
| 11,185 |
| 0.4% | |
| 7,941 |
| 0.3% |
Other | |
| 123,591 |
| 3.9% | |
| 89,655 |
| 3.1% |
Total gross loans | |
| 3,135,891 |
| 100.0% | |
| 2,876,427 |
| 100.0% |
Less allowance for credit losses for loans | |
| (32,577) |
|
| |
| (31,345) |
|
|
Less deferred loan fees and unearned discounts | |
| (9,470) |
|
| |
| (8,739) |
|
|
Less loans held for sale | |
| — |
|
| |
| (164) |
|
|
Loans, net | | $ | 3,093,844 |
|
| | $ | 2,836,179 |
|
|
Accrued interest receivable for loans was $9.0 million
June 30, 2023 | December 31, 2022 | ||||||||||
(In thousands) | |||||||||||
Commercial and industrial | $ | 1,512,476 | $ | 1,455,795 | |||||||
Paycheck Protection Program (PPP) | 8,027 | 13,226 | |||||||||
Real estate: | |||||||||||
Commercial real estate (including multi-family residential) | 4,038,487 | 3,931,480 | |||||||||
Commercial real estate construction and land development | 1,136,124 | 1,037,678 | |||||||||
1-4 family residential (including home equity) | 1,009,439 | 1,000,956 | |||||||||
Residential construction | 311,208 | 268,150 | |||||||||
Consumer and other | 52,957 | 47,466 | |||||||||
Total loans | 8,068,718 | 7,754,751 | |||||||||
Allowance for credit losses on loans | (100,195) | (93,180) | |||||||||
Loans, net | $ | 7,968,523 | $ | 7,661,571 |
From time to time, the Company will acquire and dispose of interests in loans under participation agreements with other financial institutions. Loan participations purchased and sold during the nine months ending September 30, 2022 and 2021, by loan class, were as follows:
| | | | | | |
| | Participations | | Participations | ||
(Dollars in thousands) | | Purchased | | Sold | ||
September 30, 2022 |
| |
|
| |
|
Commercial and industrial | | $ | 24,192 | | | 1,943 |
Commercial real estate | | | 30,455 | | | 1,247 |
Construction and development | | | — | | | 122 |
Other | | | 5,261 | | | — |
| | $ | 59,908 | | $ | 3,312 |
September 30, 2021 | | | | | | |
Commercial and industrial | | $ | — | | $ | 1,336 |
Commercial real estate | | | — | | | 375 |
Construction and development | | | — | | | 22 |
Other | | | 1,941 | | | — |
| | $ | 1,941 | | $ | 1,733 |
The Company participates in the SBA loan program. When advantageous, the Company will sell the guaranteed portions of these loans with servicing retained. SBA loans that were sold with servicing retained during the nine months ended September 30, 2022 and 2021, totaled $2.8 million and $3.7 million, respectively. Net gains recognized on sales of SBA loans were $328,000 and $436,000 for the nine months ended September 30, 2022 and 2021, respectively.
12
NOTE 5: LOAN PERFORMANCE
The following is anAn aging analysis of the Company’srecorded investment in past due loans, segregated by class of loans, is included below. The Company defines recorded investment as the outstanding loan class,balances including net deferred loan fees, and excluding accrued interest receivable of $35.1 million and $34.1 million as of the dates indicated below:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 90 Days or | | | | | | | | | | | 90 Days | ||
| | 30 to 59 Days | | 60 to 89 Days | | Greater | | Total | | Total | | | | | Past Due and | ||||||
(Dollars in thousands) |
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current Loans |
| Total Loans |
| Still Accruing | |||||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 4,374 | | $ | 3,416 | | $ | 281 | | $ | 8,071 | | $ | 560,000 | | $ | 568,071 | | $ | — |
Real estate: | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial real estate | |
| 5,360 | |
| 4,447 | |
| — | |
| 9,807 | |
| 1,232,311 | |
| 1,242,118 | |
| — |
Construction and development | |
| 1,350 | |
| — | |
| — | |
| 1,350 | |
| 506,220 | |
| 507,570 | |
| — |
1-4 family residential | |
| — | |
| 1,309 | |
| 1,601 | |
| 2,910 | |
| 285,546 | |
| 288,456 | |
| — |
Multi-family residential | |
| — | |
| — | |
| — | |
| — | |
| 370,391 | |
| 370,391 | |
| — |
Consumer | |
| — | |
| — | |
| — | |
| — | |
| 24,509 | |
| 24,509 | |
| — |
Agriculture | |
| 15 | |
| — | |
| — | |
| 15 | |
| 11,170 | |
| 11,185 | |
| — |
Other | |
| — | |
| — | |
| — | |
| — | |
| 123,591 | |
| 123,591 | |
| — |
Total gross loans | | $ | 11,099 | | $ | 9,172 | | $ | 1,882 | | $ | 22,153 | | $ | 3,113,738 | | $ | 3,135,891 | | $ | — |
December 31, 2021 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 14 | | $ | — | | $ | — | | $ | 14 | | $ | 634,370 | | $ | 634,384 | | $ | — |
Real estate: | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial real estate | |
| 650 | |
| — | |
| 55 | |
| 705 | |
| 1,091,264 | |
| 1,091,969 | |
| — |
Construction and development | |
| — | |
| — | |
| 142 | |
| 142 | |
| 460,577 | |
| 460,719 | |
| — |
1-4 family residential | |
| 150 | |
| 34 | |
| — | |
| 184 | |
| 277,089 | |
| 277,273 | |
| — |
Multi-family residential | |
| — | |
| — | |
| — | |
| — | |
| 286,396 | |
| 286,396 | |
| — |
Consumer | |
| 50 | |
| — | |
| — | |
| 50 | |
| 28,040 | |
| 28,090 | |
| — |
Agriculture | |
| — | |
| — | |
| — | |
| — | |
| 7,941 | |
| 7,941 | |
| — |
Other | |
| 41 | |
| — | |
| — | |
| 41 | |
| 89,614 | |
| 89,655 | |
| — |
Total gross loans | | $ | 905 | | $ | 34 | | $ | 197 | | $ | 1,136 | | $ | 2,875,291 | | $ | 2,876,427 | | $ | — |
| | | | | | | | | | | | | | | | | | | | | |
The Company places loans on nonaccrual status because of delinquency or because collection of principal or interest is doubtful. Nonaccrual loans, segregated by loan class, as of the dates indicated below were as follows:
| | | | | | |
(Dollars in thousands) |
| September 30, 2022 |
| December 31, 2021 | ||
Commercial and industrial | | $ | 7,985 | | $ | 9,090 |
Real estate: | |
| | |
| |
Commercial real estate | |
| 11,076 | |
| 11,512 |
Construction and development | |
| 139 | |
| 142 |
1-4 family residential | |
| 3,176 | |
| 1,784 |
Consumer | | | 34 | | | 40 |
Total nonaccrual loans | | $ | 22,410 | | $ | 22,568 |
Interest income that would have been earned under the original terms of the nonaccrual loans was $809,000 and $568,000 for the nine months ended SeptemberJune 30, 2022 and 2021, respectively.
13
Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the nine months ended September 30, 2022 and 2021, that remained outstanding as of the end of those periods were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | Post-modification Recorded Investment | ||||||||||
| | | | | | | | | | | | | | | | Extended | |
| | | | | | | | | | | | | | | | Maturity, | |
| | | | Pre-modification | | | | | | | | Extended | | Restructured | |||
| | | | Outstanding | | | | | | | | Maturity and | | Payments | |||
| | Number | | Recorded | | Restructured | | Extended | | Restructured | | and Adjusted | |||||
(Dollars in thousands) |
| of Loans |
| Investment |
| Payments |
| Maturity |
| Payments |
| Interest Rate | |||||
September 30, 2022 | | | | | | | | | | | | | | | | | |
Commercial and industrial | | 7 | | $ | 3,870 | | $ | 1,093 | | $ | — | | $ | — | | $ | 2,777 |
Real estate: | | | | | | | | | | | | | | | | | |
Commercial real estate |
| 2 | | | 2,273 | | | — | | | — | | | 2,040 | | | 245 |
Construction and development | | 3 | | | 431 | | | — | | | — | | | 431 | | | — |
Total |
| 12 | | $ | 6,574 | | $ | 1,093 | | $ | — | | $ | 2,471 | | $ | 3,022 |
September 30, 2021 | | | | | | | | | | | | | | | | | |
Commercial and industrial |
| 3 | | $ | 3,256 | | $ | 3,256 | | $ | — | | $ | — | | $ | — |
Real estate: | | | | | | | | | | | | | | | | | |
Commercial real estate |
| 1 | | | 1,206 | | | 1,206 | | | — | | | — | | | — |
1-4 family residential | | 1 | | | 1,548 | | | 1,548 | | | — | | | — | | | — |
Consumer | | 1 | | | 42 | | | — | | | — | | | 42 | | | — |
Total |
| 6 | | $ | 6,052 | | $ | 6,010 | | $ | — | | $ | 42 | | $ | — |
Loan modifications related to a loan refinancing or restructuring other than a troubled debt restructuring are accounted for as a new loan if the terms provided to the borrower are at least as favorable to the Company as terms for comparable loans to other borrowers with similar collection risks that is not a loan refinancing or restructuring. If the loan refinancing or restructuring does not meet this condition or if only minor modifications are made to the original loan contract, it is not considered a new loan and is considered a renewal or modification of the original contract. Restructured or modified loans are not considered past due if they are performing under the terms of the modified or restructured payment schedule.
A troubled debt restructuring is considered in default when a payment in accordance with the terms of the restructuring is more than 30 days past due. All loans restructured in a troubled debt restructuring are individually evaluated based on the underlying collateral for the determination of an ACL.
There were four commercial and industrial loans totaling $1.7 million and one commercial and industrial loan of $1.5 million that were troubled debt restructurings and have payment defaults during the twelve months ended September 30, 2022 and 2021, respectively.
At September 30, 20222023 and December 31, 2021, the Company had an outstanding commitment2022, respectively, due to fund $1.1 million and $2.5 million, respectively, for loans that were previously restructured.
June 30, 2023 | |||||||||||||||||||||||||||||||||||
Loans Past Due and Still Accruing | Nonaccrual Loans | Current Loans | Total Loans | ||||||||||||||||||||||||||||||||
30-89 Days | 90 or More Days | Total Past Due Loans | |||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 2,210 | $ | — | $ | 2,210 | $ | 22,800 | $ | 1,487,466 | $ | 1,512,476 | |||||||||||||||||||||||
Paycheck Protection Program (PPP) | 56 | — | 56 | 168 | 7,803 | 8,027 | |||||||||||||||||||||||||||||
Real estate: | |||||||||||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | 3,302 | — | 3,302 | 8,221 | 4,026,964 | 4,038,487 | |||||||||||||||||||||||||||||
Commercial real estate construction and land development | 4,573 | — | 4,573 | 388 | 1,131,163 | 1,136,124 | |||||||||||||||||||||||||||||
1-4 family residential (including home equity) | 8,332 | — | 8,332 | 10,880 | 990,227 | 1,009,439 | |||||||||||||||||||||||||||||
Residential construction | 662 | — | 662 | 665 | 309,881 | 311,208 | |||||||||||||||||||||||||||||
Consumer and other | 142 | — | 142 | 227 | 52,588 | 52,957 | |||||||||||||||||||||||||||||
Total loans | $ | 19,277 | $ | — | $ | 19,277 | $ | 43,349 | $ | 8,006,092 | $ | 8,068,718 |
14
Loans individually evaluated for credit losses were as follows for the dates indicated below:
| | | | | | | | | | | | | | | | | | |
| | Troubled Debt Restructurings | | | | | | Total Loans | ||||||||||
(Dollars in thousands) | | Accruing | | Non-Accrual | | Total | | Other Non-Accrual | | Other Accruing | | Individually Evaluated | ||||||
September 30, 2022 | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 1,870 | | $ | 7,934 | | $ | 9,804 | | $ | 51 | | $ | 1,077 | | $ | 10,932 |
Real estate: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 7,629 | | | 10,980 | | | 18,609 | | | 96 | | | — | | | 18,705 |
Construction and development | | | 10,325 | | | 139 | | | 10,464 | | | — | | | — | | | 10,464 |
1-4 family residential | | | 26 | | | 3,149 | | | 3,175 | | | 27 | | | — | | | 3,202 |
Consumer | | | — | | | 34 | | | 34 | | | — | | | 82 | | | 116 |
Other | | | 8,523 | | | — | | | 8,523 | | | — | | | — | | | 8,523 |
Total | | $ | 28,373 | | $ | 22,236 | | $ | 50,609 | | $ | 174 | | $ | 1,159 | | $ | 51,942 |
December 31, 2021 | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 5,661 | | $ | 6,851 | | $ | 12,512 | | $ | 2,239 | | $ | 1,828 | | $ | 16,579 |
Real estate: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 5,755 | | | 11,401 | | | 17,156 | | | 111 | | | 3,790 | | | 21,057 |
Construction and development | | | 12,282 | | | — | | | 12,282 | | | 142 | | | 292 | | | 12,716 |
1-4 family residential | | | 1,571 | | | 1,727 | | | 3,298 | | | 57 | | | — | | | 3,355 |
Consumer | | | — | | | 40 | | | 40 | | | — | | | 85 | | | 125 |
Other | | | 5,440 | | | — | | | 5,440 | | | — | | | — | | | 5,440 |
Total | | $ | 30,709 | | $ | 20,019 | | $ | 50,728 | | $ | 2,549 | | $ | 5,995 | | $ | 59,272 |
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
December 31, 2022 | |||||||||||||||||||||||||||||||||||
Loans Past Due and Still Accruing | Nonaccrual Loans | Current Loans | Total Loans | ||||||||||||||||||||||||||||||||
30-89 Days | 90 or More Days | Total Past Due Loans | |||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 1,591 | $ | — | $ | 1,591 | $ | 25,297 | $ | 1,428,907 | $ | 1,455,795 | |||||||||||||||||||||||
Paycheck Protection Program (PPP) | 517 | — | 517 | 105 | 12,604 | 13,226 | |||||||||||||||||||||||||||||
Real estate: | |||||||||||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | 3,222 | — | 3,222 | 9,970 | 3,918,288 | 3,931,480 | |||||||||||||||||||||||||||||
Commercial real estate construction and land development | 851 | — | 851 | — | 1,036,827 | 1,037,678 | |||||||||||||||||||||||||||||
1-4 family residential (including home equity) | 3,385 | — | 3,385 | 9,404 | 988,167 | 1,000,956 | |||||||||||||||||||||||||||||
Residential construction | — | — | — | — | 268,150 | 268,150 | |||||||||||||||||||||||||||||
Consumer and other | 192 | — | 192 | 272 | 47,002 | 47,466 | |||||||||||||||||||||||||||||
Total loans | $ | 9,758 | $ | — | $ | 9,758 | $ | 45,048 | $ | 7,699,945 | $ | 7,754,751 |
Risk Grading
The methodology used by the Company in the determination of its ACL, which is performed at leastloans. Loans are rated on a quarterlyscale of 10 to 90. Risk ratings are updated on an ongoing basis is designedand are subject to be responsive to changes inchange by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks certain risk ratings to be used as well as forecasted economic conditions. The credit quality indicators including trends related to (1) the weighted-average risk grade of loans, (2) the level of classified loans, (3) the delinquency status of loans, (4) nonperforming loans and (5) the general economic conditions in the our markets. Individual bankers, under the oversight of credit administration, review updated financial information for all pass grade commercial loans to reassess the risk grade on at least an annual basis. When a loan reaches a set of internally designated criteria, including Substandard or higher, a special assets officer will be involved in the monitoring of the loan portfolio is assessed through different processes. At origination, a risk grade is assigned to each loan based on underwriting procedures and criteria. The risk grades used are described below. The Company monitors the credit quality of the loan portfolio on an on-going basis by performing loan reviews, both internally and throughbasis.
risk ratings used by the Company:
institution will sustain some loss if the deficiencies are not corrected.
15
estimated—Loans classified as loss that is probableare to be incurred. Loans deemed substandard and on nonaccrual status are individually evaluated for expected credit losses.
Doubtful—Credits in this category are considered doubtful in accordance with regulatory guidelines, are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determinecharged-off or upon some near-term event which lacks certainty. Generally, these credits will have a valuation allowance based upon management’s best estimate of the losses probable to occur in the liquidation of the debt.
Loss—Credits in this category are considered loss in accordance with regulatory guidelines and are considered uncollectible and of such little value as to question their continued existence as assets on the Company’s financial statements. Such credits are charged off or charged downcharged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. This category does“Loss” is not intendintended to imply that the debtloan or some portion of it will never be paid, nor does it in any way imply that the debt will be forgiven.
there has been a forgiveness of debt.
At September 30, 20222023 and December 31, 2021,2022:
As of June 30, 2023 | As of December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | Total | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | 2020 | 2019 | Prior | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 179,607 | $ | 330,548 | $ | 202,720 | $ | 61,221 | $ | 42,300 | $ | 31,586 | $ | 558,826 | $ | 50,630 | $ | 1,457,438 | $ | 1,400,191 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Special Mention | — | 349 | 492 | 446 | 381 | 2 | 8,173 | 836 | 10,679 | 18,982 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 510 | 5,279 | 18,110 | 1,197 | 12,511 | 344 | 5,263 | 1,094 | 44,308 | 36,568 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | 51 | — | — | — | — | — | — | 51 | 54 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial and industrial loans | $ | 180,117 | $ | 336,227 | $ | 221,322 | $ | 62,864 | $ | 55,192 | $ | 31,932 | $ | 572,262 | $ | 52,560 | $ | 1,512,476 | $ | 1,455,795 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current-period gross charge-offs | $ | — | $ | 95 | $ | 126 | $ | 456 | $ | — | $ | — | $ | 373 | $ | 434 | $ | 1,484 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Paycheck Protection Program (PPP) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | — | $ | — | $ | 4,858 | $ | 3,169 | $ | — | $ | — | $ | — | $ | — | $ | 8,027 | $ | 13,226 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total PPP loans | $ | — | $ | — | $ | 4,858 | $ | 3,169 | $ | — | $ | — | $ | — | $ | — | $ | 8,027 | $ | 13,226 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 283,360 | $ | 1,304,844 | $ | 844,501 | $ | 473,336 | $ | 356,126 | $ | 549,716 | $ | 131,751 | $ | 20,950 | $ | 3,964,584 | $ | 3,844,951 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Special Mention | 942 | 135 | 7,005 | 7,269 | 796 | 12,611 | 587 | — | 29,345 | 18,183 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 1,903 | 4,711 | 11,580 | 7,274 | 5,048 | 13,855 | 187 | — | 44,558 | 68,346 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial real estate (including multi-family residential) loans | $ | 286,205 | $ | 1,309,690 | $ | 863,086 | $ | 487,879 | $ | 361,970 | $ | 576,182 | $ | 132,525 | $ | 20,950 | $ | 4,038,487 | $ | 3,931,480 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate construction and land development | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 154,065 | $ | 522,070 | $ | 299,038 | $ | 35,881 | $ | 33,778 | $ | 10,070 | $ | 62,503 | $ | 658 | $ | 1,118,063 | $ | 1,025,141 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Special Mention | — | 3,814 | 1,945 | 142 | 303 | 209 | — | — | 6,413 | 832 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 581 | 10,477 | 89 | 82 | 270 | — | 149 | 11,648 | 11,705 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total commercial real estate construction and land development | $ | 154,065 | $ | 526,465 | $ | 311,460 | $ | 36,112 | $ | 34,163 | $ | 10,549 | $ | 62,503 | $ | 807 | $ | 1,136,124 | $ | 1,037,678 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
As of June 30, 2023 | As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Term Loans Amortized Cost Basis by Origination Year | Revolving Loans | Revolving Loans Converted to Term Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1-4 family residential (including home equity) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 85,495 | $ | 245,898 | $ | 227,583 | $ | 119,543 | $ | 75,722 | $ | 109,646 | $ | 107,781 | $ | 8,692 | $ | 980,360 | $ | 969,396 | |||||||||||||||||||||||||||||||||||||||
Special Mention | — | 57 | — | 1,614 | — | 196 | — | 190 | 2,057 | 3,714 | |||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 722 | 2,410 | 2,526 | 2,302 | 4,039 | 5,289 | 7,076 | 2,658 | 27,022 | 27,846 | |||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Total 1-4 family residential (including home equity) | $ | 86,217 | $ | 248,365 | $ | 230,109 | $ | 123,459 | $ | 79,761 | $ | 115,131 | $ | 114,857 | $ | 11,540 | $ | 1,009,439 | $ | 1,000,956 | |||||||||||||||||||||||||||||||||||||||
Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 23 | $ | — | $ | — | $ | 23 | |||||||||||||||||||||||||||||||||||||||||
Residential construction | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 75,514 | $ | 177,850 | $ | 16,576 | $ | 7,682 | $ | 661 | $ | 1,378 | $ | 27,385 | $ | — | $ | 307,046 | $ | 266,943 | |||||||||||||||||||||||||||||||||||||||
Special Mention | — | — | — | — | — | — | — | — | — | 421 | |||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 868 | 665 | 2,629 | — | — | — | — | — | 4,162 | 786 | |||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Total residential construction | $ | 76,382 | $ | 178,515 | $ | 19,205 | $ | 7,682 | $ | 661 | $ | 1,378 | $ | 27,385 | $ | — | $ | 311,208 | $ | 268,150 | |||||||||||||||||||||||||||||||||||||||
Current-period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||
Consumer and other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 20,268 | $ | 10,715 | $ | 4,645 | $ | 2,248 | $ | 791 | $ | 619 | $ | 12,716 | $ | 633 | $ | 52,635 | $ | 47,062 | |||||||||||||||||||||||||||||||||||||||
Special Mention | — | 30 | 1 | — | — | — | — | — | 31 | 43 | |||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 67 | 37 | — | 71 | 5 | 4 | 107 | 291 | 361 | |||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Total consumer and other | $ | 20,268 | $ | 10,812 | $ | 4,683 | $ | 2,248 | $ | 862 | $ | 624 | $ | 12,720 | $ | 740 | $ | 52,957 | $ | 47,466 | |||||||||||||||||||||||||||||||||||||||
Current-period gross charge-offs | $ | — | $ | 38 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 38 | |||||||||||||||||||||||||||||||||||||||||
Total loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 798,309 | $ | 2,591,925 | $ | 1,599,921 | $ | 703,080 | $ | 509,378 | $ | 703,015 | $ | 900,962 | $ | 81,563 | $ | 7,888,153 | $ | 7,566,910 | |||||||||||||||||||||||||||||||||||||||
Special Mention | 942 | 4,385 | 9,443 | 9,471 | 1,480 | 13,018 | 8,760 | 1,026 | 48,525 | 42,175 | |||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | 4,003 | 13,713 | 45,359 | 10,862 | 21,751 | 19,763 | 12,530 | 4,008 | 131,989 | 145,612 | |||||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | 51 | — | — | — | — | — | — | 51 | 54 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total loans | $ | 803,254 | $ | 2,610,074 | $ | 1,654,723 | $ | 723,413 | $ | 532,609 | $ | 735,796 | $ | 922,252 | $ | 86,597 | $ | 8,068,718 | $ | 7,754,751 | |||||||||||||||||||||||||||||||||||||||
Total current-period gross charge-offs | $ | — | $ | 133 | $ | 126 | $ | 456 | $ | — | $ | 23 | $ | 373 | $ | 434 | $ | 1,545 |
2022:
Commercial and industrial | Paycheck Protection Program (PPP) | Commercial real estate (including multi-family residential) | Commercial real estate construction and land development | 1-4 family residential (including home equity) | Residential construction | Consumer and other | Total | ||||||||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Allowance for credit losses on loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Balance March 31, 2023 | $ | 39,516 | $ | — | $ | 37,700 | $ | 13,579 | $ | 2,832 | $ | 2,089 | $ | 472 | $ | 96,188 | |||||||||||||||||||||||||||||||
Provision for credit losses on loans | (814) | — | 1,263 | 921 | 1,946 | 991 | (64) | 4,243 | |||||||||||||||||||||||||||||||||||||||
Charge-offs | (1,058) | — | — | — | (23) | — | (30) | (1,111) | |||||||||||||||||||||||||||||||||||||||
Recoveries | 861 | — | — | — | 2 | — | 12 | 875 | |||||||||||||||||||||||||||||||||||||||
Net charge-offs | (197) | — | — | — | (21) | — | (18) | (236) | |||||||||||||||||||||||||||||||||||||||
Balance June 30, 2023 | $ | 38,505 | $ | — | $ | 38,963 | $ | 14,500 | $ | 4,757 | $ | 3,080 | $ | 390 | $ | 100,195 | |||||||||||||||||||||||||||||||
Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2022 | $ | 41,236 | $ | — | $ | 32,970 | $ | 14,121 | $ | 2,709 | $ | 1,796 | $ | 348 | $ | 93,180 | |||||||||||||||||||||||||||||||
Provision for credit losses on loans | (2,316) | 5,979 | 379 | 2,062 | 1,284 | 55 | 7,443 | ||||||||||||||||||||||||||||||||||||||||
Charge-offs | (1,484) | — | — | — | (23) | — | (38) | (1,545) | |||||||||||||||||||||||||||||||||||||||
Recoveries | 1,069 | — | 14 | — | 9 | — | 25 | 1,117 | |||||||||||||||||||||||||||||||||||||||
Net charge-offs | (415) | — | 14 | — | (14) | — | (13) | (428) | |||||||||||||||||||||||||||||||||||||||
Balance June 30, 2023 | $ | 38,505 | $ | — | $ | 38,963 | $ | 14,500 | $ | 4,757 | $ | 3,080 | $ | 390 | $ | 100,195 | |||||||||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Balance March 31, 2022 | $ | 16,295 | $ | — | $ | 24,877 | $ | 6,147 | $ | 752 | $ | 1,093 | $ | 51 | $ | 49,215 | |||||||||||||||||||||||||||||||
Provision for credit losses on loans | 1,010 | — | (855) | 1,197 | 284 | (45) | 7 | 1,598 | |||||||||||||||||||||||||||||||||||||||
Charge-offs | (615) | — | (72) | — | — | — | — | (687) | |||||||||||||||||||||||||||||||||||||||
Recoveries | 11 | — | 50 | 55 | — | — | — | 116 | |||||||||||||||||||||||||||||||||||||||
Net charge-offs | (604) | — | (22) | 55 | — | — | — | (571) | |||||||||||||||||||||||||||||||||||||||
Balance June 30, 2022 | $ | 16,701 | $ | — | $ | 24,000 | $ | 7,399 | $ | 1,036 | $ | 1,048 | $ | 58 | $ | 50,242 | |||||||||||||||||||||||||||||||
Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2021 | $ | 16,629 | $ | — | $ | 23,143 | $ | 6,263 | $ | 847 | $ | 975 | $ | 83 | $ | 47,940 | |||||||||||||||||||||||||||||||
Provision for credit losses on loans | 627 | — | 1,134 | 1,144 | 189 | 73 | 23 | 3,190 | |||||||||||||||||||||||||||||||||||||||
Charge-offs | (956) | — | (327) | (63) | — | — | (48) | (1,394) | |||||||||||||||||||||||||||||||||||||||
Recoveries | 401 | — | 50 | 55 | — | — | — | 506 | |||||||||||||||||||||||||||||||||||||||
Net charge-offs | (555) | — | (277) | (8) | — | — | (48) | (888) | |||||||||||||||||||||||||||||||||||||||
Balance June 30, 2022 | $ | 16,701 | $ | — | $ | 24,000 | $ | 7,399 | $ | 1,036 | $ | 1,048 | $ | 58 | $ | 50,242 |
The total of the Company’s qualitative and quantitative factors ranged from 0.64% to 1.92% and 0.62% to 2.08% at September 30, 2022 and December 31, 2021, respectively. All factors are reassessed at the end of each quarter.
The review of the appropriateness of the ACL, which includes evaluation of historical loss trends, qualitative adjustments and forecasted economic conditions applied to general reserves, is performed by executive management and presented
16
Loans by risk grades, loan class and vintage, at September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| Prior | | Revolving Loans | | Converted Revolving Loans |
| Total | |||||||||
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 97,529 | | $ | 131,496 | | $ | 29,688 | | $ | 41,184 | | $ | 15,542 | | $ | 5,762 | | $ | 210,724 | | $ | 23,616 | | $ | 555,541 |
Substandard | | | — | | | — | | | — | | | 2,745 | | | 3,585 | | | 300 | | | 1,540 | | | 4,360 | | | 12,530 |
Total commercial and industrial | | | 97,529 | | | 131,496 | | | 29,688 | | | 43,929 | | | 19,127 | | | 6,062 | | | 212,264 | | | 27,976 | | | 568,071 |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 409,433 | | | 226,016 | | | 196,281 | | | 159,697 | | | 80,581 | | | 77,497 | | | 42,858 | | | 17,631 | | | 1,209,994 |
Special mention | | | — | | | — | | | — | | | — | | | 2,161 | | | — | | | — | | | — | | | 2,161 |
Substandard | | | — | | | 47 | | | 1,083 | | | 8,132 | | | 6,746 | | | 3,470 | | | — | | | 10,485 | | | 29,963 |
Total commercial real estate | | | 409,433 | | | 226,063 | | | 197,364 | | | 167,829 | | | 89,488 | | | 80,967 | | | 42,858 | | | 28,116 | | | 1,242,118 |
Construction and development: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 169,575 | | | 183,167 | | | 27,542 | | | 24,518 | | | 5,889 | | | 11,691 | | | 74,221 | | | 82 | | | 496,685 |
Special mention | | | 421 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 421 |
Substandard | | | — | | | — | | | 291 | | | — | | | 2,700 | | | 7,473 | | | — | | | — | | | 10,464 |
Total construction and development | | | 169,996 | | | 183,167 | | | 27,833 | | | 24,518 | | | 8,589 | | | 19,164 | | | 74,221 | | | 82 | | | 507,570 |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 64,430 | | | 107,974 | | | 19,278 | | | 11,647 | | | 22,871 | | | 48,751 | | | 7,289 | | | 246 | | | 282,486 |
Substandard | | | — | | | 1,310 | | | 1,548 | | | 494 | | | 891 | | | 226 | | | — | | | 1,501 | | | 5,970 |
Total 1-4 family residential | | | 64,430 | | | 109,284 | | | 20,826 | | | 12,141 | | | 23,762 | | | 48,977 | | | 7,289 | | | 1,747 | | | 288,456 |
Multi-family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 50,748 | | | 35,442 | | | 59,609 | | | 17,732 | | | 35,974 | | | 170,319 | | | 567 | | | — | | | 370,391 |
Total multi-family residential | | | 50,748 | | | 35,442 | | | 59,609 | | | 17,732 | | | 35,974 | | | 170,319 | | | 567 | | | — | | | 370,391 |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 5,356 | | | 3,290 | | | 2,485 | | | 558 | | | 446 | | | 48 | | | 12,095 | | | — | | | 24,278 |
Substandard | | | — | | | — | | | 34 | | | — | | | — | | | — | | | 197 | | | — | | | 231 |
Total consumer | | | 5,356 | | | 3,290 | | | 2,519 | | | 558 | | | 446 | | | 48 | | | 12,292 | | | — | | | 24,509 |
Agriculture: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 4,680 | | | 722 | | | 362 | | | 24 | | | 26 | | | 28 | | | 5,284 | | | — | | | 11,126 |
Substandard | | | — | | | — | | | — | | | — | | | — | | | 15 | | | 44 | | | — | | | 59 |
Total agriculture | | | 4,680 | | | 722 | | | 362 | | | 24 | | | 26 | | | 43 | | | 5,328 | | | — | | | 11,185 |
Other: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 22,473 | | | 34,745 | | | 1,198 | | | — | | | 1,255 | | | 1,149 | | | 62,770 | | | — | | | 123,590 |
Substandard | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | — | | | 1 |
Total other | | | 22,473 | | | 34,745 | | | 1,198 | | | 1 | | | 1,255 | | | 1,149 | | | 62,770 | | | — | | | 123,591 |
Total | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 824,224 | | | 722,852 | | | 336,443 | | | 255,360 | | | 162,584 | | | 315,245 | | | 415,808 | | | 41,575 | | | 3,074,091 |
Special mention | | | 421 | | | — | | | — | | | — | | | 2,161 | | | — | | | — | | | — | | | 2,582 |
Substandard | | | — | | | 1,357 | | | 2,956 | | | 11,372 | | | 13,922 | | | 11,484 | | | 1,781 | | | 16,346 | | | 59,218 |
Total gross loans | | $ | 824,645 | | $ | 724,209 | | $ | 339,399 | | $ | 266,732 | | $ | 178,667 | | $ | 326,729 | | $ | 417,589 | | $ | 57,921 | | $ | 3,135,891 |
17
Loans by risk grades, loan class and vintage, at December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior | | Revolving Loans | | Converted Revolving Loans |
| Total | |||||||||
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 230,432 | | $ | 53,744 | | $ | 60,514 | | $ | 21,059 | | $ | 8,117 | | $ | 5,533 | | $ | 228,247 | | $ | 5,773 | | $ | 613,419 |
Special mention | | | — | | | — | | | 290 | | | 15 | | | — | | | — | | | 3,177 | | | — | | | 3,482 |
Substandard | | | — | | | 1,014 | | | 1,852 | | | 7,075 | | | 4 | | | 391 | | | 1,647 | | | 5,500 | | | 17,483 |
Total commercial and industrial | | | 230,432 | | | 54,758 | | | 62,656 | | | 28,149 | | | 8,121 | | | 5,924 | | | 233,071 | | | 11,273 | | | 634,384 |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 243,666 | | | 197,625 | | | 232,074 | | | 141,591 | | | 69,995 | | | 84,398 | | | 55,253 | | | 13,799 | | | 1,038,401 |
Special mention | | | — | | | — | | | 859 | | | 7,934 | | | — | | | 62 | | | — | | | — | | | 8,855 |
Substandard | | | — | | | 2,953 | | | 12,967 | | | 14,556 | | | 334 | | | 3,046 | | | — | | | 10,857 | | | 44,713 |
Total commercial real estate | | | 243,666 | | | 200,578 | | | 245,900 | | | 164,081 | | | 70,329 | | | 87,506 | | | 55,253 | | | 24,656 | | | 1,091,969 |
Construction and development: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 197,900 | | | 99,420 | | | 54,017 | | | 7,127 | | | 16,133 | | | 142 | | | 72,698 | | | 96 | | | 447,533 |
Special mention | | | — | | | 470 | | | — | | | — | | | — | | | — | | | — | | | — | | | 470 |
Substandard | | | — | | | 292 | | | — | | | 1,500 | | | 10,207 | | | 717 | | | — | | | — | | | 12,716 |
Total construction and development | | | 197,900 | | | 100,182 | | | 54,017 | | | 8,627 | | | 26,340 | | | 859 | | | 72,698 | | | 96 | | | 460,719 |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 115,451 | | | 23,298 | | | 20,210 | | | 31,416 | | | 21,607 | | | 53,253 | | | 6,516 | | | 466 | | | 272,217 |
Substandard | | | — | | | 1,548 | | | 514 | | | 902 | | | 126 | | | 464 | | | 1,502 | | | — | | | 5,056 |
Total 1-4 family residential | | | 115,451 | | | 24,846 | | | 20,724 | | | 32,318 | | | 21,733 | | | 53,717 | | | 8,018 | | | 466 | | | 277,273 |
Multi-family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 16,744 | | | 18,236 | | | 6,473 | | | 58,750 | | | 9,784 | | | 167,033 | | | 9,376 | | | — | | | 286,396 |
Total multi-family residential | | | 16,744 | | | 18,236 | | | 6,473 | | | 58,750 | | | 9,784 | | | 167,033 | | | 9,376 | | | — | | | 286,396 |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 6,427 | | | 3,637 | | | 1,199 | | | 714 | | | 277 | | | 11 | | | 14,921 | | | 679 | | | 27,865 |
Substandard | | | — | | | 40 | | | — | | | — | | | — | | | — | | | 85 | | | 100 | | | 225 |
Total consumer | | | 6,427 | | | 3,677 | | | 1,199 | | | 714 | | | 277 | | | 11 | | | 15,006 | | | 779 | | | 28,090 |
Agriculture: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 2,954 | | | 423 | | | 42 | | | 57 | | | 35 | | | — | | | 4,198 | | | 190 | | | 7,899 |
Substandard | | | — | | | — | | | — | | | — | | | — | | | 18 | | | 24 | | | — | | | 42 |
Total agriculture | | | 2,954 | | | 423 | | | 42 | | | 57 | | | 35 | | | 18 | | | 4,222 | | | 190 | | | 7,941 |
Other: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 27,656 | | | 3,744 | | | 630 | | | 1,509 | | | 10 | | | 2,157 | | | 53,906 | | | 43 | | | 89,655 |
Total other | | | 27,656 | | | 3,744 | | | 630 | | | 1,509 | | | 10 | | | 2,157 | | | 53,906 | | | 43 | | | 89,655 |
Total | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 841,230 | | | 400,127 | | | 375,159 | | | 262,223 | | | 125,958 | | | 312,527 | | | 445,115 | | | 21,046 | | | 2,783,385 |
Special mention | | | — | | | 470 | | | 1,149 | | | 7,949 | | | — | | | 62 | | | 3,177 | | | — | | | 12,807 |
Substandard | | | — | | | 5,847 | | | 15,333 | | | 24,033 | | | 10,671 | | | 4,636 | | | 3,258 | | | 16,457 | | | 80,235 |
Total gross loans | | $ | 841,230 | | $ | 406,444 | | $ | 391,641 | | $ | 294,205 | | $ | 136,629 | | $ | 317,225 | | $ | 451,550 | | $ | 37,503 | | $ | 2,876,427 |
18
Loans by risk grades and loan class as of the dates indicated below were as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(Dollars in thousands) |
| Pass |
| Special Mention |
| Substandard |
| Total Loans | ||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 555,541 | | $ | — | | $ | 12,530 | | $ | 568,071 |
Real estate: | |
| | | | | | | | |
|
|
Commercial real estate | |
| 1,209,994 | | | 2,161 | | | 29,963 | |
| 1,242,118 |
Construction and development | |
| 496,685 | | | 421 | | | 10,464 | |
| 507,570 |
1-4 family residential | |
| 282,486 | | | — | | | 5,970 | |
| 288,456 |
Multi-family residential | |
| 370,391 | | | — | | | — | |
| 370,391 |
Consumer | |
| 24,278 | | | — | | | 231 | |
| 24,509 |
Agriculture | |
| 11,126 | | | — | | | 59 | |
| 11,185 |
Other | |
| 123,590 | | | — | | | 1 | |
| 123,591 |
Total gross loans | | $ | 3,074,091 | | $ | 2,582 | | $ | 59,218 | | $ | 3,135,891 |
December 31, 2021 |
| |
|
| |
|
| |
|
| |
|
Commercial and industrial | | $ | 613,419 | | $ | 3,482 | | $ | 17,483 | | $ | 634,384 |
Real estate: | |
| | | | | | | | |
|
|
Commercial real estate | |
| 1,038,401 | | | 8,855 | | | 44,713 | |
| 1,091,969 |
Construction and development | |
| 447,533 | | | 470 | | | 12,716 | |
| 460,719 |
1-4 family residential | |
| 272,217 | | | — | | | 5,056 | |
| 277,273 |
Multi-family residential | |
| 286,396 | | | — | | | — | |
| 286,396 |
Consumer | |
| 27,865 | | | — | | | 225 | |
| 28,090 |
Agriculture | |
| 7,899 | | | — | | | 42 | |
| 7,941 |
Other | |
| 89,655 | | | — | | | — | |
| 89,655 |
Total gross loans | | $ | 2,783,385 | | $ | 12,807 | | $ | 80,235 | | $ | 2,876,427 |
Loans individually evaluated and collectively evaluated as of the dates indicated below were as follows:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | ||||||||||||||
| | Individually | | Collectively | | | | | Individually | | Collectively | | | | ||||
| | Evaluated | | Evaluated | | Total | | Evaluated | | Evaluated | | Total | ||||||
(Dollars in thousands) |
| Loans |
| Loans |
| Loans |
| Loans |
| Loans |
| Loans | ||||||
Commercial and industrial | | $ | 10,932 | | $ | 557,139 | | $ | 568,071 | | $ | 16,579 | | $ | 617,805 | | $ | 634,384 |
Real estate: | |
| | | |
| |
|
| |
| | |
|
| |
|
|
Commercial real estate | |
| 18,705 | | | 1,223,413 | |
| 1,242,118 | |
| 21,057 | |
| 1,070,912 | |
| 1,091,969 |
Construction and development | |
| 10,464 | | | 497,106 | |
| 507,570 | |
| 12,716 | |
| 448,003 | |
| 460,719 |
1-4 family residential | |
| 3,202 | | | 285,254 | |
| 288,456 | |
| 3,355 | |
| 273,918 | |
| 277,273 |
Multi-family residential | |
| — | | | 370,391 | |
| 370,391 | |
| — | |
| 286,396 | |
| 286,396 |
Consumer | |
| 116 | | | 24,393 | |
| 24,509 | |
| 125 | |
| 27,965 | |
| 28,090 |
Agriculture | |
| — | | | 11,185 | |
| 11,185 | |
| — | |
| 7,941 | |
| 7,941 |
Other | |
| 8,523 | | | 115,068 | |
| 123,591 | |
| 5,440 | |
| 84,215 | |
| 89,655 |
Total gross loans | | $ | 51,942 | | $ | 3,083,949 | | $ | 3,135,891 | | $ | 59,272 | | $ | 2,817,155 | | $ | 2,876,427 |
The Company had collateral dependent loans totaling $1.5 million pending foreclosure at both September 30, 2022 and December 31, 2021.
19
Activity in the ACL for loans, segregated by loan class for the nine months ended September 30, 2022 and 2021, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Real Estate | | | | | | | | | | | | | ||||||||||
| | Commercial | | | | Construction | | | | | | | | | | | | | | | | | | | |||
| | and | | Commercial | | and | | 1-4 Family | | Multi-family | | | | | | | | | | | | | |||||
(Dollars in thousands) |
| Industrial |
| Real Estate |
| Development |
| Residential |
| Residential |
| Consumer |
| Agriculture |
| Other |
| Total | |||||||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
| |
|
| | |
| |
|
| |
|
| |
|
Beginning balance | | $ | 11,214 | | $ | 11,015 | | $ | 3,310 | | $ | 2,105 | | $ | 1,781 | | $ | 406 | | $ | 88 | | $ | 1,426 | | $ | 31,345 |
Provision (recapture) | |
| (2,101) | | | 1,195 | | | 654 | | | 152 | | | 723 | | | 22 | | | 24 | | | 353 | |
| 1,022 |
Charge-offs | |
| (44) | | | (25) | | | — | | | (8) | | | — | | | (63) | | | — | | | — | |
| (140) |
Recoveries | |
| 328 | | | — | | | — | | | 6 | | | — | | | 6 | | | 10 | | | — | |
| 350 |
Net recoveries | |
| 284 | |
| (25) | |
| — | |
| (2) | |
| — | |
| (57) | |
| 10 | |
| — | |
| 210 |
Ending balance | | $ | 9,397 | | $ | 12,185 | | $ | 3,964 | | $ | 2,255 | | $ | 2,504 | | $ | 371 | | $ | 122 | | $ | 1,779 | | $ | 32,577 |
Period-end amount allocated to: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Specific reserve | | $ | 2,517 | | $ | 28 | | $ | — | | $ | — | | $ | — | | $ | 116 | | $ | — | | $ | — | | $ | 2,661 |
General reserve | |
| 6,880 | |
| 12,157 | |
| 3,964 | |
| 2,255 | |
| 2,504 | |
| 255 | |
| 122 | |
| 1,779 | |
| 29,916 |
Total | | $ | 9,397 | | $ | 12,185 | | $ | 3,964 | | $ | 2,255 | | $ | 2,504 | | $ | 371 | | $ | 122 | | $ | 1,779 | | $ | 32,577 |
September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 13,035 | | $ | 13,798 | | $ | 6,089 | | $ | 2,578 | | $ | 2,513 | | $ | 440 | | $ | 137 | | $ | 2,047 | | $ | 40,637 |
Provision (recapture) | |
| (2,028) | |
| (2,054) | |
| (2,755) | |
| (875) | |
| (357) | |
| (85) | |
| (75) | |
| (732) | |
| (8,961) |
Charge-offs | |
| (495) | |
| — | |
| — | |
| (3) | |
| — | |
| (13) | |
| — | |
| — | |
| (511) |
Recoveries | |
| 889 | |
| — | |
| — | |
| — | |
| — | |
| 107 | |
| 47 | |
| — | |
| 1,043 |
Net (charge-offs) recoveries | |
| 394 | |
| — | |
| — | |
| (3) | |
| — | |
| 94 | |
| 47 | |
| — | |
| 532 |
Ending balance | | $ | 11,401 | | $ | 11,744 | | $ | 3,334 | | $ | 1,700 | | $ | 2,156 | | $ | 449 | | $ | 109 | | $ | 1,315 | | $ | 32,208 |
Period-end amount allocated to: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Specific reserve | | $ | 4,343 | | $ | 670 | | $ | — | | $ | — | | $ | — | | $ | 131 | | $ | — | | $ | — | | $ | 5,144 |
General reserve | |
| 7,058 | |
| 11,074 | |
| 3,334 | |
| 1,700 | |
| 2,156 | |
| 318 | |
| 109 | |
| 1,315 | |
| 27,064 |
Total | | $ | 11,401 | | $ | 11,744 | | $ | 3,334 | | $ | 1,700 | | $ | 2,156 | | $ | 449 | | $ | 109 | | $ | 1,315 | | $ | 32,208 |
The ACL for loans by loan class as of the dates indicated was as follows:
| | | | | | | | | | | | |
| | | | | ||||||||
| | September 30, 2022 | | December 31, 2021 | ||||||||
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | ||||
Commercial and industrial | | $ | 9,397 |
| 28.9 | % | | $ | 11,214 |
| 35.7 | % |
Real estate: | |
| |
| | | |
|
|
| | |
Commercial real estate | |
| 12,185 |
| 37.4 | % | |
| 11,015 |
| 35.1 | % |
Construction and development | |
| 3,964 |
| 12.2 | % | |
| 3,310 |
| 10.6 | % |
1-4 family residential | |
| 2,255 |
| 6.9 | % | |
| 2,105 |
| 6.7 | % |
Multi-family residential | |
| 2,504 |
| 7.7 | % | |
| 1,781 |
| 5.7 | % |
Consumer | |
| 371 |
| 1.1 | % | |
| 406 |
| 1.3 | % |
Agriculture | |
| 122 |
| 0.4 | % | |
| 88 |
| 0.3 | % |
Other | |
| 1,779 |
| 5.4 | % | |
| 1,426 |
| 4.6 | % |
Total allowance for credit losses for loans | | $ | 32,577 |
| 100.0 | % | | $ | 31,345 |
| 100.0 | % |
Loans excluding loans held for sale | | 3,126,421 | | | | | | 2,867,524 | | | | |
ACL for loans to loans excluding loans held for sale | | 1.04% | | | | | | 1.09% | | | |
Allocation of a portion of the ACL to one class of loans above does not preclude its availability to absorb lossesunfunded commitments, classified in other classes.
Nonaccrual loans are includedliabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in individually evaluated loans and $15.9 million and $16.0 million of nonaccrual loans had no related ACL at September 30, 2022 and December 31, 2021, respectively.
20
Charge-offs and recoveries by loan class and vintage for the nine months ended September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2020 |
| 2019 | | 2018 | | Prior | | Revolving Loans | | Converted Revolving Loans |
| Total | |||||||||
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | $ | (43) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (1) | | $ | — | | $ | — | | $ | (44) |
Recovery | | | 1 | | | — | | | — | | | — | | | 207 | | | 55 | | | 65 | | | — | | | 328 |
Total commercial and industrial | | | (42) | | | — | | | — | | | — | | | 207 | | | 54 | | | 65 | | | — | | | 284 |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | | — | | | — | | | — | | | (25) | | | — | | | — | | | — | | | — | | | (25) |
Total commercial real estate loans | | | — | | | — | | | — | | | (25) | | | — | | | — | | | — | | | — | | | (25) |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | | — | | | — | | | — | | | — | | | (2) | | | (6) | | | — | | | — | | | (8) |
Recovery | | | — | | | — | | | — | | | — | | | — | | | 6 | | | — | | | — | | | 6 |
Total 1-4 family residential | | | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | — | | | (2) |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | | — | | | — | | | (12) | | | — | | | — | | | — | | | (1) | | | (50) | | | (63) |
Recovery | | | — | | | — | | | — | | | 1 | | | — | | | 3 | | | — | | | 2 | | | 6 |
Total consumer | | | — | | | — | | | (12) | | | 1 | | | — | | | 3 | | | (1) | | | (48) | | | (57) |
Agriculture: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recovery | | | — | | | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | 10 |
Total agriculture | | | — | | | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | 10 |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | | (43) | | | — | | | (12) | | | (25) | | | (2) | | | (7) | | | (1) | | | (50) | | | (140) |
Recovery | | | 1 | | | — | | | — | | | 1 | | | 207 | | | 74 | | | 65 | | | 2 | | | 350 |
Total | | $ | (42) | | $ | — | | $ | (12) | | $ | (24) | | $ | 205 | | $ | 67 | | $ | 64 | | $ | (48) | | $ | 210 |
Charge-offs and recoveries by loan class and vintage for the nine months ended September 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) |
| 2021 |
| 2020 |
| 2019 |
| 2018 | | 2017 | | Prior | | Revolving Loans | | Converted Revolving Loans |
| Total | |||||||||
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | $ | — | | $ | — | | $ | (191) | | $ | (260) | | $ | — | | $ | — | | $ | — | | $ | (44) | | $ | (495) |
Recovery | | | — | | | — | | | 5 | | | 39 | | | 43 | | | 762 | | | | | | 40 | | | 889 |
Total commercial and industrial | | | — | | | — | | | (186) | | | (221) | | | 43 | | | 762 | | | — | | | (4) | | | 394 |
1-4 family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) |
Total 1-4 family residential | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | | (10) | | | — | | | (3) | | | — | | | — | | | — | | | — | | | — | | | (13) |
Recovery | | | 4 | | | — | | | 4 | | | — | | | — | | | 99 | | | — | | | — | | | 107 |
Total consumer | | | (6) | | | — | | | 1 | | | — | | | — | | | 99 | | | — | | | — | | | 94 |
Agriculture: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recovery | | | — | | | — | | | — | | | — | | | — | | | 47 | | | — | | | — | | | 47 |
Total agriculture | | | — | | | — | | | — | | | — | | | — | | | 47 | | | — | | | — | | | 47 |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charge-off | | | (10) | | | — | | | (194) | | | (260) | | | — | | | (3) | | | — | | | (44) | | | (511) |
Recovery | | | 4 | | | — | | | 9 | | | 39 | | | 43 | | | 908 | | | — | | | 40 | | | 1,043 |
Total | | $ | (6) | | $ | — | | $ | (185) | | $ | (221) | | $ | 43 | | $ | 905 | | $ | — | | $ | (4) | | $ | 532 |
The Company has unfunded commitments, comprised of letters ofwhich there is exposure to credit and commitmentsrisk via a contractual obligation to extend credit, unless that are notobligation is unconditionally cancellable by the Company. See Note 16: CommitmentsThe estimate includes consideration of the likelihood that funding will occur and Contingenciesan estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and Financial
21
Instruments with Off-Balance-Sheet Risk. Unfunded commitments have similar characteristics as loans and their ACL was determined using the model and methodologydrivers. The allowance for loans noted above as well as historical and expected utilization levels. Activity in the ACL forcredit losses on unfunded commitments foras of June 30, 2023 and December 31, 2022 was $10.1 million and $12.0 million, respectively. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The Company recorded a $2.3 million reversal of provision on unfunded commitments during the ninethree months ended SeptemberJune 30, 2022 and 2021, was as follows:
| | | | | | |
| | Nine Months Ended September 30, | ||||
(Dollars in thousands) | | | 2022 | | | 2021 |
Beginning balance | | $ | 3,266 | | $ | 4,177 |
Provision (recapture) | | | 551 | |
| (605) |
Ending balance | | $ | 3,817 | | $ | 3,572 |
NOTE 7: PREMISES AND EQUIPMENT
The components2023 compared to a provision of premises and equipment as of the dates indicated below were as follows:
| | | | | | |
(Dollars in thousands) | | September 30, 2022 | | December 31, 2021 | ||
Land | | $ | 15,484 | | $ | 15,484 |
Buildings and leasehold improvements | |
| 62,260 | |
| 64,298 |
Furniture and equipment | |
| 17,619 | |
| 17,087 |
Vehicles | |
| 248 | |
| 248 |
Construction in progress | |
| 476 | |
| 496 |
| | | 96,087 | | | 97,613 |
Less accumulated depreciation | | | (40,493) | | | (39,196) |
Premises and equipment, net | | $ | 55,594 | | $ | 58,417 |
Depreciation expense was $2.5 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively and $842,000 and $871,000$544 thousand for the three months ended SeptemberJune 30, 2022 and 2021, respectively. Depreciation expenserecorded a $1.9 million reversal of provision on unfunded commitments for the six months ended June 30, 2023 compared to a provision of $767 thousand for the six months ended June 30, 2022.
During the nine months ended Septembercollateral dependent loans, which are individually evaluated to determine expected credit losses as of June 30, 2022, the Company recorded a loss of $1.2 million, which is included in net gains on sales of assets in the condensed consolidated income statement, for disposals of buildings and improvements and furniture and equipment for a land lease that was terminated early at the request of the lessor.
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $81.0 million at September 30, 20222023 and December 31, 2021 and there were no changes in goodwill during the nine months ended September 30, 2022 or the year ended December 31, 2021. Based2022:
As of June 30, 2023 | |||||||||||||||||||||||
Real Estate | Business Assets | Other | Total | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commercial and industrial | $ | — | $ | 15,718 | $ | — | $ | 15,718 | |||||||||||||||
Real estate: | |||||||||||||||||||||||
Commercial real estate (including multi-family residential) | 4,715 | — | — | 4,715 | |||||||||||||||||||
Commercial real estate construction and land development | 174 | — | — | 174 | |||||||||||||||||||
1-4 family residential (including home equity) | 2,093 | — | — | 2,093 | |||||||||||||||||||
Residential construction | 665 | — | — | 665 | |||||||||||||||||||
Consumer and other | — | — | — | — | |||||||||||||||||||
Total | $ | 7,647 | $ | 15,718 | $ | — | $ | 23,365 |
As of December 31, 2022 | |||||||||||||||||||||||
Real Estate | Business Assets | Other | Total | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commercial and industrial | $ | — | $ | 18,411 | $ | 30 | $ | 18,441 | |||||||||||||||
Real estate: | |||||||||||||||||||||||
Commercial real estate (including multi-family residential) | 1,612 | — | — | 1,612 | |||||||||||||||||||
Commercial real estate construction and land development | — | — | — | — | |||||||||||||||||||
1-4 family residential (including home equity) | 3,478 | — | — | 3,478 | |||||||||||||||||||
Residential construction | — | — | — | — | |||||||||||||||||||
Consumer and other | — | — | — | — | |||||||||||||||||||
Total | $ | 5,090 | $ | 18,411 | $ | 30 | $ | 23,531 |
Other intangiblesnonaccrual loans as of the dates indicated below were as follows:
| | | | | | | | | | | |
|
| Weighted- |
| |
| | |
| | | |
| | Average | | | | | | | | | |
| | Remaining | | Gross | | | | | Net | ||
| | Amortization | | Intangible | | Accumulated | | Intangible | |||
(Dollars in thousands) | | Period | | Assets | | Amortization | | Assets | |||
September 30, 2022 |
| |
| |
|
| |
|
| |
|
Core deposits | | 1.9 years | | $ | 13,750 | | | (13,653) | | $ | 97 |
Customer relationships | | 6.3 years | |
| 6,629 | |
| (3,866) | |
| 2,763 |
Servicing assets | | 7.3 years | |
| 672 | |
| (344) | |
| 328 |
Total other intangible assets, net | | | | $ | 21,051 | | $ | (17,863) | | $ | 3,188 |
December 31, 2021 | | | |
|
| |
|
| |
|
|
Core deposits | | 2.4 years | | $ | 13,750 | | $ | (13,538) | | $ | 212 |
Customer relationships | | 7.0 years | |
| 6,629 | |
| (3,535) | |
| 3,094 |
Servicing assets | | 11.5 years | |
| 624 | |
| (272) | |
| 352 |
Total other intangible assets, net | | | | $ | 21,003 | | $ | (17,345) | | $ | 3,658 |
22
Servicing Assets
Changes in servicing assets as of the dates indicated below were as follows:
| | | | | | |
| | | ||||
| | Nine Months Ended September 30, | ||||
(Dollars in thousands) |
| 2022 | | 2021 | ||
Balance at beginning of year | | $ | 352 | | $ | 190 |
Increase from loan sales | |
| 62 | |
| 92 |
Decrease from serviced loans paid off or foreclosed | | | (14) | | | (2) |
Amortization | |
| (72) | |
| (44) |
Balance at end of period | | $ | 328 | | $ | 236 |
NOTE 9: BANK-OWNED LIFE INSURANCE
During the nine months ended SeptemberJune 30, 2021, the Company received proceeds in the amount of $2.7 million as the owner and beneficiary under a bank-owned insurance policy as the result of claims submitted on a covered individual and the Company recorded a gain of $1.9 million.
Bank-owned life insurance policies and the net change in cash surrender value during the periods indicated below were as follows:
| | | | | | |
| | Nine Months Ended September 30, | ||||
(Dollars in thousands) |
| 2022 | | 2021 | ||
Balance at beginning of period | | $ | 73,156 | | $ | 72,338 |
Redemptions | | | — | | | (2,670) |
Net change in cash surrender value | | | 1,118 | | | 3,103 |
Balance at end of period | | $ | 74,274 | | $ | 72,771 |
NOTE 10: DEPOSITS
Deposits as of the dates indicated below were as follows:
| | | | | | |
(Dollars in thousands) | | September 30, 2022 | | December 31, 2021 | ||
Interest-bearing demand accounts | | $ | 415,970 | | $ | 468,361 |
Money market accounts | |
| 1,144,969 | |
| 1,209,659 |
Savings accounts | |
| 128,886 | |
| 127,031 |
Certificates and other time deposits, $100,000 or greater | |
| 161,975 | |
| 134,775 |
Certificates and other time deposits, less than $100,000 | |
| 91,501 | |
| 106,477 |
Total interest-bearing deposits | | | 1,943,301 | | | 2,046,303 |
Noninterest-bearing deposits | | | 1,780,473 | | | 1,784,981 |
Total deposits | | $ | 3,723,774 | | $ | 3,831,284 |
At September 30, 20222023 and December 31, 2021,2022.
As of June 30, 2023 | |||||||||||||||||
Nonaccrual Loans with No Related Allowance | Nonaccrual Loans with Related Allowance | Total Nonaccrual Loans | |||||||||||||||
(In thousands) | |||||||||||||||||
Commercial and industrial | $ | 1,487 | $ | 21,313 | $ | 22,800 | |||||||||||
Paycheck Protection Program (PPP) | 168 | — | 168 | ||||||||||||||
Real estate: | |||||||||||||||||
Commercial real estate (including multi-family residential) | 6,983 | 1,238 | 8,221 | ||||||||||||||
Commercial real estate construction and land development | 388 | — | 388 | ||||||||||||||
1-4 family residential (including home equity) | 7,300 | 3,580 | 10,880 | ||||||||||||||
Residential construction | 665 | — | 665 | ||||||||||||||
Consumer and other | 60 | 167 | 227 | ||||||||||||||
Total loans | $ | 17,051 | $ | 26,298 | $ | 43,349 |
As of December 31, 2022 | |||||||||||||||||
Nonaccrual Loans with No Related Allowance | Nonaccrual Loans with Related Allowance | Total Nonaccrual Loans | |||||||||||||||
(In thousands) | |||||||||||||||||
Commercial and industrial | $ | 2,776 | $ | 22,521 | $ | 25,297 | |||||||||||
Paycheck Protection Program (PPP) | 105 | — | 105 | ||||||||||||||
Real estate: | |||||||||||||||||
Commercial real estate (including multi-family residential) | 8,704 | 1,266 | 9,970 | ||||||||||||||
Commercial real estate construction and land development | — | — | — | ||||||||||||||
1-4 family residential (including home equity) | 4,856 | 4,548 | 9,404 | ||||||||||||||
Residential construction | — | — | — | ||||||||||||||
Consumer and other | 94 | 178 | 272 | ||||||||||||||
Total loans | $ | 16,535 | $ | 28,513 | $ | 45,048 |
Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
Interest Rate Reduction | Term Extension | Payment Delay | Principal forgiveness | Combination Term Extension and Principal Forgiveness | Combination Term Extension and Payment Delay | Total | ||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 260 | $ | 260 | ||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | — | — | — | — | — | 1,710 | 1,710 | |||||||||||||||||||||||||||||||||||||
Commercial real estate construction and land development | — | 6,950 | — | — | — | — | 6,950 | |||||||||||||||||||||||||||||||||||||
1-4 family residential (including home equity) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Residential construction | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Consumer and other | — | 96 | — | — | — | — | 96 | |||||||||||||||||||||||||||||||||||||
Total | $ | — | $ | 7,046 | $ | — | $ | — | $ | — | $ | 1,970 | $ | 9,016 |
23
NOTE 11: LINES OF CREDIT
Line
Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
Interest Rate Reduction | Term Extension | Payment Delay | Principal forgiveness | Combination Term Extension and Principal Forgiveness | Combination Term Extension and Payment Delay | Total | ||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 92 | $ | 2,251 | $ | — | $ | — | $ | — | $ | 260 | $ | 2,603 | ||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | — | — | 790 | — | — | 1,710 | 2,500 | |||||||||||||||||||||||||||||||||||||
Commercial real estate construction and land development | — | 6,950 | — | — | — | — | 6,950 | |||||||||||||||||||||||||||||||||||||
1-4 family residential (including home equity) | — | 721 | — | — | — | — | 721 | |||||||||||||||||||||||||||||||||||||
Residential construction | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Consumer and other | — | 96 | — | — | — | — | 96 | |||||||||||||||||||||||||||||||||||||
Total | $ | 92 | $ | 10,018 | $ | 790 | $ | — | $ | — | $ | 1,970 | $ | 12,870 |
Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | ||||||||||||||||||||||
Weighted Average Interest Rate Reduction | Weighted Average Term Extension | Weighted Average Interest Rate Reduction | Weighted Average Term Extension | ||||||||||||||||||||
(months) | (months) | ||||||||||||||||||||||
Commercial and industrial(1) | — | % | 12 | 2.0 | % | 12 | |||||||||||||||||
Real estate: | |||||||||||||||||||||||
Commercial real estate (including multi-family residential) | — | % | 12 | — | % | 12 | |||||||||||||||||
Commercial real estate construction and land development | — | % | 12 | — | % | 12 | |||||||||||||||||
1-4 family residential (including home equity) | — | % | — | — | % | 12 | |||||||||||||||||
Residential construction | — | % | — | — | % | — | |||||||||||||||||
Consumer and other | — | % | 4 | — | % | 4 |
The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a valid and perfected first priority lien on all of the issued and outstanding shares of capital stock of the Bank.
Covenants made under the Loan Agreement include, among other things, the Company maintaining tangible net worth of not less than $300.0 million, the Company maintaining a free cash flow coverage ratio of not less than 1.25 to 1.00, the Bank Texas Ratio (as defined in the Loan Agreement) not to exceed 15%, the Bank’s Total Capital Ratio (as defined under the Loan Agreement) of not less than 12% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. The Company was in compliance with these covenants at September 30, 2022.
Additional Lines of Credit
The Federal Home Loan Bank allows the Company to borrow on a blanket floating lien status collateralized by certain loans and the blanket lien amount was $1.2 billion at September 30, 2022 and $999.3 million at December 31, 2021. Federal Home Loan Bank advances outstanding totaled $50.0 million at December 31, 2021. These borrowings were paid in fullborrowers experiencing financial difficulty during the ninethree and six months ended SeptemberJune 30, 2022. At September 30, 2022 and December 31, 2021, there were $27.0 million and $26.0 million, respectively, of letters of credit outstanding that were issued under this agreement and used as collateral to secure certain public deposits. After considering the outstanding advances and letters of credit, the net capacity available under the Federal Home Loan Bank facility was $1.2 billion at September 30, 2022 and $923.3 million at December 31, 2021.
2023:
Interest Rate Reduction | Term Extension | Payment Delay | Principal forgiveness | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||
Commercial and industrial | $ | 92 | $ | 670 | $ | — | $ | — | ||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | — | — | — | — | ||||||||||||||||||||||
Commercial real estate construction and land development | — | — | — | — | ||||||||||||||||||||||
1-4 family residential (including home equity) | — | 721 | — | — | ||||||||||||||||||||||
Residential construction | — | — | — | — | ||||||||||||||||||||||
Consumer and other | — | — | — | — | ||||||||||||||||||||||
$ | 92 | $ | 1,391 | $ | — | $ | — |
At September 30, 2022 and December 31, 2021, the Company maintained federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $45.0 million and $65.0 million, respectively. There were no funds under these lines of credit outstanding at September 30, 2022 or December 31, 2021.
NOTE 12: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company, through the Bank, has and expects to continue to conduct routine banking business with related parties, including its executive officers and directors. Related parties also include shareholders and their affiliates who directly or indirectly have 5% or more beneficial ownership in the Company.
Loans—In the opinion of management,following table presents information regarding loans to related parties were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Company. The Company had approximately $109.6 million and $138.1 million in loans to related parties at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022 and December 31, 2021, there were no loans made to related parties deemed nonaccrual, past due, restructuredmodified in a troubled debt restructuring during the three and six months ended June 30, 2022:
Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||
Number of Contracts | Pre-modifications of Outstanding Recorded Investment | Post-modifications of Outstanding Recorded Investment | Number of Contracts | Pre-modifications of Outstanding Recorded Investment | Post-modifications of Outstanding Recorded Investment | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Troubled Debt Restructurings | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 3 | $ | 544 | $ | 544 | 3 | $ | 544 | $ | 544 | |||||||||||||||||||||||||
Real estate: | |||||||||||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | — | — | — | 4 | 1,207 | 1,207 | |||||||||||||||||||||||||||||
Total | 3 | $ | 544 | $ | 544 | 7 | $ | 1,751 | $ | 1,751 |
the lease is within the last two years of the existing lease term. When the Company is reasonably certain that a renewal option will be exercised, it measures/remeasures the right-of-use asset and related lease liability using the lease payments specified for the renewal period or, if such amounts are unspecified, the Company generally assumes an increase (evaluated on a case-by-case basis in light of prevailing market conditions) in the lease payment over the final period of the existing lease term.
June 30, 2023 | December 31, 2022 | ||||||||||
(Dollars in thousands) | |||||||||||
Balance Sheet: | |||||||||||
Operating lease right of use asset classified as premises and equipment | $ | 21,451 | $ | 23,538 | |||||||
Operating lease liability classified as other liabilities | $ | 21,098 | $ | 23,136 | |||||||
Weighted average lease term, in years | 7.99 | 8.18 | |||||||||
Weighted average discount rate | 4.10 | % | 4.00 | % |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Income Statement: | |||||||||||||||||||||||
Operating lease cost | $ | 1,579 | $ | 831 | $ | 3,393 | $ | 1,723 | |||||||||||||||
Short-term lease cost | 10 | — | 15 | — | |||||||||||||||||||
Total operating lease costs | $ | 1,589 | $ | 831 | $ | 3,408 | $ | 1,723 |
June 30, 2023 | December 31, 2022 | ||||||||||
(In thousands) | |||||||||||
Lease payments due: | |||||||||||
Within one year | $ | 2,296 | $ | 4,634 | |||||||
After one but within two years | 4,121 | 4,121 | |||||||||
After two but within three years | 3,684 | 3,684 | |||||||||
After three but within four years | 3,130 | 3,132 | |||||||||
After four but within five years | 2,918 | 2,918 | |||||||||
After five years | 9,303 | 9,303 | |||||||||
Total lease payments | 25,452 | 27,792 | |||||||||
Less: discount on cash flows | 4,354 | 4,656 | |||||||||
Total lease liability | $ | 21,098 | $ | 23,136 |
24
Inputs to valuation techniques refer toreliability of the assumptions used in pricing the asset or liability. Valuation inputs are categorized in a three-level hierarchy, that gives the highest priority to quoteddetermine fair value. These levels are:
Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access atas of the measurement date.
During the nine months ended September 30, 2022 and the year ended December 31, 2021, there were no balance sheet are as follows:
As of June 30, 2023 | |||||||||||||||||||||||||||||
Estimated Fair Value | |||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 304,089 | $ | 304,089 | $ | — | $ | — | $ | 304,089 | |||||||||||||||||||
Available for sale securities | 1,478,222 | — | 1,478,222 | — | 1,478,222 | ||||||||||||||||||||||||
Loans held for investment, net of allowance | 7,968,523 | — | — | 7,713,018 | 7,713,018 | ||||||||||||||||||||||||
Accrued interest receivable | 42,051 | 163 | 6,745 | 35,143 | 42,051 | ||||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||||||
Deposits | $ | 8,766,369 | $ | — | $ | 8,754,102 | $ | — | $ | 8,754,102 | |||||||||||||||||||
Accrued interest payable | 4,555 | — | 4,555 | — | 4,555 | ||||||||||||||||||||||||
Borrowed funds | 369,963 | — | 369,990 | — | 369,990 | ||||||||||||||||||||||||
Subordinated debt | 109,566 | — | 108,029 | — | 108,029 |
As of December 31, 2022 | |||||||||||||||||||||||||||||
Estimated Fair Value | |||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 371,705 | $ | 371,705 | $ | — | $ | — | $ | 371,705 | |||||||||||||||||||
Available for sale securities | 1,807,586 | — | 1,807,586 | — | 1,807,586 | ||||||||||||||||||||||||
Loans held for investment, net of allowance | 7,661,571 | — | — | 7,555,602 | 7,555,602 | ||||||||||||||||||||||||
Accrued interest receivable | 44,743 | 25 | 10,585 | 34,133 | 44,743 | ||||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||||||
Deposits | $ | 9,267,632 | $ | — | $ | 9,256,141 | $ | — | $ | 9,256,141 | |||||||||||||||||||
Accrued interest payable | 2,098 | — | 2,098 | — | 2,098 | ||||||||||||||||||||||||
Borrowed funds | 63,925 | — | 63,999 | — | 63,999 | ||||||||||||||||||||||||
Subordinated debt | 109,367 | — | 107,910 | — | 107,910 |
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in different estimates of fair value. Fair value estimates are based on judgments regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Financial Instruments Measured at Fair Value on a Recurring Basis
The Company’svalues for assets and liabilities measured at fair value on a recurring basis include the following:
Debt Securities Available for Sale—Debt securities classified as available for sale are recorded at fair value. For those debt securities classified as Level 1 and Level 2, 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, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies for reasonableness.
Equity Securities—Equity securities are recorded at fair value and the fair value measurements are based on observable data obtained from a third-party pricing service. The Company reviews the prices supplied by the service against publicly available information. The equity securities are mutual funds publicly traded on the National Association of Securities Dealers Automated Quotations and the fair value is determined by using unadjusted quoted market prices which are considered Level 1 inputs.
Interest Rate Swaps—The Company obtains fair value measurements for its interest rate swaps from an
25
independent pricing service which uses the income approach. The income approach calls for the utilization of valuation techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single present value amount. Measurement is based on the value indicated by the market expectations about those future amounts as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from industry standard analytic tools, considering both Level 1 and Level 2 inputs. Interest rate swaps are classified as Level 2.
Financial assets and financialbasis. There were no liabilities measured at fair value on a recurring basis as of June 30, 2023.
June 30, 2023 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||
Available for sale securities: | |||||||||||||||||||||||
U.S. government and agency securities | $ | — | $ | 404,882 | $ | — | $ | 404,882 | |||||||||||||||
Municipal securities | — | 229,198 | — | 229,198 | |||||||||||||||||||
Agency mortgage-backed pass-through securities | — | 344,381 | — | 344,381 | |||||||||||||||||||
Agency collateralized mortgage obligations | — | 388,772 | — | 388,772 | |||||||||||||||||||
Corporate bonds and other | — | 110,989 | — | 110,989 | |||||||||||||||||||
Interest rate swaps | — | — | 8,841 | 8,841 | |||||||||||||||||||
Credit risk participation agreements | — | — | 23 | 23 | |||||||||||||||||||
Total fair value of financial assets | $ | — | $ | 1,478,222 | $ | 8,864 | $ | 1,487,086 | |||||||||||||||
Financial liabilities | |||||||||||||||||||||||
Interest rate swaps | $ | — | $ | — | $ | 8,841 | $ | 8,841 | |||||||||||||||
Total fair value of financial liabilities | $ | — | $ | — | $ | 8,841 | $ | 8,841 |
December 31, 2022 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||
Available for sale securities: | |||||||||||||||||||||||
U.S. government and agency securities | $ | — | $ | 414,280 | $ | — | $ | 414,280 | |||||||||||||||
Municipal securities | — | 540,569 | — | 540,569 | |||||||||||||||||||
Agency mortgage-backed pass-through securities | — | 328,801 | — | 328,801 | |||||||||||||||||||
Agency collateralized mortgage obligations | — | 394,130 | — | 394,130 | |||||||||||||||||||
Corporate bonds and other | — | 129,806 | — | 129,806 | |||||||||||||||||||
Interest rate swaps | — | — | 9,263 | 9,263 | |||||||||||||||||||
Credit risk participation agreements | — | — | 27 | 27 | |||||||||||||||||||
Total fair value of financial assets | $ | — | $ | 1,807,586 | $ | 9,290 | $ | 1,816,876 | |||||||||||||||
Financial liabilities | |||||||||||||||||||||||
Interest rate swaps | $ | — | $ | — | $ | 9,263 | $ | 9,263 | |||||||||||||||
Total fair value of financial liabilities | $ | — | $ | — | $ | 9,263 | $ | 9,263 |
| | | | | | | |
(Dollars in thousands) | | | September 30, 2022 | | December 31, 2021 | ||
Fair value of financial assets: | |
| |
|
| |
|
Level 1 inputs: | Equity securities | | $ | 1,045 | | $ | 1,173 |
| Debt securities available for sale - U.S. Treasury securities | | | 107,259 | | | 11,797 |
Level 2 inputs: | Debt securities available for sale: | | | | | | |
| State and municipal securities | | | 135,098 | | | 172,600 |
| U.S. agency securities: | |
|
| |
|
|
| Callable debentures | | | 2,564 | | | 2,973 |
| Collateralized mortgage obligations | |
| 84,398 | |
| 62,382 |
| Mortgage-backed securities | |
| 180,918 | |
| 174,121 |
| Interest rate swaps | |
| 9,944 | |
| 3,543 |
Level 3 inputs: | Credit risk participation agreement | | | 27 | | | 15 |
| Total fair value of financial assets | | $ | 521,253 | | $ | 428,604 |
Fair value of financial liabilities: | |
|
| |
|
| |
Level 2 inputs: | Interest rate swaps | | $ | 9,944 | | $ | 3,543 |
| Total fair value of financial liabilities | | $ | 9,944 | | $ | 3,543 |
Financial Instruments Measured at Fair Value on a Non-recurring Basis
A portion of financial instruments aresix months ended June 30, 2023 or 2022.
June 30, 2023 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||||||
(In thousands) | |||||||||||||||||
Loans: | |||||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | 11,991 | |||||||||||
Commercial real estate (including multi-family residential) | — | — | 2,752 | ||||||||||||||
Commercial real estate construction and land development | — | — | 6,751 | ||||||||||||||
1-4 family residential (including home equity) | — | — | 2,045 | ||||||||||||||
Branch assets held for sale | 5,852 | — | — | ||||||||||||||
$ | 5,852 | $ | — | $ | 23,539 |
December 31, 2022 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | |||||||||||||||
(In thousands) | |||||||||||||||||
Loans: | |||||||||||||||||
Commercial and industrial | $ | — | $ | — | $ | 21,948 | |||||||||||
Commercial real estate (including multi-family residential) | — | — | 11,566 | ||||||||||||||
1-4 family residential (including home equity) | — | — | 2,883 | ||||||||||||||
Branch assets held for sale | 5,165 | — | — | ||||||||||||||
$ | 5,165 | $ | — | $ | 36,397 |
Within one year | $ | 1,325,868 | |||
After one but within two years | 88,265 | ||||
Over three years | 27,118 | ||||
Total | $ | 1,441,251 |
The Company’s financial assets measured at fair value onwhether it has been designated and qualifies as part of a non-recurring basis are certain individually evaluated loans andhedging relationship.
| | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | ||||||||||||||
(Dollars in thousands) | | Recorded Investment | | Specific ACL | | Net | | Recorded Investment | | Specific ACL | | Net | ||||||
Level 3 inputs: | | | | | | | | | | | | | | | | | | |
Loans evaluated individually |
| |
| | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 9,205 | | $ | 2,517 | | $ | 6,688 | | $ | 9,624 | | $ | 3,986 | | $ | 5,638 |
Commercial real estate | | | 733 | | | 28 | | | 705 | | | 2,629 | | | 609 | | | 2,020 |
Consumer | | | 116 | | | 116 | | | — | | | 125 | | | 125 | | | — |
Total | | $ | 10,054 | | $ | 2,661 | | $ | 7,393 | | $ | 12,378 | | $ | 4,720 | | $ | 7,658 |
Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value on a Non-recurring Basis
The Company’s non-financial assets measured at fair value on a non-recurring basis for the periods reported are foreclosed assets (upon initial recognition or subsequent impairment). The Company’s other non-financial assets whose
26
fair value may be measured on a non-recurring basis when there is evidence of impairment and may be subject to impairment adjustments include goodwill and intangible assets, among other assets.
The fair value of foreclosed assets may be estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria less estimated selling costs. There were no write-downs of foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the nine months ended September 30, 2022 or during 2021. There were no outstanding foreclosed assets at September 30, 2022 or December 31, 2021.
Financial Instruments Reported at Amortized Cost
Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates indicated below were as follows:
| | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 | ||||||||
| |
| |
| Carrying | | |
| Carrying | ||||
(Dollars in thousands) | | | Fair Value | | Amount | | Fair Value | | Amount | ||||
Financial assets: | |
| |
|
| |
| | |
|
| |
|
Level 1 inputs: | Cash and due from banks | | $ | 370,448 | | $ | 370,448 | | $ | 950,146 | | $ | 950,146 |
Level 2 inputs: | Bank-owned life insurance | |
| 74,274 | |
| 74,274 | |
| 73,156 | |
| 73,156 |
| Accrued interest receivable | |
| 10,777 | |
| 10,777 | |
| 11,616 | |
| 11,616 |
| Servicing asset | |
| 328 | |
| 328 | |
| 352 | |
| 352 |
Level 3 inputs: | Loans, including held for sale, net | |
| 2,906,108 | |
| 3,093,844 | |
| 2,864,663 | |
| 2,836,343 |
| Other investments | |
| 17,835 | |
| 17,835 | |
| 17,727 | |
| 17,727 |
Total financial assets | | | $ | 3,379,770 | | $ | 3,567,506 | | $ | 3,917,660 | | $ | 3,889,340 |
Financial liabilities: | | |
|
| |
|
| |
|
| |
|
|
Level 1 inputs: | Noninterest-bearing deposits | | $ | 1,780,473 | | $ | 1,780,473 | | $ | 1,784,981 | | $ | 1,784,981 |
Level 2 inputs: | Interest-bearing deposits | |
| 1,938,023 | |
| 1,943,301 | |
| 2,040,794 | |
| 2,046,303 |
| Federal Home Loan Bank advances | | | — | | | — | | | 50,591 | | | 50,000 |
| Accrued interest payable | |
| 306 | |
| 306 | |
| 201 | |
| 201 |
Total financial liabilities | | $ | 3,718,802 | | $ | 3,724,080 | | $ | 3,876,567 | | $ | 3,881,485 |
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts the Company will realize. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS
The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest rate swaps with other financial institutions entered into at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers to effectively convert a variable rate loan to a fixed rate.
27
accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.
follows (dollars in thousands):
| | | | | | | | | | | | | | |
| | |
| | | | | |
| | | |
| Weighted |
| | | | | | | | | | | | | | Average |
| | | | Notional |
| Fair | | | | | | Maturity | ||
(Dollars in thousands) | | Classification | | Amounts | | Value | | Fixed Rate | | Floating Rate | | (Years) | ||
September 30, 2022 | | |
| |
|
| | |
|
| |
| |
|
Interest rate swaps with financial institutions | | Other assets | | $ | 87,537 | | $ | 8,485 | | 3.25% - 5.58% | | LIBOR 1M + 2.50% - 3.00% | | 4.58 |
Interest rate swaps with customers | | Other assets | | | 22,676 | | | 1,021 |
| 5.35% - 5.40% | | SOFR CME 1M + 2.50% | | 10.22 |
Interest rate swaps with financial institutions | | Other assets | |
| 5,057 | | | 438 |
| 4.99% | | U.S. Prime | | 5.21 |
Interest rate swaps with customers | | Other liabilities | |
| 5,057 | | | (438) |
| 4.99% | | U.S. Prime | | 5.21 |
Interest rate swaps with financial institutions | | Other liabilities | | | 22,676 | | | (1,021) |
| 5.35% - 5.40% | | SOFR CME 1M + 2.50% | | 10.22 |
Interest rate swaps with customers | | Other liabilities | | | 87,537 | | | (8,485) | | 3.25% - 5.58% | | LIBOR 1M + 2.50% - 3.00% | | 4.58 |
Credit risk participation agreement with financial institution | | Other assets | | | 13,163 | | | 2 | | 3.50% | | LIBOR 1M + 2.50% | | 7.49 |
Credit risk participation agreement with financial institution | | Other assets | | | 8,503 | | | 25 | | 5.35% - 5.40% | | SOFR CME 1M + 2.50% | | 10.22 |
Total derivatives | | | | $ | 252,206 | | $ | 27 | | | | | | |
December 31, 2021 | | |
| |
|
| |
|
|
| |
|
|
|
Interest rate swaps with customers | | Other assets | | $ | 56,440 | | $ | 2,474 |
| 4.00% - 5.60% | | LIBOR 1M + 2.50% - 3.00% | | 5.10 |
Interest rate swaps with financial institutions | | Other assets | | | 66,650 | | | 875 | | 3.25% - 3.50% | | LIBOR 1M + 2.50% | | 5.59 |
Interest rate swaps with customers | | Other assets | |
| 5,141 | | | 194 |
| 4.99% | | U.S. Prime | | 5.96 |
Interest rate swaps with financial institutions | | Other liabilities | |
| 5,141 | | | (194) |
| 4.99% | | U.S. Prime | | 5.96 |
Interest rate swaps with financial institutions | | Other liabilities | | | 56,440 | | | (2,474) |
| 4.00% - 5.60% | | LIBOR 1M + 2.50% - 3.00% | | 5.10 |
Interest rate swaps with customers | | Other liabilities | | | 66,650 | | | (875) | | 3.25% - 3.50% | | LIBOR 1M + 2.50% | | 5.59 |
Credit risk participation agreement with financial institution | | Other assets | | | 13,563 | | | 15 | | 3.50% | | LIBOR 1M + 2.50% | | 8.24 |
Total derivatives | | | | $ | 270,025 | | $ | 15 | | | | | | |
Weighted | ||||||||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||||||||
Notional | Fair | Maturity | ||||||||||||||||||||||||||||||||||||
Classification | Amounts | Value | Fixed Rate | Floating Rate | (Years) | |||||||||||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||||||||||||||||
Financial institutions | Other assets | $ | 112,077 | $ | 8,425 | 3.25% - 5.58% | SOFR CME 1M + 2.50% - 3.00% | 4.99 | ||||||||||||||||||||||||||||||
Financial institutions | Other assets | 4,970 | 416 | 4.99% | U.S. Prime | 4.46 | ||||||||||||||||||||||||||||||||
Customers | Other liabilities | 4,970 | (416) | 4.99% | U.S. Prime | 4.46 | ||||||||||||||||||||||||||||||||
Customers | Other liabilities | 112,077 | (8,425) | 3.25% - 5.58% | SOFR CME 1M + 2.50% - 3.00% | 4.99 | ||||||||||||||||||||||||||||||||
Credit risk participations: | ||||||||||||||||||||||||||||||||||||||
Financial institutions | Other assets | 21,159 | 23 | 3.50% - 5.40% | SOFR CME 1M + 2.50% | 7.86 |
NOTE 15: OPERATING LEASES
Weighted | ||||||||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||||||||
Notional | Fair | Maturity | ||||||||||||||||||||||||||||||||||||
Classification | Amounts | Value | Fixed Rate | Floating Rate | (Years) | |||||||||||||||||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||||||||||||||||||||||
Financial institutions | Other assets | $ | 109,242 | $ | 8,856 | 3.25% - 5.58% | SOFR CME 1M + 2.50% - 3.00% | 5.49 | ||||||||||||||||||||||||||||||
Financial institutions | Other assets | 5,029 | 407 | 4.99% | U.S. Prime | 4.96 | ||||||||||||||||||||||||||||||||
Customers | Other liabilities | 5,029 | (407) | 4.99% | U.S. Prime | 4.96 | ||||||||||||||||||||||||||||||||
Customers | Other liabilities | 109,242 | (8,856) | 3.25% - 5.58% | SOFR CME 1M + 2.50% | 5.49 | ||||||||||||||||||||||||||||||||
Credit risk participations: | ||||||||||||||||||||||||||||||||||||||
Financial institutions | Other assets | 13,028 | 2 | 3.50% | LIBOR 1M + 2.50% | 7.24 | ||||||||||||||||||||||||||||||||
Financial institutions | Other assets | 8,485 | 25 | 5.35% - 5.40% | SOFR CME 1M + 2.50% | 9.97 |
Lease costs for the periods indicated below were as follows:
common securities will also be deferred.
| | | | | | |
| | Nine Months Ended September 30, | ||||
(Dollars in thousands) | | 2022 | | 2021 | ||
Operating lease cost | | $ | 1,244 | | $ | 1,436 |
Short-term lease cost | | | 15 | | | 13 |
Sublease income | | | (469) | | | (472) |
Total lease cost | | $ | 790 | | $ | 977 |
28
Otherpertinent information related to operating leasesthe Company’s issues of junior subordinated debentures outstanding at June 30, 2023 is set forth in the table below:Description (Dollars in thousands) Farmers & Merchants Capital Trust II November 13, 2003 $ 7,500 3 month LIBOR + 3.00% $ 7,732 November 8, 2033 Farmers & Merchants Capital Trust III June 30, 2005 3,500 3 month LIBOR + 1.80% 3,609 July 7, 2035 $ 11,341
(1) | The 3-month LIBOR in effect as of June 30, 2023 was 5.07%. Transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date. | ||||
(2) | All debentures are currently callable. |
| | | | | | |
| | Nine Months Ended September 30, | ||||
(Dollars in thousands) | | 2022 | | 2021 | ||
Amortization of lease right-to-use assets | | $ | 1,008 | | $ | 1,141 |
Accretion of lease liabilities | | | 260 | | | 294 |
Cash paid for amounts included in the measurement of lease liabilities | | | 1,461 | | | 1,566 |
Weighted-average remaining lease term in years | | | 10.1 | | | 10.7 |
Weighted-average discount rate | | | 2.63% | | | 2.63% |
A maturity analysisCompany Notes), payable quarterly in arrears on January 1, April 1, July 1 and October 1 of operating lease liabilities aseach year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
Income tax expense | $ | 7,467 | $ | 3,702 | $ | 17,380 | $ | 7,904 | |||||||||||||||
Effective income tax rate | 17.5 | % | 18.4 | % | 19.4 | % | 18.4 | % |
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
(Shares in thousands) | (In years) | (Dollars in thousands) | |||||||||||||||||||||
Options outstanding, January 1, 2023 | 368 | $ | 17.89 | 2.72 | $ | 4,256 | |||||||||||||||||
Options granted | — | — | |||||||||||||||||||||
Options exercised | (25) | 13.95 | |||||||||||||||||||||
Options forfeited | (33) | 20.49 | |||||||||||||||||||||
Options outstanding, June 30, 2023 | 310 | $ | 17.94 | 2.31 | $ | 1,656 | |||||||||||||||||
Options vested and exercisable, June 30, 2023 | 310 | $ | 17.94 | 2.31 | $ | 1,656 |
| | | | |
(Dollars in thousands) | | | September 30, 2022 | |
1 year or less | | | $ | 1,775 |
Over 1 year through 2 years | | |
| 1,928 |
Over 2 years through 3 years | | | | 1,966 |
Over 3 years through 4 years | | | | 1,928 |
Over 4 years through 5 years | | | | 1,821 |
Thereafter | | |
| 6,836 |
Total undiscounted lease liability | | | | 16,254 |
Less: | | | | |
Discount on cash flows | | | | (2,506) |
Total operating lease liability | | | $ | 13,748 |
During
Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
(Shares in thousands) | |||||||||||
Nonvested share awards outstanding, January 1, 2023 | 501 | $ | 32.84 | ||||||||
Share awards granted | 253 | 25.71 | |||||||||
Share awards vested | (14) | 25.99 | |||||||||
Unvested share awards forfeited or cancelled | (50) | 31.11 | |||||||||
Nonvested share awards outstanding, June 30, 2023 | 690 | 30.49 |
During the nine months ended September 30, 2022, the operating lease right-of-use asset and liabilities were both increased $809,000 dueexpected to be recognized over a lease modification to extend the termweighted-average period of a lease.
NOTE 16:2.1 years.
Financial Instruments with Off-Balance-Sheet Risk
The
June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Commitments to extend credit(1) | $ | 513,423 | $ | 1,403,262 | $ | 673,098 | $ | 1,686,627 | |||||||||||||||
Standby letters of credit | 14,818 | 23,670 | 10,310 | 25,190 | |||||||||||||||||||
Total | $ | 528,241 | $ | 1,426,932 | $ | 683,408 | $ | 1,711,817 |
– Borrowings and Borrowing Capacity.
| | | | | | |
| | | | | ||
(Dollars in thousands) | | September 30, 2022 | | December 31, 2021 | ||
Commitments to extend credit, variable interest rate | | $ | 853,644 | | $ | 714,084 |
Commitments to extend credit, fixed interest rate | |
| 135,404 | |
| 60,876 |
Total commitments | | $ | 989,048 | | $ | 774,960 |
Standby letters of credit | | $ | 11,611 | | $ | 18,109 |
Extend Credit
29
Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third-party.third party. In the event of nonperformance by the customer, the Company has the rights to the underlying collateral. The credit risk involvedto the Company in issuing letters of credit is essentially the same assubstantially similar to that involved in extending loan facilities to its customers. The Company’s policy for obtaining collateral, and the Company’s customers.
nature of such collateral, is substantially similar to that involved in making commitments to extend credit.
NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS
Employee Benefit Plans
Executive Deferred Compensation Arrangements
The Company established an executive incentive compensation arrangement with several officers of the Bank in which these officers are eligible for performance-based incentive bonus compensation. As part of this compensation arrangement, the Company contributes one-fourth of the incentive bonus amount into a deferred compensation account. The deferred amounts accrue at a market rate of interest and are payable to the employees upon separation from the Bank provided vesting arrangements have been met. At September 30, 2022 and December 31, 2021, the amount payable, including interest, for this deferred plan was approximately $1.4 million and $1.7 million, respectively, which is included in other liabilities in the condensed consolidated balance sheets.
Salary Continuation Agreements
The Company entered into a salary continuation arrangement in 2008 with the Company’s then President and Chief Executive Officer, or CEO, that calls for payments of $100,000 per year for a period of 10 years commencing at age 65. Payments under the plan began during 2014. The Company’s liability was $82,000 and $153,000 at September 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets and equals the present value of the benefits expected to be provided.
In October 2017, the Company entered into a salary continuation arrangement with the Company’s President and CEO that calls for payments of $200,000 per year payable for a period of 10 years commencing at age 70. Payments under the plan will begin in 2024. The Company’s liability was $1.5 million and $900,000 at September 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets. The liability stopped accruing on October 1, 2022 and was paid in full as a result of the Merger.
NOTE 18: STOCK-BASED COMPENSATION
The Company acquired a stock option plan, which originated under VB Texas, Inc. as a part of a merger of the two companies, or the 2006 Plan. At the merger date, all outstanding options under this plan became fully vested and exercisable. The plan expired in 2016 and no additional options may be granted under its terms. As of September 30, 2022, there were options outstanding to acquire 10,160 shares of the Company’s common stock under the 2006 Plan, which will expire in 2022 if not exercised.
In 2014, the Company adopted the 2014 Stock Option Plan, or the 2014 Plan, which was approved by the Company’s shareholders and limits the number of shares that may be optioned to 1,127,200. The 2014 Plan provides that no options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of grant
30
and become exercisable in installments over a period of one to five years, beginning on the first anniversary of the date of grant. As of September 30, 2022, 963,200 shares were available for future grant. No options have been issued under the 2014 Plan since 2017.
In 2017, the Company adopted the 2017 Omnibus Incentive Plan, or the 2017 Plan. The 2017 Plan authorizes the Company to grant options, performance-based and non-performance based restricted stock awards as well as various other types of stock-based awards and other awards that are not stock-based to eligible employees, consultants and non-employee directors up to an aggregate of 600,000 shares of common stock. As of September 30, 2022, 244,140 shares were available for future grant under the 2017 Plan.
In connection with the closing of the Merger on October 1, 2022, the 2022 Omnibus Incentive Plan approved by the Company’s shareholders at the special meeting of shareholders on May 23, 2022 became effective and no grants or future awards may be made under the 2014 Plan or the 2017 Plans, or the Prior Plans. In addition, all restricted stock awards outstanding under the Prior Plans as of the effective time of the Merger became fully vested and exercisable, other than certain restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. All outstanding options were fully vested prior to September 30, 2022. See Note 22: Subsequent Events.
Stock option activity for the periods indicated below was as follows:
| | | | | | | | | | |
| | Nine Months Ended September 30, | ||||||||
| | 2022 | | 2021 | ||||||
| | Number of | | Weighted | | Number of | | Weighted | ||
| | Shares | | Average | | Shares | | Average | ||
| | Underlying | | Exercise | | Underlying | | Exercise | ||
| | Options | | Price | | Options | | Price | ||
Outstanding at beginning of period |
| 191,560 | | $ | 17.53 |
| 201,720 | | $ | 17.22 |
Granted |
| — | | | — |
| — | | | — |
Exercised |
| (15,240) | | | 11.32 |
| (2,032) | | | 11.32 |
Forfeited/expired |
| (10,160) | | | 11.32 |
| — | | | — |
Outstanding at end of period |
| 166,160 | | $ | 18.48 |
| 199,688 | | $ | 17.28 |
A summary of stock options as of the date indicated below was as follows:
| | | | | | | | | |
| | September 30, 2022 | |||||||
Stock Options | | | Exercisable | | | Unvested | | | Outstanding |
Number of shares underlying options |
| | 166,160 | | | — | | | 166,160 |
Weighted-average exercise price per share |
| $ | 18.48 | | $ | — | | $ | 18.48 |
Aggregate intrinsic value (in thousands) |
| $ | 1,789 | | $ | — | | $ | 1,789 |
Weighted-average remaining contractual term (years) |
| | 3.5 | | | — | | | 3.5 |
The fair value of the Company’s restricted stock awards is estimated based on the market value of the Company’s common stock at the date of grant. Restricted stock awards are considered legally fully issued at the time of the grant and the grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares of restricted stock awards are non-transferable and subject to forfeiture until the restricted stock awards vest and any dividends with respect to the restricted stock awards are subject to the same restrictions, including the risk of forfeiture.
Non-performance based restricted stock awards vest over the service period in equal increments over a period of two to five years, beginning on the first anniversary of the date of grant.
The number of shares earned under the Company’s performance-based restricted stock award agreements is based on the achievement of certain branch production goals. Compensation expense for performance-based restricted stock is recognized for the probable award level over the period estimated to achieve the performance conditions and other goals, on a straight-line basis. If the probable award level and/or the period estimated to be achieved change, compensation expense will be adjusted via a cumulative catch-up adjustment to reflect these changes. The performance conditions and goals must be achieved within five years or the awards expire.
31
Restricted stock activity for the periods indicated below was as follows:
| | | | | | | | | | |
| | Non-performance Based | | Performance-based | ||||||
| | | | Weighted | | | | Weighted | ||
| | | | Average | | | | Average | ||
| | Number of | | Grant Date | | Number of | | Grant Date | ||
| | Shares | | Fair Value | | Shares | | Fair Value | ||
Outstanding at December 31, 2020 | | 129,667 | | $ | 28.22 | | 2,250 | | $ | 34.40 |
Granted |
| 51,665 | | | 26.31 |
| — | | | — |
Vested |
| (22,210) | | | 30.57 |
| — | | | — |
Forfeited |
| (1,411) | | | 28.82 |
| — | | | — |
Outstanding at September 30, 2021 | | 157,711 | | | 27.26 | | 2,250 | | | 34.40 |
| | | | | | | | | | |
Outstanding at December 31, 2021 | | 83,563 | | | 27.85 | | 2,250 | | | 34.40 |
Granted |
| 38,457 | | | 29.42 |
| — | | | — |
Vested |
| (27,083) | | | 29.70 |
| — | | | — |
Forfeited |
| (1,977) | | | 33.04 |
| — | | | — |
Outstanding at September 30, 2022 |
| 92,960 | | | 27.86 |
| 2,250 | | | 34.40 |
A summary of restricted stock as of the date indicated below was as follows:
| | | | | | |
| | September 30, 2022 | ||||
Restricted Stock | | | Non-performance Based | | | Performance-based |
Number of shares underlying restricted stock |
| | 92,960 | | | 2,250 |
Weighted-average grant date fair value per share |
| $ | 27.86 | | $ | 34.40 |
Aggregate fair value (in thousands) |
| $ | 2,719 | | $ | 66 |
Weighted-average remaining vesting period (years) |
| | — | | | — |
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options. The shares of stock subject to options exercised, restricted stock vested, shares withheld and shares issued for the periods indicated below were as follows:
| | | | | | | | | |
| | | Exercised/Vested | | | Shares Withheld | | | Shares Issued |
Nine Months Ended September 30, 2022 | | | | | | | | | |
Stock options |
| | 15,240 | | | — |
| | 15,240 |
Non-performance based restricted stock | | | 27,083 | | | (4,620) | | | 22,463 |
Nine Months Ended September 30, 2021 | | | | | | | | | |
Stock options | | | 2,032 | | | — | | | 2,032 |
Non-performance based restricted stock |
| | 22,210 | | | (3,213) |
| | 18,997 |
For the nine months ended September 30, 2022 and 2021, stock compensation expense was $1.5 million and $1.8 million, respectively, and for the three months ended September 30, 2022 and 2021, stock compensation expense was $515,000 and $698,000, respectively. As of September 30, 2022, there was approximately $962,000 of total unrecognized compensation expense related to the unvested restricted stock awards.
.
32
NOTE 19: REGULATORY MATTERS
Banks and bank holding companies are subject to various regulatory capital requirements administered by state andthe federal banking agencies. Capital adequacy guidelines, and additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off-balance-sheetoff balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightingweightings and other factors.
The Company and the Bank’s Common Equity Tier 1 capital includes common stock and related capital surplus, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, the Company and the Bank elected Failure to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.
The Basel III Capital Rules require the Company and the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.
The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company and the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
In November 2019, the federal bank regulatory agencies published a final rule, the Community Bank Leverage Ratio Framework, or the Framework, to simplify capital calculations for community banks. The Framework provides for a simple measure of capital adequacy for certain community banking organizations. The Framework is optional and is designed to reduce burden by removing requirements for calculating and reporting risk-based capital ratios. Depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9.0%, are considered qualifying community banking organizations and are eligible to opt into the Framework. A qualifying community banking organization that elects to use the Framework and that maintains a Tier 1 capital-to-adjusted total assets ratio, or leverage capital ratio, of greater than 9.0% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III Capital Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules. The final rule became effective January 1, 2020, and organizations that opt into the Framework and meet the criteria established by the rule can use the Framework for regulatory reports for the year ended December 31, 2020. In April 2020, the federal bank regulatory agencies announced two interim final rules to provide relief associated with Section 4012 of the Coronavirus Aid Relief and Economic Security Act, or CARES Act. For institutions that elect the Framework, the interim rules temporarily lowered the leverage ratio requirement to 8.0% for the second quarter of 2020 through the end of calendar year 2020 and to 8.5% for the 2021 calendar year and greater than 9.0% thereafter. The Company determined not to opt into the Framework and will continue to compute regulatory capital ratios based on the Basel III Capital Rules discussed above.
In September 2020, the federal bank regulatory agencies finalized an interim final rule that allows banking organizations to mitigate the effects of CECL on their regulatory capital computations. The rule permitted banking organizations that were required to adopt CECL for purposes of GAAP (as in effect January 1, 2021) for a fiscal year beginning during the calendar year 2020, the option to delay for up to two years an estimate of CECL’s effect on regulatory capital, followed by a three-year transition period (i.e., a transition period of five years in total). The Company determined
33
not to use the transition provision and has reported the full effect of CECL upon adoption and for each reporting period thereafter in its regulatory capital calculation and ratios.
The Company is subject to the regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and, for the Bank, those administered by the Office of Comptroller of Currency, or OCC. Regulatory authorities can initiate certain mandatory actions if the Company or the Bank fail to meet the minimum capital requirements whichcan cause regulators to initiate actions that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The final rules implementing Basel Committee on Banking Supervision's capital guideline for U.S.
On June 18, 2021,
At September 30, 2022 and December 31, 2021, the Company and the Bank were “well capitalized” based on the ratios presented below. Actualactual and required capital ratios for the Companyas of June 30, 2023 and the Bank were as follows for the dates presented:
December 31, 2022:
Actual | Minimum Required for Capital Adequacy Purposes | Minimum Required Plus Capital Conservation Buffer | To Be Categorized As Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
STELLAR BANCORP, INC. | |||||||||||||||||||||||||||||||||||||||||||||||
(Consolidated) | |||||||||||||||||||||||||||||||||||||||||||||||
As of June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 1,175,829 | 13.03 | % | $ | 722,193 | 8.00 | % | $ | 947,878 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk-weighted assets) | 963,620 | 10.67 | % | 406,234 | 4.50 | % | 631,919 | 7.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 973,518 | 10.78 | % | 541,645 | 6.00 | % | 767,330 | 8.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
Tier 1 Leverage (to average tangible assets) | 973,518 | 9.51 | % | 409,420 | 4.00 | % | 409,420 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
As of December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 1,092,618 | 12.39 | % | $ | 705,765 | 8.00 | % | $ | 926,317 | 10.50 | % | N/A | N/A | |||||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk-weighted assets) | 885,652 | 10.04 | % | 396,993 | 4.50 | % | 617,545 | 7.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 895,520 | 10.15 | % | 529,324 | 6.00 | % | 749,876 | 8.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
Tier 1 Leverage (to average tangible assets) | 895,520 | 8.55 | % | 418,720 | 4.00 | % | 418,720 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||||||||
STELLAR BANK | |||||||||||||||||||||||||||||||||||||||||||||||
As of June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 1,153,970 | 12.80 | % | $ | 721,471 | 8.00 | % | $ | 946,931 | 10.50 | % | $ | 901,839 | 10.00 | % | |||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk-weighted assets) | 1,011,659 | 11.22 | % | 405,827 | 4.50 | % | 631,287 | 7.00 | % | 586,195 | 6.50 | % | |||||||||||||||||||||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 1,011,659 | 11.22 | % | 541,103 | 6.00 | % | 766,563 | 8.50 | % | 721,471 | 8.00 | % | |||||||||||||||||||||||||||||||||||
Tier 1 Leverage (to average tangible assets) | 1,011,659 | 9.89 | % | 409,051 | 4.00 | % | 409,051 | 4.00 | % | 511,313 | 5.00 | % | |||||||||||||||||||||||||||||||||||
As of December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Total Capital (to risk-weighted assets) | $ | 1,059,313 | 12.02 | % | $ | 705,120 | 8.00 | % | $ | 925,470 | 10.50 | % | $ | 881,400 | 10.00 | % | |||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital (to risk-weighted assets) | 921,714 | 10.46 | % | 396,630 | 4.50 | % | 616,980 | 7.00 | % | 572,910 | 6.50 | % | |||||||||||||||||||||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 921,714 | 10.46 | % | 528,840 | 6.00 | % | 749,190 | 8.50 | % | 705,120 | 8.00 | % | |||||||||||||||||||||||||||||||||||
Tier 1 Leverage (to average tangible assets) | 921,714 | 8.81 | % | 418,388 | 4.00 | % | 418,388 | 4.00 | % | 522,984 | 5.00 | % |
| | | | | | | | | | | | |
| | | | | | Minimum | | Required to be | ||||
| | | | | | Capital Required | | Considered Well | ||||
| | Actual | | Basel III | | Capitalized | ||||||
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
September 30, 2022 |
|
|
|
| |
|
|
| |
|
|
|
Common Equity Tier 1 to Risk-Weighted Assets: |
|
|
|
| |
|
|
| |
|
|
|
Consolidated | | $ 487,717 | | 14.05% | | $ 243,053 | | 7.00% | | N/A |
| N/A |
Bank Only | | $ 479,175 | | 13.81% | | $ 242,969 | | 7.00% | | $ 225,614 |
| 6.50% |
Tier 1 Capital to Risk-Weighted Assets: | | | | | | | |
| |
|
|
|
Consolidated | | $ 487,717 | | 14.05% | | $ 295,135 | | 8.50% | | N/A |
| N/A |
Bank Only | | $ 479,175 | | 13.81% | | $ 295,034 | | 8.50% | | $ 277,679 |
| 8.00% |
Total Capital to Risk-Weighted Assets: | | | | | | | | | |
|
|
|
Consolidated | | $ 524,112 | | 15.09% | | $ 364,579 | | 10.50% | | N/A |
| N/A |
Bank Only | | $ 515,570 | | 14.85% | | $ 364,454 | | 10.50% | | $ 347,099 |
| 10.00% |
Tier 1 Leverage Capital to Average Assets: | | | | | | | | | |
|
|
|
Consolidated | | $ 487,717 | | 11.42% | | $ 170,891 | | 4.00% | | N/A |
| N/A |
Bank Only | | $ 479,175 | | 11.22% | | $ 170,856 | | 4.00% | | $ 213,570 |
| 5.00% |
December 31, 2021 |
|
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Common Equity Tier 1 to Risk-Weighted Assets: |
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| |
|
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| |
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Consolidated | | $ 475,154 | | 15.31% | | $ 217,300 | | 7.00% | | N/A |
| N/A |
Bank Only | | $ 447,819 | | 14.43% | | $ 217,270 | | 7.00% | | $ 201,757 |
| 6.50% |
Tier 1 Capital to Risk-Weighted Assets: | | | | | | | |
| |
|
|
|
Consolidated | | $ 475,154 | | 15.31% | | $ 263,864 | | 8.50% | | N/A |
| N/A |
Bank Only | | $ 447,819 | | 14.43% | | $ 263,836 | | 8.50% | | $ 248,316 |
| 8.00% |
Total Capital to Risk-Weighted Assets: | | | | | | | | | |
|
|
|
Consolidated | | $ 509,766 | | 16.42% | | $ 325,950 | | 10.50% | | N/A |
| N/A |
Bank Only | | $ 482,431 | | 15.54% | | $ 325,915 | | 10.50% | | $ 310,395 |
| 10.00% |
Tier 1 Leverage Capital to Average Assets: | | | | | | | | | |
|
|
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Consolidated | | $ 475,154 | | 11.22% | | $ 169,470 | | 4.00% | | N/A |
| N/A |
Bank Only | | $ 447,819 | | 10.58% | | $ 169,381 | | 4.00% | | $ 211,726 |
| 5.00% |
34
Dividend Restrictions
In
NOTE 20: INCOME TAXES
The provision for income tax expense and effective tax rates for the periods indicated below were as follows:
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |||||||
(Dollars in thousands) | | 2022 | | 2021 |
| 2022 | | 2021 | |||
Income tax expense | | $ 3,381 | | | $ 2,913 | | | $ 8,485 | | | $ 8,090 |
Effective tax rate | | 20.96% | | | 16.81% | | | 19.49% | | | 18.29% |
The differences between the federal statutory rate of 21% and the effective tax rates presentedincluded in the table above were largely attributable to permanent differences primarily related to tax exempt interest income, bank-owned life insurance related earnings and costs related to the Merger.
NOTE 21: EARNINGS PER SHARE
The computation of basic and diluted weighted average common shares outstanding.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
Amount | Per Share Amount | Amount | Per Share Amount | Amount | Per Share Amount | Amount | Per Share Amount | ||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to shareholders | $ | 35,175 | $ | 16,437 | $ | 72,323 | $ | 35,094 | |||||||||||||||||||||||||||||||||||||||
Basic: | |||||||||||||||||||||||||||||||||||||||||||||||
Weighted average shares outstanding | 53,297 | $ | 0.66 | 28,874 | $ | 0.57 | 53,160 | $ | 1.36 | 28,879 | $ | 1.22 | |||||||||||||||||||||||||||||||||||
Diluted: | |||||||||||||||||||||||||||||||||||||||||||||||
Add incremental shares for: | |||||||||||||||||||||||||||||||||||||||||||||||
Dilutive effect of stock option exercises and performance share units | 78 | 246 | 101 | 229 | |||||||||||||||||||||||||||||||||||||||||||
Total | 53,375 | $ | 0.66 | 29,120 | $ | 0.56 | 53,261 | $ | 1.36 | 29,108 | $ | 1.21 | |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
(Dollars in thousands, except per share data) | | 2022 | | 2021 | | 2022 | | | 2021 | |||
Net income for common shareholders | | $ | 12,747 | | $ | 14,421 | | $ | 35,049 | | $ | 36,143 |
Weighted-average shares (thousands) | | | | | | | | | | | | |
Basic weighted-average shares outstanding | |
| 24,345 | | | 24,432 | |
| 24,445 | | | 24,462 |
Dilutive effect of outstanding stock options and unvested restricted stock awards | | | 119 | | | 112 | | | 107 | | | 110 |
Diluted weighted-average shares outstanding | |
| 24,464 | | | 24,544 | |
| 24,552 | | | 24,572 |
Earnings per share: | | | | | | | | | | | | |
Basic | | $ | 0.52 | | $ | 0.59 | | $ | 1.43 | | $ | 1.48 |
Diluted | | $ | 0.52 | | $ | 0.59 | | $ | 1.43 | | $ | 1.47 |
Forequivalent number of shares issued to holders of Allegiance common stock in the nine months ended September 30, 2022 and the three and nine months ended September 30, 2021, the impact of 1,802, 5,907 and 14,858, respectively, shares of unvested restricted stock were excluded from diluted weighted-average shares as they were anti-dilutive. The Company also excluded the impact of 2,250 shares of performance based restricted stock awards for the three and nine months ended September 30, 2021 as they are contingently issuable and the performance conditions for these awards were not deemed likely to be met at that time.
Merger.
35
NOTE 22: SUBSEQUENT EVENTS
Effective October 1, 2022,
Immediately after the Merger, the Company’sour wholly owned bankbanking subsidiary, CommunityBank of Texas, N.A., merged with and into Allegiance’s wholly owned bank subsidiary, AllegianceStellar Bank, a Texas state banking association, or Allegiance Bank, with Allegiance Bank as the surviving entity.
Pursuant to the Merger Agreement, each share of Allegiance common stock, $1.00 par value per share, or Allegiance common stock, outstanding as of immediately prior to the Effective Time, other than certain shares of Allegiance common stock held by Allegiance or the Company, was converted into the right to receive 1.4184 shares, or the Exchange Ratio, of common stock of the Company, $0.01 par value per share, or the Company common stock, with cash to be paid in lieu of fractional shares, or the Merger Consideration. As a result of the Merger, Allegiance shareholders hold shares which represent approximately 53.9% of outstanding Company common stock. Each outstanding share of Company common stock remained outstanding and was unaffected by the Merger
In connection with the closing of the Merger, the Company also amended and restated its certificate of formation, which among other things, increased the number of authorized shares of Company common stock from 90,000,000 to 140,000,000 shares.
At the Effective Time, each outstanding equity award of the Company under the Company’s equity compensation plans fully vested, other than the restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. The vesting of the non-employee director restricted stock awards was prorated based on the number of days that elapsed from January 1, 2022 through September 30, 2022 and the remaining unvested shares of restricted stock were forfeited at the Effective Time.
The Merger will be accounted for as a reverse acquisition in accordance with the provisions of Accounting Standards Codification Topic 805-10, Business Combinations, or ASC 805. Management is undertaking a comprehensive review and determination of the fair value of the assets and liabilities of the Company to ensure that they conform to the measurement and reporting guidance as set forth for the accounting for business combinations. Determining the fair value of assets and liabilities, especially in the loan portfolio, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair values. Accordingly, the initial accounting for the Merger is not complete. Management is also undertaking a comprehensive review of the classification of certain assets and liabilities to ensure that they conform to the Company’s current policies and reporting practices. As a result of these efforts, the value and classification of certain assets and liabilities may vary in subsequent reporting periods.
Additional disclosures required by ASC 805 have been omitted from this report because the information required for the disclosures, including the purchase price accounting fair value adjustments, are not available due to the close proximity of the closing of the transaction with the date the accompanying condensed consolidated financial statements were issued.
Future filings will include the financial statements of Stellar for all periods presented, with recognition of the Company’s activity from the date the Merger was completed. The Company’s financial statements for all periods through the date of the Merger will not be included in future filings.
36
The tables below present condensed financial information of Allegiance as of and for the period indicated, which is not included in the accompanying condensed financial statements of the Company.
| | | | | | | |
Allegiance Bancshares, Inc. Condensed Balance Sheet (Unaudited) | | | | | | | |
(Dollars in thousands) | | | | | | September 30, 2022 | |
Assets: | | | | | | | |
Cash and cash equivalents | | | | | | $ | 118,567 |
Securities | | | | | | | 1,618,995 |
Loans held for investment | | | | | | | 4,591,912 |
Allowance for credit losses for loans | | | | | | | (52,147) |
Loans, net | | | | | | | 4,539,765 |
Premises and equipment | | | | | | | 57,837 |
Goodwill | | | | | | | 223,642 |
Other assets | | | | | | | 171,536 |
Total assets | | | | | | $ | 6,730,342 |
Liabilities: | | | | | | | |
Noninterest-bearing deposits | | | | | | $ | 2,465,839 |
Interest-bearing deposits | | | | | | | 3,194,880 |
Total deposits | | | | | | | 5,660,719 |
Borrowed funds | | | | | | | 257,000 |
Subordinated debt | | | | | | | 109,241 |
Other liabilities | | | | | | | 47,080 |
Total liabilities | | | | | | | 6,074,040 |
Total shareholders’ equity | | | | | | | 656,302 |
Total liabilities and shareholders’ equity | | | | | | $ | 6,730,342 |
| | | | | | | |
| | | | | | | |
Allegiance Bancshares, Inc. Condensed Statements of Income (Unaudited) | | Three Months Ended | | | Nine Months Ended | ||
(Dollars in thousands) | | September 30, 2022 | | | September 30, 2022 | ||
Net interest income | | $ | 60,690 | | | $ | 173,344 |
Provision for credit losses | | | 1,962 | | | | 5,919 |
Net interest income after provision for credit losses | | | 58,728 | | | | 167,425 |
Noninterest income | | | 2,995 | | | | 9,717 |
Noninterest expense | | | 44,031 | | | | 116,452 |
Net income before income tax expense | | | 17,692 | | | | 60,690 |
Income tax expense | | | 3,406 | | | | 11,310 |
Net income | | $ | 14,286 | | | $ | 49,380 |
Earnings per common share | | | | | | | |
Basic | | $ | 0.72 | | | $ | 2.44 |
Diluted | | $ | 0.71 | | | $ | 2.42 |
37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
38
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from what is anticipated. Undue reliance should not be placed on any such forward-lookingforward‑looking statements. Any forward-lookingforward‑looking statement speaks only as of the date made, and the Company does not undertake any obligation to publicly update or review any forward-lookingforward‑looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible to predict which will arise. In addition, the Company cannot assess the impact of each factor on its 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-lookingforward‑looking statements.
Merger
Effective October 1, 2022, or the Effective Time, the Company completed its previously announced merger
Immediately after the Merger, the Company’s wholly owned bank subsidiary, CommunityBank of Texas, N.A., merged with and into Allegiance’s wholly owned bank subsidiary, Allegiance Bank, a Texas state banking association, or Allegiance Bank, with Allegiance Bank as the surviving entity.
Pursuant to the Merger Agreement, each share of Allegiance common stock, $1.00 par value per share, or Allegiance common stock, outstanding as of immediately prior to the Effective Time, other than certain shares of Allegiance common stock held by Allegiance or the Company, was converted into the right to receive 1.4184 shares, or the Exchange Ratio, of common stock of the Company, $0.01 par value per share, or the Company common stock, with cash to be paid in lieu of fractional shares, or the Merger Consideration. As a result of the Merger Allegiance shareholders hold shares which represent approximately 53.9% of outstanding Company common stock. Each outstanding share of Company common stock remained outstanding and was unaffected by the Merger.
In connection with the closing of the Merger, the Company also amended and restated its certificate of formation, which among other things, increased the number of authorized shares of Company common stock from 90,000,000 to 140,000,000 shares.
39
At the Effective Time, each outstanding equity award of the Company under the Company’s equity compensation plans fully vested, other than the restricted stock awards granted to the Company’s non-employee directors on February 1, 2022. The vesting of the non-employee director restricted stock awards was prorated based on the number of days that elapsed from January 1, 2022 through September 30, 2022 and the remaining unvested shares of restricted stock were forfeited at the Effective Time.
The Merger will be accounted for as a reverse acquisition in accordance with the provisions of Accounting Standards Codification Topic 805-10, Business Combinations, or ASC 805. Management is undertaking a comprehensive review and determination of the fair value of the assets and liabilities of the Company to ensure that they conform to the measurement and reporting guidance as set forth for the accounting for business combinations. Determining the fair value of assets and liabilities, especially in the loan portfolio, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair values. Accordingly, the initial accounting for the Merger is not complete. Management is also undertaking a comprehensive review of the classification of certain assets and liabilities to ensure that they conform to the Company’s current policies and reporting practices. As a result of these efforts, the value and classification of certain assets and liabilities may vary in subsequent reporting periods.
Overview
The Company operates through one segment. The Company’s primary source of funds is deposits and its primary use of funds is loans. Most of the Company’s revenue is generatedour income from interest income on loans, interest income from investments in securities and investments. The Company incursservice charges on customer accounts. We incur interest expense on deposits and other borrowed funds as well asand noninterest expense,expenses such as salaries and employee benefits and occupancy expenses.
The Company’s operating results depend primarily on net Net interest income calculated asis the difference between interest income on interest-earningearning assets such as loans and securities and interest expense on interest-bearing liabilities such as deposits and borrowings. Changes in marketborrowings that are used to fund those assets. Net interest ratesincome is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the interest expenses of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets orand rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.
The Company seeks to remain competitive with respect to interest rates on loans and deposits, as well as prices on fee-based services, which are typically significant competitive factors within the banking and financial services industry. Many of the Company’s competitors are much larger financial institutions that have greater financial resources and compete aggressively for market share. Through the Company’s relationship-driven, community banking strategy, a significant portion of its growth has been through referral business from its existing customers and professionals in the Company’s markets including attorneys, accountants and other professional service providers.
Uncertain Economic Outlook
Although national and local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors used to determine the Company’s ACL. If the national and/or local economies and economic forecasts and loan performance indicators worsen in the future, increases in the ACL through additional provisionsallowance for credit losses may occur which would negatively impact net income. The future impactis its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 – Nature of these items is uncertain but could materially affect the Company’s future financialOperations and operational results. See “Part I—Item 1A.—Risk Factors”Summary of Significant Accounting and Reporting Policies in the Company’sour Annual Report on Form 10-K.
40
The table below shows the trend
| | | | | | | | | | | | | | | |
| | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | |||||
(Dollars in thousands) | | 2022 | | 2022 | | 2022 | | 2021 | | 2021 | |||||
Risk grades: | | | | | | | | | | | | | | | |
Pass | | $ | 3,074,091 | | $ | 2,972,739 | | $ | 2,804,237 | | $ | 2,783,385 | | $ | 2,526,395 |
Special mention | |
| 2,582 | |
| 468 | |
| 4,281 |
|
| 12,807 |
|
| 4,661 |
Substandard | |
| 59,218 | |
| 68,768 | |
| 80,460 |
|
| 80,235 |
|
| 86,501 |
Total gross loans | | $ | 3,135,891 | | $ | 3,041,975 | | $ | 2,888,978 |
| $ | 2,876,427 |
| $ | 2,617,557 |
Past due loans: | | | | | | | | | | | | | | | |
30 to 59 days past due | | $ | 11,099 | | $ | 537 | | $ | 13,603 |
| $ | 905 |
| $ | 2,755 |
60 to 89 days past due | |
| 9,172 | |
| 4,611 | |
| 2,032 |
|
| 34 |
|
| 143 |
90 days or greater past due | | | 1,882 | | | 10,276 | | | 140 | | | 197 | | | 104 |
Total past due loans | | $ | 22,153 | | $ | 15,424 | | $ | 15,775 |
| $ | 1,136 |
| $ | 3,002 |
Loans individually evaluated: | | | | | | | | | | | | | | | |
Accruing troubled debt restructurings | | $ | 28,373 | | $ | 26,117 | | $ | 28,428 |
| $ | 30,709 |
| $ | 31,656 |
Non-accrual troubled debt restructurings | |
| 22,236 | |
| 22,761 | |
| 21,720 |
|
| 20,019 |
|
| 17,834 |
Total troubled debt restructurings | | | 50,609 | | | 48,878 | | | 50,148 | | | 50,728 | | | 49,490 |
Other non-accrual | | | 174 | | | 5,512 | | | 363 | | | 2,549 | | | 2,751 |
Other accruing | | | 1,159 | | | 1,152 | | | 3,494 | | | 5,995 | | | 5,260 |
Total loans individually evaluated | | $ | 51,942 | | $ | 55,542 | | $ | 54,005 |
| $ | 59,272 |
| $ | 57,501 |
Nonperforming assets: | | | | | | | | | | | | | | | |
Nonaccrual loans | | $ | 22,410 | | $ | 28,273 | | $ | 22,083 | | $ | 22,568 | | $ | 20,585 |
Accruing loans 90 or more days past due | | | — | | | — | | | — | | | — | | | — |
Total nonperforming loans | | | 22,410 | | | 28,273 | | | 22,083 | | | 22,568 | | | 20,585 |
Foreclosed assets | | | — | | | — | | | — | | | — | | | — |
Total nonperforming assets | | $ | 22,410 | | $ | 28,273 | | $ | 22,083 | | $ | 22,568 | | $ | 20,585 |
Company’s financial statements in future periods.
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 | | Increase (Decrease) | | | 2022 | | 2021 | | Increase (Decrease) | |||||||||
Interest income | | $ | 44,673 | | $ | 32,697 | | $ | 11,976 | | 36.6% | | $ | 114,789 | | $ | 99,864 | | $ | 14,925 | | 14.9% |
Interest expense | | | 1,661 | | | 1,448 | | | 213 | | 14.7% | | | 4,275 | | | 4,507 | | | (232) | | (5.1%) |
Net interest income | | | 43,012 | | | 31,249 | | | 11,763 | | 37.6% | | | 110,514 | | | 95,357 | | | 15,157 | | 15.9% |
Provision (recapture) for credit losses | | | 1,012 | | | (4,895) | | | 5,907 | | 120.7% | | | 1,573 | | | (9,566) | | | 11,139 | | 116.4% |
Noninterest income | | | 3,449 | | | 5,562 | | | (2,113) | | (38.0%) | | | 12,324 | | | 12,164 | | | 160 | | 1.3% |
Noninterest expense | | | 29,321 | | | 24,372 | | | 4,949 | | 20.3% | | | 77,731 | | | 72,854 | | | 4,877 | | 6.7% |
Income before income taxes | | | 16,128 | | | 17,334 | | | (1,206) | | (7.0%) | | | 43,534 | | | 44,233 | | | (699) | | (1.6%) |
Income tax expense | | | 3,381 | | | 2,913 | | | 468 | | 16.1% | | | 8,485 | | | 8,090 | | | 395 | | 4.9% |
Net income | | $ | 12,747 | | $ | 14,421 | | $ | (1,674) | | (11.6%) | | $ | 35,049 | | $ | 36,143 | | $ | (1,094) | | (3.0%) |
Earnings per share - basic | | $ | 0.52 | | $ | 0.59 | | | | | | | $ | 1.43 | | $ | 1.48 | | | | | |
Earnings per share - diluted | | | 0.52 | | | 0.59 | | | | | | | | 1.43 | | | 1.47 | | | | | |
Dividends per share | | | 0.13 | | | 0.13 | | | | | | | | 0.39 | | | 0.39 | | | | | |
41
Net Interest Income for the Nine Months Ended September 30, 2022, Compared to the Nine Months Ended September 30, 2021
Net interest income increased $15.2 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to higher average balances and higher average rates on loans and securities and higher average rates on interest-bearing deposits at other financial institutions.
The yield on interest-earning assets was 3.74% for the nine months ended September 30, 2022, compared to 3.52% for the nine months ended September 30, 2021. The cost of interest-bearing liabilities was 0.29% for the nine months ended September 30, 2022 and 0.32% for the nine months ended September 30, 2021. The Company’s net interest margin on a tax equivalent basis was 3.65%primarily due to the Merger and an increase in the average yield on interest-earning assets partially offset by increased funding costs. The average yield on interest-earning assets of 6.08% and the average rate paid on interest-bearing liabilities of 2.86% for the ninesecond quarter of 2023 increased by 227 basis points and 230 basis points, respectively, over the same period in 2022. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the three months ended SeptemberJune 30, 2023 and 2022, comparedthus making tax-exempt yields comparable to 3.40% for the nine months ended September 30, 2021.
taxable asset yields.
Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||||||||||||||
Average Balance | Interest Earned/ Interest Paid | Average Yield/ Rate | Average Balance | Interest Earned/ Interest Paid | Average Yield/ Rate | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||
Interest-earning Assets: | |||||||||||||||||||||||||||||||||||
Loans | $ | 7,980,856 | $ | 133,931 | 6.73 | % | $ | 4,303,714 | $ | 53,835 | 5.02 | % | |||||||||||||||||||||||
Securities | 1,502,949 | 10,162 | 2.71 | % | 1,778,745 | 8,128 | 1.83 | % | |||||||||||||||||||||||||||
Deposits in other financial institutions | 209,722 | 2,865 | 5.48 | % | 535,546 | 877 | 0.66 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 9,693,527 | $ | 146,958 | 6.08 | % | 6,618,005 | $ | 62,840 | 3.81 | % | |||||||||||||||||||||||||
Allowance for credit losses on loans | (96,414) | (49,290) | |||||||||||||||||||||||||||||||||
Noninterest-earning assets | 1,143,025 | 450,584 | |||||||||||||||||||||||||||||||||
Total assets | $ | 10,740,138 | $ | 7,019,299 | |||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||
Interest-bearing Liabilities: | |||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 1,387,604 | $ | 9,343 | 2.70 | % | $ | 1,044,493 | $ | 927 | 0.36 | % | |||||||||||||||||||||||
Money market and savings deposits | 2,220,827 | 11,365 | 2.05 | % | 1,566,376 | 932 | 0.24 | % | |||||||||||||||||||||||||||
Certificates and other time deposits | 1,225,834 | 9,622 | 3.15 | % | 1,088,664 | 1,922 | 0.71 | % | |||||||||||||||||||||||||||
Borrowed funds | 479,896 | 6,535 | 5.46 | % | 50,116 | 114 | 0.91 | % | |||||||||||||||||||||||||||
Subordinated debt | 109,499 | 1,812 | 6.64 | % | 109,045 | 1,463 | 5.38 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 5,423,660 | $ | 38,677 | 2.86 | % | 3,858,694 | $ | 5,358 | 0.56 | % | |||||||||||||||||||||||||
Noninterest-Bearing Liabilities: | |||||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits | 3,779,594 | 2,382,230 | |||||||||||||||||||||||||||||||||
Other liabilities | 78,411 | 34,249 | |||||||||||||||||||||||||||||||||
Total liabilities | 9,281,665 | 6,275,173 | |||||||||||||||||||||||||||||||||
Shareholders' equity | 1,458,473 | 744,126 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 10,740,138 | $ | 7,019,299 | |||||||||||||||||||||||||||||||
Net interest rate spread | 3.22 | % | 3.25 | % | |||||||||||||||||||||||||||||||
Net interest income and margin(1) | $ | 108,281 | 4.48 | % | $ | 57,482 | 3.48 | % | |||||||||||||||||||||||||||
Net interest income and margin (tax equivalent)(2) | $ | 108,509 | 4.49 | % | $ | 58,238 | 3.53 | % | |||||||||||||||||||||||||||
Cost of funds | 1.69 | % | 0.34 | % | |||||||||||||||||||||||||||||||
Cost of deposits | 1.41 | % | 0.25 | % |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | ||||||||||||||
| | 2022 | | 2021 | ||||||||||||
| | Average | | Interest | | Average | | Average | | Interest | | Average | ||||
| | Outstanding | | Earned/ | | Yield/ | | Outstanding | | Earned/ | | Yield/ | ||||
(Dollars in thousands) | | Balance | | Interest Paid | | Rate(1) | | Balance | | Interest Paid | | Rate(1) | ||||
Assets | | | | | | | | | | | | | | | | |
Interest-earning assets: |
| | |
| |
|
|
| | |
|
| |
|
|
|
Total loans(2) | | $ | 2,953,607 | | $ | 102,047 |
| 4.62% | | $ | 2,812,449 | | $ | 94,723 |
| 4.50% |
Securities | |
| 537,889 | |
| 8,275 |
| 2.06% | |
| 296,958 | | | 3,940 |
| 1.77% |
Interest-bearing deposits at other financial institutions | |
| 595,458 | |
| 3,994 |
| 0.90% | |
| 668,119 | | | 740 |
| 0.15% |
Equity investments | |
| 13,386 | |
| 473 |
| 4.72% | |
| 14,679 | | | 461 |
| 4.20% |
Total interest-earning assets | |
| 4,100,340 | | $ | 114,789 |
| 3.74% | |
| 3,792,205 | | $ | 99,864 |
| 3.52% |
Allowance for credit losses for loans | |
| (31,599) | |
|
|
|
| |
| (39,594) | |
|
|
|
|
Noninterest-earning assets | |
| 313,938 | |
|
|
|
| |
| 318,009 | |
|
|
|
|
Total assets | | $ | 4,382,679 | |
|
|
|
| | $ | 4,070,620 | |
|
|
|
|
Liabilities and Shareholders’ Equity | |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Interest-bearing liabilities: | |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Interest-bearing deposits | | $ | 1,971,247 | | $ | 4,003 |
| 0.27% | | $ | 1,846,211 | | $ | 3,844 |
| 0.28% |
Federal Home Loan Bank advances | |
| 18,315 | |
| 272 |
| 1.99% | |
| 50,000 | |
| 663 |
| 1.77% |
Total interest-bearing liabilities | |
| 1,989,562 | | $ | 4,275 |
| 0.29% | |
| 1,896,211 | | $ | 4,507 |
| 0.32% |
Noninterest-bearing liabilities: | |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Noninterest-bearing deposits | |
| 1,803,702 | |
|
|
|
| |
| 1,568,071 | |
|
|
|
|
Other liabilities | |
| 44,479 | |
|
|
|
| |
| 50,966 | |
|
|
|
|
Total noninterest-bearing liabilities | |
| 1,848,181 | |
|
|
|
| |
| 1,619,037 | |
|
|
|
|
Shareholders’ equity | |
| 544,936 | |
|
|
|
| |
| 555,372 | |
|
|
|
|
Total liabilities and shareholders’ equity | | $ | 4,382,679 | |
|
|
|
| | $ | 4,070,620 | |
|
|
|
|
Net interest income | |
|
| | $ | 110,514 |
|
| |
|
| | $ | 95,357 |
|
|
Net interest spread(3) | |
|
| |
|
|
| 3.45% | |
|
| |
|
|
| 3.20% |
Net interest margin(4) | |
|
| |
|
|
| 3.60% | |
|
| |
|
|
| 3.36% |
Net interest margin - tax equivalent(5) | |
|
| |
|
|
| 3.65% | |
|
| |
|
|
| 3.40% |
42
Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||||||||||||||||
Average Balance | Interest Earned/ Interest Paid | Average Yield/ Rate | Average Balance | Interest Earned/ Interest Paid | Average Yield/ Rate | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||
Loans | $ | 7,914,303 | $ | 259,660 | 6.62 | % | $ | 4,267,810 | $ | 106,205 | 5.02 | % | |||||||||||||||||||||||
Securities | 1,553,200 | 21,077 | 2.74 | % | 1,807,024 | 15,721 | 1.75 | % | |||||||||||||||||||||||||||
Deposits in other financial institutions | 286,823 | 6,636 | 4.67 | % | 670,316 | 1,217 | 0.37 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 9,754,326 | $ | 287,373 | 5.94 | % | 6,745,150 | $ | 123,143 | 3.68 | % | |||||||||||||||||||||||||
Allowance for credit losses on loans | (94,881) | (48,819) | |||||||||||||||||||||||||||||||||
Noninterest-earning assets | 1,151,497 | 441,390 | |||||||||||||||||||||||||||||||||
Total assets | $ | 10,810,942 | $ | 7,137,721 | |||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||
Interest-bearing Liabilities: | |||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 1,518,213 | $ | 17,725 | 2.35 | % | $ | 1,057,678 | $ | 1,476 | 0.28 | % | |||||||||||||||||||||||
Money market and savings deposits | 2,355,112 | 21,020 | 1.80 | % | 1,575,325 | 1,730 | 0.22 | % | |||||||||||||||||||||||||||
Certificates and other time deposits | 1,044,721 | 12,929 | 2.50 | % | 1,166,490 | 4,078 | 0.70 | % | |||||||||||||||||||||||||||
Borrowed funds | 293,578 | 7,852 | 5.39 | % | 69,868 | 300 | 0.87 | % | |||||||||||||||||||||||||||
Subordinated debt | 109,458 | 3,739 | 6.89 | % | 108,979 | 2,905 | 5.38 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 5,321,082 | $ | 63,265 | 2.40 | % | 3,978,340 | $ | 10,489 | 0.53 | % | |||||||||||||||||||||||||
Noninterest-Bearing Liabilities: | |||||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits | 3,971,862 | 2,347,366 | |||||||||||||||||||||||||||||||||
Other liabilities | 79,609 | 37,767 | |||||||||||||||||||||||||||||||||
Total liabilities | 9,372,553 | 6,363,473 | |||||||||||||||||||||||||||||||||
Shareholders' equity | 1,438,389 | 774,248 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 10,810,942 | $ | 7,137,721 | |||||||||||||||||||||||||||||||
Net interest rate spread | 3.54 | % | 3.15 | % | |||||||||||||||||||||||||||||||
Net interest income and margin(1) | $ | 224,108 | 4.63 | % | $ | 112,654 | 3.37 | % | |||||||||||||||||||||||||||
Net interest income and margin (tax equivalent)(2) | $ | 224,628 | 4.64 | % | $ | 114,160 | 3.41 | % | |||||||||||||||||||||||||||
Cost of funds | 1.37 | % | 0.33 | % | |||||||||||||||||||||||||||||||
Cost of deposits | 1.17 | % | 0.24 | % |
| | | | | | | | | |
| | Nine Months Ended September 30, 2022, | |||||||
| | Compared to Nine Months Ended September 30, 2021 | |||||||
|
| Increase (Decrease) due to | | ||||||
(Dollars in thousands) | | Rate | | Volume | | Total | |||
Interest-earning assets: | | | | | | | | | |
Total loans | | $ | 2,573 | | $ | 4,751 | | $ | 7,324 |
Securities | |
| 1,145 | | | 3,190 | |
| 4,335 |
Interest-bearing deposits at other financial institutions | |
| 3,336 | | | (82) | |
| 3,254 |
Equity investments | |
| 53 | | | (41) | |
| 12 |
Total increase in interest income | | | 7,107 | | | 7,818 | | | 14,925 |
Interest-bearing liabilities: | |
|
| |
|
| |
|
|
Interest-bearing deposits | | | (103) | | | 262 | | | 159 |
Federal Home Loan Bank advances | |
| 28 | | | (419) | |
| (391) |
Total decrease in interest expense | | | (75) | | | (157) | | | (232) |
Increase in net interest income | | $ | 7,182 | | $ | 7,975 | | $ | 15,157 |
Net Interest Income
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
2023 vs. 2022 | 2023 vs. 2022 | ||||||||||||||||||||||||||||||||||
Increase (Decrease) Due to Change in | Increase (Decrease) Due to Change in | ||||||||||||||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Interest-earning Assets: | |||||||||||||||||||||||||||||||||||
Loans | $ | 46,022 | $ | 34,074 | $ | 80,096 | $ | 90,914 | $ | 62,541 | $ | 153,455 | |||||||||||||||||||||||
Securities | (1,258) | 3,292 | 2,034 | (2,203) | 7,559 | 5,356 | |||||||||||||||||||||||||||||
Deposits in other financial institutions | (536) | 2,524 | 1,988 | (704) | 6,123 | 5,419 | |||||||||||||||||||||||||||||
Total increase in interest income | 44,228 | 39,890 | 84,118 | 88,007 | 76,223 | 164,230 | |||||||||||||||||||||||||||||
Interest-bearing Liabilities: | |||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | 308 | 8,108 | 8,416 | 639 | 15,610 | 16,249 | |||||||||||||||||||||||||||||
Money market and savings deposits | 392 | 10,041 | 10,433 | 851 | 18,439 | 19,290 | |||||||||||||||||||||||||||||
Certificates and other time deposits | 243 | 7,457 | 7,700 | (423) | 9,274 | 8,851 | |||||||||||||||||||||||||||||
Borrowed funds | 975 | 5,446 | 6,421 | 965 | 6,587 | 7,552 | |||||||||||||||||||||||||||||
Subordinated debt | 6 | 343 | 349 | 13 | 821 | 834 | |||||||||||||||||||||||||||||
Total increase in interest expense | 1,924 | 31,395 | 33,319 | 2,045 | 50,731 | 52,776 | |||||||||||||||||||||||||||||
Increase in net interest income | $ | 42,304 | $ | 8,495 | $ | 50,799 | $ | 85,962 | $ | 25,492 | $ | 111,454 |
Net interest income increased $11.8bring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities to a level deemed appropriate by management. We recorded a provision for credit losses of $1.9 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to higher rates on interest-earning assets and higher average loans and securities.
The yield on interest-earning assets was 4.36%$2.1 million for the three months ended SeptemberJune 30, 2023 and 2022, compared to 3.33% for the three months ended September 30, 2021. The cost of interest-bearing liabilities was 0.34% for the three months ended September 30, 2022respectively, and 0.30% for the three months ended September 30, 2021. The Company’s net interest margin on a tax equivalent basis was 4.25% for the three months ended September 30, 2022, compared to 3.22% for the three months ended September 30, 2021.
43
The following table presents for the periods indicated, average outstanding balances for each major category of interest-earning assets$5.6 million and interest-bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated.
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | ||||||||||||||
| | 2022 | | 2021 | ||||||||||||
| | Average | | Interest | | Average | | Average | | Interest | | Average | ||||
| | Outstanding | | Earned/ | | Yield/ | | Outstanding | | Earned/ | | Yield/ | ||||
(Dollars in thousands) | | Balance | | Interest Paid | | Rate(1) | | Balance | | Interest Paid | | Rate(1) | ||||
Assets | | | | | | | | | | | | | | | | |
Interest-earning assets: |
| |
|
| |
|
|
| | |
|
| |
|
|
|
Total loans(2) | | $ | 3,074,655 | | $ | 39,058 |
| 5.04% | | $ | 2,702,248 | | $ | 30,765 |
| 4.52% |
Securities | |
| 552,901 | |
| 3,046 |
| 2.19% | |
| 327,968 | |
| 1,435 |
| 1.74% |
Interest-bearing deposits at other financial institutions | |
| 428,196 | |
| 2,408 |
| 2.23% | |
| 854,406 | |
| 340 |
| 0.16% |
Equity investments | |
| 13,393 | |
| 161 |
| 4.77% | |
| 13,367 | |
| 157 |
| 4.66% |
Total interest-earning assets | |
| 4,069,145 | | $ | 44,673 |
| 4.36% | |
| 3,897,989 | | $ | 32,697 |
| 3.33% |
Allowance for credit losses for loans | |
| (32,106) | |
|
|
| | |
| (36,945) | |
|
|
|
|
Noninterest-earning assets | |
| 318,761 | |
|
|
|
| |
| 313,901 | |
|
|
|
|
Total assets | | $ | 4,355,800 | |
|
|
|
| | $ | 4,174,945 | |
|
|
|
|
Liabilities and Shareholders’ Equity | |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Interest-bearing liabilities: | |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Interest-bearing deposits | | $ | 1,954,854 | | $ | 1,661 |
| 0.34% | | $ | 1,895,617 | | $ | 1,227 |
| 0.26% |
Federal Home Loan Bank advances | |
| — | |
| — |
| — | |
| 50,000 | |
| 221 |
| 1.75% |
Total interest-bearing liabilities | |
| 1,954,854 | | $ | 1,661 |
| 0.34% | |
| 1,945,617 | | $ | 1,448 |
| 0.30% |
Noninterest-bearing liabilities: | |
|
| |
|
|
|
| |
|
| |
|
|
|
|
Noninterest-bearing deposits | |
| 1,822,323 | |
|
|
|
| |
| 1,612,985 | |
|
|
|
|
Other liabilities | |
| 40,684 | |
|
|
|
| |
| 52,712 | |
|
|
|
|
Total noninterest-bearing liabilities | |
| 1,863,007 | |
|
|
|
| |
| 1,665,697 | |
|
|
|
|
Shareholders’ equity | |
| 537,939 | |
|
|
|
| |
| 563,631 | |
|
|
|
|
Total liabilities and shareholders’ equity | | $ | 4,355,800 | |
|
|
|
| | $ | 4,174,945 | |
|
|
|
|
Net interest income | |
|
| | $ | 43,012 |
|
| |
|
| | $ | 31,249 |
|
|
Net interest spread(3) | |
|
| |
|
|
| 4.02% | |
|
| |
|
|
| 3.03% |
Net interest margin(4) | |
|
| |
|
|
| 4.19% | |
|
| |
|
|
| 3.18% |
Net interest margin - tax equivalent(5) | |
|
| |
|
|
| 4.25% | |
|
| |
|
|
| 3.22% |
44
The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
| | | | | | | | | |
| | Three Months Ended September 30, 2022, | |||||||
| | Compared to Three Months Ended September 30, 2021 | |||||||
|
| Increase (Decrease) due to | | ||||||
(Dollars in thousands) | | Rate | | Volume | | Total | |||
Interest-earning assets: | | | | | | | | | |
Total loans | | $ | 4,051 | | $ | 4,242 | | $ | 8,293 |
Securities | |
| 624 | |
| 987 | |
| 1,611 |
Interest-bearing deposits at other financial institutions | |
| 2,239 | |
| (171) | |
| 2,068 |
Equity investments | |
| 4 | |
| — | |
| 4 |
Total increase in interest income | | | 6,918 | | | 5,058 | | | 11,976 |
Interest-bearing liabilities: | |
|
| |
|
| |
|
|
Interest-bearing deposits | | | 394 | | | 40 | | | 434 |
Federal Home Loan Bank advances | |
| — | | | (221) | |
| (221) |
Total decrease in interest expense | | | 394 | | | (181) | | | 213 |
Increase in net interest income | | $ | 6,524 | | $ | 5,239 | | $ | 11,763 |
Provision for Credit Losses
The$4.0 million provision for credit losses was $1.0 million and $1.6 million for the three and ninesix months ended SeptemberJune 30, 2023 and 2022, respectively, compared to recaptures of $4.9 million and $9.6 million for the three and nine months ended September 30, 2021, respectively.
The provision for credit losses for the three and ninesix months ended SeptemberJune 30, 2023 and 2022, was comprisedprimarily resulted from an increase in loans during those periods, among other factors.
The recapture of credit losses for the three and nine months ended SeptemberJune 30, 2021 was2023 compared with $2.7 million for the same period in 2022, an increase of $2.8 million, or 102.8%, primarily due to increased debt card and ATM income and service charges due to increased scale as a result of certain qualitative factor adjustments made on the ACL. DueMerger.
Merger.
Noninterest Income
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||||||||||||
(Dollars in thousands) | | 2022 | | 2021 | | Increase (Decrease) | | 2022 | | 2021 | | Increase (Decrease) | ||||||||||
Deposit account service charges | | $ | 1,320 | | $ | 1,352 | | $ | (32) |
| (2.4%) | | $ | 4,076 | | $ | 3,712 | | $ | 364 |
| 9.8% |
Card interchange fees | |
| 1,056 | |
| 1,048 | |
| 8 |
| 0.8% | |
| 3,228 | |
| 3,119 | |
| 109 |
| 3.5% |
Earnings on bank-owned life insurance | |
| 376 | |
| 2,323 | |
| (1,947) |
| (83.8%) | |
| 1,118 | |
| 3,103 | |
| (1,985) |
| (64.0%) |
Net gain on sales of assets | |
| 85 | |
| 360 | |
| (275) |
| (76.4%) | |
| 673 | |
| 918 | |
| (245) |
| (26.7%) |
Other | |
| 612 | |
| 479 | |
| 133 |
| 27.8% | |
| 3,229 | |
| 1,312 | |
| 1,917 |
| 146.1% |
Total noninterest income | | $ | 3,449 | | $ | 5,562 | | $ | (2,113) |
| (38.0%) | | $ | 12,324 | | $ | 12,164 | | $ | 160 |
| 1.3% |
For the Three Months Ended June 30, | Increase (Decrease) | For the Six Months Ended June 30, | Increase (Decrease) | ||||||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Nonsufficient funds fees | $ | 418 | $ | 126 | $ | 292 | $ | 824 | $ | 242 | $ | 582 | |||||||||||||||||||||||
Service charges on deposit accounts | 1,157 | 560 | 597 | 2,100 | 1,087 | 1,013 | |||||||||||||||||||||||||||||
(Loss) gain on sale of assets | (6) | (17) | 11 | 192 | (17) | 209 | |||||||||||||||||||||||||||||
Bank-owned life insurance income | 532 | 342 | 190 | 1,054 | 475 | 579 | |||||||||||||||||||||||||||||
Debit card and ATM card income | 1,821 | 880 | 941 | 3,519 | 1,699 | 1,820 | |||||||||||||||||||||||||||||
Other(1) | 1,561 | 813 | 748 | 5,292 | 3,236 | 2,056 | |||||||||||||||||||||||||||||
Total noninterest income | $ | 5,483 | $ | 2,704 | $ | 2,779 | $ | 12,981 | $ | 6,722 | $ | 6,259 |
The decrease in noninterest incomeOther includes wire transfer and letter of $2.1credit fees, among other items.
For the Three Months Ended June 30, | Increase (Decrease) | For the Six Months Ended June 30, | Increase (Decrease) | ||||||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Salaries and employee benefits(1) | $ | 37,300 | $ | 21,864 | $ | 15,436 | $ | 77,075 | $ | 44,592 | $ | 32,483 | |||||||||||||||||||||||
Net occupancy and equipment | 3,817 | 2,220 | 1,597 | 7,905 | 4,425 | 3,480 | |||||||||||||||||||||||||||||
Depreciation | 1,841 | 1,012 | 829 | 3,677 | 2,045 | 1,632 | |||||||||||||||||||||||||||||
Data processing and software amortization | 4,674 | 2,522 | 2,152 | 9,728 | 5,020 | 4,708 | |||||||||||||||||||||||||||||
Professional fees | 1,564 | 662 | 902 | 3,091 | 800 | 2,291 | |||||||||||||||||||||||||||||
Regulatory assessments and FDIC insurance | 2,755 | 1,256 | 1,499 | 4,049 | 2,517 | 1,532 | |||||||||||||||||||||||||||||
Amortization of intangibles | 6,881 | 751 | 6,130 | 13,760 | 1,502 | 12,258 | |||||||||||||||||||||||||||||
Communications | 689 | 363 | 326 | 1,390 | 704 | 686 | |||||||||||||||||||||||||||||
Advertising | 907 | 483 | 424 | 1,746 | 945 | 801 | |||||||||||||||||||||||||||||
Acquisition and merger-related expenses | 2,897 | 1,667 | 1,230 | 9,062 | 2,118 | 6,944 | |||||||||||||||||||||||||||||
Other | 5,882 | 5,104 | 778 | 10,322 | 7,753 | 2,569 | |||||||||||||||||||||||||||||
Total noninterest expense | $ | 69,207 | $ | 37,904 | $ | 31,303 | $ | 141,805 | $ | 72,421 | $ | 69,384 |
45
Total other noninterest income increased $160,000 during the ninesix months ended SeptemberJune 30, 2022,2023, respectively, were primarily related to compensation and legal and advisory fees associated with the Merger.
Noninterest Expense
Generally, noninterest expense is composed of employee expenses and costs associatedcomparison with operating facilities, obtaining and retaining customer relationships and providing bank services. See further analysis of these changes in our total assets and loans, and we believe that maintaining or reducing the related discussions that follow.
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | ||||||||||||||||
(Dollars in thousands) | | 2022 | | 2021 | | Increase (Decrease) | | 2022 | | 2021 | | Increase (Decrease) | ||||||||||
Salaries and employee benefits | | $ | 16,453 | | $ | 15,000 | | $ | 1,453 |
| 9.7% | | $ | 46,405 | | $ | 43,922 | | $ | 2,483 |
| 5.7% |
Occupancy expense | | | 2,595 | | | 2,660 | | | (65) |
| (2.4%) | | | 7,362 | | | 7,778 | | | (416) |
| (5.3%) |
Professional and director fees | | | 942 | | | 1,567 | | | (625) |
| (39.9%) | | | 2,963 | | | 5,711 | | | (2,748) |
| (48.1%) |
Data processing and software | | | 1,502 | | | 1,629 | | | (127) |
| (7.8%) | | | 4,723 | | | 4,866 | | | (143) |
| (2.9%) |
Regulatory fees | | | 599 | | | 478 | | | 121 |
| 25.3% | | | 2,016 | | | 1,535 | | | 481 |
| 31.3% |
Advertising, marketing and business development | | | 350 | | | 493 | | | (143) |
| (29.0%) | | | 965 | | | 1,288 | | | (323) |
| (25.1%) |
Telephone and communications | | | 348 | | | 516 | | | (168) |
| (32.6%) | | | 1,151 | | | 1,529 | | | (378) |
| (24.7%) |
Security and protection expense | | | 386 | | | 425 | | | (39) |
| (9.2%) | | | 880 | | | 1,352 | | | (472) |
| (34.9%) |
Amortization of intangibles | | | 165 | | | 182 | | | (17) |
| (9.3%) | | | 518 | | | 559 | | | (41) |
| (7.3%) |
Other expenses | | | 5,981 | | | 1,422 | | | 4,559 |
| 320.6% | | | 10,748 | | | 4,314 | | | 6,434 |
| 149.1% |
Total noninterest expense | | $ | 29,321 | | $ | 24,372 | | $ | 4,949 |
| 20.3% | | $ | 77,731 | | $ | 72,854 | | $ | 4,877 |
| 6.7% |
Total noninterest expense increased $4.9 million for bothefficiency ratio during periods of growth demonstrates the three and nine months ended September 30, 2022, comparedscalability of our operating platform. We expect to the three and nine months ended September 30, 2021.
The increasecontinue to benefit from our scalable platform in noninterest expense for the nine months ended September 30, 2022, comparedfuture periods as we continue to the nine months ended September 30, 2021, was primarily duemonitor overhead expenses necessary to $7.8 million of costs related to the Merger, partially offset by a $2.7 million decrease in professional and director fees, primarily related to BSA/AML compliance matters and legal fees.
The increase in noninterest expense for the third quarter of 2022, compared to the third quarter of 2021, was primarily due to $5.9 million of costs related to the Merger, partially offset by a $625,000 decrease in professional and director fees, primarily related to BSA/AML compliance matters and legal fees.
support our growth.
Taxes
| | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |||||||
(Dollars in thousands) | | 2022 | | 2021 |
| 2022 | | 2021 | |||
Income tax expense | | $ 3,381 | | | $ 2,913 | | | $ 8,485 | | | $ 8,090 |
Effective tax rate | | 20.96% | | | 16.81% | | | 19.49% | | | 18.29% |
a percentage of deposits were 92.0% and 83.7% as of June 30, 2023 and December 31, 2022, respectively. Total loans as a percentage of assets were 74.9% and 71.1% as of June 30, 2023 and December 31, 2022, respectively.
June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 1,512,476 | 18.7 | % | $ | 1,455,795 | 18.8 | % | |||||||||||||||||||||||||||
Paycheck Protection Program (PPP) | 8,027 | 0.1 | % | 13,226 | 0.2 | % | |||||||||||||||||||||||||||||
Real estate: | |||||||||||||||||||||||||||||||||||
Commercial real estate (including multi-family residential) | 4,038,487 | 50.0 | % | 3,931,480 | 50.7 | % | |||||||||||||||||||||||||||||
Commercial real estate construction and land development | 1,136,124 | 14.1 | % | 1,037,678 | 13.4 | % | |||||||||||||||||||||||||||||
1-4 family residential (including home equity) | 1,009,439 | 12.5 | % | 1,000,956 | 12.9 | % | |||||||||||||||||||||||||||||
Residential construction | 311,208 | 3.9 | % | 268,150 | 3.4 | % | |||||||||||||||||||||||||||||
Consumer and other | 52,957 | 0.7 | % | 47,466 | 0.6 | % | |||||||||||||||||||||||||||||
Total loans | 8,068,718 | 100.0 | % | 7,754,751 | 100.0 | % | |||||||||||||||||||||||||||||
Allowance for credit losses on loans | (100,195) | (93,180) | |||||||||||||||||||||||||||||||||
Loans, net | $ | 7,968,523 | $ | 7,661,571 |
46
Financial Condition
Total assets were $4.3$1.51 billion as of SeptemberJune 30, 2022, compared to $4.52023 from $1.46 billion as of December 31, 2021.2022.
| | | | | | | | | | | |
(Dollars in thousands) |
| September 30, 2022 |
| December 31, 2021 | | Increase (Decrease) | |||||
Assets: | | | | | | | | | | | |
Loans excluding loans held for sale | | $ | 3,126,421 |
| $ | 2,867,524 | | $ | 258,897 |
| 9.0% |
Allowance for credit losses | |
| (32,577) |
| | (31,345) | |
| 1,232 |
| 3.9% |
Loans, net | | | 3,093,844 | | | 2,836,179 | | | 257,665 |
| 9.1% |
Cash and cash equivalents | | | 370,448 | | | 950,146 | | | (579,698) |
| (61.0%) |
Securities | | | 511,282 | | | 425,046 | | | 86,236 |
| 20.3% |
Premises and equipment | | | 55,594 | | | 58,417 | | | (2,823) | | (4.8%) |
Goodwill | | | 80,950 | | | 80,950 | | | — | | — |
Other intangible assets | | | 3,188 | | | 3,658 | | | (470) | | (12.8%) |
Loans held for sale | | | — | | | 164 | | | (164) | | (100.0%) |
Operating lease right-to-use asset | | | 10,992 | | | 11,191 | | | (199) |
| (1.8%) |
Other assets | | | 145,533 | | | 120,250 | | | 25,283 |
| 21.0% |
Total assets | | $ | 4,271,831 | | $ | 4,486,001 | | $ | (214,170) |
| (4.8%) |
Liabilities: | | | | | | | | | |
| |
Noninterest-bearing deposits | | $ | 1,780,473 |
| $ | 1,784,981 | | $ | (4,508) |
| (0.3%) |
Interest-bearing deposits | | | 1,943,301 | | | 2,046,303 | | | (103,002) |
| (5.0%) |
Total deposits | | | 3,723,774 | | | 3,831,284 | | | (107,510) |
| (2.8%) |
Federal Home Loan Bank advances | | | — | | | 50,000 | | | (50,000) |
| (100.0%) |
Operating lease liabilities | | | 13,748 | | | 14,142 | | | (394) |
| (2.8%) |
Other liabilities | | | 32,884 | | | 28,450 | | | 4,434 |
| 15.6% |
Total liabilities | | | 3,770,406 | | | 3,923,876 | | | (153,470) |
| (3.9%) |
Shareholders' equity | | | 501,425 | | | 562,125 | | | (60,700) |
| (10.8%) |
Total liabilities and shareholders' equity | | $ | 4,271,831 | | $ | 4,486,001 | | $ | (214,170) |
| (4.8%) |
47
Loan Portfolio
The components of theour commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased $107.0 million, or 2.7%, to $4.04 billion as of the dates indicated wasJune 30, 2023 from $3.93 billion as follows:
| | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2022 | | December 31, 2021 | | Increase (Decrease) | |||||
Commercial and industrial: | | | | | | | | | | | |
Oil and gas | | $ | 102,282 | | $ | 135,081 | | $ | (32,799) | | (24.3%) |
Industrial construction | | | 80,512 | | | 67,618 | | | 12,894 | | 19.1% |
Equipment rental | | | 69,900 | | | 60,206 | | | 9,694 | | 16.1% |
Professional/medical | | | 47,828 | | | 57,365 | | | (9,537) | | (16.6%) |
Manufacturing | | | 39,461 | | | 31,120 | | | 8,341 | | 26.8% |
PPP loans | | | 2,302 | | | 54,262 | | | (51,960) | | (95.8%) |
Other | | | 225,786 | | | 228,732 | | | (2,946) | | (1.3%) |
Total commercial and industrial | | | 568,071 | | | 634,384 | | | (66,313) | | (10.5%) |
Commercial real estate: | | | | | | | | | | | |
Non-owner occupied | | | 685,560 | | | 581,229 | | | 104,331 | | 18.0% |
Owner occupied | | | 500,690 | | | 443,853 | | | 56,837 | | 12.8% |
Oil and gas | | | 55,868 | | | 66,887 | | | (11,019) | | (16.5%) |
Total commercial real estate | | | 1,242,118 | | | 1,091,969 | | | 150,149 | | 13.8% |
Construction and development: | | | | | | | | | | | |
Land and development | | | 207,665 | | | 177,506 | | | 30,159 | | 17.0% |
Commercial | | | 154,344 | | | 107,663 | | | 46,681 | | 43.4% |
Multi-family community development | | | 73,343 | | | 119,363 | | | (46,020) | | (38.6%) |
1-4 family - commercial | | | 47,465 | | | 39,345 | | | 8,120 | | 20.6% |
1-4 family - primary | | | 23,343 | | | 14,285 | | | 9,058 | | 63.4% |
Oil and gas | | | 1,410 | | | 2,557 | | | (1,147) | | (44.9%) |
Total construction and development | | | 507,570 | | | 460,719 | | | 46,851 | | 10.2% |
Multi-family residential: | | | | | | | | | | | |
Multi-family community development | | | 305,567 | | | 238,913 | | | 66,654 | | 27.9% |
Other | | | 64,824 | | | 47,483 | | | 17,341 | | 36.5% |
Total multi-family residential | | | 370,391 | | | 286,396 | | | 83,995 | | 29.3% |
Total commercial loans | | | 2,688,150 | | | 2,473,468 | | | 214,682 | | 8.7% |
1-4 family residential | | | 288,456 | | | 277,273 | | | 11,183 | | 4.0% |
Consumer | | | 24,509 | | | 28,090 | | | (3,581) | | (12.7%) |
Other loans | | | 123,293 | | | 89,309 | | | 33,984 | | 38.1% |
Agriculture | | | 11,185 | | | 7,941 | | | 3,244 | | 40.9% |
Other oil and gas loans | | | 298 | | | 346 | | | (48) | | (13.9%) |
Total gross loans | | | 3,135,891 | | | 2,876,427 | | | 259,464 | | 9.0% |
Less deferred fees and unearned discount | | | (9,470) | | | (8,739) | | | (731) | | 8.4% |
Less loans held for sale | | | — | | | (164) | | | 164 | | (100.0%) |
Loans excluding loans held for sale | | | 3,126,421 | | | 2,867,524 | | | 258,897 | | 9.0% |
Less allowance for credit losses for loans | | | (32,577) | | | (31,345) | | | (1,232) | | 3.9% |
Loans, net | | $ | 3,093,844 | | $ | 2,836,179 | | $ | 257,665 | | 9.1% |
As of September 30, 2022, loans excluding loans held for sale were $3.1 billion, an increase of $258.9 million, or 9.0%, compared to December 31, 2021, primarily due to originations and line of credit drawdowns outpacing paydowns.
As of September 30, 2022, the Company had 11 loans outstanding funded under the Paycheck Protection Program, or PPP, under the CARES Act totaling $2.3 million. As of December 31, 2021, the Company2022, primarily as a result of organic loan growth. Included in our commercial real estate portfolio are multi-family residential loans. Our multi-family loans as of June 30, 2023 decreased to $431.3 million from $471.6 million as of December 31, 2022. We had 330 PPP233 multi-family loans totaling $54.3 million.
with an average loan size of $2.0 million as of June 30, 2023.
48
service companies and commercial real estate companies with significant reliance on oil and gas companies.
As of September 30, 2022 and December 31, 2021, the Company’s loan portfolio included $378.9 million and $358.3 million, respectively, ofmultifamily community development loans with associated tax credits, which fund Texas basedTexas-based projects to promote affordable housing.
housing, compared to $287.3 million as of December 31, 2022.
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
|
| |
| 1 Year |
| 5 Years | | After |
| | | ||||
(Dollars in thousands) | | 1 Year or Less | | Through 5 Years | | Through 15 Years | | 15 years | | Total | |||||
September 30, 2022 | | | | | | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | |
Fixed rate | | $ | 52,941 | | $ | 147,256 | | $ | 4,320 | | $ | — | | $ | 204,517 |
Variable rate | | | 175,044 | | | 125,566 | | | 62,464 | | | 480 | | | 363,554 |
| | | 227,985 | | | 272,822 | | | 66,784 | | | 480 | | | 568,071 |
Real estate: | |
| | | | | | | | | | | |
|
|
Commercial real estate: | |
| | | | | | | | | | | | | |
Fixed rate | | | 71,069 | | | 520,448 | | | 82,018 | | | — | | | 673,535 |
Variable rate | | | 26,456 | | | 339,615 | | | 182,475 | | | 20,037 | | | 568,583 |
| | | 97,525 | | | 860,063 | | | 264,493 | | | 20,037 | | | 1,242,118 |
Construction and development: | |
| | | | | | | | | | | | | |
Fixed rate | | | 52,706 | | | 86,184 | | | 1,728 | | | 12,163 | | | 152,781 |
Variable rate | | | 66,967 | | | 260,955 | | | 10,701 | | | 16,166 | | | 354,789 |
| | | 119,673 | | | 347,139 | | | 12,429 | | | 28,329 | | | 507,570 |
1-4 family residential: | |
| | | | | | | | | | | | | |
Fixed rate | | | 3,458 | | | 42,936 | | | 16,973 | | | 111,825 | | | 175,192 |
Variable rate | | | 1,134 | | | 2,975 | | | 14,043 | | | 95,112 | | | 113,264 |
| | | 4,592 | | | 45,911 | | | 31,016 | | | 206,937 | | | 288,456 |
Multi-family residential: | |
| | | | | | | | | | | | | |
Fixed rate | | | 1,273 | | | 16,505 | | | 200,984 | | | 41,100 | | | 259,862 |
Variable rate | | | 80,710 | | | 29,618 | | | 201 | | | — | | | 110,529 |
| | | 81,983 | | | 46,123 | | | 201,185 | | | 41,100 | | | 370,391 |
Consumer: | |
| | | | | | | | | | | |
| |
Fixed rate | | | 6,276 | | | 8,356 | | | — | | | — | | | 14,632 |
Variable rate | | | 7,935 | | | 1,795 | | | 147 | | | — | | | 9,877 |
| | | 14,211 | | | 10,151 | | | 147 | | | — | | | 24,509 |
Agriculture: | |
| | | | | | | | | | | |
| |
Fixed rate | | | 6,711 | | | 1,299 | | | — | | | — | | | 8,010 |
Variable rate | | | 3,151 | | | 24 | | | — | | | — | | | 3,175 |
| | | 9,862 | | | 1,323 | | | — | | | — | | | 11,185 |
Other: | | | | | | | | | | | | | | | |
Fixed rate | | | 2,128 | | | 1,007 | | | — | | | — | | | 3,135 |
Variable rate | | | 28,131 | | | 88,110 | | | 4,215 | | | — | | | 120,456 |
| | | 30,259 | | | 89,117 | | | 4,215 | | | — | | | 123,591 |
Total: | | | | | | | | | | | | | | | |
Fixed rate loans | | | 196,562 | | | 823,991 | | | 306,023 | | | 165,088 | | | 1,491,664 |
Variable rate loans | |
| 389,528 | | | 848,658 | | | 274,246 | | | 131,795 | | | 1,644,227 |
Total gross loans | | $ | 586,090 | | $ | 1,672,649 | | $ | 580,269 | | $ | 296,883 | | $ | 3,135,891 |
of December 31, 2022.
49
June 30, 2023 | December 31, 2022 | ||||||||||
(Dollars in thousands) | |||||||||||
Nonaccrual loans: | |||||||||||
Commercial and industrial | $ | 22,800 | $ | 25,297 | |||||||
Paycheck Protection Program (PPP) | 168 | 105 | |||||||||
Real estate: | |||||||||||
Commercial real estate (including multi-family residential) | 8,221 | 9,970 | |||||||||
Commercial real estate construction and land development | 388 | — | |||||||||
1-4 family residential (including home equity) | 10,880 | 9,404 | |||||||||
Residential construction | 665 | — | |||||||||
Consumer and other | 227 | 272 | |||||||||
Total nonaccrual loans | 43,349 | 45,048 | |||||||||
Accruing loans 90 or more days past due | — | — | |||||||||
Total nonperforming loans | 43,349 | 45,048 | |||||||||
Other real estate | — | — | |||||||||
Total nonperforming assets | $ | 43,349 | $ | 45,048 | |||||||
Modified/restructured loans(1) | $ | 11,291 | $ | 35,425 | |||||||
Nonperforming assets to total assets | 0.40 | % | 0.41 | % | |||||||
Nonperforming loans to total loans | 0.54 | % | 0.58 | % |
| | | | | | |
|
| | | | ||
(Dollars in thousands) | | September 30, 2022 | | December 31, 2021 | ||
Nonaccrual loans | | $ | 22,410 | | $ | 22,568 |
Accruing loans 90 or more days past due | | | — | | | — |
Total nonperforming loans | | | 22,410 | | | 22,568 |
Foreclosed assets | | | — | | | — |
Total nonperforming assets | | $ | 22,410 | | $ | 22,568 |
Total assets | | $ | 4,271,831 | | $ | 4,486,001 |
Loans excluding loans held for sale | | | 3,126,421 | | | 2,867,524 |
Allowance for credit losses for loans | | | 32,577 | | | 31,345 |
Allowance for credit losses for loans to nonaccrual loans | | | 145.37% | | | 138.89% |
Nonperforming loans to loans excluding loans held for sale | | | 0.72% | | | 0.79% |
Nonperforming assets to total assets | | | 0.52% | | | 0.50% |
a nonperforming loan.
Nonperformingf 107 separate credits at June 30, 2023 compared to 96 separate credits at December 31, 2022.
As of and for the Six Months Ended June 30, | |||||||||||
2023 | 2022 | ||||||||||
(Dollars in thousands) | |||||||||||
Average loans outstanding | $ | 7,914,303 | $ | 4,267,810 | |||||||
Gross loans outstanding at end of period | 8,068,718 | 4,348,833 | |||||||||
Allowance for credit losses on loans at beginning of period | 93,180 | 47,940 | |||||||||
Provision for credit losses on loans | 7,443 | 3,190 | |||||||||
Charge-offs: | |||||||||||
Commercial and industrial loans | (1,484) | (956) | |||||||||
Real estate: | |||||||||||
Commercial real estate (including multi-family residential) | — | (327) | |||||||||
Commercial real estate construction and land development | — | (63) | |||||||||
1-4 family residential (including home equity) | (23) | — | |||||||||
Residential construction | — | — | |||||||||
Consumer and other | (38) | (48) | |||||||||
Total charge-offs for all loan types | (1,545) | (1,394) | |||||||||
Recoveries: | |||||||||||
Commercial and industrial loans | 1,069 | 401 | |||||||||
Real estate: | |||||||||||
Commercial real estate (including multi-family residential) | 14 | 50 | |||||||||
Commercial real estate construction and land development | — | 55 | |||||||||
1-4 family residential (including home equity) | 9 | — | |||||||||
Consumer and other | 25 | — | |||||||||
Total recoveries for all loan types | 1,117 | 506 | |||||||||
Net charge-offs | (428) | (888) | |||||||||
Allowance for credit losses on loans at end of period | $ | 100,195 | $ | 50,242 | |||||||
Allowance for credit losses on loans to total loans | 1.24 | % | 1.16 | % | |||||||
Net charge-offs to average loans(1) | 0.01 | % | 0.04 | % | |||||||
Allowance for credit losses on loans to nonperforming loans | 231.14 | % | 178.01 | % |
Troubled Debt Restructurings
Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the nine months ended September 30, 2022, and 2021, which remained outstanding asrespectively
| | | | | | | | | | | | | | | | | |
| | | | | | | Post-modification Recorded Investment | ||||||||||
| | | | | | | | | | | | | | | | Extended | |
| | | | | | | | | | | | | | | | Maturity, | |
| | | | Pre-modification | | | | | | | | Extended | | Restructured | |||
| | | | Outstanding | | | | | | | | Maturity and | | Payments | |||
| | Number | | Recorded | | Restructured | | Extended | | Restructured | | and Adjusted | |||||
(Dollars in thousands) |
| of Loans |
| Investment |
| Payments |
| Maturity |
| Payments |
| Interest Rate | |||||
September 30, 2022 | | | | | | | | | | | | | | | | | |
Commercial and industrial | | 7 | | $ | 3,870 | | $ | 1,093 | | $ | — | | $ | — | | $ | 2,777 |
Real estate: | | | | | | | | | | | | | | | | | |
Commercial real estate |
| 2 | | | 2,273 | | | — | | | — | | | 2,040 | | | 245 |
Construction and development | | 3 | | | 431 | | | — | | | — | | | 431 | | | — |
Total |
| 12 | | $ | 6,574 | | $ | 1,093 | | $ | — | | $ | 2,471 | | $ | 3,022 |
September 30, 2021 | | | | | | | | | | | | | | | | | |
Commercial and industrial |
| 3 | | $ | 3,256 | | $ | 3,256 | | $ | — | | $ | — | | $ | — |
Real estate: | | | | | | | | | | | | | | | | | |
Commercial real estate |
| 1 | | | 1,206 | | | 1,206 | | | — | | | — | | | — |
1-4 family residential | | 1 | | | 1,548 | | | 1,548 | | | — | | | — | | | — |
Consumer | | 1 | | | 42 | | | — | | | — | | | 42 | | | — |
Total |
| 6 | | $ | 6,052 | | $ | 6,010 | | $ | — | | $ | 42 | | $ | — |
50
Risk Gradings
As partaccumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income. The following table summarizes the amortized cost and fair value of the on-going monitoring of the credit quality of the Company’s loansecurities in our securities portfolio and methodology for calculating the ACL, management assigns and tracks risk gradings as described below that are used as credit quality indicators.
The internal ratings of loans as of the periods indicated were as follows:
| | | | | | | | | | | | |
|
| | | | Special |
| | |
| | | |
(Dollars in thousands) | | Pass | | Mention | | Substandard | | Total | ||||
September 30, 2022 | | | | | | | | | | | | |
Commercial and industrial | | $ | 555,541 | | $ | — |
| $ | 12,530 |
| $ | 568,071 |
Real estate: | |
|
| |
|
|
|
|
|
|
|
|
Commercial real estate | |
| 1,209,994 | |
| 2,161 |
|
| 29,963 |
|
| 1,242,118 |
Construction and development | |
| 496,685 | |
| 421 |
|
| 10,464 |
|
| 507,570 |
1-4 family residential | |
| 282,486 | |
| — |
|
| 5,970 |
|
| 288,456 |
Multi-family residential | |
| 370,391 | |
| — |
|
| — |
|
| 370,391 |
Consumer | |
| 24,278 | |
| — |
|
| 231 |
|
| 24,509 |
Agriculture | |
| 11,126 | |
| — |
|
| 59 |
|
| 11,185 |
Other | |
| 123,590 | |
| — |
|
| 1 |
|
| 123,591 |
Total gross loans | | $ | 3,074,091 | | $ | 2,582 |
| $ | 59,218 |
| $ | 3,135,891 |
| | | | | | | | | | | | |
|
| | | | Special |
| | |
| | | |
(Dollars in thousands) | | Pass | | Mention | | Substandard | | Total | ||||
December 31, 2021 | | | | | | | | | | | | |
Commercial and industrial | | $ | 613,419 | | $ | 3,482 |
| $ | 17,483 |
| $ | 634,384 |
Real estate: | |
|
| |
|
|
|
|
|
|
|
|
Commercial real estate | |
| 1,038,401 | |
| 8,855 |
|
| 44,713 |
|
| 1,091,969 |
Construction and development | |
| 447,533 | |
| 470 |
|
| 12,716 |
|
| 460,719 |
1-4 family residential | |
| 272,217 | |
| — |
|
| 5,056 |
|
| 277,273 |
Multi-family residential | |
| 286,396 | |
| — |
|
| — |
|
| 286,396 |
Consumer | |
| 27,865 | |
| — |
|
| 225 |
|
| 28,090 |
Agriculture | |
| 7,899 | |
| — |
|
| 42 |
|
| 7,941 |
Other | |
| 89,655 | |
| — |
|
| — |
|
| 89,655 |
Total gross loans | | $ | 2,783,385 | | $ | 12,807 |
| $ | 80,235 |
| $ | 2,876,427 |
During the nine months of 2022, loans with an internal rating of pass increased $290.7 million primarily due to new originations, loans with an internal rating of special mention decreased $10.2 million primarily due to loan payoffs changes in risk gradings and loans with an internal rating of substandard decreased $21.0 million primarily due to payoffs and loans upgraded to pass during the same period.
Allowance for Credit Losses
The Company maintains an ACL that represents management’s best estimate of the expected credit losses and risks inherent in the loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the ACL, the Company estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current and forecasted economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Please refer to “Part I—Item 1.—Financial Statements—Note 6.”
51
The ACL by loan category as of the dates indicated wasshown:
June 30, 2023 | |||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||
U.S. government and agency securities | $ | 420,321 | $ | 156 | $ | (15,595) | $ | 404,882 | |||||||||||||||
Municipal securities | 259,423 | 2,177 | (32,402) | 229,198 | |||||||||||||||||||
Agency mortgage-backed pass-through securities | 385,780 | 272 | (41,671) | 344,381 | |||||||||||||||||||
Agency collateralized mortgage obligations | 455,153 | 1 | (66,382) | 388,772 | |||||||||||||||||||
Corporate bonds and other | 124,626 | 53 | (13,690) | 110,989 | |||||||||||||||||||
Total | $ | 1,645,303 | $ | 2,659 | $ | (169,740) | $ | 1,478,222 |
December 31, 2022 | |||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||
U.S. government and agency securities | $ | 433,417 | $ | 90 | $ | (19,227) | $ | 414,280 | |||||||||||||||
Municipal securities | 580,076 | 4,319 | (43,826) | 540,569 | |||||||||||||||||||
Agency mortgage-backed pass-through securities | 370,471 | 362 | (42,032) | 328,801 | |||||||||||||||||||
Agency collateralized mortgage obligations | 461,760 | — | (67,630) | 394,130 | |||||||||||||||||||
Corporate bonds and other | 143,192 | 2 | (13,388) | 129,806 | |||||||||||||||||||
Total | $ | 1,988,916 | $ | 4,773 | $ | (186,103) | $ | 1,807,586 |
| | | | | | | | | | | | |
| | | | | ||||||||
| | September 30, 2022 | | December 31, 2021 | ||||||||
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | ||||
Commercial and industrial | | $ | 9,397 |
| 28.9 | % | | $ | 11,214 |
| 35.7 | % |
Real estate: | |
| |
| | | |
|
|
| | |
Commercial real estate | |
| 12,185 |
| 37.4 | % | |
| 11,015 |
| 35.1 | % |
Construction and development | |
| 3,964 |
| 12.2 | % | |
| 3,310 |
| 10.6 | % |
1-4 family residential | |
| 2,255 |
| 6.9 | % | |
| 2,105 |
| 6.7 | % |
Multi-family residential | |
| 2,504 |
| 7.7 | % | |
| 1,781 |
| 5.7 | % |
Consumer | |
| 371 |
| 1.1 | % | |
| 406 |
| 1.3 | % |
Agriculture | |
| 122 |
| 0.4 | % | |
| 88 |
| 0.3 | % |
Other | |
| 1,779 |
| 5.4 | % | |
| 1,426 |
| 4.6 | % |
Total allowance for credit losses for loans | | $ | 32,577 |
| 100.0 | % | | $ | 31,345 |
| 100.0 | % |
Loans excluding loans held for sale | | 3,126,421 | | | | | | 2,867,524 | | | | |
ACL for loans to loans excluding loans held for sale | | 1.04% | | | | | | 1.09% | | | |
The ACL for loans was $32.6 million, or 1.04% of loans excluding loans heldavailable for sale or held to maturity are evaluated for expected credit losses under ASC Topic 326, “
June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Within One Year | After One Year but Within Five Years | After Five Years but Within Ten Years | After Ten Years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Total | Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government and agency securities | $ | 76,474 | 0.55 | % | $ | 173,661 | 0.92 | % | $ | 14,419 | 4.82 | % | $ | 155,767 | 4.83 | % | $ | 420,321 | 2.47 | % | |||||||||||||||||||||||||||||||||||||||
Municipal securities | — | — | % | 2,895 | 4.46 | % | 55,437 | 2.82 | % | 201,091 | 2.79 | % | 259,423 | 2.81 | % | ||||||||||||||||||||||||||||||||||||||||||||
Agency mortgage-backed pass-through securities | 7 | 2.35 | % | 14,944 | 3.93 | % | 13,682 | 4.26 | % | 357,147 | 3.04 | % | 385,780 | 3.12 | % | ||||||||||||||||||||||||||||||||||||||||||||
Agency collateralized mortgage obligations | — | — | % | 17,251 | 2.80 | % | 7,970 | 2.68 | % | 429,932 | 1.55 | % | 455,153 | 1.62 | % | ||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds and other | 1,063 | 4.82 | % | 3,000 | 6.20 | % | 63,391 | 5.17 | % | 57,172 | 2.84 | % | 124,626 | 5.05 | % | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 77,544 | 0.60 | % | $ | 211,751 | 1.42 | % | $ | 154,899 | 4.11 | % | $ | 1,201,109 | 2.78 | % | $ | 1,645,303 | 2.63 | % |
December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Within One Year | After One Year but Within Five Years | After Five Years but Within Ten Years | After Ten Years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Total | Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available for Sale | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government and agency securities | $ | 76,438 | 0.54 | % | $ | 173,380 | 0.92 | % | $ | 16,081 | 4.96 | % | $ | 167,518 | 4.92 | % | $ | 433,417 | 2.55 | % | |||||||||||||||||||||||||||||||||||||||
Municipal securities | — | — | % | 21,195 | 3.45 | % | 93,313 | 2.93 | % | 465,568 | 3.39 | % | 580,076 | 3.31 | % | ||||||||||||||||||||||||||||||||||||||||||||
Agency mortgage-backed pass-through securities | 1 | 3.21 | % | 14,112 | 4.02 | % | 11,201 | 4.53 | % | 345,157 | 2.94 | % | 370,471 | 3.03 | % | ||||||||||||||||||||||||||||||||||||||||||||
Agency collateralized mortgage obligations | — | — | % | 17,291 | 2.80 | % | 8,008 | 2.70 | % | 436,461 | 1.78 | % | 461,760 | 1.83 | % | ||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds and other | 1,050 | 1.25 | % | 4,000 | 6.20 | % | 64,176 | 4.64 | % | 73,966 | 2.68 | % | 143,192 | 3.66 | % | ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 77,489 | 0.55 | % | $ | 229,978 | 1.58 | % | $ | 192,779 | 3.75 | % | $ | 1,488,670 | 2.95 | % | $ | 1,988,916 | 2.78 | % |
Although national
Activity in the ACL for loans for the periods indicatedCore Deposit Intangibles
| | | | | | | |
| | | Nine Months Ended September 30, | ||||
(Dollars in thousands) | | 2022 | | 2021 | |||
Beginning balance | | $ | 31,345 | | $ | 40,637 | |
Provision (recapture): | |
| | |
| | |
Commercial and industrial | | | (2,101) | | | (2,028) | |
Real estate: | | | | | | | |
| Commercial real estate | | | 1,195 | | | (2,054) |
| Construction and development | | | 654 | | | (2,755) |
| 1-4 family residential | | | 152 | | | (875) |
| Multi-family residential | | | 723 | | | (357) |
Consumer | | | 22 | | | (85) | |
Agriculture | | | 24 | | | (75) | |
Other | | | 353 | | | (732) | |
Total provision (recapture) | | | 1,022 | | | (8,961) | |
Net (charge-offs) recoveries: | |
|
| |
|
| |
Commercial and industrial | |
| 284 | |
| 394 | |
Real estate: | |
|
| |
|
| |
| Commercial real estate | |
| (25) | |
| — |
| 1-4 family residential | |
| (2) | |
| (3) |
Consumer | |
| (57) | |
| 94 | |
Agriculture | | | 10 | | | 47 | |
Total net (charge-offs) recoveries | |
| 210 | |
| 532 | |
Ending balance | | $ | 32,577 | | $ | 32,208 | |
Total average loans | | | 2,953,607 | | | 2,812,449 | |
Net charge-offs (recoveries) to total average loans | | | (0.01%) | | | (0.03%) |
52
Annualized net charge-off (recoveries) to average loans by loan category for the periods indicated below were as follows:
| | | | | | |
| | Nine Months Ended September 30, | ||||
(Dollars in thousands) | | | 2022 | | | 2021 |
Commercial and industrial | | | (0.06%) | | | (0.08%) |
Real estate: | | | | | | |
Commercial real estate | | | 0.00% | |
| — |
1-4 family residential | | | 0.00% | |
| 0.00% |
Consumer | | | 0.29% | |
| (0.41%) |
Agriculture | | | (0.14%) | | | (0.72%) |
The ACL for unfunded commitments was $3.8 million and $3.3 million Septemberboth June 30, 20222023 and December 31, 2021, respectively.
Securities
The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as2022. Goodwill resulting from business combinations represents the excess of the dates indicated below were as follows:
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | | ||||
(Dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
September 30, 2022 |
| |
|
| |
|
| |
|
| |
|
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
|
State and municipal securities | | $ | 175,763 | | $ | — | | $ | (40,665) | | $ | 135,098 |
U.S. Treasury securities | | | 111,045 | | | — | | | (3,786) | | | 107,259 |
U.S. agency securities: | |
| | | | | | | | |
|
|
Callable debentures | | | 3,000 | | | — | | | (436) | | | 2,564 |
Collateralized mortgage obligations | |
| 97,307 | | | — | | | (12,909) | |
| 84,398 |
Mortgage-backed securities | |
| 211,497 | | | — | | | (30,579) | |
| 180,918 |
Equity securities | |
| 1,201 | | | — | | | (156) | |
| 1,045 |
Total | | $ | 599,813 | | $ | — | | $ | (88,531) | | $ | 511,282 |
December 31, 2021 | | | | | | | | | | | | |
Debt securities available for sale: |
| |
|
| |
|
| |
|
| |
|
State and municipal securities | | $ | 168,541 | | $ | 4,451 | | $ | (392) | | $ | 172,600 |
U.S. Treasury securities | | | 11,888 | | | — | | | (91) | | | 11,797 |
U.S. agency securities: | |
| | |
| | |
| | |
|
|
Callable debentures | | | 3,000 | | | — | | | (27) | | | 2,973 |
Collateralized mortgage obligations | |
| 63,129 | |
| 115 | |
| (862) | |
| 62,382 |
Mortgage-backed securities | |
| 173,446 | |
| 1,805 | |
| (1,130) | |
| 174,121 |
Equity securities | |
| 1,189 | |
| — | |
| (16) | |
| 1,173 |
Total | | $ | 421,193 | | $ | 6,371 | | $ | (2,518) | | $ | 425,046 |
As of September 30, 2022,consideration paid over the fair value of the Company’s securities totaled $511.3net assets acquired. Goodwill is assessed
The Company’s mortgage-backed securities at September 30, 2022terms including demand, savings, money market and December 31, 2021 were agency securities. The Company does not hold any Federal National Mortgage Loan Association, or Fannie Mae, or Federal Home Mortgage Corporation, or Freddie Mac, preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elementscertificates and other time accounts. We rely primarily on convenient locations, personalized service and our customer relationships to attract and retain these deposits. We seek customers that will engage in the securities portfolio.
53
The weighted-average life of the securities portfolio was 7.5 years with an estimated modified duration of 6.0 years as of September 30, 2022. See “Part I—Item 1.—Financial Statements—Note 2” for securities by contractual maturity.
Weighted-average yields by security type and maturity based on estimated annual income divided by the average amortized cost of the Company’s available for sale securities portfolio as of the date indicated was as follows:
| | | | | | | | | | |
(Dollars in thousands) | | 1 Year or Less | | After 1 Year to 5 Years | | After 5 Years to 10 Years | | After 10 Years | | Total |
September 30, 2022 | | | | | | | | | | |
Debt securities: | | | | | | | | | | |
State and municipal securities | | — | | 2.20% | | 2.60% | | 2.17% | | 2.22% |
U.S. Treasury securities | | 1.34% | | 1.43% | | 1.26% | | — | | 1.37% |
U.S. agency securities: | | | | | | | | | | |
Callable debentures | | — | | — | | 1.37% | | — | | 1.37% |
Collateralized mortgage obligations | | — | | — | | 2.56% | | 2.23% | | 2.24% |
Mortgage-backed securities | | 3.71% | | 3.44% | | 2.80% | | 2.01% | | 2.10% |
Equity securities: | | 1.25% | | — | | — | | — | | 1.25% |
Total securities | | 1.34% | | 1.47% | | 2.55% | | 2.11% | | 2.02% |
At September 30, 2022 and December 31, 2021, securities with a carrying amount of approximately $25.4 million and $25.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Deposits
Total deposits as of Septemberat June 30, 20222023 were $3.7$8.77 billion, a decrease of $107.5$501.3 million, or 2.8%5.4%, compared towith $9.27 billion at December 31, 2021.2022 primarily driven by seasonality, industry-wide pressures and the maintenance of pricing discipline in an intensely competitive market for deposits. Noninterest-bearing deposits as of Septemberat June 30, 20222023 were $1.8$3.71 billion, a decrease of $4.5$516.6 million, or 12.2%, compared with $4.23 billion at December 31, 2022. Interest-bearing deposits at June 30, 2023 were $5.05 billion, an increase of $15.4 million, or 0.3%, compared towith $5.04 billion at December 31, 2021. Total interest-bearing account balances as2022. Estimated uninsured deposits totaled $4.75 billion and estimated uninsured deposits net of Septembercollateralized deposits of $936 million were $3.82 billion, or 43.5%, of total deposits at June 30, 2022 were $1.9 billion, a decrease of $103.0 million, or 5.0%, from December 31, 2021, primarily due to decreases in interest-bearing demand deposits, money market accounts and certificates less than $100,000, partially offset by increases in certificates over $100,000.
2023.
| | | | | | | | | | | |
|
| | | | | | |||||
(Dollars in thousands) |
| September 30, 2022 | | December 31, 2021 | | Increase (Decrease) | |||||
Interest-bearing demand accounts | | $ | 415,970 | | $ | 468,361 | | $ | (52,391) | | (11.2%) |
Money market accounts | |
| 1,144,969 | |
| 1,209,659 | | | (64,690) | | (5.3%) |
Savings accounts | |
| 128,886 | |
| 127,031 | | | 1,855 | | 1.5% |
Certificates and other time deposits, $100,000 or greater | |
| 161,975 | |
| 134,775 | | | 27,200 | | 20.2% |
Certificates and other time deposits, less than $100,000 | |
| 91,501 | |
| 106,477 | | | (14,976) | | (14.1%) |
Total interest-bearing deposits | |
| 1,943,301 | |
| 2,046,303 | | | (103,002) | | (5.0%) |
Noninterest-bearing deposits | |
| 1,780,473 | |
| 1,784,981 | | | (4,508) | | (0.3%) |
Total deposits | | $ | 3,723,774 | | $ | 3,831,284 | | $ | (107,510) | | (2.8%) |
54
The scheduled maturities of uninsured certificates of deposit or other time deposits as of the date indicated were as follows:
| | | |
|
| | |
(Dollars in thousands) | | September 30, 2022 | |
Three months or less | | $ | 46,359 |
Over three months through six months | |
| 20,219 |
Over six months through 12 months | |
| 10,822 |
Over 12 months | |
| 24,476 |
Total | | $ | 101,876 |
Securities pledged which secure certain public deposits were not considered in determiningfollowing table sets forth the amount of uninsured deposits.
Cash and Equivalents
Cash and equivalents decreased $579.7 million duringtime deposits that met or exceeded the nine months ended September 30, 2022, primarily due to purchasesFDIC insurance limit of securities, increases in loans, net deposit outflows and repayment$250 thousand by time remaining until maturity:
As of June 30, 2023 | |||||
(In thousands) | |||||
Three months or less | $ | 199,784 | |||
Over three months through six months | 171,492 | ||||
Over six months through 12 months | 75,055 | ||||
Over 12 months | 55,779 | ||||
Total | $ | 502,110 |
Other Assets
Other assets("FHLB") of Dallas, which allows us to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased $25.3customer deposits. At June 30, 2023, we had a total borrowing capacity of $4.10 billion, of which $2.90 billion was available and $1.20 billion was outstanding in/through FHLB advances and letters of credit. There were $370.0 million from December 31, 2021 to Septemberof FHLB short-term advances outstanding at June 30, 2022, primarily due to2023 at a $19.6weighted-average rate of 5.45%. Letters of credit were $831.3 million increaseat June 30, 2023, of which $91.0 million will expire during the remaining months of 2023, $45.0 million will expire in net deferred tax assets resulting from an increase2024, $148.0 million will expire in 2025, $52.3 million will expire in 2026, $453.0 million will expire in 2027, $15.0 million will expire in 2028 and $27.0 million will expire in 2029.
Description | Issuance Date | Trust Preferred Securities Outstanding | Interest Rate(1) | Junior Subordinated Debt Owed to Trusts | Maturity Date(2) | |||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Farmers & Merchants Capital Trust II | November 13, 2003 | $ | 7,500 | 3 month LIBOR + 3.00% | $ | 7,732 | November 8, 2033 | |||||||||||||||||||||||||
Farmers & Merchants Capital Trust III | June 30, 2005 | 3,500 | 3 month LIBOR + 1.80% | 3,609 | July 7, 2035 | |||||||||||||||||||||||||||
$ | 11,341 |
(1) | The 3-month LIBOR in effect as of June 30, 2023 was 5.07%. Transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 30-day LIBOR is no longer published on a future adjustment date | ||||
(2) | All debentures are currently callable. |
The Company monitors its liquidity
As of September 30, 2022, the Company had $370.4 million in cash and cash equivalents and $511.3 million of securities, which are considered to be liquid assets, compared to $950.1 million in cash and cash equivalents and $425.0 million of securities as of December 31, 2021. This decrease in liquid assets of $493.4 million during the ninesix months ended SeptemberJune 30, 2022 was primarily due to a $107.5 million decrease in deposits, an increase of $258.9 million in loans excluding loans held for sale2023 and repayment of $50.0 million of Federal Home Loan Bank advances.
Historically, the cost of the Company’s deposits has been lower than other sources of funds available. Average rates paid for the three and nine months ended September 30, 2022 were computed on an annualized basis. Average balances and average rates paid on deposits for the periods indicated were as follows:
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 | | Year Ended December 31, 2021 | ||||||||
(Dollars in thousands) | | Average Balance | | Average Rate | | Average Balance | | Average Rate | ||||
Interest-bearing demand accounts | | $ | 438,589 |
| 0.06 | % | | $ | 391,388 |
| 0.05 | % |
Money market accounts | |
| 1,154,766 |
| 0.31 | % | |
| 1,094,042 |
| 0.27 | % |
Savings accounts | |
| 129,582 |
| 0.04 | % | |
| 115,972 |
| 0.03 | % |
Certificates and other time deposits, $100,000 or greater | |
| 95,526 |
| 0.39 | % | |
| 142,605 |
| 0.37 | % |
Certificates and other time deposits, less than $100,000 | |
| 152,784 |
| 0.84 | % | |
| 126,141 |
| 1.07 | % |
Total interest-bearing deposits | |
| 1,971,247 |
| 0.27 | % | |
| 1,870,148 |
| 0.27 | % |
Noninterest-bearing deposits | | | 1,803,702 | | — | | | | 1,603,006 | | — | |
Total deposits | | $ | 3,774,949 |
| 0.14 | % | | $ | 3,473,154 |
| 0.14 | % |
55
The ratio of average noninterest-bearing deposits to average total deposits was 47.8% for the nine months ended September 30, 2022 and 46.2% for the year ended December 31, 2021.
In addition2022, our liquidity needs have been primarily met by deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. The Bank has access to purchased funds from correspondent banks, the Federal Reserve discount window and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities.
| | | | | | | | | |
(Dollars in thousands) | | Capacity | | Outstanding(1) | | Availability | |||
Federal Home Loan Bank Facility | | $ | 1,241,283 | | $ | (27,000) | | $ | 1,214,283 |
Loan Agreement | | | 30,000 | | | — | | | 30,000 |
Federal Funds | | | 45,000 | | | — | | | 45,000 |
Total | | $ | 1,316,283 | | $ | (27,000) | | $ | 1,289,283 |
The composition of fundingbalance between sources and uses of funds as a percentage of average total assetsdeemed appropriate. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the periods indicatedidentification of our liquidity needs.
| | | | | | |
|
| | | | ||
| | September 30, 2022 | | December 31, 2021 | ||
Sources of funds: |
|
|
| |
| |
Deposits: |
|
|
| |
| |
Interest-bearing |
| 45.0 | % | | 45.2 | % |
Noninterest-bearing |
| 41.2 | % | | 38.8 | % |
Federal Home Loan Bank advances |
| 0.4 | % | | 1.2 | % |
Other liabilities |
| 1.0 | % | | 1.3 | % |
Shareholders’ equity |
| 12.4 | % | | 13.5 | % |
Total sources |
| 100.0 | % | | 100.0 | % |
Uses of funds: |
|
|
| |
| |
Loans |
| 67.4 | % | | 67.4 | % |
Securities |
| 12.3 | % | | 7.8 | % |
Interest-bearing deposits at other financial institutions |
| 13.6 | % | | 17.7 | % |
Equity securities |
| 0.3 | % | | 0.4 | % |
Other noninterest-earning assets |
| 6.4 | % | | 6.7 | % |
Total uses |
| 100.0 | % | | 100.0 | % |
Average loans to average deposits |
| 78.2 | % | | 80.2 | % |
$86
A portionTable of Contents
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| | | ||
| | 1 Year | | Over 1 Year | | Greater | | | | |||
(Dollars in thousands) | | or Less | | to 3 Years | | than 3 Years | | Total | ||||
September 30, 2022 | | | | | | | | | | | | |
Non-cancellable future operating leases | | $ | 1,775 | | $ | 3,894 | | $ | 10,585 | | $ | 16,254 |
Certificates of deposit | | | 206,671 | | | 35,875 | | | 10,930 | | | 253,476 |
Total | | $ | 208,446 | | $ | 39,769 | | $ | 21,515 | | $ | 269,730 |
December 31, 2021 | | | | | | | | | | | | |
Federal Home Loan Bank advances | | $ | 10,000 | | $ | 40,000 | | $ | — | | $ | 50,000 |
Non-cancellable future operating leases | |
| 1,812 | | | 3,823 | | | 11,164 | | | 16,799 |
Certificates of deposit | |
| 162,153 | | | 68,956 | | | 10,143 | | | 241,252 |
Total | | $ | 173,965 | | $ | 112,779 | | $ | 21,307 | | $ | 308,051 |
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As of SeptemberJune 30, 2023 and December 31, 2022, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Commitments to extend credit are agreements to lendinstitution to a customervariety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as long as there is no violationconservator or receiver.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.
Commitments to extend credit and standby letters of credit expiring by periodrisk-weighted capital ratios as of the dates indicated were as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | ||
| | 1 Year | | Over 1 Year | | Greater | | | | |||
(Dollars in thousands) | | or Less | | to 3 Years | | than 3 Years | | Total | ||||
September 30, 2022 | | | | | | | | | | | | |
Commitments to extend credit | | $ | 517,940 | | $ | 400,095 | | $ | 71,013 | | $ | 989,048 |
Standby letters of credit | |
| 10,241 | |
| 1,370 | |
| — | |
| 11,611 |
Total | | $ | 528,181 | | $ | 401,465 | | $ | 71,013 | | $ | 1,000,659 |
December 31, 2021 | | | | | | | | | | | | |
Commitments to extend credit | | $ | 400,006 | | $ | 293,606 | | $ | 81,348 | | $ | 774,960 |
Standby letters of credit | |
| 16,532 | |
| 1,415 | |
| 162 | |
| 18,109 |
Total | | $ | 416,538 | | $ | 295,021 | | $ | 81,510 | | $ | 793,069 |
As a general matter, Federal Deposit Insurance Corporation, or FDIC, insured depository institutions and their holding companies are required to maintain minimum capital relative to the amountminimum and typeswell-capitalized regulatory standards, as well as with the capital conservation buffer:
Actual Ratio | Minimum Required For Capital Adequacy Purposes | Minimum Required Plus Capital Conservation Buffer | To Be Categorized As Well-Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||
Stellar Bancorp, Inc. (Consolidated) | |||||||||||||||||||||||
As of June 30, 2023 | |||||||||||||||||||||||
Total Capital (to risk-weighted assets) | 13.03 | % | 8.00 | % | 10.50 | % | N/A | ||||||||||||||||
Common Equity Tier 1 capital (to risk-weighted assets) | 10.67 | % | 4.50 | % | 7.00 | % | N/A | ||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 10.78 | % | 6.00 | % | 8.50 | % | N/A | ||||||||||||||||
Tier 1 Leverage (to average assets) | 9.51 | % | 4.00 | % | 4.00 | % | N/A | ||||||||||||||||
As of December 31, 2022 | |||||||||||||||||||||||
Total Capital (to risk-weighted assets) | 12.39 | % | 8.00 | % | 10.50 | % | N/A | ||||||||||||||||
Common Equity Tier 1 capital (to risk-weighted assets) | 10.04 | % | 4.50 | % | 7.00 | % | N/A | ||||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 10.15 | % | 6.00 | % | 8.50 | % | N/A | ||||||||||||||||
Tier 1 Leverage (to average assets) | 8.55 | % | 4.00 | % | 4.00 | % | N/A | ||||||||||||||||
Stellar Bank | |||||||||||||||||||||||
As of June 30, 2023 | |||||||||||||||||||||||
Total Capital (to risk-weighted assets) | 12.80 | % | 8.00 | % | 10.50 | % | 10.00 | % | |||||||||||||||
Common Equity Tier 1 capital (to risk-weighted assets) | 11.22 | % | 4.50 | % | 7.00 | % | 6.50 | % | |||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 11.22 | % | 6.00 | % | 8.50 | % | 8.00 | % | |||||||||||||||
Tier 1 Leverage (to average assets) | 9.89 | % | 4.00 | % | 4.00 | % | 5.00 | % | |||||||||||||||
As of December 31, 2022 | |||||||||||||||||||||||
Total Capital (to risk-weighted assets) | 12.02 | % | 8.00 | % | 10.50 | % | 10.00 | % | |||||||||||||||
Common Equity Tier 1 capital (to risk-weighted assets) | 10.46 | % | 4.50 | % | 7.00 | % | 6.50 | % | |||||||||||||||
Tier 1 Capital (to risk-weighted assets) | 10.46 | % | 6.00 | % | 8.50 | % | 8.00 | % | |||||||||||||||
Tier 1 Leverage (to average assets) | 8.81 | % | 4.00 | % | 4.00 | % | 5.00 | % |
Interest Rate SensitivityRisk
Marketinterest rate risk refers topolicy provides management with the risk of loss arising from adverse changes inguidelines for effective balance sheet management. We have established a measurement system for monitoring our net interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices. rate sensitivity position. We manage our sensitivity position within our established guidelines.
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 Company managesobjective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
The Company has asset, liability and funds management policies that provide the guidelines for effective funds management and has established a measurement system for monitoring the net interest rate sensitivity position. The Company’s
57
strategies and other factors. The committeeBSRC meets regularly to review, among other things, the relationships between interest-earning assets and interest-bearing liabilities, 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 committeeBSRC reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.
The Company uses
On a quarterly basis, two simulation models are run, including a
Simulated changes in net interest income and the faireconomic value of equity over a 12-month period as of the dates indicated below were as follows:
| | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | ||||||||
Change in Interest | | Percent Change in | | Percent Change | | Percent Change in | | Percent Change | ||||
Rates (Basis Points) | | Net Interest Income | | Fair Value of Equity | | Net Interest Income | | Fair Value of Equity | ||||
+ 300 |
| 10.6 | % | | (3.6) | % |
| 25.4 | % | | 6.7 | % |
+ 200 |
| 7.1 | % | | (0.6) | % |
| 16.9 | % | | 13.0 | % |
+ 100 |
| 3.7 | % | | 0.8 | % |
| 7.9 | % | | 8.8 | % |
Base |
| — | % | | — | % |
| — | % | | — | % |
−100 |
| (9.2) | % | | (10.3) | % |
| (2.5) | % | | (37.2) | % |
−200 |
| (19.0) | % | | (22.6) | % |
| (3.2) | % | | (70.8) | % |
indicated:
Change in Interest Rates (Basis Points) | Percent Change in Net Interest Income | Percent Change in Economic Value of Equity | ||||||||||||||||||||||||
As of June 30, 2023 | As of December 31, 2022 | As of June 30, 2023 | As of December 31, 2022 | |||||||||||||||||||||||
+300 | (3.7)% | 0.5% | (5.1)% | (2.9)% | ||||||||||||||||||||||
+200 | (2.4)% | 0.5% | (2.5)% | (0.7)% | ||||||||||||||||||||||
+100 | (1.1)% | 0.4% | (0.6)% | 0.6% | ||||||||||||||||||||||
Base | 0.0% | 0.0% | 0.0% | 0.0% | ||||||||||||||||||||||
-100 | 0.5% | (2.0)% | (1.7)% | (3.2)% | ||||||||||||||||||||||
-200 | 0.0% | (7.5)% | (6.5)% | (9.4)% |
The Company's model simulation as of September 30, 2022 indicates that its projected balance sheet was less asset sensitive in comparison to its balance sheet as of December 31, 2021. The shift to a less asset sensitive position wasThese results are primarily due to the deploymentsize of interest-bearingour cash position, the size and duration of our loan and securities portfolio, the duration of our borrowings and the expected behavior of demand, money market and savings deposits (primarily amounts heldduring such rate fluctuations. During the six months ended June 30, 2023, changes in an interest-bearing account atour overall interest rate profile were driven by the Federal Reserve) to originate loan growth during 2022decrease in noninterest bearing deposits and deposit balance run off that resultedcertain interest bearing deposits, increases in certificates of deposits and borrowed funds, an increase to the economic valuein loans and decreases in securities and cash and cash equivalents.
LIBOR Transition
has been substantially completed. As of June 30, 2023, LIBOR was used as an index rate for a majorityless than 1% of the Company’s interest-rate swaps and approximately 4.5% of the Company’s loans at September 30, 2022. In March 2021, the UK Financial Conduct authority formally confirmed that a number of U.S. dollar LIBOR rates will be available until the end of June 2023 to support the rundown of legacy contracts. The Company’s transition away from LIBOR may span several reporting periods through June 2023.
58
The Company’s loans that remain indexed to LIBOR are primarily participations and syndications where the Company is not the lead agent bank and the transition away from LIBOR is dependent on the lead agent bank. The Company is in active discussions with the lead agent banks regarding these loans indexed to LIBOR. These lead agent banks have LIBOR transition programs in place to assist in the transition from LIBOR. The Company’s interest-rate swaps are paired swaps and the interest-rate swaps are established by dealers that have many such agreements and have established or will establish fallback language to transition away from LIBOR.
If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to the Company. One of the major identified risks is inadequate fallback language in various existing instruments’ contracts that may result in issues establishing the alternative index and adjusting the margin as applicable. The Company continues to monitor this activity and evaluate the related risks to its business.
Non-GAAP Financial Measures
The Company’s accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, the Company also evaluates its performance based on certain additional non-GAAP financial measures. The Company classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are not included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating, other statistical measures or ratios calculated using exclusively financial measures calculated in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the way the Company calculates non-GAAP financial measures may differ from that of other companies reporting measures with similar names.
The Company calculates tangible equity as total shareholders’ equity, less goodwill and other intangible assets, net of accumulated amortization, and tangible book value per share as tangible equity divided by shares of common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share. The Company calculates tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible equity to tangible assets is total shareholders’ equity to total assets. The Company believes that tangible book value per share and tangible equity to tangible assets are measures that are important to many investors in the marketplace who are interested in book value per share and total shareholders’ equity to total assets, exclusive of change in intangible assets.
59
The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible equity, total assets to tangible assets and presents book value per share, tangible book value per share, total shareholders’ equity to total assets and tangible equity to tangible assets:
| | | | | | |
(Dollars in thousands, except per share data) |
| September 30, 2022 | | December 31, 2021 | ||
Tangible Equity |
| |
| | |
|
Total shareholders’ equity | | $ | 501,425 | | $ | 562,125 |
Adjustments: | |
|
| |
|
|
Goodwill | |
| (80,950) | |
| (80,950) |
Other intangibles | |
| (3,188) | |
| (3,658) |
Tangible equity | | $ | 417,287 | | $ | 477,517 |
Tangible Assets | |
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| |
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Total assets | | $ | 4,271,831 | | $ | 4,486,001 |
Adjustments: | |
|
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|
|
Goodwill | |
| (80,950) | |
| (80,950) |
Other intangibles | |
| (3,188) | |
| (3,658) |
Tangible assets | | $ | 4,187,693 | | $ | 4,401,393 |
Common shares outstanding | |
| 24,015 | |
| 24,488 |
Book value per share | | $ | 20.88 | | $ | 22.96 |
Tangible book value per share | | $ | 17.38 | | $ | 19.50 |
Total shareholders’ equity to total assets | |
| 11.74% | |
| 12.53% |
Tangible equity to tangible assets | |
| 9.96% | |
| 10.85% |
Critical Accounting Policies
The Company’s accounting policies are described in “Part II—Item 8.—Financial Statements and Supplementary Data—Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Company’s accounting policies that it considers critical because they involve a higher degree of judgment and complexity are described in “Part II—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jump Start Our Business Start-ups, or JOBS Act. As an emerging growth company, the Company has taken advantage of reduced reporting and other requirements that are otherwise generally applicable to public companies. Emerging growth company are:
The Company will lose its emerging growth status December 31, 2022, which is the end of the fiscal year in which the fifth anniversary of its initial public offering occurs.
Recently Issued Accounting Pronouncements
See “Part I—Item 1.—Financial Statements—Note 1.”
60
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See “Part I—Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” for a discussion of how the Company manages market risk.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures—procedures.As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its 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, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or the Exchange Act)(the “Exchange Act”)) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
See Exhibits 31.1 and 31.2 for the Certification statements issued by the Company’s Chief Executive Officer and Chief Financial Officer, respectively.
The Company is not currently subject to any material legal proceedings. The Company is fromLEGAL PROCEEDINGS
At this time, in In the opinion of management, we are not party to any legal proceedings the likelihood is remote that the impactresolution of such proceedings, either individually or in the aggregate,which we believe would have a material adverse effect on the Company’sour business, prospects, financial condition, liquidity, results of operations, financial conditionoperation, cash flows or cash flows.capital levels. However, one or more unfavorable outcomes in any claim or litigation against the Companyus could have a material adverse effect for the period in which they aresuch claim or litigation is resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially and adversely affect the Company’sour reputation, even if resolved in our favor. We intend to defend ourselves vigorously against any future claims or litigation.
Item 1A. Risk Factors
s
Itemfilings.
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In 2021, the Company’s Board of Directors authorized a share repurchase program, or the 2021 Repurchase Program, under which the Company could repurchase up to $40.0 million of the Company’s common stock starting September 16, 2021 through September 30, 2022. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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repurchase program, or the 2022 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 22, 2022 through September 30, 2023. No shares were repurchased underDuring the 2022 Repurchase Program duringsecond quarter of 2023, the three months ended September 30, 2022.
Company's Board of Directors authorized the expansion of its existing share repurchase program to provide that the Company may repurchase up to $60 million of the Company’s common stock through May 31, 2024.
The following table provides information with respect to purchases of shares of
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | Shares Purchased | | Number of Shares That |
| | Total Number of | | Average Price | | as Part of Publicly | | May Yet be Purchased | ||
Period | | Shares Purchased | | Paid per Share | | Announced Plan(2) | | Under the Plan(3) | ||
July 1, 2022 - July 31, 2022 | | — | | | | — | | — | | 1,208,842 |
August 1, 2022 -August 31, 2022 | | 47,111 | (1) | | | $ 29.80 | | 47,000 | | 1,208,444 |
September 1, 2022 - September 30, 2022 | | 369,746 | (2) | | | $ 29.90 | | 369,746 | | 1,367,521 |
Total | | 416,857 | | | | $ 29.89 | | 416,746 | | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
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31.2* | ||||||||
32.1** |
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32.2** |
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101.INS* | Inline XBRL | |||||||
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101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
104 | Cover Page Interactive Data File
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+ The schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K
* Filed with this Quarterly Report on Form 10-Q.
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| /s/ Robert R. Franklin, Jr. | ||||
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