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Franklin Financial Network (FSB)

Filed: 27 Jul 20, 4:22pm

Exhibit 99.1
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Franklin Financial Network Reports Second Quarter 2020 Results
Net Income $10.2 million, Diluted Earnings per share $0.66
Pre-Tax Pre-Provision Profit of $16.1 million, a 24.7% Year-Over-Year Increase
Strategic Merger with FB Financial Corporation Expected to Close in Third Quarter 2020
FRANKLIN, Tennessee, July 27, 2020 (BUSINESS WIRE) -- Franklin Financial Network, Inc. (the "Company") (NYSE: FSB), parent company of Franklin Synergy Bank (the "Bank"), reports net income of $10.2 million, or $0.66 per diluted common share, for the quarter-ended June 30, 2020, compared to net income of $5.2 million, or $0.34 per diluted common share, for the quarter-ended June 30, 2019. Pre-tax pre-provision profit was $16.1 million for the quarter-ended June 30, 2020, compared to $12.9 million for the quarter-ended June 30, 2019.
On a non-GAAP basis, net income excluding non-core revenues and non-core expenses (core net income”) for the quarter-ended June 30, 2020 was $10.7 million, or $0.70 per diluted common share, compared to $5.2 million, or $0.34 per diluted common share, for the quarter-ended June 30, 2019. Core pre-tax pre-provision profit was $16.8 million for the quarter-ended June 30, 2020, an increase from $12.9 million in the quarter-ended June 30, 2019.
Chief Executive Officer, J. Myers Jones, III, stated, “Across our Company, at every level of our organization, I continue to be impressed and extremely proud of our Bank-wide team, that continues to perform with selflessness and unity as we navigate the challenges and new realities confronting our Company, community and society at-large. During this past quarter, our team has successfully executed our response to COVID-19, ensuring the safety and well-being of our employees and customers, fulfilled our role as trusted advisor and community pillar through the extension of $76.6 million of the Small Business Association ("SBA") Paycheck Protection Program (“PPP”) loans to our customers and continue to prepare for the closing and integration of our pending merger with our soon-to-be-partners at FirstBank.”
Jones continued, “Furthermore, we have continued to successfully operate our Company for the benefit of our shareholders as our team delivered a strong financial performance during this challenging quarter, highlighted by robust results from our mortgage group, net interest margin expansion and continued reduction of non-core assets and liabilities, all while continuing to strengthen our capital and loan loss reserve positions.”
Second Quarter Key Highlights
Core net income increased to $10.7 million, or $0.70 per diluted common share for the quarter-ended June 30, 2020 compared to $5.2 million, or $0.34 per diluted common share for the quarter-ended June 30, 2019
Core pre-tax pre-provision profit of $16.8 million, a 30.1% year-over-year increase
Core deposit growth of $496.4 million, or 26.6% year-over-year and $124.1 million, or 22.9% linked-quarter annualized
Sold the entirety of $76.6 million of SBA PPP loans originated to a third party at a minimal discount, recognized full loan fee amount of $1.5 million
Net interest margin (“NIM”) expanded 24 bps to 3.26%; excluding PPP fee income impact NIM was 3.13%
Record mortgage banking revenue of $8.7 million driven by robust origination and strong execution
SNC portfolio year-over-year reduction of 56.9%, or $131.6 million, to a balance of $99.6 million, representing 3.6% of loans held for investment ("HFI")
Securities to total assets declined to 13.3% as of June 30, 2020, down from 20.5% at June 30, 2019
Tangible book value per share of $27.01, up 5.5% year-over-year; Tangible Common Equity / Tangible Assets of 10.7% at June 30, 2020, up from 10.1% at December 31, 2019 and 9.2% at June 30, 2019



COVID-19 Operational Highlights
The Company continues to execute its business continuity plans and pandemic response plan, with 2/3 of branches currently being utilized per normal operating procedures and more than 50% of the Company’s employees continuing to operate remotely
As of July 15, 2020, the Company had approximately 170 loans totaling approximately $380 million that were expected to remain on temporary loan payment deferral during the next 90 day period, and the Company had approximately 260 loans totaling approximately $350 million that were previously granted a temporary loan payment deferral and are expected to return to payment status during the third quarter of 2020. The Company continues to proactively engage and work with customers. For comparison purposes, the Company had approximately 350 loans totaling approximately $490 million that were on deferral as of April 30, 2020.

Performance Summary
Reported GAAP Results
Non-GAAP "Core" Results(1)
(dollars in thousands, except share data and %)2Q 20201Q 20202Q 20192Q 20201Q 20202Q 2019
Net Interest Income$29,528  $27,464  $27,365  $27,897  $27,464  $27,365  
Net Interest Margin (FTE)(2)
3.26 %3.02 %2.84 %3.26 %3.02 %2.84 %
Provision for Loan Losses$3,195  $13,022  $7,031  $3,195  $13,022  $7,031  
Net Charge-offs / Average Loans0.49 %2.85 %1.04 %0.49 %2.85 %1.04 %
Noninterest Income$10,555  $5,893  $4,923  $10,762  $4,913  $4,923  
Noninterest Expense$23,976  $22,421  $19,370  $21,859  $20,768  $19,370  
Efficiency Ratio59.8 %67.2 %60.0 %56.5 %64.1 %60.0 %
Pre-tax Income$12,912  $(2,086) $5,887  $13,605  $(1,413) $5,887  
Net Income available to common shareholders(3)
$10,174  $(1,148) $5,173  $10,686  $(651) $5,173  
Pre-tax pre-provision profit$16,107  $10,936  $12,918  $16,800  $11,609  $12,918  
Diluted EPS$0.66  $(0.08) $0.34  $0.70  $(0.04) $0.34  
Effective Tax Rate21.14 %44.97 %11.99 %21.40 %53.94 %11.99 %
Weighted Average Diluted Shares15,271,41415,321,47614,894,14015,271,41415,321,47614,894,140
Actual Shares Outstanding14,937,77614,859,70414,628,28714,937,77614,859,70414,628,287
Return on Average:
Assets1.06 %(0.12)%0.51 %1.11 %(0.07)%0.51 %
Equity9.9 %(1.1)%5.3 %10.5 %(0.6)%5.3 %
Tangible Common Equity10.4 %(1.2)%5.6 %10.9 %(0.7)%5.6 %
 
(1)Non-GAAP financial measures that adjust GAAP reported net income and other metrics for certain income and expense items. Non-GAAP for 2Q20 excludes interest income - SBA PPP loans of $140, amortization loan fees SBA PPP loans of $1,491, gain on sales of securities of $166, loss on sales of loans of $143, merger related expenses of $1,540, and accrual for post-employment benefits of $577. Non-GAAP for 1Q2020 excludes gain on sales of securities of $1,396, loss on sales of loans of $416, and merger related expenses of $1,653. Non-GAAP for 2Q2019 excludes $598 employment related payroll adjustment expenses. See "GAAP reconciliation and use of non-GAAP financial measures" below for a discussion and reconciliation of non-GAAP financial measures.
(2)Interest income and rates include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis (FTE).
(3)Net income available to common shareholders includes a dividend declared and paid by the Company's REIT subsidiary to minority interest preferred shareholders in the fourth quarter of 2019.
Balance Sheet
Loans HFI decreased $61.0 million, or 8.6% annualized from the first quarter of 2020, and decreased $85.7 million year-over-year, or 3.0%. This net loan decrease for the second quarter of 2020 was driven primarily by the continued reduction in the Institutional loan portfolio.

The Shared National Credit ("SNC") portfolio decreased to $99.6 million, representing a 56.9% year-over-year and 22.6% annualized linked-quarter decrease. This is the lowest SNC balance held by the Company during the last seven quarters, representing 3.6% of loans HFI, which is more than half of the Company’s concentration of 9.3% of loans HFI at the peak of the SNC portfolio at December 31, 2018.




Non-SNC loans decreased in the second quarter by $55.1 million representing an annualized decrease of 8.1% from the first quarter of 2020. Despite continued economic uncertainty, customer line of credit utilization did not change much during the second quarter of 2020, following approximately $32.0 million of line of credit utilization in the first quarter of 2020. Of the $727.0 million of unfunded commitments at June 30, 2020, the Company estimates approximately $294.3 million, or approximately 40.5%, are available to be drawn by customers without further approval by the Bank.

Total deposits increased by $5.8 million, or 0.7% annualized when compared to the first quarter of 2020. Total deposits decreased by $3.4 million, basically flat when compared to the second quarter of 2019. Core deposits increased by $175.8 million, or 32.4% annualized from the first quarter 2020, and increased by $496.4 million, or 26.6% from the second quarter of 2019. The increase in core deposits, and in particular in noninterest bearing deposits, has been driven by continued focus on customer deposit growth, as well as additional liquidity in the banking system due to the overall market and economic factors. As a result of the focused strategic loan reduction and core deposit emphasis, loans HFI decreased to 88.9% of total deposits at June 30, 2020, when compared with 91.0% at March 31, 2020, and with 91.5% at June 30, 2019.

As of June 30, 2020, securities totaled $503.9 million, which represents 13.3% of total assets. The Company has reduced its securities portfolio by a total of $896.1 million since its peak level of $1.4 billion at March 31, 2018, representing a reduction of 64.0% as part of the strategic rotation and optimization away from non-core assets and liabilities. Wholesale funding, represented by brokered deposits and FHLB advances, totaled $506.5 million, down $659.8 million from the December 31, 2018 peak of $1.2 billion, a 56.6% decline in the non-core wholesale funding portfolio.

Net Interest Income and Net Interest Margin (NIM)
Net interest income increased to $29.5 million, or 7.5%, for the second quarter of 2020 compared to $27.5 million during the first quarter of 2020, and increased 7.9% year-over-year. The increase in net interest income during the quarter was driven primarily by $1.5 million of accelerated loan fees due to the sale of approximately $76.6 million of PPP loans that occurred prior-to-quarter end.

NIM (tax-equivalent basis) was 3.26% for the three months ended June 30, 2020, a 24 basis point increase quarter-over-quarter, and a 42 basis point increase year-over-year, The current increase was primarily driven by the accelerated loan fees due to the PPP loan sale, which contributed 13 basis points to the NIM. Excluding the recognition of $1.5 million of PPP loan fees, NIM would have been 3.13%.

Noninterest Income and Expense
Total noninterest income was $10.6 million and $5.9 million for the second and first quarters of 2020, respectively. After non-core adjustments, core noninterest income was $10.8 million and $4.9 million for the second and first quarters of 2020, an increase of 118.6% on a year-over-year basis. Mortgage banking revenue of $8.7 million in the second quarter of 2020, which more than doubled from the second quarter of 2019, was the primary driver of the substantial increase in total noninterest income. The robust results from mortgage banking were driven by a combination of historically low interest rates, strong origination pipelines and teams, as well as outstanding secondary market execution and pricing.

Total noninterest expense was $24.0 million and $22.4 million during the first quarter of 2020 and fourth quarter of 2019, respectively. Core non-interest expense increased 21.1% during the second quarter of 2020 when adjusted for merger-related expenses of $1.5 million and post-employment and retirement expenses of $0.6 million compared to first quarter of 2020 when adjusted for merger-related expenses of $1.7 million. Core non-interest expense increased 12.8% year-over-year when compared to the second quarter of 2019 with no expense adjustments.




Asset Quality

Corporate and Healthcare Portfolios2Q201Q204Q193Q192Q19
Corporate$95,150  $102,370  $139,840  $133,386  $170,125  
Portion SNC34,912  36,011  59,339  58,544  112,756  
Portion not SNC60,238  66,359  80,501  74,842  57,369  
Healthcare262,417  306,343  289,703  273,106  329,818  
Portion SNC64,690  69,515  77,319  85,932  118,460  
Portion not SNC197,727  236,828  212,384  187,174  211,358  
Total institutional$357,567  $408,713  $429,543  $406,492  $499,943  
Commercial and industrial$519,040  $579,751  $580,696  $576,018  $666,025  
% of Institutional within commercial and industrial68.9 %70.5 %74.0 %70.6 %75.1 %
Total SNC$99,602  $105,526  $136,658  $144,476  $231,216  
% of total loans HFI3.6 %3.7 %4.9 %5.2 %8.0 %

Institutional Loans Asset Quality2Q201Q204Q193Q192Q19
Corporate loans$95,150  $102,370  $139,840  $133,386  $170,125  
Loans classified as criticized or worse—  —  17,608  17,598  —  
Loans criticized or worse as % corporate Loans0.0 %0.0 %12.6 %13.2 %0.0 %
Loans requiring specific reserve$—  $—  $17,608  $—  $—  
Specific reserve—  —  13,894  —  —  
Specific reserve as % of corporate loans requiring specific reserve0.0 %0.0 %78.9 %0.0 %0.0 %
Net charge-offs (1)
$—  $(20,428) $—  $—  $—  
Healthcare loans262,417  306,343  289,703  273,106  329,818  
Loans classified as criticized or worse28,209  33,735  21,517  21,554  20,699  
Loans criticized or worse as a % of healthcare loans10.7 %11.0 %7.4 %7.9 %6.3 %
Loans requiring specific reserve$1,339  $6,592  $6,667  $—  $2,193  
Specific reserve1,339  6,544  6,763  —  2,193  
Specific reserve as % of healthcare loans requiring specific reserve100.0 %99.3 %0.0 %0.0 %100.0 %
Net charge-offs$(5,152) $—  $—  $(1,691) $(7,563) 
Total Institutional Loans$357,567  $408,713  $429,543  $406,492  $499,943  
(1) Net charge-offs include approximately $2.9 million of demand deposit account (DDA) charge-offs for 1Q20.
In accordance with the CARES Act that was signed into law on March 27, 2020, the Company deferred implementation of CECL and thus elected to continue to utilize the incurred loss model ("ILM") to calculate loan loss reserves. The allowance for loan and lease losses ("ALLL") was $38.1 million representing 1.36% of total loans HFI at June 30, 2020 compared to $38.4 million (1.34% of loans HFI) at March 31, 2020 and $27.4 million (0.95% of total loans HFI) at June 30, 2019.

When combined with the cumulative $32.0 million in loan loss provisions recorded in the fourth quarter of 2019 and the first quarter of 2020, and netted against the cumulative $23.6 million in net charge-offs recorded in the fourth quarter of 2019 through the second quarter of 2020, the $3.2 million loan loss provision recorded for the second quarter of 2020 resulted in a net ALLL build of approximately $11.6 million, or an increase of approximately 43.9% since the third quarter of 2019.




As of June 30, 2020, the Company’s total nonperforming assets ("NPAs") were 0.65% of total assets, or $24.4 million, which represents a decrease of $3.0 million from March 31, 2020. The ALLL/NPAs coverage ratio was 1.56 at June 30, 2020, compared with the 1.40 coverage present at March 31, 2020. Criticized and classified assets were $50.7 million at June 30, 2020, representing 1.81% of loans HFI, a slight decrease from 1.86% of loans HFI at March 31, 2020, and December 31, 2019.

The Company reported no bank-owned real estate (OREO) at June 30, 2020.

Given the on-going and uncertain impact to the economy of the current COVID- 19 pandemic, the Company continues to monitor its portfolio as the potential exists for adverse events to impact credit quality trends.

Capital
Tangible common equity to tangible assets was 10.7% at June 30, 2020, compared with 10.1% and 9.2% at December 31, 2019, and June 30, 2019, respectively. The Company's tangible book value per share was $27.01 at June 30, 2020, compared to $25.61 at June 30, 2019, a 5.5% year-over-year increase.

Summary
Jones concluded, “I am proud and humbled to work with such a fine group of selfless professionals, as has been consistently demonstrated during the past year. We look forward to the conclusion of the current chapter of this wonderful franchise, with our sights set on the exciting future that lies before us with our new partners at FirstBank. We firmly believe that we will be better together with our focus continuing to be concentrated on our customers and our abilities being stronger than ever to meet their needs.”

WEBCAST AND CONFERENCE CALL INFORMATION
Due to the pending strategic merger with FB Financial Corporation, management will not conduct an earnings conference call or webcast.

ABOUT THE COMPANY
Franklin Financial Network, Inc. (NYSE: FSB) is a financial holding company headquartered in Franklin, Tennessee. The Company's wholly owned bank subsidiary, Franklin Synergy Bank, a Tennessee-chartered commercial bank founded in November 2007 and a member of the Federal Reserve System, provides a full range of banking and related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. With consolidated total assets of $3.8 billion at June 30, 2020, the Bank currently operates through 15 branches in the growing Williamson, Rutherford and Davidson Counties and one loan production/deposit production office in Wilson County, all within the Nashville metropolitan statistical area. Additional information about the Company, which is included in the NYSE Financial-100 Index, the FTSE Russell 2000 Index and the S&P SmallCap 600 Index, is available at www.FranklinSynergyBank.com.

Investor Relations Contact:
Chris Black
EVP, Chief Financial Officer
(615) 721-6096
chris.black@franklinsynergy.com




SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

This Earnings Release contains forward-looking statements regarding, among other things, our anticipated financial and operating results, the transaction with FB Financial Corporation, and the COVID 19 pandemic. The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our management's current assumptions, beliefs, and expectations. Words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "objective," "should," "hope," "pursue," "seek," and similar expressions are intended to identify forward-looking statements. While we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove correct. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the future results, performance, or achievements expressed in or implied by any forward-looking statement we make. Some of the relevant risks and uncertainties that could cause our actual performance to differ materially from the forward-looking statements contained in this Earnings Release are discussed below and under the heading "Risk Factors" and elsewhere in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 16, 2020 and our Quarterly Report on Form 10-Q filed with the SEC on May 7, 2020. We caution readers that these discussions of important risks and uncertainties are not exclusive, and our business may be subject to other risks and uncertainties which are not detailed there. Readers are cautioned not to place undue reliance on our forward-looking statements. We make forward-looking statements as of the date on which this Earnings Release is filed with the SEC, and we assume no obligation to update the forward-looking statements after the date hereof whether as a result of new information or events, changed circumstances, or otherwise, except as required by law.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
the risk that the cost savings and any revenue synergies from the proposed merger with FB Financial Corporation may not be realized or may take longer than anticipated to be realized;
disruption from the proposed merger with customer, supplier, or employee relationships;
the occurrence of any event, change, or other circumstances that could give rise to the termination of the merger agreement with FB Financial Corporation;
the failure to obtain necessary regulatory approvals for the proposed merger with FB Financial Corporation;
the possibility that the costs, fees, expenses, and charges related to the proposed merger with FB Financial Corporation may be greater than anticipated, including as a result of unexpected or unknown factors, events, or liabilities;
the failure of the conditions to the proposed merger to be satisfied;
the risks related to the integration of the combined businesses (as well as FB Financial Corporation’s acquisition of FNB Financial Corp completed February 14, 2020, and any future acquisitions), including the risk that the integration will be materially delayed or will be more costly or difficult than expected;
the diversion of management time on merger-related issues;
the ability of FB Financial Corporation to effectively manage the larger and more complex operations of the combined company following the proposed merger with the Company;
reputational risk and the reaction of the Company’s and FB Financial Corporation’s customers to the proposed merger;
the risk of litigation or regulatory action related to the proposed merger;
business and economic conditions nationally, regionally and in our target markets, particularly in Middle Tennessee and the geographic areas in which we operate;
the concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;
the concentration of our business within our geographic areas of operation in Middle Tennessee;
credit and lending risks associated with our commercial real estate, residential real estate, commercial and industrial, and construction and land development portfolios;



adverse trends or events affecting business industry groups, reduction in real estate values or markets, business closings or layoffs, inclement weather, natural disasters, pandemic crises, and international instability;
increased competition in the banking and mortgage banking industry, nationally, regionally and locally;
our ability to execute our business strategy to achieve profitable growth;
the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets;
risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;
our ability to increase our operating efficiency;
failure to keep pace with technological change or difficulties when implementing new technologies;
risks related to our acquisition, disposition, growth and other strategic opportunities and initiatives;
negative impact on our mortgage banking services, including declines in our mortgage originations or profitability due to rising interest rates and increased competition and regulation;
our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;
our ability to attract sufficient loans that meet prudent credit standards, including in our commercial and industrial and commercial real estate loan categories;
failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;
inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk;
failure to develop new, and grow our existing, streams of non-interest income;
our ability to maintain expenses in line with our current projections;
our dependence on our management team and our ability to motivate and retain our management team;
risks related to management transition;
risks related to any future acquisitions, including failure to realize anticipated benefits from future acquisitions;
inability to find acquisition candidates that will be accretive to our financial condition and results of operations;
system failures, data security breaches (including as a result of cyber-attacks), or failures to prevent breaches of our network security;
data processing system failures and errors;
fraudulent and negligent acts by individuals and entities that are beyond our control;
fluctuations in our market value and its impact on the securities held in our securities portfolio;
changes in the level of nonperforming assets and other credit quality measures, and their impact on the adequacy of our allowance for loan losses;
further deterioration in the credits that we are presently monitoring could result in future losses;
the adequacy of our reserves (including allowance for loan losses) and the appropriateness of our methodology for calculating such reserves;
the makeup of our asset mix and investments;
our focus on small and mid-sized businesses;
an inability to raise necessary capital to fund our growth strategy or operations, or to meet increased minimum regulatory capital levels;
the sufficiency of our capital, including sources of such capital and the extent to which capital may be used or required;
interest rate shifts and its impact on our financial condition and results of operation;
the expenses that we incur to operate as a public company;
the institution and outcome of litigation and other legal proceeding against us or to which we become subject;
changes in accounting standards;
the impact of recent and future legislative and regulatory changes;



governmental monetary and fiscal policies;
changes in the scope and cost of Federal Deposit Insurance Corporation, or FDIC, insurance and other coverage;
future equity issuances under our Amended and Restated 2017 Omnibus Equity Incentive Plan and future sales of our common stock by us or our executive officers or directors;
the continuation of the disruption to the global economy caused by COVID-19, which could affect our capital and liquidity position, impair the ability of borrowers to repay outstanding loans and increase our allowance for loan and lease losses, impair the collateral values, cause an outflow of deposits, result in lost revenue or additional expenses, result in goodwill impairment charges, and increase our cost of capital;
natural or other disasters, acts of terrorism, widespread protests and civil unrest and pandemics, could have an adverse effect on us, including a material disruption of our operations or the ability or willingness of clients to access our products and services;
widespread system outages, caused by the failure of critical internal systems or critical services provided by third parties could adversely impact our financial condition and results of operations; and
depressed market values for our stock and adverse economic conditions sustained over a period of time may require a write down to goodwill. 

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed March 16, 2020 with the SEC and our Quarterly Report on Form 10-Q filed with the SEC on May 7, 2020, as well as the section below entitled "Statement Regarding the Impact of the COVID-19 Pandemic." If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect the Company.

Statement Regarding the Impact of the COVID-19 Pandemic

The Company prioritizes the health and safety of its employees and customers, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves.
Through this earnings release, the Company has sought to describe the historical and future impact of the COVID-19 pandemic on the Company's operations, including the discussions of our loan portfolio and credit quality. Although the Company believes that the statements that pertain to future events, results and trends and their impact on the Company's business are reasonable at the present time, those statements are not historical facts and are based upon current assumptions, expectations, estimates and projections, many of which, by their nature, are beyond the Company's control. Accordingly, all discussions regarding future events, results and trends and their impact on the Company's business, even in the near term, are necessarily uncertain given the fluid and evolving nature of the pandemic.
If the health, logistical or economic effects of the pandemic worsen, or if the assumptions, expectations, estimates or projections that underlie the Company's statements regarding future effects or trends prove to be incorrect, then the Company's operations may be materially and adversely impacted in ways that the Company cannot reasonably forecast.
Therefore, when reading this earnings release, undue reliance should not be placed upon any statement pertaining to future events, results and trends and their impact on the Company's business in future periods.



GAAP RECONCILIATION AND USE OF NON-GAAP FINANCIAL MEASURES
Some of the financial data included in this earnings release and our selected historical consolidated financial information are not measures of financial performance recognized by GAAP. Our management uses these non-GAAP financial measures in its analysis of our performance:
"Common equity" is defined as total shareholders' equity at end of period less the liquidation preference value of the preferred stock;
"Tangible common equity" is common equity less goodwill and other intangible assets;
"Total tangible assets" is defined as total assets less goodwill and other intangible assets;
"Other intangible assets" is defined as the sum of core deposit intangible assets and SBA servicing rights;
"Tangible book value per share" is defined as tangible common equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets;
"Tangible common equity ratio" is defined as the ratio of tangible common equity divided by total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period-to period in common equity and total assets, each exclusive of changes in intangible assets;
"Core Return on Average Tangible Common Equity" is defined as annualized core net income available to common shareholders divided by average tangible common equity;
"Core Efficiency Ratio" is defined as noninterest expense divided by our operating revenue, which is equal to net interest income plus noninterest income with all adjusted to certain one-time expenses;
"Core Diluted Earnings Per Share" is defined as reported earnings per share adjusted for certain one-time expenses;
"Core Interest Income" is defined as interest income adjusted for certain one-time items;
"Core Net Interest Income" is defined as net interest income adjusted for certain one-time items;
"Core NonInterest Income" is defined as noninterest income adjusted for certain one-time items;
"Core NonInterest Expense" is defined as noninterest expense adjusted for certain one-time items;
"Core Compensation Expense" is defined as compensation expense adjusted for certain one-time items;
"Core Net Income" is defined as "Net Income Available to Common Shareholders" adjusted for certain one-time items;
"Pre-tax core net income" is defined as pre-tax net income adjusted for certain one-time noninterest income and noninterest expense items; and
"Pre-tax pre-provision core profit" is defined as pre-tax core net income and provision for loan losses.

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.




Financial Summary and Key Metrics   
(Unaudited)
(In Thousands, Except Share Data and %)
20202019
 Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second 
Quarter
Statement of Income Data     
Total interest income$39,814  $41,607  $43,185  $46,531  $47,453  
Total interest expense10,286  14,143  15,072  18,269  20,088  
Net interest income29,528  27,464  28,113  28,262  27,365  
Provision for loan losses3,195  13,022  18,961  1,000  7,031  
Total noninterest income10,555  5,893  4,573  4,793  4,923  
Total noninterest expense23,976  22,421  21,279  18,614  19,370  
Net income before income taxes12,912  (2,086) (7,554) 13,441  5,887  
Income tax expense2,730  (938) (2,970) 2,117  706  
Net income available to common shareholders (a)
$10,174  $(1,148) $(4,592) $11,324  $5,173  
Pre-tax pre-provision profit$16,107  $10,936  $11,407  $14,441  $12,918  
Net interest income (tax-equivalent basis)$30,028  $28,000  $28,778  $28,808  $27,921  
Core net income* (a)
$10,686  $(651) $(4,102) $10,926  $5,173  
Per Common Share
Diluted net income$0.66  $(0.08) $(0.31) $0.75  $0.34  
Core diluted net income *0.70  (0.04) (0.27) 0.72  0.34  
Book value28.25  27.51  27.68  27.89  26.90  
Tangible book value*27.01  26.26  26.43  26.61  25.61  
Weighted average number of shares-diluted15,271,414  15,321,476  15,126,270  14,991,363  14,894,140  
Period-end number of shares14,937,776  14,859,704  14,821,594  14,636,484  14,628,287  
Selected Balance Sheet Data
Cash and due from banks$236,775  $173,482  $234,991  $178,747  $150,721  
Securities available-for-sale, at fair value503,877  543,225  652,132  612,371  715,132  
Securities held to maturity—  —  —  —  118,963  
Loans held for sale, at fair value61,142  42,682  43,162  56,570  27,093  
Loans held for investment2,794,768  2,855,768  2,812,444  2,796,233  2,880,433  
Allowance for loan losses(38,100) (38,403) (45,436) (26,474) (27,443) 
Total assets3,775,741  3,791,601  3,896,162  3,818,324  4,071,971  
Retail and other deposits1,928,940  1,726,087  1,706,699  1,756,558  1,530,722  
Local Government deposits229,685  328,169  386,903  349,535  480,206  
Brokered deposits406,459  534,375  632,241  589,482  699,195  
Reciprocal deposits578,175  548,840  481,741  366,375  436,522  
Total deposits3,143,259  3,137,471  3,207,584  3,061,950  3,146,645  
Borrowings158,961  193,916  213,872  278,827  455,282  
Total shareholders' equity421,970  408,755  410,333  408,168  393,516  
Total equity422,063  408,848  410,426  408,261  393,609  
Selected Ratios
Return on average:
Assets1.06 %(0.12)%(0.48)%1.12 %0.51 %
Shareholders' equity9.9 %(1.1)%(4.4)%11.3 %5.3 %
Tangible common equity*10.4 %(1.2)%(4.6)%11.8 %5.6 %
Average shareholders' equity to average assets10.6 %10.7 %10.9 %10.0 %9.5 %
Net interest margin (NIM) (tax-equivalent basis)3.26 %3.02 %3.13 %2.98 %2.84 %
Efficiency ratio (GAAP)59.8 %67.2 %65.1 %56.3 %60.0 %
Core efficiency ratio (tax-equivalent basis)*56.5 %64.1 %63.3 %58.1 %60.0 %
Loans held for investment to deposit ratio88.9 %91.0 %87.7 %91.3 %91.5 %
Total loans to deposit ratio90.9 %92.4 %89.0 %93.2 %92.4 %
Yield on interest-earning assets4.38 %4.55 %4.76 %4.87 %4.89 %
Cost of interest-bearing liabilities1.40 %1.85 %2.00 %2.26 %2.41 %
Cost of total deposits1.12 %1.53 %1.65 %1.91 %2.07 %
Credit Quality Ratios
Allowance for loan losses as a percentage of loans held for investment (c)
1.36 %1.34 %1.62 %0.95 %0.95 %
Net charge-offs (recoveries) as a percentage of average loans held for investment(b)
0.49 %2.85 %— %0.27 %1.04 %
Nonperforming loans held for investment as a percentage of total loans held for investments0.87 %0.96 %0.98 %0.11 %0.16 %
Nonperforming assets as a percentage of total assets0.65 %0.72 %0.71 %0.08 %0.12 %
Criticized and classified assets as a percentage of loans held for investment1.81 %1.86 %1.86 %2.95 %2.01 %
Preliminary capital ratios (Consolidated)
Shareholders' equity to assets11.2 %10.8 %10.5 %10.7 %9.7 %
Tangible common equity to tangible assets*10.7 %10.3 %10.1 %10.2 %9.2 %
Tier 1 capital (to average assets)10.4 %10.1 %10.3 %9.8 %9.2 %
Tier 1 capital (to risk-weighted assets)12.5 %12.0 %11.9 %12.0 %11.2 %
Total capital (to risk-weighted assets)15.5 %15.0 %15.0 %14.7 %13.7 %
Common Equity Tier 1 (to risk-weighted assets) (CET1)12.5 %12.0 %11.9 %12.0 %11.2 %



*These measures are considered non-GAAP financial measures. See "GAAP Reconciliation and Use of Non-GAAP Financial Measures" and the corresponding financial tables below for reconciliations of these Non-GAAP measures.
(a) - Includes a dividend declared and paid by the Company's REIT subsidiary to minority interest preferred shareholders in the second and fourth quarters.
(b) - annualized
(c) - In accordance with the CARES Act passed in March 2020, the Company deferred the implementation of the current expected credit loss (CECL) methodology, and as such, ALLL/provision should not be compared to those
under a different accounting method (e.g.CECL)



Consolidated Statements of Income
(Unaudited)
(In Thousands, Except Share Data and %)
Q2 2020
vs.
Q2 2020
vs.
 20202019Q1 2020
Percent
Q2 2019
Percent
 Second QuarterFirst QuarterFourth QuarterThird QuarterSecond QuarterVarianceVariance
Interest income:       
Loans, including fees$36,623  $37,038  $38,567  $40,118  $40,202  (1.1)%(8.9)%
Securities
Taxable1,700  2,424  2,639  3,815  4,614  (29.9)%(63.2)%
Tax-exempt1,219  1,383  1,208  1,471  1,410  (11.9)%(13.5)%
Dividends on restricted equity securities220  162  238  291  350  35.8 %(37.1)%
Federal funds sold and other52  600  533  836  877  (91.3)%(94.1)%
Total interest income39,814  41,607  43,185  46,531  47,453  (4.3)%(16.1)%
Interest expense:
Deposits8,929  12,246  12,609  15,020  16,679  (27.1)%(46.5)%
Federal funds purchased and repurchase agreements 14  79  49  90  (92.9)%(98.9)%
Federal Home Loan Bank advances and other274  801  1,302  2,118  2,237  (65.8)%(87.8)%
Subordinated notes1,082  1,082  1,082  1,082  1,082  0.0 %0.0 %
Total interest expense10,286  14,143  15,072  18,269  20,088  (27.3)%(48.8)%
Net interest income29,528  27,464  28,113  28,262  27,365  7.5 %7.9 %
Provision for loan losses3,195  13,022  18,961  1,000  7,031  (75.5)%(54.6)%
Net interest income after provision26,333  14,442  9,152  27,262  20,334  82.3 %29.5 %
Noninterest income:
Service charges on deposit accounts74  92  83  83  77  (19.57)%(3.9)%
Other service charges and fees1,397  897  995  1,069  903  55.7 %54.7 %
Mortgage banking revenue8,688  2,685  2,307  2,702  2,473  223.6 %251.3 %
Wealth management702  814  813  767  673  (13.8)%4.3 %
Gain on sales and calls of securities166  1,396  34  1,493  367  (88.1)%(54.8)%
Net (loss) gain on sale of loans(372) (416) (31) (1,758)  (10.6)%NM
Net gain on foreclosed assets  (2)   150.0 %66.7 %
Other income(105) 423  374  435  424  (124.8)%(124.8)%
Total noninterest income10,555  5,893  4,573  4,793  4,923  79.1 %114.4 %
Total revenue40,083  33,357  32,686  33,055  32,288  20.2 %24.1 %
Noninterest expenses:
Salaries and employee benefits14,762  12,580  13,073  11,632  11,365  17.3 %29.9 %
Occupancy and equipment expense2,832  3,086  3,313  3,360  3,283  (8.2)%(13.7)%
FDIC assessment expense900  450  550  (357) 660  100.0 %36.4 %
Marketing expense133  245  254  315  301  (45.7)%(55.8)%
Professional fees2,345  3,068  1,242  1,118  1,073  (23.6)%118.5 %
Amortization of core deposit intangible82  94  107  120  132  (12.8)%(37.9)%
Other expense2,922  2,898  2,740  2,426  2,556  0.8 %14.3 %
Total noninterest expense23,976  22,421  21,279  18,614  19,370  6.9 %23.8 %
Net income before income taxes12,912  (2,086) (7,554) 13,441  5,887  (719.0)%119.3 %
Income tax expense2,730  (938) (2,970) 2,117  706  (391.0)%286.7 %
Net income$10,182  $(1,148) $(4,584) $11,324  $5,181  (986.9)%96.5 %
       Earnings attributable to noncontrolling interest(8) —  (8) —  (8) 0.00 %0.00 %
       Net income available to common shareholders (a)
$10,174  $(1,148) $(4,592) $11,324  $5,173  (986.2)%96.7 %
Weighted average common shares outstanding:  
Basic14,864,794  14,758,960  14,649,906  14,530,586  14,482,344    
Fully diluted15,271,414  15,321,476  15,126,270  14,991,363  14,894,140   
Earnings per share  
Basic$0.68  $(0.08) $(0.31) $0.77  $0.35    
Fully diluted$0.66  $(0.08) $(0.31) $0.75  $0.34    
Dividend per share$0.06  $0.06  $0.06  $0.04  $0.04    
 (a) Includes a dividend declared and paid by the Company's REIT subsidiary to minority interest preferred shareholders in the second and fourth quarters.




Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except %)
 
Q2 2020
vs.
Q2 2020
vs.
 20202019Q1 2020
Percent
Q2 2019
Percent
Second QuarterFirst QuarterFourth QuarterThird QuarterSecond 
Quarter
Annualized
Variance
Percent
Variance
ASSETS       
Cash and due from banks$236,775  $173,482  $234,991  $178,747  $150,721  146.7 %57.1 %
Certificates of deposit at other financial institutions3,506  3,345  3,590  3,590  3,840  19.4 %(8.7)%
Securities available for sale, fair value503,877  543,225  652,132  612,371  715,132  (29.1)%(29.5)%
Securities held to maturity—  —  —  —  118,963  0.0 %(100.0)%
Loans held for sale, at fair value61,142  42,682  43,162  56,570  27,093  174.0 %125.7 %
Loans held for investment2,794,768  2,855,768  2,812,444  2,796,233  2,880,433  (8.6)%(3.0)%
Allowance for loan losses(38,100) (38,403) (45,436) (26,474) (27,443) (3.2)%38.8 %
Net loans2,756,668  2,817,365  2,767,008  2,769,759  2,852,990  (8.7)%(3.4)%
Restricted equity securities, at cost24,110  24,844  24,802  24,764  24,524  (11.9)%(1.7)%
Premises and equipment, net47,305  48,470  12,141  12,449  12,948  (9.7)%265.3 %
Accrued interest receivable18,576  12,043  12,362  12,077  14,281  218.2 %30.1 %
Bank owned life insurance57,432  57,082  56,726  56,366  55,989  2.5 %2.6 %
Deferred tax asset, net10,093  12,846  14,229  10,297  10,451  (86.2)%(3.4)%
Servicing rights, net4,035  3,057  3,246  3,128  3,299  128.7 %22.3 %
Goodwill18,176  18,176  18,176  18,176  18,176  0.0 %0.0 %
Core deposit intangible asset271  354  448  556  675  (94.3)%(59.9)%
Other assets33,775  34,630  53,149  59,474  62,889  (9.9)%(46.3)%
Total assets$3,775,741  $3,791,601  $3,896,162  $3,818,324  $4,071,971  (1.7)%(7.3)%
LIABILITIES AND EQUITY       
Liabilities:       
Demand deposits       
Noninterest-bearing$483,445  $387,195  $319,373  $346,441  $334,802  100.0 %44.4 %
Interest-bearing2,659,814  2,750,276  2,888,211  2,715,509  2,811,843  (13.2)%(5.4)%
Total deposits3,143,259  3,137,471  3,207,584  3,061,950  3,146,645  0.7 %(0.1)%
Federal Home Loan Bank advances100,000  135,000  155,000  220,000  396,500  (104.3)%(74.8)%
Subordinated notes, net58,961  58,916  58,872  58,827  58,782  0.3 %0.3 %
Accrued interest payable2,711  3,179  4,201  3,932  4,312  (59.2)%(37.1)%
Other liabilities48,747  48,187  60,079  65,354  72,123  4.7 %(32.4)%
Total liabilities3,353,678  3,382,753  3,485,736  3,410,063  3,678,362  (3.5)%(8.8)%
Shareholders' equity:       
Common stock279,232  277,341  275,412  269,842  268,505  2.7 %4.0 %
Retained earnings140,339  131,061  133,102  138,579  127,840  28.5 %9.8 %
Accumulated other comprehensive gain/(loss), net2,399  353  1,819  (253) (2,829) NM(184.8)%
Total shareholders' equity421,970  408,755  410,333  408,168  393,516  13.0 %7.2 %
Noncontrolling interest in consolidated93  93  93  93  93  0.0 %0.0 %
Total equity422,063  408,848  410,426  408,261  393,609  13.0 %7.2 %
Total liabilities and equity$3,775,741  $3,791,601  $3,896,162  $3,818,324  $4,071,971  (1.7)%(7.3)%




Average Balance, Average Yield Earned and Average Rate Paid (7)
For the Periods Ended
(Unaudited)
(In Thousands, Except %) 
Three Months Ended
June 30, 2020
Three Months Ended
March 31, 2020
Average
balances
Interest
income/
expense
Average
yield/
rate
Average
balances
Interest
income/
expense
Average
yield/
rate
Interest-earning assets:      
Loans(1)(6)
$2,870,460  $36,401  5.10 %$2,834,437  $36,707  5.21 %
Loans held for sale48,899  290  2.39 %36,668  379  4.16 %
Securities:
Taxable299,546  1,700  2.28 %399,135  2,424  2.44 %
Tax-Exempt (6)
227,039  1,651  2.92 %221,190  1,872  3.40 %
Restricted equity securities24,675  219  3.57 %24,824  162  2.62 %
Total Securities551,260  3,570  2.60 %645,149  4,458  2.78 %
Certificates of deposit at other financial institutions3,445  20  2.33 %3,426  20  2.35 %
Fed funds sold and other (2)
227,451  33  0.06 %207,164  579  1.12 %
Total interest earning assets3,701,515  40,314  4.38 %3,726,844  42,143  4.55 %
Noninterest Earning Assets:   
Allowance for loan losses(38,211)   (45,100) 
Other assets205,647    198,380  
Total noninterest earning assets167,436    153,280  
Total assets$3,868,951    $3,880,124  
Interest-bearing liabilities:   
Interest bearing deposits:   
Interest Checking$800,030  $1,913  0.96 %$877,751  $3,400  1.56 %
Money market1,328,548  3,758  1.14 %1,241,087  4,930  1.60 %
Savings deposits42,662  29  0.27 %40,055  27  0.27 %
Time deposits567,477  3,229  2.29 %718,294  3,889  2.18 %
Total interest bearing deposits2,738,717  8,929  1.31 %2,877,187  12,246  1.71 %
Other interest-bearing liabilities:   
FHLB advances and other (8)
141,333  265  0.75 %137,319  801  2.35 %
Federal funds purchased and other (3)
11,124  10  0.36 %2,876  14  1.96 %
Subordinated notes58,932  1,082  7.38 %58,887  1,082  7.39 %
Total other interest-bearing liabilities211,389  1,357  2.58 %199,082  1,897  3.83 %
Total Interest-bearing liabilities2,950,106  10,286  1.40 %3,076,269  14,143  1.85 %
Noninterest bearing liabilities:    
Demand deposits455,540    333,883   
Other liabilities51,943    53,454   
Total noninterest-bearing liabilities507,483    387,337   
Total liabilities3,457,589    3,463,606   
Equity411,362    416,518   
Total liabilities and equity$3,868,951    $3,880,124   
Net interest income $30,028    $28,000  
Interest rate spread (4)
  2.98 %  2.70 %
Net interest margin (5)
  3.26 %  3.02 %
Cost of total deposits  1.12 %  1.53 %
Average interest-earning assets to average interest-bearing liabilities  125.47 %  121.15 %
Tax equivalent adjustment $500    $536  
Loan yield components:    
Contractual interest rate on loans held for investment (1)
 $33,332  4.67 % $34,973  4.96 %
Origination and other loan fee income 3,008  0.42 % 1,626  0.23 %
Accretion on purchased loans 61  0.01 % 108  0.02 %
Nonaccrual interest collections —  0.00 % —  0.00 %
Total loan yield $36,401  5.10 % $36,707  5.21 %
(1) Loan balances are net of deferred origination fees and costs. Nonaccrual loans are included in total loan balances.
(2) Includes federal funds sold and capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank and the Federal Home Loan Bank.
(3) Includes repurchase agreements and other borrowings from the Federal Reserve Bank.
(4) Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Represents net interest income (annualized) divided by total average earning assets.
(6) Interest income and rates include the effects of a tax equivalent adjustment to adjust tax-exempt interest income on tax exempt loans and investment securities to a fully taxable basis.
(7) Average balances are average daily balances.
(8) Includes finance lease.



Average Balance, Average Yield Earned and Average Rate Paid (7)
For the Quarters Ended
(Unaudited)
(In Thousands, Except %)
Three Months Ended
December 31, 2019
Three Months Ended
September 30, 2019
Three Months Ended
June 30, 2019
Average
balances
Interest
income/expense
Average
yield/rate
Average
balances
Interest
income/expense
Average
yield/rate
Average
balances
Interest
income/expense
Average
yield/rate
Interest-earning assets:         
Loans held for investment(1)(6)
$2,827,590  $38,510  5.40 %$2,848,888  $39,926  5.56 %$2,858,948  $40,003  5.61 %
Loans held for sale27,131  211  3.09 %22,048  217  3.90 %23,883  256  4.30 %
Securities:
Taxable438,494  2,639  2.39 %570,891  3,815  2.65 %673,386  4,614  2.75 %
Tax-Exempt (6)
189,091  1,636  3.43 %209,442  1,991  3.77 %208,417  1,909  3.67 %
Restricted equity securities24,784  241  3.86 %24,676  292  4.69 %24,331  350  5.77 %
Total Securities652,369  4,516  2.75 %805,009  6,098  3.01 %906,134  6,873  3.04 %
Certificates of deposit at other financial institutions3,590  21  2.32 %3,628  22  2.41 %3,759  22  2.35 %
Fed funds sold and other (2)
141,199  592  1.66 %158,618  814  2.04 %147,542  855  2.32 %
Total interest earning assets3,651,879  43,850  4.76 %3,838,191  47,077  4.87 %3,940,266  48,009  4.89 %
Noninterest Earning Assets:
Provision for loan losses(26,844) (27,364) (28,007) 
Other assets183,123  188,520  192,843  
Total noninterest earning assets156,279  161,156  164,836  
Total assets$3,808,158  $3,999,347  $4,105,102  
Interest-bearing liabilities:
Interest bearing deposits:
Interest Checking$676,909  $2,818  1.65 %$712,992  $3,536  1.97 %$816,429  $4,357  2.14 %
Money market1,208,200  5,305  1.74 %1,112,573  5,815  2.07 %1,026,200  6,103  2.39 %
Savings deposits38,778  27  0.28 %38,952  27  0.28 %38,882  27  0.28 %
Time deposits770,464  4,459  2.30 %928,571  5,642  2.41 %1,036,904  6,192  2.40 %
Total interest bearing deposits2,694,351  12,609  1.86 %2,793,088  15,020  2.13 %2,918,415  16,679  2.29 %
Other interest-bearing liabilities:
FHLB advances(8)
225,125  1,302  2.29 %343,419  2,118  2.45 %349,615  2,237  2.57 %
Federal funds purchased and other (3)
14,985  79  2.09 %7,170  49  2.71 %13,249  90  2.72 %
Subordinated notes, net58,842  1,082  7.30 %58,798  1,082  7.30 %58,754  1,082  7.39 %
Total other interest-bearing liabilities298,952  2,463  3.27 %409,387  3,249  3.15 %421,618  3,409  3.24 %
Total Interest-bearing liabilities2,993,303  15,072  2.00 %3,202,475  18,269  2.26 %3,340,033  20,088  2.41 %
Noninterest bearing liabilities:
Demand deposits334,840  329,620  313,104  
Other liabilities65,764  68,156  63,505  
Total noninterest-bearing liabilities400,604  397,776  376,609  
Total liabilities3,393,907  3,600,251  3,716,642  
Equity414,251  399,096  388,460  
Total liabilities and equity$3,808,158  $3,999,347  $4,105,102  
Net interest income $28,778   $28,808   $27,921  
Interest rate spread (4)
  2.76 %  2.61 %  2.48 %
Net interest margin (5)
  3.13 %  2.98 %  2.84 %
Cost of total deposits  1.65 %  1.91 %  2.07 %
Average interest-earning assets to average interest-bearing liabilities  122.00 %  119.85 %  117.97 %
Tax equivalent adjustment $665   $546   $556  
Loan yield components:    
Contractual interest rate on loans held for investment (1)
 $36,568  5.13 % $37,908  5.28 % $37,925  5.32 %
Origination and other loan fee income 1,696  0.24 % 1,895  0.26 % 1,904  0.27 %
Accretion on purchased loans 229  0.03 % 123  0.02 % 174  0.02 %
Nonaccrual interest collections —  0.00 % —  0.00 % —  — %
Total loan yield $38,493  5.40 % $39,926  5.56 % $40,003  5.61 %
(1) Loan balances are net of deferred origination fees and costs. Nonaccrual loans are included in total loan balances. 
(2) Includes federal funds sold, capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank and the Federal Reserve Bank and the Federal Home Loan Bank.
(3) Includes repurchase agreements and other borrowings from the Federal Reserve Bank.
(4) Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Represents net interest income (annualized) divided by total average earning assets.
(6) Interest income and rates include the effects of a tax equivalent adjustment to adjust tax-exempt interest income on tax exempt loans and investment securities to a fully taxable basis.
(7) Average balances are average daily balances.
(8) Includes finance lease.



Loan Portfolio and Asset Quality
For the Quarters Ended
(Unaudited)
(In Thousands, Except %)  
20202019
June 30,% of
Total
March 31,% of
Total
December 31,% of
Total
September 30,% of
Total
June 30,% of
Total
Loan portfolio          
Commercial and industrial$519,040  18.57 %$579,751  20.30 %$580,696  20.65 %$576,018  20.60 %$666,025  23.12 %
Construction and land development643,704  23.03 %625,411  21.90 %589,800  20.97 %596,459  21.33 %582,715  20.23 %
Commercial real estate:
Nonfarm, nonresidential967,967  34.63 %953,490  33.39 %942,190  33.50 %911,205  32.59 %893,085  31.01 %
Other47,466  1.70 %42,516  1.49 %49,793  1.77 %32,466  1.16 %37,789  1.31 %
Residential real estate:
Closed-end 1-to-4 family425,626  15.23 %457,571  16.02 %456,972  16.25 %477,789  17.09 %497,838  17.28 %
Other187,377  6.71 %192,557  6.74 %188,204  6.69 %196,322  7.02 %198,016  6.87 %
Consumer and other3,588  0.13 %4,472  0.16 %4,789  0.17 %5,974  0.21 %4,965  0.17 %
Total loans held for investment$2,794,768  100.00 %$2,855,768  100.00 %$2,812,444  100.00 %$2,796,233  100.00 %$2,880,433  100.00 %
Allowance for loan losses roll forward summary          
Allowance for loan losses at the beginning of the period$38,403  $45,436  $26,474   $27,443   $27,857   
Charge-offs(5,166) (20,530) (191)  (2,021)  (7,592)  
Recoveries1,668  475  192   52   147   
Provision for Loan losses3,195  13,022  18,961   1,000   7,031   
Allowance for loan losses at the end of the period$38,100  $38,403  $45,436   $26,474   $27,443   
Allowance for loan losses as a percentage of total loans held for investment1.36 %1.34 %1.62 % 0.95 % 0.95 % 
Charge-offs     
Commercial and industrial$(5,163) $(20,501) $(160)  $(1,935)  $(7,563)  
Residential real estate—  (8) (9)  —   —   
Construction and land development—  —  —   (59)  —   
Consumer and other(3) (21) (22)  (27)  (29)  
Total Charge-offs$(5,166) $(20,530) $(191)  $(2,021)  $(7,592)  
Recoveries     
Commercial and industrial$1,662  $468  $185   $30   $70   
Residential real estate—   —   —   16   
Consumer and other    22   61   
Total Recoveries$1,668  $475  $192   $52   $147   
Net (charge-offs) recoveries (c)
$(3,498) $(20,055) $  $(1,969)  $(7,445)  
Net charge-offs (recoveries) as a percentage of average total loans(b)
0.49 %2.85 %0.00 % 0.27 % 1.04 % 
Criticized and Classified
Loans classified as criticized$8,336  $5,431  $3,013  $33,161  $29,876  
Loans classified as substandard or worse42,347  47,694  49,263   49,424   28,151   
Total Loans Criticized and Classified$50,683  $53,125  $52,276  $82,585  $58,027  
Nonperforming assets(a)
    
Past due 90 days or more and accruing interest$—  $—  $654   $79   $676   
Nonaccrual24,433  27,434  27,035   3,028   4,030   
Total nonperforming loans held for investment$24,433  $27,434  $27,689   $3,107   $4,706   
Total nonperforming assets$24,433  $27,434  $27,689   $3,107   $4,706   
Total nonperforming loans as a percentage of loans held for investment0.87 %0.96 %0.98 % 0.11 % 0.16 % 
Total nonperforming assets as a percentage of total assets0.65 %0.72 %0.71 % 0.08 % 0.12 % 
Total accruing loans over 90 days delinquent as a percentage of total assets0.00 %0.00 %0.02 % 0.00 % 0.02 % 
Loans restructured as troubled debt restructurings not in compliance with modified terms$311  $311  $311   $313   $316   
Loans restructured as troubled debt restructurings in compliance with modified terms4,303  —  —  —  —  
Total troubled debt restructurings$4,614  $311  $311  $313  $316  
Total troubled debt restructurings as a percentage of loans held for investment0.17 %0.01 %0.01 % 0.01 % 0.01 % 




(a) Nonperforming assets exclude purchase credit impaired loans
(b) Annualized
(c) Net (charge-offs) and recoveries includes approximately $2.9 million of DDA charge-offs for 1Q20.



COVID-19 Potentially Impacted Industries
For the Quarter Ended June 30, 2020
(Unaudited)
(In Thousands, Except %)  

IndustriesCommercial and industrialCommercial real estate owner occupiedCommercial real estate non-owner occupied other real estateTotal% of Total
Loans HFI
Retail$5,390  $39,342  $208,419  $253,151  9.1 %
Healthcare - institutional262,417  —  —  262,417  9.4 %
Healthcare non-institutional21,354  10,900  50,705  82,959  3.0 %
Total healthcare283,771  10,900  50,705  345,376  12.4 %
Hotels371  4,293  139,215  143,879  5.1 %
 Restaurants5,023  44,153  28,460  77,636  2.8 %
Transportation and warehousing19,558  1,087  6,591  27,236  1.0 %
Total$314,113  $99,775  $433,390  $847,278  30.3 %

Risk CategoryRetailHealthcare - institutionalHealthcare non-institutionalTotal
Healthcare
HotelsRestaurantsTransportation and warehousing
Pass95.2 %87.0 %97.9 %89.6 %90.1 %92.0 %94.1 %
Watch1.8 %2.3 %2.1 %2.2 %9.9 %7.0 %5.9 %
Special mention1.6 %0.0 %0.0 %0.0 %0.0 %0.8 %0.0 %
Substandard or worse1.4 %10.7 %0.0 %8.2 %0.0 %0.2 %0.0 %
Total100.0 %100.0 %100.0 %100.0 %100.0 %100.0 %100.0 %




Preliminary Capital Ratios
(Unaudited)
(In Thousands, Except %
 
Computation of Tangible Common Equity to
Tangible Assets:
June 30, 2020December 31, 2019
Total Shareholders' Equity$421,970  $410,333  
Less:  
Goodwill18,176  18,176  
Other intangibles295  476  
Tangible Common Equity$403,499  $391,681  
Total Assets$3,775,741  $3,896,162  
Less:  
Goodwill18,176  18,176  
Other intangibles295  476  
Tangible Assets$3,757,270  $3,877,510  
Preliminary Total Risk-Weighted Assets$3,193,323  $3,260,236  
Total Common Equity to Total Assets11.2 %10.5 %
Tangible Common Equity to Tangible Assets10.7 %10.1 %
 June 30, 2020December 31, 2019
Preliminary Regulatory Capital:  
Common Equity Tier 1 Capital$399,384  $388,199  
Tier 1 Capital399,384  388,199  
Total Capital496,529  487,966  
Preliminary Regulatory Capital Ratios:  
Common Equity Tier 112.5 %11.9 %
Tier 1 Risk-Based12.5 %11.9 %
Total Risk-Based15.5 %15.0 %
Tier 1 Leverage10.4 %10.3 %




Non-GAAP Reconciliation
For the Years and Quarters Ended
(Unaudited)
(In Thousands, Except Share Data and %)
20202019
Core net incomeSecond
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
Pre-tax net income$12,912  $(2,086) $(7,554) $13,441  $5,887  
Non-core items: 
Interest income
Interest income SBA PPP loans(140) —  —  —  —  
Amortization loan fees SBA PPP loans(1,491) —  —  —  —  
Noninterest income 
Gain on sales of securities(166) (1,396) —  (1,493) —  
Loss on sales of loans143  416  —  1,765  —  
Loss on sale of SBA PPP loans230  —  —  —  —  
Noninterest expenses 
Merger related expense1,540  1,653  —  —  —  
FDIC assessment credit—  —  —  (757) —  
Employment related payroll adjustments—  —  598  —  —  
Accrual for post-employment benefits577  —  —  —  —  
Pre-tax core net income$13,605  $(1,413) $(6,956) $12,956  $5,887  
Pre-tax pre-provision core profit$16,800  $11,609  $12,005  $13,956  $12,918  
Pre-tax core net income$13,605  $(1,413) $(6,956) $12,956  $5,887  
Core income tax expense2,911  (762) (2,862) 2,030  706  
Core net income$10,694  $(651) $(4,094) $10,926  $5,181  
Less: earnings attributable to noncontrolling
interest
 —   —   
Core net income available to common shareholders$10,686  $(651) $(4,102) $10,926  $5,173  
Less: earnings allocated to participating securities36  (3) (67) 74  42  
Core net income allocated to common shareholders$10,650  $(648) $(4,035) $10,852  $5,131  
Weighted average common shares outstanding fully diluted15,271,414  15,321,476  15,126,270  14,991,363  14,894,140  
Core diluted earnings per share     
Diluted earnings per share$0.66  $(0.08) $(0.31) $0.75  $0.34  
Non-core items: 
Interest income
Interest income SBA PPP loans(0.01) —  —  —  —  
Amortization loan fees SBA PPP loans(0.10) —  —  —  —  
Noninterest income 
Gain on sales of securities(0.01) (0.09) —  (0.10) —  
Loss on sales of loans0.01  0.03  —  0.12  —  
Loss on sale of SBA PPP loans0.02  —  —  —  —  
Noninterest expenses 
Merger related expense0.10  0.11  —  —  —  
FDIC assessment credit—  —  —  (0.04) —  
Employment related payroll adjustments—  —  0.05  —  —  
Accrual for post-employment benefits0.04  —  —  —  —  
Tax effect$(0.01) $(0.01) $(0.01) $(0.01) $—  
Core diluted earnings per share(a)
$0.70  $(0.04) $(0.27) $0.72  $0.34  
Non-GAAP financial measures that adjust GAAP reported net income and other metrics for certain income and expense items. Non-GAAP for 2Q20 excludes interest income SBA PPP loans of $140, amortization loan fees SBA PPP loans of $1,491, gain on sales of securities of $166, loss on sales of loans of $143, merger related expenses of $1,540, and accrual for post-employment benefits of $577. Non-GAAP for 1Q20 excludes gain on sales of securities of $1,396, loss on sales of loans of $416, and merger related expenses of $1,653. See "GAAP reconciliation and use of non-GAAP financial measures" and the reconciliation tables above for a discussion and reconciliation of non-GAAP financial measures.
(a) Quarterly rounding may vary from year-to-date totals.



Non-GAAP Reconciliation
For the Quarters Ended
(Unaudited)
(In Thousands, Except Share Data and %)
 
20202019
Core efficiency ratioSecond QuarterFirst QuarterFourth QuarterThird QuarterSecond Quarter
Total noninterest expense$23,976  $22,421  $21,279  $18,614  $19,370  
Merger related expense(1,540) (1,653) —  —  —  
FDIC assessment credit—  —  —  757  —  
Employment related payroll adjustments—  —  (598) —  —  
Post-employment and retirement expense(577) —  —  —  —  
Core noninterest expense$21,859  $20,768  $20,681  $19,371  $19,370  
Total Interest income$39,814  $41,607  $43,185  $46,531  $47,453  
Interest income - PPP loans$(140) $—  $—  $—  $—  
Amortization loan fees - PPP loans$(1,491) $—  $—  $—  $—  
Core interest income$38,183  $41,607  $43,185  $46,531  $47,453  
Interest expense$10,286  $14,143  $15,072  $18,269  $20,088  
Core net interest income$27,897  $27,464  $28,113  $28,262  $27,365  
Total noninterest income10,555  5,893  4,573  4,793  4,923  
Gain on sales of securities(166) (1,396) (1,493) (1,493) —  
Loss on sales of loans143  416  1,765  1,765  —  
Loss on sale of PPP loans230  —  —  —  —  
Core noninterest income$10,762  $4,913  $4,845  $5,065  $4,923  
Core revenue$38,659  $32,377  $32,958  $33,327  $32,288  
Efficiency ratio (GAAP)(1)
59.8 %67.2 %65.1 %56.3 %60.0 %
Core efficiency ratio56.5 %64.1 %63.3 %58.1 %60.0 %
 
(1) Efficiency ratio (GAAP) is calculated by dividing reported noninterest expense by reported total core revenue
 
20202019
Tangible assets and equitySecond QuarterFirst QuarterFourth QuarterThird QuarterSecond Quarter
Tangible Assets     
Total assets$3,775,741  $3,791,601  $3,896,162  $3,818,324  $4,071,971  
Less goodwill18,176  18,176  18,176  18,176  18,176  
Less intangibles, net295  379  476  587  709  
Tangible assets$3,757,270  $3,773,046  $3,877,510  $3,799,561  $4,053,086  
Tangible Common Equity
Total shareholders' equity$421,970  $408,755  $410,333  $408,168  $393,516  
Less goodwill18,176  18,176  18,176  18,176  18,176  
Less intangibles, net295  379  476  587  709  
Tangible common equity$403,499  $390,200  $391,681  $389,405  $374,631  
Common shares outstanding14,937,776  14,859,704  14,821,594  14,636,484  14,628,287  
Book value per common share$28.25  $27.51  $27.68  $27.89  $26.90  
Tangible book value per common share$27.01  $26.26  $26.43  $26.61  $25.61  
Total shareholders' equity to total assets11.2 %10.8 %10.5 %10.7 %9.7 %
Tangible common equity to tangible assets10.7 %10.3 %10.1 %10.2 %9.2 %
Non-GAAP financial measures that adjust GAAP reported net income and other metrics for certain income and expense items. Non-GAAP for 2Q20 excludes interest income SBA PPP loans of $140, amortization loan fees SBA PPP loans of $1,491, gain on sales of securities of $166, loss on sales of loans of $143, merger related expenses of $1,540, and accrual for post-employment benefits of $577. Non-GAAP for 1Q2020 excludes gain on sales of securities of $1,396, loss on sales of loans of $416, and merger related expenses of $1,653. Non-GAAP for 4Q2019 excludes $598 employment related payroll adjustment expenses. See "GAAP reconciliation and use of non-GAAP financial measures" and the reconciliation tables above for a discussion and reconciliation of non-GAAP financial measures.



Non-GAAP Reconciliation
For the Quarters Ended
(Unaudited)
(In Thousands, Except Share Data and %)
20202019
Return on average tangible common equitySecond QuarterFirst QuarterFourth QuarterThird QuarterSecond Quarter
Total average shareholders' equity$411,362  $416,518  $414,251  $399,096  $388,460  
Less average goodwill18,176  18,176  18,176  18,176  18,176  
Less intangibles, net347  439  633  587  709  
Average tangible common equity$392,839  $397,903  $395,442  $380,333  $369,575  
Net income available to common shareholders (1)
$10,174  $(1,148) $(4,592) $11,324  $5,173  
Return on average tangible common equity10.4 %(1.2)%(4.6)%11.8 %5.6 %
 20202019
Core return on average tangible common equitySecond QuarterFirst QuarterFourth QuarterThird QuarterSecond Quarter
Pre-tax net income$12,912  $(2,086) $(7,554) $13,441  $5,887  
Adjustments:
Add non-core items693  673  598  (485) —  
Less core income tax expense2,911  (762) (2,862) 2,030  706  
Core net income (2)
$10,694  $(651) $(4,094) $10,926  $5,181  
Core return on average tangible common equity10.9 %(0.7)%(4.1)%11.4 %5.6 %
 20202019
Core return on average assets and equitySecond QuarterFirst QuarterFourth QuarterThird QuarterSecond Quarter
Net income$10,174  $(1,148) $(4,592) $11,324  $5,173  
Average assets3,868,951  3,880,124  3,808,158  3,999,347  4,105,102  
Average equity411,362  416,518  414,251  399,096  388,460  
Return on average assets1.06 %(0.12)%(0.48)%1.12 %0.51 %
Return on average equity9.9 %(1.1)%(4.4)%11.3 %5.3 %
Core net income (2)
$10,694  $(651) $(4,094) $10,926  $5,181  
Core return on average assets1.11 %(0.07)%(0.43)%1.08 %0.51 %
Core return on average equity10.5 %(0.6)%(3.9)%10.9 %5.3 %
 20202019
Core total revenueSecond QuarterFirst QuarterFourth QuarterThird QuarterSecond Quarter
Net interest income$29,528  $27,464  $28,113  $28,262  $27,365  
Noninterest income10,555  5,893  4,573  4,793  4,923  
Adjustments
Interest income SBA PPP loans(140) —  —  —  —  
Amortization loan fees SBA PPP loans(1,491) —  —  —  —  
Gain on sales of securities(166) (1,396) —  (1,493) —  
Loss on sales of loans143  416  —  1,765  —  
Loss on sale of SBA PPP loans230  —  —  —  —  
Core total revenue$38,659  $32,377  $32,686  $33,327  $32,288  
Annualized net income available to common shareholders (1)
$40,920  $(4,617) $(18,218) $44,927   
Annualized core net income (2)
$43,011  $(2,618) $(16,241) $43,349   
(1) Annualized net income available to common shareholders utilized in calculating year-to-date return on average tangible common equity.
(2) Annualized core net income utilized in calculating core return on average tangible common equity and core return on average assets and average equity.
Non-GAAP financial measures that adjust GAAP reported net income and other metrics for certain income and expense items. Non-GAAP for 2Q20 excludes interest income SBA PPP loans of $140, amortization loan fees SBA PPP loans of $1,491, gain on sales of securities of $166, loss on sales of loans of $143, merger related expenses of $1,540, and accrual for post-employment benefits of $577. 1Q2020 excludes gain on sales of securities of $1,396, loss on sales of loans of $416, and merger related expenses of $1,653. Non-GAAP for 4Q2019 excludes $598 employment related payroll adjustment expenses. See "GAAP reconciliation and use of non-GAAP financial measures" and the reconciliation tables above for a discussion and reconciliation of non-GAAP financial measures.