Item 2. Management’s Discussion and Analysis
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Form 10-K, filed with the Securities and Exchange Commission on February 24, 2022, which includes the audited financial statements for the year ended December 31, 2021. Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refer to Home BancShares, Inc. on a consolidated basis.
General
We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly-owned bank subsidiary, Centennial Bank (sometimes referred to as “Centennial” or the “Bank”). As of June 30, 2022, we had, on a consolidated basis, total assets of $24.25 billion, loans receivable, net of allowance for credit losses of $13.63 billion, total deposits of $19.58 billion, and stockholders’ equity of $3.50 billion.
We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits and Federal Home Loan Bank (“FHLB”) and other borrowed funds are our primary source of funding. Our largest expenses are interest on our funding sources, salaries and related employee benefits and occupancy and equipment. We measure our performance by calculating our return on average common equity, return on average assets and net interest margin. We also measure our performance by our efficiency ratio, which is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a non-GAAP measure and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding adjustments such as merger and acquisition expenses and/or certain gains, losses and other non-interest income and expenses.
Table 1: Key Financial Measures
As of or for the Three Months Ended June 30, As of or for the Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands, except per share data)
Total assets $ 24,253,168 $ 17,627,192 $ 24,253,168 $ 17,627,192
Loans receivable 13,923,873 10,199,175 13,923,873 10,199,175
Allowance for credit losses (294,267) (240,451) (294,267) (240,451)
Total deposits 19,580,072 13,891,341 19,580,072 13,891,341
Total stockholders’ equity 3,498,565 2,696,189 3,498,565 2,696,189
Net income 15,978 79,070 80,870 170,672
Basic earnings per share 0.08 0.48 0.44 1.03
Diluted earnings per share 0.08 0.48 0.44 1.03
Book value per share 17.04 16.39 17.04 16.39
Tangible book value per share (non-GAAP) (1)
9.92 10.31 9.92 10.31
Annualized net interest margin - FTE 3.64% 3.61% 3.46% 3.81%
Efficiency ratio 66.31 41.09 58.26 38.72
Efficiency ratio, as adjusted (non-GAAP) (2)
46.02 42.07 46.53 41.36
Return on average assets 0.26 1.81 0.75 2.01
Return on average common equity 1.78 11.92 5.14 13.02
(1) See Table 19 for the non-GAAP tabular reconciliation.
(2) See Table 23 for the non-GAAP tabular reconciliation.
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Results of Operations for the Three Months Ended June 30, 2022 and 2021
Our net income decreased $63.1 million, or 79.8%, to $16.0 million for the three-month period ended June 30, 2022, from $79.1 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.08 per share for the three-month period ended June 30, 2022 compared to $0.48 per share for the three-month period ended June 30, 2021. During the second quarter of 2022, we completed the previously announced acquisition of Happy Bancshares, Inc. ("Happy"). As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $48.7 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced earnings by $107.3 million and earnings per share by $0.39 per share for the three-month period ended June 30, 2022. The markets in which we operate have been experiencing significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, excluding the impact of the acquisition of Happy, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of June 30, 2022. In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of June 30, 2022. During the three months ended June 30, 2022, the Company recorded $1.4 million in special dividend from equity investments, $2.4 million in recoveries on historic losses, $1.8 million loss for the decrease in the fair value of marketable securities and $2.1 million in trust preferred securities ("TRUPS") redemption fees.
Total interest income increased by $62.5 million, or 40.5%, and non-interest income increased by $13.5 million, or 43.3%. This was more than offset by a $5.0 million, or 38.0%, increase in total interest expense and a $92.5 million, or 126.7%, increase in non-interest expense. The increase in interest income was due to a $40.1 million, or 28.3%, increase in loan interest income, a $16.6 million, or 137.1%, increase in investment income and a $5.9 million, or 828.6%, increase in interest income on deposits at other banks. The increase in non-interest income was primarily due to a $5.0 million, or 97.1%, increase in service charges on deposit accounts, a $4.6 million, or 152.6%, increase in other income, a $3.9 million, or 873.0%, increase in trust fees, a $2.9 million, or 29.8%, increase in other services charges and fees and $1.3 million, or 49.1%, increase in dividends from FHLB, FRB, FNBB and other which was partially offset by a $3.1 million, or 244.1%, decrease in the fair value adjustment for marketable securities resulting from a $1.8 million loss for the decrease in the fair value of marketable securities, and a $1.1 million, or 100.0%, decrease in gain on sale of SBA loans. Included within other income was $2.4 million in recoveries on historic losses, and included within dividends from FHLB, FRB, FNBB and other was $1.4 million in special dividends. The increase in interest expense was primarily due to a $4.3 million, or 66.8%, increase in interest on deposits and a $649,000, or 13.5%, increase in interest on subordinated debentures as a result of the acquisition of $140.0 million of subordinated debt and $23.2 million in trust preferred securities from Happy during the quarter. The increase in non-interest expense was due to $48.7 million in merger and acquisition expenses, a $23.3 million, or 55.0%, increase in salaries and employee benefits, an $11.0 million, or 70.7%, increase in other operating expenses, a $5.2 million, or 57.7%, increase in occupancy and equipment and a $4.2 million, or 71.3%, increase in data processing expense. Included within other operating expense was $2.1 million in TRUPS redemption fees. Income tax expense decreased by $21.8 million, or 86.9%, during the quarter due to a decrease in net income. These fluctuations are primarily due to the acquisition of Happy during the quarter and the rising rate environment.
Our net interest margin increased from 3.61% for the three-month period ended June 30, 2021 to 3.64% for the three-month period ended June 30, 2022. The yield on interest earning assets was 3.97% and 3.94% for the three months ended June 30, 2022 and 2021, respectively, as average interest earning assets increased from $15.89 billion to $22.18 billion. The increase in average earning assets is primarily due to a $3.30 billion increase in average loans receivable, a $2.31 billion increase in average investment securities, and $675.6 million increase in average interest-bearing balances due from banks due to the acquisition of Happy during the quarter. For the three months ended June 30, 2022 and 2021, we recognized $5.2 million and $5.8 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by one basis point. We recognized $1.4 million in event interest income for the three months ended June 30, 2022 compared to $942,000 for the three months ended June 30, 2021. This increased the net interest margin by one basis point.
Our efficiency ratio was 66.31% for the three months ended June 30, 2022, compared to 41.09% for the same period in 2021. For the second quarter of 2022, our efficiency ratio, as adjusted (non-GAAP), was 46.02%, compared to 42.07% reported for the second quarter of 2021. (See Table 23 for the non-GAAP tabular reconciliation).
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Our annualized return on average assets was 0.26% for the three months ended June 30, 2022, compared to 1.81% for the same period in 2021. Our annualized return on average assets, as adjusted (non-GAAP), was 1.57% for the three months ended June 30, 2022, compared to 1.75% for the same period in 2021. (See Table 20 for the non-GAAP tabular reconciliation). Our annualized return on average common equity was 1.78% and 11.92% for the three months ended June 30, 2022, and 2021, respectively. Our annualized return on average common equity, as adjusted (non-GAAP), was 10.83% for the three months ended June 30, 2022 and 11.54% for the same period in 2021. (See Table 21 for the non-GAAP tabular reconciliation).
Results of Operations for the Six Months Ended June 30, 2022 and 2021
Our net income decreased $89.8 million, or 52.6%, to $80.9 million for the six-month period ended June 30, 2022, from $170.7 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.44 per share for the six-month period ended June 30, 2022 compared to $1.03 per share for the six-month period ended June 30, 2021. As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $49.6 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced earnings by $108.2 million and earnings per share by $0.44 per share for the six-month period ended June 30, 2022. The markets in which we operate have been experiencing significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, excluding the impact of the acquisition of Happy, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of June 30, 2022. In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of June 30, 2022. During the six months ended June 30, 2022, the Company recorded a $324,000 adjustment for the increase in fair value of marketable securities, $1.4 million special dividend from equity investments, $2.1 million in TRUPS redemption fees and a $5.6 million recovery on historic losses.
Total interest income increased by $44.8 million, or 14.1%. This was more than offset by a $1.1 million, or 1.5%, decrease in non-interest income, a $4.2 million, or 15.2%, increase in interest expense and a $96.5 million, or 66.2%, increase in non-interest expense. The increase in interest income was due to an $18.6 million, or 6.4%, increase in loan interest income, a $19.0 million, or 81.3%, increase in investment income and a $7.1 million, or 637.5%, increase in interest income on deposits at other banks. The decrease in non-interest income was primarily due to a $6.7 million, or 95.4%, decrease in income for the fair value adjustment for marketable securities resulting from a $324,000 increase in the fair value of marketable securities for the six months ended June 30, 2022 compared to a $7.0 million increase for the six months ended June 30, 2021, a $6.6 million, or 58.7%, decrease in dividends from FHLB, FRB, FNBB and other, a $4.5 million, or 31.0%, decrease in mortgage lending income, which was partially offset by a $6.1 million, or 60.3%, increase in service charges on deposit accounts, a $4.6 million, or 41.3%, increase in other income, a $3.9 million, or 406.6%, increase in trust fees and a $3.0 million, or 17.4%, increase in other service charges and fees. Included within other income was $5.6 million recovery on historic losses, and included within dividends from FHLB, FRB, FNBB and other was $1.4 million in special dividends. The increase in interest expense was primarily due to a $2.7 million, or 28.5%, increase in interest on subordinated debentures as a result of the acquisition of $140.0 million of subordinated debt and $23.2 million in trust preferred securities from Happy during the second quarter, and a $1.5 million, or 10.5%, increase in interest on deposits. The increase in non-interest expense was due to $49.6 million in merger and acquisition expenses, a $24.8 million, or 29.4%, increase in salaries and employee benefits, an $11.6 million, or 37.1%, increase in other operating expenses, a $5.4 million, or 45.7%, increase in data processing expense and a $5.1 million, or 28.0% increase in occupancy and equipment. Included within other operating expense was $2.1 million in TRUPS redemption fees. Income tax expense decreased by $30.6 million, or 56.8%, during the quarter due to a decrease in net income. These fluctuations are primarily due to the acquisition of Happy during the second quarter of 2022 and the rising rate environment.
Our net interest margin decreased from 3.81% for the six-month period ended June 30, 2021 to 3.46% for the six-month period ended June 30, 2022. The yield on interest earning assets was 3.79% and 4.17% for the six-month period ended June 30, 2022 and 2021, respectively, as average interest earning assets increased from $15.51 billion to $19.49 billion. The increase in average earning assets is primarily the result of a $1.59 billion increase in average investment securities, a $1.28 billion increase in average interest-bearing balances due from banks and a $1.12 billion increase in average loans receivable. For the six months ended June 30, 2022 and 2021, we recognized $8.3 million and $11.3 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 3 basis points. The Company experienced an $18.8 million reduction in interest income from PPP loans due to the forgiveness of the PPP loans and the acceleration of the deferred fees for the loans that were forgiven. This was dilutive to the net interest margin by approximately 9 basis points.
Our efficiency ratio was 58.26% for the six-month period ended June 30, 2022, compared to 38.72% for the same period in 2021. For the first six months of 2022, our efficiency ratio, as adjusted (non-GAAP), was 46.53%, compared to 41.36% reported for the first six months of 2021. (See Table 23 for the non-GAAP tabular reconciliation).
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Our annualized return on average assets was 0.75% for the six-month period ended June 30, 2022, compared to 2.01% for the same period in 2021. Our annualized return on average assets, as adjusted (non-GAAP), was 1.48% for the six months ended June 30, 2022, compared to 1.81% for the same period in 2021. (See Table 20 for the non-GAAP tabular reconciliation). Our annualized return on average common equity was 5.14% and 13.02% for the six-month period ended June 30, 2022, and 2021, respectively. Our annualized return on average common equity, as adjusted (non-GAAP), was 10.08% for the six months ended June 30, 2022 and 11.74% for the same period in 2021. (See Table 21 for the non-GAAP tabular reconciliation).
Financial Condition as of and for the Period Ended June 30, 2022 and December 31, 2021
Our total assets as of June 30, 2022 increased $6.20 billion to $24.25 billion from the $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.68 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $833.9 million, for the six months ended June 30, 2022. Our loan portfolio balance increased to $13.92 billion as of June 30, 2022 from $9.84 billion at December 31, 2021. The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $192.9 million in organic loan growth. Total deposits increased $5.32 billion to $19.58 billion as of June 30, 2022 from $14.26 billion as of December 31, 2021. The increase in deposits was primarily due to the acquisition of $5.86 billion in deposits, net of purchase accounting adjustments, from Happy in the second quarter of 2022. Stockholders’ equity increased $732.8 million to $3.50 billion as of June 30, 2022, compared to $2.77 billion as of December 31, 2021. The $732.8 million increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and the $80.9 million in net income for the six months ended June 30, 2022, partially offset by the $226.4 million in other comprehensive loss, the $61.0 million of shareholder dividends paid and stock repurchases of $26.6 million in 2022.
Our non-performing loans were $60.6 million, or 0.44% of total loans as of June 30, 2022, compared to $50.2 million, or 0.51% of total loans as of December 31, 2021. The allowance for credit losses as a percentage of non-performing loans increased to 485.57% as of June 30, 2022, from 471.61% as of December 31, 2021. Non-performing loans from our Arkansas franchise were $15.0 million at June 30, 2022 compared to $13.9 million as of December 31, 2021. Non-performing loans from our Florida franchise were $33.3 million at June 30, 2022 compared to $26.8 million as of December 31, 2021. Non-performing loans from our Texas franchise were $5.5 million at June 30, 2022 compared to zero as of December 31, 2021. Non-performing loans from our Alabama franchise were $813,000 at June 30, 2022 compared to $470,000 as of December 31, 2021. Non-performing loans from our Shore Premier Finance ("SPF") franchise were $1.3 million at June 30, 2022 compared to $1.5 million as of December 31, 2021. Non-performing loans from our Centennial Commercial Finance Group (“CFG”) franchise were $4.7 million at June 30, 2022 compared to $7.5 million as of December 31, 2021.
As of June 30, 2022, our non-performing assets increased to $61.1 million, or 0.25% of total assets, from $51.8 million, or 0.29% of total assets, as of December 31, 2021. Non-performing assets from our Arkansas franchise were $15.0 million at June 30, 2022 compared to $14.4 million as of December 31, 2021. Non-performing assets from our Florida franchise were $33.6 million at June 30, 2022 compared to $27.9 million as of December 31, 2021. Non-performing assets from our Texas franchise were $5.7 million at June 30, 2022 compared to zero as of December 31, 2021. Non-performing assets from our Alabama franchise were $813,000 at June 30, 2022 compared to $470,000 as of December 31, 2021. Non-performing assets from our SPF franchise were $1.3 million at June 30, 2022 compared to $1.5 million as of December 31, 2021. Non-performing assets from our CFG franchise were $4.7 million at June 30, 2022 compared to $7.5 million as of December 31, 2021.
The $4.7 million balance of non-accrual loans for our Centennial CFG market consists of one loan that is assessed for credit risk by the Federal Reserve under the Shared National Credit Program. The decision to place this loan on non-accrual status was made by the Federal Reserve and not the Company. The loan that makes up the total balance is still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because the Federal Reserve required us to place this loan on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.
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Critical Accounting Policies and Estimates
Overview. We prepare our consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. Our accounting policies are described in detail in the notes to our consolidated financial statements included as part of this document.
We consider a policy critical if (i) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate; and (ii) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that the accounting policies most critical to us are those associated with our lending practices, including revenue recognition and the accounting for the allowance for credit losses, foreclosed assets, investments, intangible assets, income taxes and stock options.
Revenue Recognition. Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit and investment securities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of non-interest income are as follows:
• Service charges on deposit accounts – These represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
• Other service charges and fees – These represent credit card interchange fees and Centennial CFG loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310. Interchange fees were $6.5 million, $10.5 million, $4.3 million and $8.1 million for the three and six months ended June 30, 2022 and 2021, respectively. Centennial CFG loan fees were $3.3 million, $5.1 million, $3.3 million and $5.3 million and for the three and six months ended June 30, 2022 and 2021, respectively.
Investments – Available-for-sale. Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments ("CECL"). The Company first assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
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Investments – Held-to-Maturity. Securities held-to-maturity ("HTM"), which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets.
Loans Receivable and Allowance for Credit Losses. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding. Loan origination fees and direct origination costs are capitalized and recognized as adjustments to yield on the related loans.
The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price index and national retail sales index.
The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:
• 1-4 family construction
• All other construction
• 1-4 family revolving home equity lines of credit (“HELOC”) & junior liens
• 1-4 family senior liens
• Multifamily
• Owner occupied commercial real estate
• Non-owner occupied commercial real estate
• Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
• Consumer auto
• Other consumer
• Other consumer - SPF
The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. For loans that are not considered to be collateral dependent, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:
• Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.
• The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
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Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factors ("Q-Factors") and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system; and (ix) economic conditions.
Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements . The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Foreclosed Assets Held for Sale. Real estate and personal properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Valuations are periodically performed by management, and the real estate and personal properties are carried at fair value less costs to sell. Gains and losses from the sale of other real estate and personal properties are recorded in non-interest income, and expenses used to maintain the properties are included in non-interest expenses.
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Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 48 to 121 months on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by FASB ASC 350, Intangibles - Goodwill and Other, in the fourth quarter or more often if events and circumstances indicate there may be an impairment.
Income Taxes. We account for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes ). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Both we and our subsidiary file consolidated tax returns. Our subsidiary provides for income taxes on a separate return basis, and remits to us amounts determined to be currently payable.
Stock Compensation. In accordance with FASB ASC 718, Compensation - Stock Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees , the fair value of each option award is estimated on the date of grant. We recognize compensation expense for the grant-date fair value of the option award over the vesting period of the award.
Acquisitions
Acquisition of Marine Portfolio
On February 4, 2022, the Company completed the purchase of the performing marine loan portfolio of Utah-based LendingClub Bank (“LendingClub”). Under the terms of the purchase agreement with LendingClub, the Company acquired yacht loans totaling approximately $242.2 million. This portfolio of loans is housed within the Company's Shore Premier Finance division, which is responsible for servicing the acquired loan portfolio and originating new loan production.
Acquisition of Happy Bancshares, Inc.
On April 1, 2022, the Company completed the acquisition of Happy Bancshares, Inc. (“Happy”), and merged Happy State Bank into Centennial Bank. The Company issued approximately 42.4 million shares of its common stock valued at approximately $958.8 million as of April 1, 2022. In addition, the holders of certain Happy stock-based awards received approximately $3.7 million in cash in cancellation of such awards, for a total transaction value of approximately $962.5 million.
Including the effects of the known purchase accounting adjustments, as of the acquisition date, Happy had approximately $6.68 billion in total assets, $3.65 billion in loans and $5.86 billion in customer deposits. Happy formerly operated its banking business from 62 locations in Texas.
For further discussion of the acquisition, see Note 2 "Business Combinations" to the Condensed Notes to Consolidated Financial Statements.
We will continue evaluating all types of potential bank acquisitions, which may include FDIC-assisted acquisitions as opportunities arise, to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.
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Branches
As opportunities arise, we will continue to open new (commonly referred to as de novo ) branches in our current markets and in other attractive market areas.
As of June 30, 2022, we had 222 branch locations. There were 76 branches in Arkansas, 78 branches in Florida, 62 branches in Texas, five branches in Alabama and one branch in New York City.
Results of Operations
For the three and six months ended June 30, 2022 and 2021
Our net income decreased $63.1 million, or 79.8%, to $16.0 million for the three-month period ended June 30, 2022, from $79.1 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.08 per share for the three-month period ended June 30, 2022 compared to $0.48 per share for the three-month period ended June 30, 2021. During the second quarter of 2022, we completed the previously announced acquisition of Happy Bancshares, Inc. ("Happy"). As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $48.7 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced earnings by $107.3 million and earnings per share by $0.39 per share for the three-month period ended June 30, 2022. The markets in which we operate have been experiencing significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, excluding the impact of the acquisition of Happy, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of June 30, 2022. In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of June 30, 2022. During the three months ended June 30, 2022, the Company recorded $1.4 million in special dividend from equity investments, $2.4 million in recoveries on historic losses, $1.8 million loss for the decrease in the fair value of marketable securities and $2.1 million in TRUPS redemption fees.
Our net income decreased $89.8 million, or 52.6%, to $80.9 million for the six-month period ended June 30, 2022, from $170.7 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $0.44 per share for the six-month period ended June 30, 2022 compared to $1.03 per share for the six-month period ended June 30, 2021. As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $49.6 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced earnings by $108.2 million and earnings per share by $0.44 per share for the six-month period ended June 30, 2022. The markets in which we operate have been experiencing significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, excluding the impact of the acquisition of Happy, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of June 30, 2022. In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of June 30, 2022. During the six months ended June 30, 2022, the Company recorded a $324,000 adjustment for the increase in fair value of marketable securities, $1.4 million special dividend from equity investments, $2.1 million in TRUPS redemption fees and a $5.6 million recovery on historic losses.
Net Interest Income
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments, rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (25.1475% for 2022 and 25.74% for 2021).
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The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. In 2020, the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in effect throughout all of 2021. On March 16, 2022, the target rate was increased to 0.25% to 0.50%. On May 4, 2022, the target rate was increased to 0.75% to 1.00%. On June 15, 2022, the target rate was increased to 1.50% to 1.75%. Presently, the Federal Reserve has indicated they are anticipating multiple rate increases for 2022.
Our net interest margin increased from 3.61% for the three-month period ended June 30, 2021 to 3.64% for the three-month period ended June 30, 2022. The yield on interest earning assets was 3.97% and 3.94% for the three months ended June 30, 2022 and 2021, respectively, as average interest earning assets increased from $15.89 billion to $22.18 billion. The increase in average earning assets is primarily due to a $3.30 billion increase in average loans receivable, a $2.31 billion increase in average investment securities, and $675.6 million increase in average interest-bearing balances due from banks due to the acquisition of Happy during the quarter. For the three months ended June 30, 2022 and 2021, we recognized $5.2 million and $5.8 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by one basis point. We recognized $1.4 million in event interest income for the three months ended June 30, 2022 compared to $942,000 for the three months ended June 30, 2021. This increased the net interest margin by one basis point.
Our net interest margin decreased from 3.81% for the six-month period ended June 30, 2021 to 3.46% for the six-month period ended June 30, 2022. The yield on interest earning assets was 3.79% and 4.17% for the six-month period ended June 30, 2022 and 2021, respectively, as average interest earning assets increased from $15.51 billion to $19.49 billion. The increase in average earning assets is primarily the result of a $1.59 billion increase in average investment securities, a $1.28 billion increase in average interest-bearing balances due from banks and a $1.12 billion increase in average loans receivable. For the six months ended June 30, 2022 and 2021, we recognized $8.3 million and $11.3 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 3 basis points. The Company experienced an $18.8 million reduction in interest income from PPP loans due to the forgiveness of the PPP loans and the acceleration of the deferred fees for the loans that were forgiven. This was dilutive to the net interest margin by approximately 9 basis points.
Net interest income on a fully taxable equivalent basis increased $58.2 million, or 40.7%, to $201.2 million for the three-month period ended June 30, 2022, from $143.0 million for the same period in 2021. This increase in net interest income for the three-month period ended June 30, 2022 was the result of a $63.2 million increase in interest income, partially offset by an $5.0 million increase in interest expense, on a fully taxable equivalent basis. The $63.2 million increase in interest income was primarily the result of the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The higher yield on earning assets resulted in an increase in interest income of approximately $6.9 million, and the increase in earning assets resulted in an increase in interest income of approximately $56.3 million. The $5.0 million increase in interest expense is primarily the result of the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The higher yield on interest bearing liabilities resulted in an increase in interest expense of approximately $548,000 and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $4.5 million.
Net interest income on a fully taxable equivalent basis increased $41.2 million, or 14.1%, to $334.1 million for the six-month period ended June 30, 2022, from $292.9 million for the same period in 2021. This increase in net interest income for the six-month period ended June 30, 2022 was the result of a $45.4 million increase in interest income, partially offset by a $4.2 million increase in interest expense, on a fully taxable equivalent basis. The $45.4 million increase in interest income was primarily the result of the higher level of average interest earning assets due to the acquisition of Happy during the second quarter of 2022 partially offset by lower earning asset yields. The lower yield on earning assets resulted in a decrease in interest income of approximately $844,000, and the increase in earning assets resulted in an increase in interest income of approximately $46.2 million. The $4.2 million increase in interest expense is primarily the result of the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022 partially offset by lower interest rates paid on interest-bearing liabilities. The lower yield on interest bearing liabilities resulted in an decrease in interest expense of approximately $2.8 million and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $7.0 million.
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Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and six months ended June 30, 2022 and 2021, as well as changes in fully taxable equivalent net interest margin for the three and six months ended June 30, 2022 compared to the same period in 2021.
Table 2: Analysis of Net Interest Income
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands)
Interest income $ 217,013 $ 154,481 $ 361,916 $ 317,132
Fully taxable equivalent adjustment 2,471 1,774 4,209 3,595
Interest income – fully taxable equivalent 219,484 156,255 366,125 320,727
Interest expense 18,255 13,229 32,010 27,792
Net interest income – fully taxable equivalent $ 201,229 $ 143,026 $ 334,115 $ 292,935
Yield on earning assets – fully taxable equivalent 3.97 % 3.94 % 3.79 % 4.17 %
Cost of interest-bearing liabilities 0.49 0.49 0.49 0.53
Net interest spread – fully taxable equivalent 3.48 3.45 3.30 3.64
Net interest margin – fully taxable equivalent 3.64 3.61 3.46 3.81
Table 3: Changes in Fully Taxable Equivalent Net Interest Margin
Three Months Ended June 30, Six Months Ended June 30,
2022 vs. 2021 2022 vs. 2021
(In thousands)
Increase in interest income due to change in earning assets $ 56,278 $ 46,242
Increase (decrease) increase in interest income due to change in earning asset yields 6,951 (844)
Increase in interest expense due to change in interest-bearing liabilities (4,478) (7,014)
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities (548) 2,796
Increase (decrease) increase in net interest income $ 58,203 $ 41,180
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Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the three and six months ended June 30, 2022 and 2021, respectively. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.
Table 4: Average Balance Sheets and Net Interest Income Analysis
Three Months Ended June 30,
2022 2021
Average
Balance
Income /
Expense
Yield /
Rate
Average
Balance
Income /
Expense Yield /
Rate
(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from
banks $ 3,252,674 $ 6,565 0.81 % $ 2,577,101 $ 707 0.11 %
Federal funds sold 1,857 3 0.65 51 — —
Investment securities – taxable 3,817,209 20,941 2.20 1,909,485 7,185 1.51
Investment securities – non-taxable 1,270,602 10,055 3.17 864,416 6,494 3.01
Loans receivable 13,838,687 181,920 5.27 10,541,466 141,869 5.40
Total interest-earning assets 22,181,029 219,484 3.97 % 15,892,519 156,255 3.94 %
Non-earning assets 2,607,336 1,598,840
Total assets $ 24,788,365 $ 17,491,359
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest-bearing transaction
accounts $ 12,632,612 $ 9,770 0.31 % $ 8,684,726 3,960 0.18 %
Time deposits 1,170,860 959 0.33 1,123,287 2,474 0.88
Total interest-bearing deposits 13,803,472 10,729 0.31 9,808,013 6,434 0.26
Federal funds purchased 869 2 0.92 — — —
Securities sold under agreement to repurchase 123,011 187 0.61 157,570 107 0.27
FHLB and other borrowed funds 400,000 1,896 1.90 400,000 1,896 1.90
Subordinated debentures 568,187 5,441 3.84 370,613 4,792 5.19
Total interest-bearing liabilities 14,895,539 18,255 0.49 % 10,736,196 13,229 0.49 %
Non-interest-bearing liabilities
Non-interest-bearing deposits 6,138,497 3,966,968
Other liabilities 162,571 128,048
Total liabilities 21,196,607 14,831,212
Stockholders’ equity 3,591,758 2,660,147
Total liabilities and stockholders’ equity $ 24,788,365 $ 17,491,359
Net interest spread 3.48 % 3.45 %
Net interest income and margin $ 201,229 3.64 % $ 143,026 3.61 %
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Six Months Ended June 30,
2022 2021
Average
Balance Income /
Expense Yield /
Rate Average
Balance Income /
Expense Yield /
Rate
(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing balances due from banks $ 3,374,606 $ 8,238 0.49 % $ 2,096,452 $ 1,117 0.11 %
Federal funds sold 1,805 4 0.45 84 — —
Investment securities – taxable 3,155,481 30,021 1.92 1,774,026 13,438 1.53
Investment securities – non-taxable 1,061,822 16,339 3.10 856,332 13,194 3.11
Loans receivable 11,899,115 311,523 5.28 10,780,972 292,978 5.48
Total interest-earning assets 19,492,829 366,125 3.79 % 15,507,866 320,727 4.17 %
Non-earning assets 2,115,558 1,599,393
Total assets $ 21,608,387 $ 17,107,259
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities
Savings and interest- bearing transaction accounts $ 11,007,232 $ 13,643 0.25 % $ 8,512,714 8,677 0.21 %
Time deposits 1,013,600 1,980 0.39 1,166,121 5,462 0.94
Total interest-bearing deposits 12,020,832 15,623 0.26 9,678,835 14,139 0.29
Federal funds purchased 437 2 0.92 — — —
Securities sold under agreement to repurchase 130,248 295 0.46 158,628 297 0.38
FHLB borrowed funds 400,000 3,771 1.90 400,000 3,771 1.90
Subordinated debentures 589,917 12,319 4.21 370,518 9,585 5.22
Total interest-bearing liabilities 13,141,434 32,010 0.49 % 10,607,981 27,792 0.53 %
Non-interest-bearing liabilities
Non-interest-bearing deposits 5,152,673 3,724,854
Other liabilities 142,080 131,446
Total liabilities 18,436,187 14,464,281
Stockholders’ equity 3,172,200 2,642,978
Total liabilities and stockholders’ equity $ 21,608,387 $ 17,107,259
Net interest spread 3.30 % 3.64 %
Net interest income and margin $ 334,115 3.46 % $ 292,935 3.81 %
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Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and six months ended June 30, 2022 compared to the same period in 2021, on a fully taxable basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.
Table 5: Volume/Rate Analysis
Three Months Ended June 30, Six Months Ended June 30,
2022 over 2021 2022 over 2021
Volume Yield /
Rate Total Volume Yield /
Rate Total
(In thousands)
Increase (decrease) in:
Interest income:
Interest-bearing balances due from banks $ 232 $ 5,626 $ 5,858 $ 1,036 $ 6,085 $ 7,121
Federal funds sold — 3 3 — 4 4
Investment securities – taxable 9,432 4,324 13,756 12,480 4,103 16,583
Investment securities – non-taxable 3,198 363 3,561 3,162 (17) 3,145
Loans receivable 43,416 (3,365) 40,051 29,564 (11,019) 18,545
Total interest income 56,278 6,951 63,229 46,242 (844) 45,398
Interest expense:
Interest-bearing transaction and savings deposits 2,295 3,515 5,810 2,859 2,107 4,966
Time deposits 101 (1,616) (1,515) (638) (2,844) (3,482)
Federal funds purchased 1 1 2 1 1 2
Securities sold under agreement to repurchase (28) 108 80 (58) 56 (2)
FHLB borrowed funds — — — — — —
Subordinated debentures 2,109 (1,460) 649 4,850 (2,116) 2,734
Total interest expense 4,478 548 5,026 7,014 (2,796) 4,218
Increase (decrease) in net interest income $ 51,800 $ 6,403 $ 58,203 $ 39,228 $ 1,952 $ 41,180
Provision for Credit Losses
The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 requires credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not, they will be required to sell.
Loans. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price index and national retail sales index.
Acquired loans . In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. This is commonly referred to as “double accounting" (or "double count").
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The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:
• 1-4 family construction
• All other construction
• 1-4 family revolving HELOC & junior liens
• 1-4 family senior liens
• Multifamily
• Owner occupied commercial real estate
• Non-owner occupied commercial real estate
• Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
• Consumer auto
• Other consumer
• Other consumer - SPF
The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.
During the three-month and six-month periods ended June 30, 2022, the Company recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count" and an $11.4 million provision for credit losses on acquired unfunded commitments resulting from the acquisition of Happy on April 1, 2022. As of June 30, 2022, the markets in which we operate have been experiencing significant economic uncertainty primarily related to inflationary concerns, continuing supply chain issues and the potential impacts of international unrest. However, excluding the impact of the acquisition of Happy, the Company determined that an additional provision for credit losses was not necessary as the current level of the allowance for credit losses was considered adequate as of June 30, 2022. In addition, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments was necessary as of June 30, 2022.
Net charge-offs to average total loans was 0.07% for the three months ended June 30, 2022 compared to 0.09% for the three months ended June 30, 2021. Net charge-offs to average total loans was 0.08% for the six months ended June 30, 2022 compared to 0.09% for the six months ended June 30, 2021.
Investments – Available-for-sale : The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments . The Company first assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Investments – Held-to-Maturity. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets.
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The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.09 billion, or 79.7% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. Treasury securities. Due to the inherent low risk in U.S. Treasury securities, no provision for credit loss was established on that portion of the portfolio.
At June 30, 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio, and the allowance for credit losses for the HTM portfolio resulting from the Happy acquisition was considered adequate. No additional provision for credit losses was considered necessary for the portfolio.
Non-Interest Income
Total non-interest income was $44.6 million and $75.3 million for the three and six months ended June 30, 2022, compared to $31.1 million and $76.4 million for the same period in 2021. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending income, insurance commissions, increase in cash value of life insurance, fair value adjustment for marketable securities and dividends.
Table 6 measures the various components of our non-interest income for the three and six months ended June 30, 2022 and 2021, respectively, as well as changes for the three and six months ended June 30, 2022 compared to the same period in 2021.
Table 6: Non-Interest Income
Three Months Ended June 30, 2021 Change
from 2020 Six Months Ended June 30, 2021 Change
from 2020
2022 2021 2022 2021
(Dollars in thousands)
Service charges on deposit accounts $ 10,084 $ 5,116 $ 4,968 97.1 % $ 16,224 $ 10,118 $ 6,106 60.3 %
Other service charges and fees 12,541 9,659 2,882 29.8 20,274 17,267 3,007 17.4
Trust fees 4,320 444 3,876 873.0 4,894 966 3,928 406.6
Mortgage lending income 5,996 6,202 (206) (3.3) 9,912 14,369 (4,457) (31.0)
Insurance commissions 658 478 180 37.7 1,138 970 168 17.3
Increase in cash value of life insurance 1,140 537 603 112.3 1,632 1,039 593 57.1
Dividends from FHLB, FRB, FNBB & other 3,945 2,646 1,299 49.1 4,643 11,255 (6,612) (58.7)
Gain on sale of SBA loans — 1,149 (1,149) (100.0) 95 1,149 (1,054) (91.7)
Gain (loss) on sale of branches, equipment and other assets, net 2 (23) 25 108.7 18 (52) 70 134.6
Gain on OREO, net 9 619 (610) (98.5) 487 1,020 (533) (52.3)
Gain on securities, net — — — 0.0 — 219 (219) (100.0)
Fair value adjustment for marketable securities (1,801) 1,250 (3,051) (244.1) 324 7,032 (6,708) (95.4)
Other income 7,687 3,043 4,644 152.6 15,609 11,044 4,565 41.3
Total non-interest income $ 44,581 $ 31,120 $ 13,461 43.3 % $ 75,250 $ 76,396 $ (1,146) (1.5) %
Non-interest income increased $13.5 million, or 43.3%, to $44.6 million for the three months ended June 30, 2022 from $31.1 million for the same period in 2021. The primary factors that resulted in this increase were the increase in service charges on deposit account and the increase in other income. Other factors were changes related to other services charges and fees, trust fees, dividends from FHLB, FRB, FNBB and other, gain on sale of SBA loans, gain on OREO and fair value adjustment for marketable securities.
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Additional details for the three months ended June 30, 2022 on some of the more significant changes are as follows:
• The $5.0 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees resulting from the acquisition of Happy.
• The $2.9 million increase in other service charges and fees is primarily related to an increase in interchange fees resulting from the acquisition of Happy.
• The $3.9 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy.
• The $1.3 million increase for dividends from FHLB, FRB, FNBB & other is primarily due to an increase in special dividends from equity investments and an increase in FRB stock holdings related to the acquisition of Happy.
• The $1.1 million decrease in gains on sales of SBA loans was due to no SBA loan sales taking place during the second quarter of 2022.
• The $610,000 decrease in gains on OREO resulted from a reduction in the level of sales of OREO during 2022.
• The $3.1 million decrease in the fair value adjustment for marketable securities is due to a reduction in the fair market values of marketable securities held by the Company.
• The $4.6 million increase in other income is primarily due to a $2.8 million increase in additional income for items previously charged off, a $878,000 increase in investment brokerage fee income, a $260,000 increase in real estate rental income and a $492,000 increase in building rental income related to the acquisition of Happy.
Non-interest income decreased $1.1 million, or 1.5%, to $75.3 million for the six months ended June 30, 2022 from $76.4 million for the same period in 2021. The primary factors that resulted in this decrease were the reduction in dividends from FHLB, FRB, FNBB & other, the reduction in fair value adjustment for marketable securities and the reduction in mortgage lending income which was partially offset by the increase in service charges on deposit accounts, increase in other income and increase in trust fees. Other factors were changes related to other service charges and fees and gain on sale of SBA loans.
Additional details for the six months ended June 30, 2022 on some of the more significant changes are as follows:
• The $6.1 million increase in service charges on deposit accounts is primarily related to an increase in overdraft fees resulting from the acquisition of Happy.
• The $3.0 million increase in other service charges and fees is primarily related to an increase in interchange acquisition fees resulting from the acquisition of Happy.
• The $3.9 million increase in trust fees is primarily related to an increase in employee and personal trust fees resulting from the acquisition of Happy.
• The $4.5 million decrease in mortgage lending income is primarily due to a decrease in volume of secondary market loans from the high volume of loans during 2021.
• The $6.6 million decrease for dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments, partially offset by an increase in FRB stock holdings related to the acquisition of Happy.
• The $1.1 million decrease in gains on sales of SBA loans is primarily due to decrease in the volume of SBA loan sales during 2022.
• The $533,000 decrease in gains on OREO resulted from a reduction in the level of sales of OREO during 2022.
• The $6.7 million decrease in the fair value adjustment for marketable securities is due to a reduction in the increase of the fair market values of marketable securities held by the Company.
• The $4.6 million increase in other income is primarily due to a $2.8 million increase in additional income for items previously charged off and a $1.4 million increase in investment brokerage fee income related to the acquisition of Happy.
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Non-Interest Expense
Non-interest expense primarily consists of salaries and employee benefits, occupancy and equipment, data processing, and other expenses such as advertising, merger and acquisition expenses, amortization of intangibles, electronic banking expense, FDIC and state assessment, insurance, legal and accounting fees and other professional fees.
Table 7 below sets forth a summary of non-interest expense for the three and six months ended June 30, 2022 and 2021, as well as changes for the three and six months ended June 30, 2022 compared to the same period in 2021.
Table 7: Non-Interest Expense
Three Months Ended June 30, 2022 Change
from 2021 Six Months Ended June 30, 2022 Change
from 2021
2022 2021 2022 2021
(Dollars in thousands)
Salaries and employee benefits $ 65,795 $ 42,462 $ 23,333 55.0 % $ 109,346 $ 84,521 $ 24,825 29.4 %
Occupancy and equipment 14,256 9,042 5,214 57.7 23,400 18,279 5,121 28.0
Data processing expense 10,094 5,893 4,201 71.3 17,133 11,763 5,370 45.7
Merger and acquisition expenses 48,731 — 48,731 100.0 49,594 — 49,594 100.0
Other operating expenses:
Advertising 2,117 1,194 923 77.3 3,383 2,240 1,143 51.0
Amortization of intangibles 2,477 1,421 1,056 74.3 3,898 2,842 1,056 37.2
Electronic banking expense 3,352 2,616 736 28.1 5,890 4,854 1,036 21.3
Directors' fees 375 414 (39) (9.4) 779 797 (18) (2.3)
Due from bank service charges 396 273 123 45.1 666 522 144 27.6
FDIC and state assessment 2,390 1,108 1,282 115.7 4,058 2,471 1,587 64.2
Insurance 973 787 186 23.6 1,743 1,568 175 11.2
Legal and accounting 1,061 1,058 3 0.3 1,858 1,904 (46) (2.4)
Other professional fees 2,254 1,796 458 25.5 3,863 3,409 454 13.3
Operating supplies 995 465 530 114.0 1,749 952 797 83.7
Postage 556 292 264 90.4 862 630 232 36.8
Telephone 384 365 19 5.2 721 711 10 1.4
Other expense 9,276 3,796 5,480 144.4 13,435 8,385 5,050 60.2
Total non-interest expense $ 165,482 $ 72,982 $ 92,500 126.7 % $ 242,378 $ 145,848 $ 96,530 66.2 %
Non-interest expense increased $92.5 million, or 126.7%, to $165.5 million for the three months ended June 30, 2022 from $73.0 million for the same period in 2021. The primary factors that resulted in this increase were the changes related to salaries and employee benefits and merger and acquisition expense. Other factors were changes related to occupancy and equipment, data processing expense, amortization of intangibles, FDIC and state assessment fees and other expenses.
Additional details for the three months ended June 30, 2022 on some of the more significant changes are as follows:
• The $23.3 million increase in salaries and employee benefits expense is primarily due to increased salary expenses and insurance expenses related to the acquisition of Happy.
• The $5.2 million increase in occupancy and equipment expenses is primarily due to increases in depreciation on buildings, machinery and equipment, increases in utility expenses and increases in property taxes related to the acquisition of Happy.
• The $4.2 million increase in data processing expense is primarily due to increases in telecommunication fees, computer software fees, licensing fee and increases in internet banking and cash management expenses related to the acquisition of Happy.
• The $48.7 increase in merger and acquisition expense is related to costs associated with the acquisition of Happy.
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• The $923,000 increase in advertising expense is related to the acquisition of Happy.
• The $1.1 million increase in amortization of intangibles is due to the acquisition of Happy.
• The $736,000 increase in electronic banking expense is due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy.
• The $1.3 million increase in FDIC and state assessment expense is primarily due to FDIC assessment reductions for 2021 and the acquisition of Happy during the second quarter of 2022.
• The $5.5 million increase in other expenses is primarily related to the acquisition of Happy as well as $2.1 million in TRUPS redemption fees.
Non-interest expense increased $96.5 million, or 66.2%, to $242.4 million for the three months ended June 30, 2022 from $145.8 million for the same period in 2021. The primary factors that resulted in this increase were the changes related to salaries and employee benefits and merger and acquisition expense. Other factors were changes related to occupancy and equipment expense, data processing expense, advertising, amortization of intangibles, electronic banking expense, FDIC and state assessment fees and other expenses.
Additional details for the six months ended June 30, 2022 on some of the more significant changes are as follows:
• The $24.8 million increase in salaries and employee benefits expense is primarily due to the acquisition of Happy.
• The $5.1 million increase in occupancy and equipment expense is primarily due to increases in depreciation on buildings, machinery and equipment, increases in utility expenses and increases in property taxes related to the acquisition of Happy.
• The $5.4 million increase in data processing expense is primarily due to increases in telecommunication fees, computer software fees, licensing fee and increases in internet banking and cash management expenses related to the acquisition of Happy.
• The $49.6 million increase in merger and acquisition expense is related to costs associated with the acquisition of Happy.
• The $1.1 million increase in advertising expense is related to the acquisition of Happy.
• The $1.1 million increase in amortization of intangibles is due to the acquisition of Happy.
• The $1.0 million increase in electronic banking expense is due to increased debit card processing fees and interchange network expenses resulting from the acquisition of Happy.
• The $1.6 million increase in FDIC and state assessment expense is primarily due to FDIC assessment reductions for 2021 and the acquisition of Happy during the second quarter of 2022.
• The $5.1 million increase in other expenses is primarily related to the acquisition of Happy. as well as $2.1 million in TRUPS redemption fees.
Income Taxes
Income tax expense decreased $21.8 million, or 86.9%, to $3.3 million for the three-month period ended June 30, 2022, from $25.1 million for the same period in 2021. Income tax expense decreased $30.6 million, or 56.8%, to $23.3 million for the six-month period ended June 30, 2022, from $54.0 million for the same period in 2021. The effective income tax rate was 17.09% and 22.38% for the three and six months ended June 30, 2022, compared to 24.07% and 24.02% for the same periods in 2021. The marginal tax rate was 25.1475% and 25.74% 2022 and 2021, respectively.
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Financial Condition as of and for the Period Ended June 30, 2022 and December 31, 2021
Our total assets as of June 30, 2022 increased $6.20 billion to $24.25 billion from the $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.68 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $833.9 million, for the six months ended June 30, 2022. Our loan portfolio balance increased to $13.92 billion as of June 30, 2022 from $9.84 billion at December 31, 2021. The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $192.9 million in organic loan growth. Total deposits increased $5.32 billion to $19.58 billion as of June 30, 2022 from $14.26 billion as of December 31, 2021. The increase in deposits was primarily due to the acquisition of $5.86 billion in deposits, net of purchase accounting adjustments, from Happy in the second quarter of 2022. Stockholders’ equity increased $732.8 million to $3.50 billion as of June 30, 2022, compared to $2.77 billion as of December 31, 2021. The $732.8 million increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and the $80.9 million in net income for the six months ended June 30, 2022, partially offset by the $226.4 million in other comprehensive loss, the $61.0 million of shareholder dividends paid and stock repurchases of $26.6 million in 2022.
Loan Portfolio
Loans Receivable
Our loan portfolio averaged $13.84 billion and $10.54 billion during the three months ended June 30, 2022 and 2021, respectively. Our loan portfolio averaged $11.90 billion and $10.78 billion during the six months ended June 30, 2022 and 2021, respectively. Loans receivable were $13.92 billion and $9.84 billion as of June 30, 2022 and December 31, 2021, respectively.
From December 31, 2021 to June 30, 2022, the Company experienced an increase of approximately $4.09 billion in loans. The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $192.9 million in organic loan growth. The $192.9 million in organic loan growth included $498.6 million in loan growth for Centennial CFG which was partially offset by $177.9 million in loan decline within the remaining footprint as well as $127.8 million in PPP loan decline. As of June 30, 2022, the Company had $37.2 million of PPP loans.
The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises in Arkansas, Florida, Texas, Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Texas, Alabama and New York. Loans receivable were approximately $3.03 billion, $3.49 billion, $3.66 billion, $202.5 million, $1.12 billion and $2.42 billion as of June 30, 2022 in Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG, respectively.
As of June 30, 2022, we had approximately $1.05 billion of construction land development loans which were collateralized by land. This consisted of approximately $136.8 million for raw land and approximately $912.5 million for land with commercial and/or residential lots.
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Table 8 presents our loans receivable balances by category as of June 30, 2022 and December 31, 2021.
Table 8: Loans Receivable
June 30, 2022 December 31, 2021
(In thousands)
Real estate:
Commercial real estate loans:
Non-farm/non-residential $ 5,092,539 $ 3,889,284
Construction/land development 2,595,384 1,850,050
Agricultural 329,106 130,674
Residential real estate loans:
Residential 1-4 family 1,708,221 1,274,953
Multifamily residential 389,633 280,837
Total real estate 10,114,883 7,425,798
Consumer 1,106,343 825,519
Commercial and industrial 2,187,771 1,386,747
Agricultural 324,630 43,920
Other 190,246 154,105
Total loans receivable $ 13,923,873 $ 9,836,089
Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized (where defined) over a 15 to 30-year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.
As of June 30, 2022, commercial real estate loans totaled $8.02 billion, or 57.6%, of loans receivable, as compared to $5.87 billion, or 59.7%, of loans receivable, as of December 31, 2021. Commercial real estate loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $1.97 billion, $2.27 billion, $2.14 billion, $87.9 million, zero and $1.55 billion at June 30, 2022, respectively.
Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 38.6% and 51.6% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as of June 30, 2022, with the remaining 9.8% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.
As of June 30, 2022, residential real estate loans totaled $2.10 billion, or 15.1%, of loans receivable, compared to $1.56 billion, or 15.8%, of loans receivable, as of December 31, 2021. Residential real estate loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $416.6 million, $862.2 million, $562.8 million, $49.3 million, zero and $206.9 million at June 30, 2022, respectively.
Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats within our SPF division. The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.
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As of June 30, 2022, consumer loans totaled $1.11 billion, or 7.9%, of loans receivable, compared to $825.5 million, or 8.4%, of loans receivable, as of December 31, 2021. Consumer loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $23.2 million, $7.8 million, $31.3 million, $977,000, $1.04 billion and zero at June 30, 2022, respectively.
Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to seven years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally, accounts receivable are financed at between 50% and 80% of accounts receivable less than 60 days past due. Inventory financing will range between 50% and 80% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans.
As of June 30, 2022, commercial and industrial loans totaled $2.19 billion, or 15.7%, of loans receivable, compared to $1.39 billion, or 14.1%, of loans receivable, as of December 31, 2021. Commercial and industrial loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $453.9 million, $288.4 million, $653.0 million, $56.4 million, $73.1 million and $662.9 million at June 30, 2022, respectively.
Non-Performing Assets
We classify our problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing).
When management determines that a loan is no longer performing, and that collection of interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past due are placed on non-accrual status unless they are adequately secured and there is reasonable assurance of full collection of both principal and interest. Our management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on non-accrual status.
Purchased loans that have experienced more than insignificant credit deterioration since origination are purchase credit deteriorated (“PCD”) loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. T he Company held approximately $152.3 million and $448,000 in PCD loans, as of June 30, 2022 and December 31, 2021 , respectively.
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Table 9 sets forth information with respect to our non-performing assets as of June 30, 2022 and December 31, 2021. As of these dates, all non-performing restructured loans are included in non-accrual loans.
Table 9: Non-performing Assets
As of June 30, 2022 As of December 31, 2021
(Dollars in thousands)
Non-accrual loans $ 44,170 $ 47,158
Loans past due 90 days or more (principal or interest payments) 16,432 3,035
Total non-performing loans 60,602 50,193
Other non-performing assets
Foreclosed assets held for sale, net 373 1,630
Other non-performing assets 104 —
Total other non-performing assets 477 1,630
Total non-performing assets $ 61,079 $ 51,823
Allowance for credit losses to non-accrual loans 666.21 % 501.96 %
Allowance for credit losses to non-performing loans 485.57 471.61
Non-accrual loans to total loans 0.32 0.48
Non-performing loans to total loans 0.44 0.51
Non-performing assets to total assets 0.25 0.29
Our non-performing loans are comprised of non-accrual loans and accruing loans that are contractually past due 90 days. Our bank subsidiary recognizes income principally on the accrual basis of accounting. When loans are classified as non-accrual, the accrued interest is charged off and no further interest is accrued, unless the credit characteristics of the loan improve. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses.
Total non-performing loans were $60.6 million and $50.2 million as of June 30, 2022 and December 31, 2021, respectively. Non-performing loans at June 30, 2022 were $15.0 million, $33.3 million, $5.5 million, $813,000, $1.3 million and $4.7 million in the Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets, respectively.
The $4.7 million balance of non-accrual loans for our Centennial CFG market consists of one loan that is assessed for credit risk by the Federal Reserve under the Shared National Credit Program. The decision to place this loan on non-accrual status was made by the Federal Reserve and not the Company. The loan that makes up the total balance is still current on both principal and interest. However, all interest payments are currently being applied to the principal balance. Because the Federal Reserve required us to place this loan on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.
Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. As of June 30, 2022, we had $5.9 million of restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 9. Our Florida market contains $3.6 million and our Arkansas market contains $2.3 million of these restructured loans.
A loan modification that might not otherwise be considered may be granted resulting in classification as a TDR. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of nine months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can pay under the new terms and may result in the loan being returned to an accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan will remain in a non-accrual status.
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The majority of the Bank’s loan modifications relates to commercial lending and involves reducing the interest rate, changing from a principal and interest payment to interest-only, lengthening the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. At June 30, 2022 and December 31, 2021, the amount of TDRs was $6.6 million and $7.5 million, respectively. As of June 30, 2022 and December 31, 2021, 88.9% and 85.7%, respectively, of all restructured loans were performing to the terms of the restructure.
Total foreclosed assets held for sale were $373,000 as of June 30, 2022, compared to $1.6 million as of December 31, 2021 for a decrease of $1.3 million. The foreclosed assets held for sale as of June 30, 2022 are comprised of $8,000 of assets located in Arkansas, $260,000 located in Florida, $105,000 located in Texas and zero from Alabama, SPF and Centennial CFG.
Table 10 shows the summary of foreclosed assets held for sale as of June 30, 2022 and December 31, 2021.
Table 10: Foreclosed Assets Held For Sale
As of June 30, 2022 As of December 31, 2021
(In thousands)
Commercial real estate loans
Non-farm/non-residential $ 49 $ 536
Construction/land development 55 834
Residential real estate loans
Residential 1-4 family 269 260
Multifamily residential — —
Total foreclosed assets held for sale $ 373 $ 1,630
A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and non-accrual loans), criticized and/or classified loans with a specific allocation, loans categorized as TDRs and certain other loans identified by management that are still performing (loans included in multiple categories are only included once). As of June 30, 2022 and December 31, 2021, impaired loans were $385.1 million and $331.5 million, respectively. The amortized cost balance for loans with a specific allocation increased from $284.0 million to $323.1 million, and the specific allocation for impaired loans increased by approximately $6.6 million for the period ended June 30, 2022 compared to the period ended December 31, 2021. The Company is continuing to monitor these impaired loans and will adjust the discount as necessary. As of June 30, 2022, our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets accounted for approximately $176.3 million, $145.0 million, $57.1 million, $813,000, $1.3 million and $4.7 million of the impaired loans, respectively.
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Past Due and Non-Accrual Loans
Table 11 shows the summary of non-accrual loans as of June 30, 2022 and December 31, 2021:
Table 11: Total Non-Accrual Loans
As of June 30, 2022 As of December 31, 2021
(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential $ 14,247 $ 11,923
Construction/land development 1,050 1,445
Agricultural 194 897
Residential real estate loans
Residential 1-4 family 17,210 16,198
Multifamily residential 156 156
Total real estate 32,857 30,619
Consumer 1,321 1,648
Commercial and industrial 8,698 13,875
Agricultural & other 1,294 1,016
Total non-accrual loans $ 44,170 $ 47,158
If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $672,000 and $795,000, respectively, would have been recorded for the three-month periods ended June 30, 2022 and 2021. If non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $1.3 million and $1.6 million, respectively, would have been recorded for the six month periods ended June 30, 2022 and 2021. The interest income recognized on non-accrual loans for the three and six months ended June 30, 2022 and 2021 was considered immaterial.
Table 12 shows the summary of accruing past due loans 90 days or more as of June 30, 2022 and December 31, 2021:
Table 12: Loans Accruing Past Due 90 Days or More
As of June 30, 2022 As of December 31, 2021
(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential $ 10,712 $ 2,225
Construction/land development 246 —
Agricultural 711 —
Residential real estate loans
Residential 1-4 family 2,378 701
Multifamily residential — —
Total real estate 14,047 2,926
Consumer 43 2
Commercial and industrial 2,342 107
Other — —
Total loans accruing past due 90 days or more $ 16,432 $ 3,035
Our ratio of total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.44% and 0.51% at June 30, 2022 and December 31, 2021, respectively.
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Allowance for Credit Losses
Overview. The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The Company uses the discounted cash flow (“DCF”) method to estimate expected losses for all of the Company’s loan pools. These pools are as follows: construction & land development; other commercial real estate; residential real estate; commercial & industrial; and consumer & other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price index and national retail sales index.
The combination of adjustments for credit expectations (default and loss) and time expectations prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis.
The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower or
the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Management qualitatively adjusts model results for risk factors ("Q-Factors") that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factors and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system; and (ix) economic conditions.
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Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements . The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An allowance for credit losses is determined using the same methodology as other loans. The Company develops separate PCD models for each loan segment with PCD loans not individually analyzed for impairment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Specific Allocations. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. Typically, when it becomes evident through the payment history or a financial statement review that a loan or relationship is no longer supported by the cash flows of the asset and/or borrower and has become collateral dependent, we will use appraisals or other collateral analysis to determine if collateral impairment has occurred. The amount or likelihood of loss on this credit may not yet be evident, so a charge-off would not be prudent. However, if the analysis indicates that an impairment has occurred, then a specific allocation will be determined for this loan. If our existing appraisal is outdated or the collateral has been subject to significant market changes, we will obtain a new appraisal for this impairment analysis. The majority of our impaired loans are collateral dependent at the present time, so third-party appraisals were used to determine the necessary impairment for these loans. Cash flow available to service debt was used for the other impaired loans. This analysis is performed each quarter in connection with the preparation of the analysis of the adequacy of the allowance for credit losses, and if necessary, adjustments are made to the specific allocation provided for a particular loan.
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For collateral dependent loans, we do not consider an appraisal outdated simply due to the passage of time. However, if an appraisal is older than 13 months and if market or other conditions have deteriorated and we believe that the current market value of the property is not within approximately 20% of the appraised value, we will consider the appraisal outdated and order either a new appraisal or an internal validation report for the impairment analysis. The recognition of any provision or related charge-off on a collateral dependent loan is either through annual credit analysis or, many times, when the relationship becomes delinquent. If the borrower is not current, we will update our credit and cash flow analysis to determine the borrower's repayment ability. If we determine this ability does not exist and it appears that the collection of the entire principal and interest is not likely, then the loan could be placed on non-accrual status. In any case, loans are classified as non-accrual no later than 105 days past due. If the loan requires a quarterly impairment analysis, this analysis is completed in conjunction with the completion of the analysis of the adequacy of the allowance for credit losses. Any exposure identified through the impairment analysis is shown as a specific reserve on the individual impairment. If it is determined that a new appraisal or internal validation report is required, it is ordered and will be taken into consideration during completion of the next impairment analysis.
In estimating the net realizable value of the collateral, management may deem it appropriate to discount the appraisal based on the applicable circumstances. In such case, the amount charged off may result in loan principal outstanding being below fair value as presented in the appraisal.
Between the receipt of the original appraisal and the updated appraisal, we monitor the loan's repayment history. If the loan is $3.0 million or greater or the total loan relationship is $5.0 million or greater, our policy requires an annual credit review. For these loans, our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually on these loans.
As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or by law at 105 days past due, we will reflect that loan as non-performing. It will remain non-performing until it performs in a manner that it is reasonable to expect that we will collect the full principal and accrued interest.
When the amount or likelihood of a loss on a loan has been determined, a charge-off should be taken in the period it is determined. If a partial charge-off occurs, the quarterly impairment analysis will determine if the loan is still impaired, and thus continues to require a specific allocation.
The Company had $385.1 million and $331.5 million in collateral-dependent impaired loans for the periods ended June 30, 2022 and December 31, 2021 , respectively.
Loans Collectively Evaluated for Impairment . Loans receivable collectively evaluated for impairment increased by approximately $4.04 billion from $9.54 billion at December 31, 2021 to $13.57 billion at June 30, 2022. The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment was 1.74% and 1.94% at June 30, 2022 and December 31, 2021, respectively .
Charge-offs and Recoveries. Total charge-offs increased to $3.3 million for the three months ended June 30, 2022, compared to $3.0 million for the same period in 2021. Total charge-offs decreased to $5.6 million for the six months ended June 30, 2022, compared to $6.1 million for the same period in 2021. Total recoveries were $778,000 and $542,000 for the three months ended June 30, 2022 and 2021, respectively. Total recoveries were $1.1 million and $1.0 million for the six months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022, net charge-offs were $262,000 for Arkansas, $1.5 million for Florida, $724,000 for Texas, $35,000 for Alabama and zero for Centennial CFG, partially offset by net recoveries of $63,000 for SPF. These equal a net charge-off position of $2.5 million. For the six months ended June 30, 2022, net charge-offs were $530,000 for Arkansas, $2.7 million for Florida, $724,000 for Texas, $36,000 for Alabama, $395,000 for SPF and zero for Centennial CFG. These equal a net charge-off position of $4.4 million.
We have not charged off an amount less than what was determined to be the fair value of the collateral as presented in the appraisal, less estimated costs to sell (for collateral dependent loans), for any period presented. Loans partially charged-off are placed on non-accrual status until it is proven that the borrower's repayment ability with respect to the remaining principal balance can be reasonably assured. This is usually established over a period of 6-12 months of timely payment performance.
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Table 13 shows the allowance for credit losses, charge-offs and recoveries as of and for the three and six months ended June 30, 2022 and 2021.
Table 13: Analysis of Allowance for Credit Losses
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands)
Balance, beginning of year $ 234,768 $ 242,932 $ 236,714 $ 245,473
Allowance for credit losses on PCD loans - Happy acquisition 16,816 — 16,816 —
Loans charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential — 576 — 595
Construction/land development — — — —
Agricultural — 42 — 42
Residential real estate loans:
Residential 1-4 family 39 97 289 323
Multifamily residential — — — —
Total real estate 39 715 289 960
Consumer 2,174 55 2,237 122
Commercial and industrial — 1,931 1,416 4,210
Agricultural — — — —
Other 1,052 322 1,633 778
Total loans charged off 3,265 3,023 5,575 6,070
Recoveries of loans previously charged off
Real estate:
Commercial real estate loans:
Non-farm/non-residential 52 54 78 68
Construction/land development 302 17 317 39
Agricultural — — — —
Residential real estate loans:
Residential 1-4 family 23 104 49 166
Multifamily residential — — — —
Total real estate 377 175 444 273
Consumer 37 (14) 48 32
Commercial and industrial 221 226 330 302
Agricultural — — — —
Other 143 155 320 441
Total recoveries 778 542 1,142 1,048
Net loans charged off 2,487 2,481 4,433 5,022
Provision for credit loss - acquired loans 45,170 — 45,170 —
Balance, June 30 $ 294,267 $ 240,451 $ 294,267 $ 240,451
Net charge-offs to average loans receivable 0.07 % 0.09 % 0.08 % 0.09 %
Allowance for credit losses to total loans 2.11 2.36 2.11 2.36
Allowance for credit losses to net charge-offs 2,949.95 2,416.29 3,291.77 2,374.30
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Table 14 presents the allocation of allowance for credit losses as of June 30, 2022 and December 31, 2021.
Table 14: Allocation of Allowance for Credit Losses
As of June 30, 2022 As of December 31, 2021
Allowance
Amount % of
loans (1)
Allowance
Amount % of
loans (1)
(Dollars in thousands)
Real estate:
Commercial real estate loans:
Non-farm/non- residential $ 113,645 36.6 % $ 86,910 39.5 %
Construction/land development 36,689 18.6 28,415 18.8
Agricultural residential real estate loans 1,550 2.4 308 1.3
Residential real estate loans:
Residential 1-4 family 47,343 12.3 45,364 13.0
Multifamily residential 3,803 2.8 3,094 2.9
Total real estate 203,030 72.7 164,091 75.5
Consumer 20,460 7.9 16,612 8.4
Commercial and industrial 66,894 15.7 52,910 14.1
Agricultural 1,415 2.3 152 0.4
Other 2,468 1.4 2,949 1.6
Total $ 294,267 100.0 % $ 236,714 100.0 %
(1) Percentage of loans in each category to total loans receivable.
Investment Securities
Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 5.2 years as of June 30, 2022.
Securities held-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. As of June 30, 2022, we had $1.37 billion of held-to-maturity securities. Of the $1.37 billion of held-to-maturity securities as of June 30, 2022, $1.09 billion, or 79.7%, is invested in obligations of state and political subdivisions and the other $277.7 million, or 20.3%, is invested in U.S. Treasury securities.
Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive (loss) income. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. Available-for-sale securities were $3.79 billion and $3.12 billion as June 30, 2022 and December 31, 2021, respectively.
As of June 30, 2022, $1.98 billion, or 52.2%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.54 billion, or 49.3%, of our available-for-sale securities as of December 31, 2021. To reduce our income tax burden, $934.5 million, or 24.6%, of our available-for-sale securities portfolio as of June 30, 2022, were primarily invested in tax-exempt obligations of state and political subdivisions, compared to $997.0 million, or 32.0%, of our available-for-sale securities as of December 31, 2021. We had $451.5 million, or 11.9%, invested in obligations of U.S. Government-sponsored enterprises as of June 30, 2022, compared to $433.0 million, or 13.9%, of our available-for-sale securities as of December 31, 2021. Also, we had approximately $427.3 million, or 11.3%, invested in other securities as of June 30, 2022, compared to $151.9 million, or 4.9% of our available-for-sale securities as of December 31, 2021.
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The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments . The Company first assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.09 billion, or 79.7% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. Treasury securities. Due to the inherent low risk in U.S. Treasury securities, no provision for credit loss was established on that portion of the portfolio.
At June 30, 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio, and the allowance for credit losses for the HTM portfolio resulting from the Happy acquisition was considered adequate. No additional provision for credit losses was considered necessary for the portfolio.
See Note 3 to the Condensed Notes to Consolidated Financial Statements for the carrying value and fair value of investment securities.
Deposits
Our deposits averaged $19.94 billion and $17.17 billion for the three and six months ended June 30, 2022, respectively. Our deposits averaged $13.77 billion and $13.40 billion for the three and six months ended June 30, 2021, respectively. Total deposits were $19.58 billion as of June 30, 2022, and $14.26 billion as of December 31, 2021. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.
Our policy also permits the acceptance of brokered deposits. From time to time, when appropriate in order to fund strong loan demand, we accept brokered time deposits, generally in denominations of less than $250,000, from a regional brokerage firm, and other national brokerage networks. We also participate in the One-Way Buy Insured Cash Sweep (“ICS”) service and similar services, which provide for one-way buy transactions among banks for the purpose of purchasing cost-effective floating-rate funding without collateralization or stock purchase requirements. Management believes these sources represent a reliable and cost-efficient alternative funding source for the Company. However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.
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Table 15 reflects the classification of the brokered deposits as of June 30, 2022 and December 31, 2021.
Table 15: Brokered Deposits
June 30, 2022 December 31, 2021
(In thousands)
Time Deposits $ — $ —
CDARS — —
Insured Cash Sweep and Other Transaction Accounts 626,929 625,704
Total Brokered Deposits $ 626,929 $ 625,704
The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. We may allow higher rate deposits to run off during periods of limited loan demand. We believe that additional funds can be attracted, and deposit growth can be realized through deposit pricing if we experience increased loan demand or other liquidity needs.
The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. In 2020, the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in effect throughout all of 2021. On March 16, 2022, the target rate was increased to 0.25% to 0.50%. On May 4, 2022, the target rate was increased to 0.75% to 1.00%. On June 15, 2022, the target rate was increased to 1.50% to 1.75%. Presently, the Federal Reserve has indicated they are anticipating multiple rate increases for 2022.
Table 16 reflects the classification of the average deposits and the average rate paid on each deposit category, which are in excess of 10 percent of average total deposits, for the three and six months ended June 30, 2022 and 2021.
Table 16: Average Deposit Balances and Rates
Three Months Ended June 30,
2022 2021
Average
Amount Average
Rate Paid Average
Amount Average
Rate Paid
(Dollars in thousands)
Non-interest-bearing transaction accounts $ 6,138,497 — % $ 3,966,968 — %
Interest-bearing transaction accounts 10,999,598 0.35 7,816,822 0.20
Savings deposits 1,633,014 0.07 867,904 0.06
Time deposits:
$100,000 or more 731,761 0.36 761,017 1.06
Other time deposits 439,099 0.27 362,270 0.51
Total $ 19,941,969 0.22 % $ 13,774,981 0.19 %
Six Months Ended June 30,
2022 2021
Average
Amount Average
Rate Paid Average
Amount Average
Rate Paid
(Dollars in thousands)
Non-interest-bearing transaction accounts $ 5,152,673 — % $ 3,724,854 — %
Interest-bearing transaction accounts 9,701,529 0.27 7,682,933 0.22
Savings deposits 1,305,703 0.07 829,781 0.06
Time deposits:
$100,000 or more 625,901 0.46 797,619 1.12
Other time deposits 387,699 0.29 368,502 0.56
Total $ 17,173,505 0.18 % $ 13,403,689 0.21 %
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Securities Sold Under Agreements to Repurchase
We enter into short-term purchases of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) of substantially identical securities. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the balance sheet at the amount advanced. Interest incurred on repurchase agreements is reported as interest expense. Securities sold under agreements to repurchase decreased $22.3 million, or 15.8%, from $140.9 million as of December 31, 2021 to $118.6 million as of June 30, 2022.
FHLB and Other Borrowed Funds
The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $400.0 million at both June 30, 2022 and December 31, 2021. The Company had no other borrowed funds as of June 30, 2022 or December 31, 2021. At June 30, 2022 and December 31, 2021, all of the outstanding balances were classified as long-term advances. The FHLB advances mature in 2033 with fixed interest rates ranging from 1.76% to 2.26%. Expected maturities could differ from contractual maturities because FHLB may have the right to call or the Company may have the right to prepay certain obligations.
Subordinated Debentures
Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $458.5 million and $371.1 million as of June 30, 2022 and December 31, 2021, respectively.
The Company holds trust preferred securities with a face amount of $17.6 million which are currently callable without penalty based on the terms of the specific agreements. The trust preferred securities are tax-advantaged issues that previously qualified for Tier 1 capital treatment subject to certain limitations. However, now that the Company has exceeded $15 billion in assets and has completed the acquisition of Happy Bancshares, the Tier 1 treatment of the Company’s outstanding trust preferred securities has been eliminated, and these securities are now treated as Tier 2 capital. Distributions on these securities are included in interest expense. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s subordinated debentures, the sole asset of each trust. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the subordinated debentures held by the trust. The Company wholly owns the common securities of each trust. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The Company’s obligations under the subordinated securities and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust. The Company has received approval from the Federal Reserve to redeem the trust preferred securities, and is in the process of redeeming all of its trust preferred securities.
On April 1, 2022, the Company acquired $23.2 million in trust preferred securities from Happy which were currently callable without penalty based on the terms of the specific agreements. During the quarter, $10.7 million of these trust preferred securities were paid off without penalty. As of June 30, 2022, the Company held a face amount of $12.5 million in trust preferred securities acquired from Happy.
During the second quarter, the Company chose to redeem an additional $68.1 million in trust preferred securities held prior to the acquisition of Happy. As of June 30, 2022, the Company's remaining balance of trust preferred securities which were held prior to the acquisition of Happy was $5.1 million.
On April 1, 2022, the Company acquired $140.0 million of subordinated notes from Happy. These notes have a maturity date of July 31, 2030 and carry a fixed rate of 5.500% for the first five years. Thereafter, the notes bear interest at 3-month Secured Overnight Funding Rate (SOFR) plus 5.345% resetting quarterly. Interest payments are due semi-annually and the notes include a right of prepayment without penalty on or after July 31, 2025.
On January 18, 2022, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “2032 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $296.4 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. From and including the date of issuance to, but excluding January 30, 2027 or the date of earlier redemption, the 2032 Notes will bear interest at an initial rate of 3.125% per annum, payable in arrears on January 30 and July 30 of each year. From and including January 30, 2027 to, but excluding the maturity date or earlier redemption, the 2032 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be Three-Month Term SOFR), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2032 Notes, plus 182 basis points, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, commencing on April 30, 2027.
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The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.
On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The 2027 Notes are unsecured, subordinated debt obligations and mature on April 15, 2027. From and including the date of issuance to, but excluding April 15, 2022, the 2027 Notes bear interest at an initial rate of 5.625% per annum. From and including April 15, 2022 to, but excluding the maturity date or earlier redemption, the 2027 Notes bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination plus a spread of 3.575%; provided, however, that in the event three-month LIBOR is less than zero, then three-month LIBOR shall be deemed to be zero.
The Company, beginning with the interest payment date of April 15, 2022, and on any interest payment date thereafter, was permitted to redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the Redemption Date.
Stockholders’ Equity
Stockholders’ equity increased $732.8 million to $3.50 billion as of June 30, 2022, compared to $2.77 billion as of December 31, 2021. The $732.8 million increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and the $80.9 million in net income for the six months ended June 30, 2022, partially offset by the $226.4 million in other comprehensive loss, the $61.0 million of shareholder dividends paid and stock repurchases of $26.6 million in 2022. As of June 30, 2022 and December 31, 2021, our equity to asset ratio was 14.43% and 15.32%, respectively. Book value per share was $17.04 as of June 30, 2022, compared to $16.90 as of December 31, 2021, a 3.5% annualized increase.
Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.165 and $0.14 per share for the three months ended June 30, 2022 and 2021, respectively. The common stock dividend payout ratio for the three months ended June 30, 2022 and 2021 was 212.4% and 29.2%, respectively. The common stock dividend payout ratio for the six months ended June 30, 2022 and 2021 was 75.4% and 27.1%, respectively. On July 22, 2022, the Board of Directors declared a regular $0.165 per share quarterly cash dividend payable September 7, 2022, to shareholders of record August 17, 2022.
Stock Repurchase Program. On January 22, 2021, the Company’s Board of Directors authorized the repurchase of up to an additional 20,000,000 shares of its common stock under the previously approved stock repurchase program. We repurchased a total of 1,212,732 shares with a weighted-average stock price of $21.89 per share during the first six months of 2022. The remaining balance available for repurchase was 20,877,933 shares at June 30, 2022.
Liquidity and Capital Adequacy Requirements
Risk-Based Capital. We, as well as our bank subsidiary, are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors.
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In July 2013, the Federal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary on January 1, 2015. Basel III limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5% of common equity Tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement began being phased in beginning January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019 when the phase-in period ended, and the full capital conservation buffer requirement became effective.
Basel III permanently grandfathers trust preferred securities and other non-qualifying capital instruments that were issued and outstanding as of May 19, 2010 in the Tier 1 capital of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. The rule phases out of Tier 1 capital these non-qualifying capital instruments issued before May 19, 2010 by all other bank holding companies. However, now that the Company has exceeded $15 billion in assets and has completed the acquisition of Happy Bancshares, the Tier 1 treatment of the Company’s outstanding trust preferred securities has been eliminated, and these securities are now treated as Tier 2 capital.
Basel III also amended the prompt corrective action rules to incorporate a “common equity Tier 1 capital” requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least a 4.5% “common equity Tier 1 risk-based capital” ratio, a 4% “Tier 1 leverage capital” ratio, a 6% “Tier 1 risk-based capital” ratio and an 8% “total risk-based capital” ratio .
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of June 30, 2022 and December 31, 2021, we met all regulatory capital adequacy requirements to which we were subject.
On January 18, 2022, the Company completed an underwritten public offering of the 2032 Notes in aggregate principal amount of $300.0 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.
On April 1, 2022, the Company acquired $140.0 million of subordinated notes from Happy. These notes have a maturity date of July 31, 2030 and carry a fixed rate of 5.500% for the first five years. Thereafter, the notes bear interest at 3-month Secured Overnight Funding Rate (SOFR) plus 5.345% resetting quarterly. Interest payments are due semi-annually and the notes include a right of prepayment without penalty on or after July 31, 2025.
On April 3, 2017, the Company completed an underwritten public offering of the 2027 Notes in aggregate principal amount of $300.0 million. The 2027 Notes are unsecured, subordinated debt obligations and mature on April 15, 2027. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the Redemption Date.
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On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 27, 2020, the federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company has elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below.
Table 17 presents our risk-based capital ratios on a consolidated basis as of June 30, 2022 and December 31, 2021.
Table 17: Risk-Based Capital
As of June 30, 2022 As of December 31, 2021
(Dollars in thousands)
Tier 1 capital
Stockholders’ equity $ 3,498,565 $ 2,765,721
ASC 326 transitional period adjustment 24,369 55,143
Goodwill and core deposit intangibles, net (1,461,362) (997,605)
Unrealized (gain) loss on available-for-sale securities 215,905 (10,462)
Total common equity Tier 1 capital 2,277,477 1,812,797
Qualifying trust preferred securities 17,630 71,270
Total Tier 1 capital 2,295,107 1,884,067
Tier 2 capital
Allowance for credit losses 294,267 236,714
ASC 326 transitional period adjustment (24,369) (55,143)
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets) (46,178) (33,514)
Qualifying allowance for credit losses 223,720 148,057
Qualifying subordinated notes 440,825 299,824
Total Tier 2 capital 664,545 447,881
Total risk-based capital $ 2,959,652 $ 2,331,948
Average total assets for leverage ratio $ 23,482,743 $ 16,960,683
Risk weighted assets $ 17,817,635 $ 11,793,539
Ratios at end of period
Common equity Tier 1 capital 12.78 % 15.37 %
Leverage ratio 9.77 11.11
Tier 1 risk-based capital 12.88 15.98
Total risk-based capital 16.61 19.77
Minimum guidelines – Basel III
Common equity Tier 1 capital 7.00 % 7.00 %
Leverage ratio 4.00 4.00
Tier 1 risk-based capital 8.50 8.50
Total risk-based capital 10.50 10.50
Well-capitalized guidelines
Common equity Tier 1 capital 6.50 % 6.50 %
Leverage ratio 5.00 5.00
Tier 1 risk-based capital 8.00 8.00
Total risk-based capital 10.00 10.00
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As of the most recent notification from regulatory agencies, our bank subsidiary was “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” we, as well as our banking subsidiary, must maintain minimum common equity Tier 1 capital, leverage, Tier 1 risk-based capital, and total risk-based capital ratios as set forth in the table. There are no conditions or events since that notification that we believe have changed the bank subsidiary’s category.
Non-GAAP Financial Measurements
Our accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, this report contains financial information determined by methods other than in accordance with GAAP, including earnings, as adjusted; diluted earnings per common share, as adjusted; tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity, excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted.
We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP.
The tables below present non-GAAP reconciliations of earnings, as adjusted, and diluted earnings per share, as adjusted, as well as the non-GAAP computations of tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. The items used in these calculations are included in financial results presented in accordance with GAAP.
Earnings, as adjusted, and diluted earnings per common share, as adjusted, are meaningful non-GAAP financial measures for management, as they exclude certain items such as merger expenses and/or certain gains and losses. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business, because management does not consider these items to be relevant to ongoing financial performance.
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In Table 18 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Table 18: Earnings, As Adjusted
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands)
GAAP net income available to common shareholders (A) $ 15,978 $ 79,070 $ 80,870 $ 170,672
Pre-tax adjustments:
Merger and acquisition expenses 48,731 — 49,594 —
Initial provision for credit losses - acquisition 58,585 — 58,585 —
Fair value adjustment for marketable securities 1,801 (1,250) (324) (7,032)
Special dividend from equity investment (1,434) (2,200) (1,434) (10,273)
TRUPS redemption fees 2,081 — 2,081 —
Recoveries on historic losses (2,353) — (5,641) (5,107)
Gain on securities — — — (219)
Total pre-tax adjustments 107,411 (3,450) 102,861 (22,631)
Tax-effect of adjustments(1) 26,396 (888) 25,176 (5,825)
Total adjustments after-tax (B) 81,015 (2,562) 77,685 (16,806)
Earnings, as adjusted (C) $ 96,993 $ 76,508 $ 158,555 $ 153,866
Average diluted shares outstanding (D) 206,015 165,226 185,223 165,314
GAAP diluted earnings per share: A/D $ 0.08 $ 0.48 $ 0.44 $ 1.03
Adjustments after-tax: B/D 0.39 (0.02) 0.42 (0.10)
Diluted earnings per common share excluding adjustments: C/D $ 0.47 $ 0.46 $ 0.86 $ 0.93
(1) Blended statutory rate of 25.1475% for 2022 and 25.74% for 2021
We had $1.46 billion, $998.1 million, and $1.00 billion total goodwill, core deposit intangibles and other intangible assets as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share, return on average assets excluding intangible amortization, return on average tangible equity, return on average tangible equity excluding intangible amortization, and tangible equity to tangible assets are useful in evaluating our company. Management also believes return on average assets, as adjusted, return on average equity, as adjusted, and return on average tangible equity, as adjusted, are meaningful non-GAAP financial measures, as they exclude items such as certain non-interest income and expenses that management believes are not indicative of our primary business operating results. These calculations, which are similar to the GAAP calculations of book value per share, return on average assets, return on average equity, and equity to assets, are presented in Tables 19 through 22, respectively.
Table 19: Tangible Book Value Per Share
As of June 30, 2022 As of December 31, 2021
(In thousands, except per share data)
Book value per share: A/B $ 17.04 $ 16.90
Tangible book value per share: (A-C-D)/B 9.92 10.80
(A) Total equity $ 3,498,565 $ 2,765,721
(B) Shares outstanding 205,291 163,699
(C) Goodwill 1,398,400 973,025
(D) Core deposit and other intangibles 63,410 25,045
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Table 20: Return on Average Assets
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands)
Return on average assets: A/D 0.26 % 1.81 % 0.75 % 2.01 %
Return on average assets excluding intangible amortization: (A+B)/(D-E) 0.31 1.95 0.83 2.16
Return on average assets, as adjusted: (A+C)/D 1.57 1.75 1.48 1.81
(A) Net income $ 15,978 $ 79,070 $ 80,870 $ 170,672
Intangible amortization after-tax 1,854 1,055 2,903 2,110
(B) Earnings excluding intangible amortization $ 17,832 $ 80,125 $ 83,773 $ 172,782
(C) Adjustments after-tax $ 81,015 $ (2,562) $ 77,685 $ (16,806)
(D) Average assets 24,788,365 17,491,359 21,608,387 17,107,259
(E) Average goodwill, core deposits and other intangible assets 1,423,466 1,001,598 1,211,580 1,002,301
Table 21: Return on Average Equity
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands)
Return on average equity: A/D 1.78 % 11.92 % 5.14 % 13.02 %
Return on average common equity, as adjusted: (A+C)/D 10.83 11.54 10.08 11.74
Return on average tangible equity excluding intangible amortization: B/(D-E) 3.30 19.38 8.62 21.24
Return on average tangible common equity, as adjusted: (A+C)/(D-E) 17.94 18.50 16.31 18.91
(A) Net income $ 15,978 $ 79,070 $ 80,870 $ 170,672
(B) Earnings excluding intangible amortization 17,832 80,125 83,773 172,782
(C) Adjustments after-tax 81,015 (2,562) 77,685 (16,806)
(D) Average equity 3,591,758 2,660,147 3,172,200 2,642,978
(E) Average goodwill, core deposits and other intangible assets 1,423,466 1,001,598 1,211,580 1,002,301
Table 22: Tangible Equity to Tangible Assets
As of June 30, 2022 As of December 31, 2021
(Dollars in thousands)
Equity to assets: B/A 14.43 % 15.32 %
Tangible equity to tangible assets: (B-C-D)/(A-C-D) 8.94 10.36
(A) Total assets $ 24,253,168 $ 18,052,138
(B) Total equity 3,498,565 2,765,721
(C) Goodwill 1,398,400 973,025
(D) Core deposit and other intangibles 63,410 25,045
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The efficiency ratio is a standard measure used in the banking industry and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP measure for management, as it excludes certain items and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding items such as merger expenses and/or certain gains, losses and other non-interest income and expenses. In Table 23 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Table 23: Efficiency Ratio, As Adjusted
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in thousands)
Net interest income (A) $ 198,758 $ 141,252 $ 329,906 $ 289,340
Non-interest income (B) 44,581 31,120 75,250 76,396
Non-interest expense (C) 165,482 72,982 242,378 145,848
FTE Adjustment (D) 2,471 1,774 4,209 3,595
Amortization of intangibles (E) 2,477 1,421 3,898 2,842
Adjustments:
Non-interest income:
Fair value adjustment for marketable securities $ (1,801) $ 1,250 $ 324 $ 7,032
Special dividend from equity investment 1,434 2,200 1,434 10,273
Gain on OREO, net 9 619 487 1,020
Gain (loss) on branches, equipment and other assets, net 2 (23) 18 (52)
Gain on securities, net — — — 219
Recoveries on historic losses 2,353 — 5,641 5,107
Total non-interest income adjustments (F) $ 1,997 $ 4,046 $ 7,904 $ 23,599
Non-interest expense:
Merger and acquisition expenses 48,731 — 49,594 —
Total non-core non-interest expense (G) $ 50,812 $ — $ 51,675 $ —
Efficiency ratio (reported): ((C-E)/(A+B+D)) 66.31 % 41.09 % 58.26 % 38.72 %
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F)) 46.02 42.07 46.53 41.36
Recently Issued Accounting Pronouncements
See Note 21 to the Condensed Notes to Consolidated Financial Statements for a discussion of certain recently issued and recently adopted accounting pronouncements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.