What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-06 · 234 added, 175 removed, 703 unchanged (37% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our net income for the three months ended June 30, 2020 was $58.8 million, or $0.54 diluted earnings per share, an increase of $3.2 million and a decrease of $0.04, respectively, compared to the second quarter of 2019.

Included in both second quarter 2020 and 2019 results were non-core items related to our acquisitions, early retirement programs and branch right sizing initiatives.

Also included in our 2020 results are the gains associated with the Texas Branch Sale and Colorado Branch Sale.

Excluding all non-core items, core earnings for the three months ended June 30, 2020 were $60.1 million, or $0.55 core diluted earnings per share, compared to $65.5 million, or $0.68 core diluted earnings per share for the three months ended June 30, 2019.

See “GAAP Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

Net income for the first six months of 2020 was $136.0 million, or $1.22 diluted earnings per share, compared to $103.3 million, or $1.09 diluted earnings per share, for the same period in 2019.

Our net income for the three months ended September 30, 2020 was $65.9 million, or $0.60 diluted earnings per share, a decrease of $15.9 million and of $0.24, respectively, compared to the third quarter of 2019.

Included in both third quarter 2020 and 2019 results were non-core items related to our acquisitions, early retirement programs and branch right sizing initiatives.

Excluding all non-core items, core earnings for the three months ended September 30, 2020 were $68.3 million, or $0.63 core diluted earnings per share, compared to $84.0 million, or $0.87 core diluted earnings per share for the three months ended September 30, 2019.

Net income for the first nine months of 2020 was $201.9 million, or $1.83 diluted earnings per share, compared to $185.1 million, or $1.94 diluted earnings per share, for the same period in 2019.

In addition to the non-core items related to acquisitions, early retirement programs and branch right sizing initiatives, gains associated with the Texas Branch Sale and the Colorado Branch Sale were included in the results for the first nine months of 2020.

Excluding the non-core items, year-to-date core earnings were $202.3 million, an increase of $3.8 million compared to the same period in prior year.

Core diluted earnings per share for the first half of 2020 were $1.21, equal to the same period in 2019.

See “GAAP Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

Core diluted earnings per share for the first nine months of 2020 were $1.83 compared to $2.08 for the same period in 2019.

We completed the acquisition of The Landrum Company, including its wholly-owned bank subsidiary, Landmark Bank, in October 2019.

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Additionally, on May 18, 2020 we completed the Colorado Branch Sale of four Simmons Bank locations in Denver, Englewood, Highlands Ranch and Lone Tree, Colorado.

The Company recognized a combined gain on sale of $8.1 million on the Texas Branches and Colorado Branches.

Early in 2020, we offered qualifying associates an early retirement option resulting in $493,000 of non-core expense during the second quarter.

We recognized a combined gain on sale of $8.1 million on the Texas Branches and Colorado Branches.

Early in 2020, we offered qualifying associates an early retirement option resulting in $2.8 million of non-core expense during the first nine months of 2020.

We expect ongoing net annualized savings of approximately $2.9 million from this program.

We continuously evaluate our branch network as part of our analysis of our profitability of our operations and the efficiency with which we deliver banking services to our markets.

We continuously evaluate our branch network as part of our analysis of our profitability of our operations and the efficiency with which we deliver banking services to our markets, including, among other things, changes in customer traffic and preferences.

As a result of this ongoing evaluation, we closed 11 branch locations during June 2020, with estimated net annual cost savings of approximately $2.4 million related to these locations.

In addition, we expect to close an additional 23 branch locations and one loan production office during the fourth quarter of 2020, with an expected net annual cost savings of approximately $6.8 million.

We have added over 38,000 new digital banking users since the end of February 2020.

We closed an additional 23 branch locations on October 9, 2020, with an expected net annual cost savings of approximately $6.7 million.

We added over 38,000 new digital banking users since the end of February 2020 through June 30, 2020.

Digital users continue to grow in the third quarter of 2020, adding over 15,000 additional users, a 7% increase.

In March 2020, for the first time, we had more weekly transactions using digital channels than at the branches, and our mobile deposit usage has seen an increase of 75% since the end of February.

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All consumer customers are now on the same online and mobile platforms, including acquired institutions.

Stockholders’ equity as of June 30, 2020 was $2.9 billion, book value per share was $26.64 and tangible book value per share was $15.79.

Our ratio of common stockholders’ equity to total assets was 13.26% and the ratio of tangible common stockholders’ equity to tangible assets was 8.31% at June 30, 2020.

See “GAAP Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

In September 2020, we completed the development of new credit card functionality which allows mobile and online banking to display credit card balances, line of credit utilization, recent transactions and minimum payment details, all with real-time information.

Stockholders’ equity as of September 30, 2020 was $2.9 billion, book value per share was $26.98 and tangible book value per share was $16.07.

Our ratio of common stockholders’ equity to total assets was 13.72% and the ratio of tangible common stockholders’ equity to tangible assets was 8.65% at September 30, 2020.

The Company’s Tier 1 leverage ratio of 9.05%, as well as our other regulatory capital ratios, remain significantly above the “well capitalized” levels (see Table 13 in the Capital section of this Item).

Total loans were $14.61 billion at June 30, 2020, compared to $14.37 billion at March 31, 2020 and $13.13 billion at June 30, 2019.

Total loans were $14.02 billion at September 30, 2020, compared to $14.61 billion at June 30, 2020 and $13.00 billion at September 30, 2019.

The increase from prior year is primarily due to the Landrum acquisition.

Sequentially, total loans increased $232.6 million from the first quarter 2020.

During the second quarter of 2020, we had $963.7 million in loan originations under the Paycheck Protection Program (“PPP”) of the CARES Act.

Sequentially, total loans decreased $589.5 million from the second quarter of 2020.

During 2020, we had $970.5 million in loan originations under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

See the COVID-19 Impact section below for additional information.

At June 30, 2020, the allowance for credit losses on loans was $231.6 million.

At September 30, 2020, the allowance for credit losses on loans was $248.3 million.

We adopted the new credit loss methodology, CECL, on January 1, 2020.

Upon adoption, we recorded an additional allowance for credit losses of approximately $151.4 million, an adjustment to the reserve for unfunded commitments of $24.0 million, and a related $128.1 million adjustment to retained earnings net of taxes.

Simmons First National Corporation is an Arkansas-based financial holding company that, as of June 30, 2020, has approximately $21.9 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.

In our discussion and analysis of our financial condition and results of operation in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we provide certain financial information determined by methods other than in accordance with US GAAP.

We believe the presentation of non-GAAP financial measures provides a meaningful basis for period-to-period and company-to-company comparisons, which we believe will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance.

See the GAAP Reconciliation of Non-GAAP Measures section below for additional discussion and reconciliations of non-GAAP measures.

Simmons First National Corporation is an Arkansas-based financial holding company that, as of September 30, 2020, has approximately $21.4 billion in consolidated assets and, through its subsidiaries, conducts financial operations in Arkansas, Illinois, Kansas, Missouri, Oklahoma, Tennessee and Texas.

COVID-19 Impact

As discussed in Note 24, Recent Events, in the accompanying Condensed Notes to the Consolidated Financial Statements, we have been actively managing our response to the unfolding COVID-19 pandemic.

During the first quarter, we sold approximately $1.1 billion in securities to increase liquidity in response to potential customer withdrawals of deposits as well as for anticipated funding of PPP loans.

As of June 30, 2020, the Company has approximately $2.5 billion in cash and cash equivalents and is well capitalized, which management believes has allowed us to continue to approach the crisis from a position of strength.

Through June 30, 2020, we originated approximately 7,800 PPP loans with an average balance of $123,000 per loan.

The coronavirus (COVID-19) pandemic has placed significant health, economic and other major pressure on the communities we serve, the United States and the entire world.

In March 2020, Congress passed the CARES Act, which was designed to provide comprehensive relief to individuals and businesses following the unprecedented impact of the COVID-19 pandemic.

Additionally, we have been actively managing our response to the continuing COVID-19 pandemic and have implemented a number of procedures in response to the pandemic to support the safety and well being of our employees, customers and shareholders.

Some of the implemented procedures include:

• Addressing the safety of the Company’s branch network, following local, state, and federal guidelines;

• Holding regular executive and pandemic task force meetings to address issues that change rapidly;

• Implementing business continuity plans to help ensure that customers have adequate access to banking services;

• Providing extensions and deferrals to loan customers affected by COVID-19 provided such customers were not 30 days or more past due at December 31, 2019.

See further discussion in the Asset Quality section below;

• Participating in both appropriations of the CARES Act PPP that provides 100% federally guaranteed loans for small businesses to cover up to 24 weeks of payroll costs and assist with mortgage interest, rent and utilities.

Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions during this crisis.

We have experienced meaningful shifts in consumer habits which we believe will impact our delivery of products and services as well as the retail delivery of everyday amenities.

We believe that our investment in digital channels will continue to position our company for these changes.

During the first quarter of 2020, we sold approximately $1.1 billion in securities to increase liquidity in response to potential customer withdrawals of deposits as well as for anticipated funding of PPP loans.

As of September 30, 2020, the Company has approximately $2.5 billion in cash and cash equivalents and is well capitalized, which management believes has allowed us to continue to approach the crisis from a position of strength.

Through August 8, 2020, when the PPP program ended to new applicants, we had originated 8,199 PPP loans with an average balance of $118,000 per loan.

Approximately 93% of our PPP loans had a balance of less than $350,000 at the end of the quarter.

The following table categorizes our PPP loans by outstanding balance as of June 30, 2020:

Number of Balance

(Dollars in thousands) Loans % of Loans June 30, 2020 % of Balance

PPP loan balance less than $350,000 7,286 93 % $ 392,329 41 %

PPP loan balance $350,000 or less than $2 million 478 6 % 355,415 37 %

PPP loan balance $2 million to $10 million 62 1 % 215,968 22 %

The following table categorizes our PPP loans by outstanding balance as of September 30, 2020:

PPP Loans Number of Balance

(Dollars in thousands) Loans % of Loans September 30, 2020 % of Balance

Less than $50,000 5,216 63 % $ 94,401 10 %

$50,000 to $350,000 2,441 30 % 304,815 31 %

More than $350,000 to less than $2 million 481 6 % 357,943 37 %

$2 million to $10 million 61 1 % 213,329 22 %

Total 8,199 100 % $ 970,488 100 %

PPP loans are 100% federally guaranteed and have a zero percent risk-weight for regulatory capital ratios.

As a result, excluding PPP loans from total assets, common equity to total assets was 13.9% and tangible common equity to tangible assets was 8.7% as of June 30, 2020.

See “GAAP Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

As a result, excluding PPP loans from total assets, common equity to total assets was 14.4% and tangible common equity to tangible assets was 9.1% as of September 30, 2020.

We are dedicated to supporting our customers and communities throughout this period of uncertainty.

As a show of this support, we have:

As a show of this support, since March 2020, we have:

• Donated masks, gloves and hand sanitizers to healthcare facilities, police and a community group delivering meals.

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• Delivered food and care packages to support police, firefighters, emergency responders and healthcare workers.

We believe our associates have done a commendable job of adapting to the changes that have occurred over the past four months.

We believe our associates have done a commendable job of adapting to the changes that have occurred over the past eight months.

We continue to operate in an uncertain environment, and we expect to continue to adjust as necessary.

We have consolidated various operations to provide capacity for continued service to our customers and communities.

We continue to closely monitor this pandemic and expect to make future changes to respond as this situation continues to evolve.

Further economic downturns accompanying this pandemic, or a delayed economic recovery from this pandemic, could result in increased deterioration in credit quality, past due loans, loans charge offs and collateral value declines, which could cause our results of operations and financial condition to be negatively impacted.

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Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

We perform an annual goodwill impairment test, and more than annually if circumstances warrant, in accordance with ASC Topic 350, Intangibles – Goodwill and Other, as amended by ASU 2011-08 – Testing Goodwill for Impairment.

ASC Topic 350 requires that goodwill and intangible assets that have indefinite lives be reviewed for impairment annually or more frequently if certain conditions occur.

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During the second quarter of 2020, we performed our annual goodwill impairment test and concluded that it is more likely-than-not that the fair value of our goodwill continues to exceed its carrying value and therefore, goodwill is not impaired.

Once more, we performed an interim goodwill impairment assessment during the third quarter of 2020 and concluded no impairment existed.

While our goodwill impairment analysis indicated no impairment at September 30, 2020, our assessment depends on several assumptions which are dependent on market and economic conditions, and future changes in those conditions could impact our assessment in the future.

Stock-Based Compensation Plans

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Net Interest Income Quarter-to-Date Analysis

For the three month period ended June 30, 2020, net interest income on a fully taxable equivalent basis was $166.0 million, an increase of $14.9 million, or 9.9%, over the same period in 2019.

For the three month period ended September 30, 2020, net interest income on a fully taxable equivalent basis was $156.5 million, an increase of $5.4 million, or 3.6%, over the same period in 2019.

The increase in net interest income was primarily the result of a $21.0 million decrease in interest expense partially offset by a reduction in interest income of $15.7 million.

The reduction in interest income primarily resulted from decreases of $1.1 million and $1.7 million in interest income on loans and investment securities, respectively.

During the second quarter of 2020, we generated $24.8 million of additional interest income due to an increase in loan volume, primarily from our Landrum acquisition completed during the fourth quarter 2019, while a 74 basis point decline in yield resulted in a $25.8 million decrease in interest income.

The loan yield for the second quarter of 2020 was 4.84% compared to 5.58% for the same period in 2019.

The reduction in interest income primarily resulted from a decrease of $16.7 million in interest income on loans partially offset by an increase of $1.4 million in interest income on investment securities.

During the third quarter of 2020, we generated $16.3 million of additional interest income due to an increase in loan volume, primarily from our Landrum acquisition completed during the fourth quarter of 2019, while a 93 basis point decline in yield resulted in a $33.0 million decrease in interest income.

The loan yield for the third quarter of 2020 was 4.54% compared to 5.47% for the same period in 2019.

The PPP loan yield was approximately 2.37% (including accretion of net fees), which decreased the loan yield by 16 basis points.

Excluding the PPP loans, loan yield for the second quarter 2020 was 4.94%.

See “GAAP Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

Excluding the PPP loans, loan yield for the third quarter of 2020 was 4.70%.

Included in interest income is the additional yield accretion recognized as a result of updated estimates of the cash flows of our loans acquired.

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The resulting adjustment to interest income is spread on a level-yield basis over the remaining expected lives of the loans.

For the three months ended June 30, 2020 and 2019, interest income included $11.7 million and $10.2 million, respectively, for the yield accretion recognized on loans acquired.

For the three months ended September 30, 2020 and 2019, interest income included $8.9 million and $9.3 million, respectively, for the yield accretion recognized on loans acquired.

The $21.0 million decrease in interest expense is mostly due to the decline in our deposit account rates and our FHLB borrowing rates.

Interest expense decreased $24.1 million due to the decrease in yield of 86 basis points on interest-bearing deposit accounts and $1.4 million due to the decrease in yield of 44 basis points on FHLB borrowings.

These decreases were partially offset by an increase of $4.4 million in deposit growth primarily due to the Landrum acquisition.

These decreases were partially offset by an increase of $3.4 million related to deposit growth primarily due to the Landrum acquisition.

Net Interest Income Year-to-Date Analysis

For the six month period ended June 30, 2020, net interest income on a fully taxable equivalent basis was $335.8 million, an increase of $47.1 million, or 16.3%, over the same period in 2019.

For the nine month period ended September 30, 2020, net interest income on a fully taxable equivalent basis was $492.3 million, an increase of $52.5 million, or 11.9%, over the same period in 2019.

The increase in net interest income was the result of a $13.2 million increase in interest income coupled with a $39.2 million decrease in interest expense.

The increase in interest income primarily resulted from a $10.5 million increase in interest income on loans and an increase of $2.9 million in interest income on investment securities.

The increase in loan volume during the first six months of 2020 generated $61.2 million of additional interest income, primarily from our Landrum and Reliance acquisitions completed during 2019, while a 54 basis point decline in yield resulted in a $34.0 million decrease in interest income.

For the six months ended June 30, 2020 and 2019, interest income included $23.6 million and $16.8 million, respectively, for the yield accretion recognized on loans acquired.

The increase in loan volume during the first nine months of 2020 generated $77.0 million of additional interest income, primarily from our Landrum and Reliance acquisitions completed during 2019, while a 66 basis point decline in yield resulted in a $66.5 million decrease in interest income.

For the nine months ended September 30, 2020 and 2019, interest income included $32.5 million and $26.1 million, respectively, for the yield accretion recognized on loans acquired.

The $39.2 million decrease in interest expense is mostly due to the decrease in our deposit account rates and our FHLB borrowing rates.

Interest expense decreased $27.4 million due to the decrease in yield of 53 basis points on interest-bearing deposit accounts and $4.2 million due to the decrease in yield of 64 basis points on FHLB borrowings.

These decreases were partially offset by an increase of $11.1 million in deposit growth primarily due to the Landrum and Reliance acquisitions completed in 2019.

Interest expense decreased $51.6 million due to the decrease in yield of 64 basis points on interest-bearing deposit accounts

and $5.7 million due to the decrease in yield of 58 basis points on FHLB borrowings.

These decreases were partially offset by an increase of $14.6 million related to deposit growth primarily due to the Landrum and Reliance acquisitions completed in 2019.

Net Interest Margin

Our net interest margin decreased 52 basis points to 3.42% for the three month period ended June 30, 2020, when compared to 3.94% for the same period in 2019.

Normalized for all accretion, our core net interest margin for the three months ended June 30, 2020 and 2019 was 3.18% and 3.67%, respectively.

For the six month period ended June 30, 2020, our net interest margin decreased 35 basis points to 3.55% when compared to 3.90% for the same period in 2019.

The decreases in the net interest margin during the three and six months ended June 30, 2020 were primarily driven by the lower interest rate environment, additional liquidity created in response to the COVID-19 pandemic, and the lower yielding PPP loans originated during the second quarter of 2020.

The impact of these items on the second quarter 2020 core net interest margin was 25 basis points, bringing the core net interest margin adjusted for PPP loans and additional liquidity to 3.43%.

See “GAAP Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

During March 2020, the Federal Open Market Committee, or FOMC, of the Federal Reserve substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic.

Because our interest bearing deposits are repricing more quickly in response to the substantial interest rate cuts in March 2020 than we can manage the rate decrease in our variable rate loan portfolio also caused by such cuts, we expect continued pressure on the net interest margin for the remainder of 2020.

Our net interest margin on a fully tax equivalent basis decreased 61 basis points to 3.21% for the three month period ended September 30, 2020, when compared to 3.82% for the same period in 2019.

Normalized for all accretion, our core net interest margin for the three months ended September 30, 2020 and 2019 was 3.02% and 3.59%, respectively.

For the nine month period ended September 30, 2020, our net interest margin on a fully tax equivalent basis decreased 45 basis points to 3.43% when compared to 3.88% for the same period in 2019.

The decreases in the net interest margin during the three and nine months ended September 30, 2020 were primarily driven by the lower interest rate environment, additional liquidity created in response to the COVID-19 pandemic, and the lower yielding PPP loans originated during the second and third quarters of 2020.

The impact of these items on net interest margin for the third quarter 2020 was 30 basis points, bringing the net interest margin adjusted for PPP loans and excess liquidity to 3.51%.

During March 2020, the Federal Open Market Committee, or FOMC, of the Federal Reserve substantially reduced interest rates in response to the economic crisis brought on by the COVID-19 pandemic and rates have continued to remain low through the third quarter of 2020.

As such, our variable rate loan portfolio has repriced to a lower yield and we have worked to lower the cost of deposits.

In addition, our decreased net interest margin is being driven by the decrease in our non-PPP loan portfolio and we expect continued pressure on the net interest margin for the remainder of 2020.

Net Interest Income Tables

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and six months ended June 30, 2020 and 2019, respectively, as well as changes in fully taxable equivalent net interest margin for the three and six months ended June 30, 2020 versus June 30, 2019.

Tables 1 and 2 reflect an analysis of net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2020 and 2019, respectively, as well as changes in fully taxable equivalent net interest margin for the three and nine months ended September 30, 2020 versus September 30, 2019.

Analysis of Net Interest Margin

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(In thousands) 2020 2019 2020 2019

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(In thousands) 2020 vs.

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Increase in net interest income $ 5,367 $ 52,456

Table 3 shows, for each major category of earning assets and interest bearing liabilities, the average (computed on a daily basis) amount outstanding, the interest earned or expensed on such amount and the average rate earned or expensed for the three and six months ended June 30, 2020 and 2019.

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.

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(FTE = Fully Taxable Equivalent using an effective tax rate of 26.135%)

Three Months Ended June 30,

Three Months Ended September 30,

Average Income/ Yield/ Average Income/ Yield/

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Net interest margin $ 156,474 3.21 $ 151,107 3.82

Six Months Ended June 30,

Nine Months Ended September 30,

Average Income/ Yield/ Average Income/ Yield/

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Net interest margin $ 492,293 3.43 $ 439,837 3.88

Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and six month periods ended June 30, 2020, as compared to the same periods of the prior year.

Table 4 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the three and nine month periods ended September 30, 2020, as compared to the same periods of the prior year.

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.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2019 2020 vs.

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It is management’s practice to review the allowance on a monthly basis and, after considering the factors previously noted, to determine the level of provision made to the allowance.

The provision for credit losses for the three and six month periods ended June 30, 2020, was $26.9 million and $53.0 million, respectively, compared to $7.1 million and $16.4 million for the same periods ended June 30, 2019, increases of $19.8 million and $36.7 million.

The increase during the quarter ended June 30, 2020 was primarily related to updated credit loss forecast models using multiple Moody’s economic scenarios.

The updates capture the possibility of a longer, more prolonged recovery to the economies that affect the loan portfolio.

The increase during the six month period ended June 30, 2020 also included an additional provision related to problem energy credits, subsequently charged-off during second quarter of 2020 for a total of $32.6 million, that experienced further deterioration beginning in first quarter of 2020 and were negatively impacted by the sharp decline in commodity pricing.

The provision for credit losses for the three and nine month periods ended September 30, 2020, was $23.0 million and $68.0 million, respectively, compared to $22.0 million and $38.3 million for the same periods ended September 30, 2019, increases of $1.0 million and $29.7 million.

The increase during the quarter ended September 30, 2020 was primarily based on additional qualitative adjustments specific to industries that are more adversely impacted by the current and expected economic scenarios, such as the restaurant, retail, and hotel industries.

These adjustments are intended to account for potential problem credits that have not materialized into any identifiable metrics or delinquencies.

We additionally updated the credit loss forecast models using multiple Moody’s economic scenarios.

The updates to the credit loss forecast models capture the possibility of a more prolonged recovery to the economies than originally expected that affect our loan portfolio.

The increase during the nine month period ended September 30, 2020 also included an additional provision related to problem energy credits, ultimately charged-off during the second quarter of 2020 for a total of $32.6 million, that experienced further deterioration beginning in first quarter of 2020 and were negatively impacted by the sharp decline in commodity pricing.

The remainder of the increase was related to the economic impact of the COVID-19 pandemic that is incorporated in the Company’s allowance for credit losses.

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Non-interest income also includes income on the sale of mortgage and SBA loans, investment banking income, income from the increase in cash surrender values of bank owned life insurance and gains (losses) from sales of securities.

Total non-interest income was $50.2 million for the three month period ended June 30, 2020, an increase of approximately $10.3 million, or 25.8%, compared to the same period in 2019, primarily driven by increases in trust income and mortgage lending income.

Conversely, we had decreases in total service charges on deposit accounts and fees of $1.8 million, or 15.2%, primarily attributable to a reduction in customer transactions related to the impact of the COVID-19 pandemic and lower gains on the sale of securities during second quarter of 2020.

For the six month period ended June 30, 2020, total non-interest income was $132.6 million, an increase of approximately $57.9 million, or 77.5%, compared to the same period in 2019.

During the first half of 2020, we sold approximately $1.2 billion of investment securities resulting in a net gain of $32.5 million.

Total non-interest income was $71.9 million for the three month period ended September 30, 2020, a decrease of approximately $12.8 million, or 15.1%, compared to the same period in 2019, primarily due to the gain on sale of Visa Inc.

class B common stock of $42.9 million that was recognized during the third quarter of 2019.

We benefited from additional gains on the sale of securities and incremental mortgage lending income, collectively $24.4 million, during the third quarter of 2020.

During the third quarter of 2020, we evaluated our security portfolio and projected calls that we expected to occur over the next year and a half with large gains.

As a result, we sold approximately $515.6 million of investment securities resulting in a net gain of $22.3 million during the third quarter of 2020.

For the nine month period ended September 30, 2020, total non-interest income was $204.5 million, an increase of approximately $45.1 million, or 28.3%, compared to the same period in 2019.

During the first nine months of 2020, we sold approximately $1.7 billion of investment securities resulting in a net gain of $54.8 million.

The majority of the investment securities were sold in March 2020, in response to the unfolding events of the COVID-19 pandemic, as we focused on the creation of additional liquidity and strengthening our balance sheet.

We used a portion of the liquidity generated by these investment security sales to fund PPP loans originated during second quarter of 2020.

We used a portion of the liquidity generated by these investment security sales to fund PPP loans originated during the second and third quarters of 2020.

We plan to reinvest back into our investment portfolio when the PPP loans are repaid, subject to economic conditions and other concerns at such time.

Additionally, the gains on sale from the Texas Branch Sale and Colorado Branch Sales of $8.1 million, which we consider a non-core item, contributed to the increase during 2020.

The increase in mortgage lending income in both the three and six month periods ended June 30, 2020 was a result of the current low mortgage interest rate environment as well as increased business related to our Landrum and Reliance acquisitions.

Table 5 shows non-interest income for the three and six month periods ended June 30, 2020 and 2019, respectively, as well as changes in 2020 from 2019.

The increases of $9.5 million and $20.5 million in mortgage lending income in the three and nine month periods ended September 30, 2020, respectively, was a result of the current low mortgage interest rate environment as well as increased business related to our Landrum and Reliance acquisitions.

Table 5 shows non-interest income for the three and nine month periods ended September 30, 2020 and 2019, respectively, as well as changes in 2020 from 2019.

Non-Interest Income

Three Months Ended

June 30, 2020

Change from Six Months Ended

June 30, 2020

September 30, 2020

Change from Nine Months Ended

September 30, 2020

(Dollars in thousands) 2020 2019 2019 2020 2019 2019

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Gain on sale of securities, net 22,305 7,374 14,931 * 54,790 12,937 41,853 *

Gain on sale of Visa, Inc.

class B common stock — 42,860 (42,860) * — 42,860 (42,860) (100.0)

Gain on sale of banking operations, net — — — — 8,093 — 8,093 *

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* Not meaningful

Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period ended June 30, 2020 was $25.3 million, an increase of $433,000 from the same period in 2019.

Recurring fee income for the six month period ended June 30, 2020, was $55.3 million, an increase of $7.3 million from the six month period ended June 30, 2019, primarily the result of the Landrum and Reliance acquisitions completed during 2019.

Recurring fee income (total service charges, trust fees, debit and credit card fees) for the three month period ended September 30, 2020 was $27.7 million, an increase of $2.4 million from the same period in 2019.

Recurring fee income for the nine month period ended September 30, 2020, was $83.0 million, an increase of $9.7 million from the nine month period ended September 30, 2019, primarily the result of the Landrum and Reliance acquisitions completed during 2019.

NON-INTEREST EXPENSE

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We also regularly monitor staffing levels at each subsidiary to ensure productivity and overhead are in line with existing workload requirements.

Non-interest expense for the three months ended June 30, 2020 was $112.6 million, an increase of $1.9 million, or 1.7%, from the same period in 2019.

Non-interest expense during the second quarter of 2020 included $4.0 million of pre-tax non-core items:

$1.8 million of merger-related costs, $493,000 of early retirement program expenses, and $1.7 million of branch-right sizing costs.

Normalizing for these non-core costs, core non-interest expense for the three months ended June 30, 2020 increased $11.2 million, or 11.4%, from the same period in 2019.

Non-interest expense for the six months ended June 30, 2020 was $238.4 million, an increase of $26.3 million, or 12.4%, from the same period in 2019.

Normalizing for the non-core costs, core non-interest expense for the six months ended June 30, 2020 increased $36.1 million, or 18.3%, from the same period in 2019.

See “GAAP Reconciliation of Non-GAAP Measures” below for additional discussion of non-GAAP measures.

Non-interest expense for the three months ended September 30, 2020 was $118.9 million, an increase of $12.1 million, or 11.3%, from the same period in 2019.

Non-interest expense during the third quarter of 2020 included $3.7 million of pre-tax non-core items:

$902,000 of merger-related costs, $2.3 million of early retirement program expenses, and $442,000 of net branch right sizing costs.

Normalizing for these non-core costs, core non-interest expense for the three months ended September 30, 2020 increased $11.3 million, or 10.9%, from the same period in 2019.

Non-interest expense for the nine months ended September 30, 2020 was $365.4 million, an increase of $46.3 million, or 14.5%, from the same period in 2019.

Normalizing for the non-core costs, core non-interest expense for the nine months ended September 30, 2020 increased $55.4 million, or 18.4%, from the same period in 2019.

The increases during both periods were primarily due to the incremental operating expenses from the Landrum and Reliance acquisitions completed during 2019.

Also, our Next Generation Banking (“NGB”) technology initiative is well underway and the incremental software and technology expenditures of $9.4 million during the first six months of 2020 were primarily related to this initiative.

Table 6 below shows non-interest expense for the three and six month periods ended June 30, 2020 and 2019, respectively, as well as changes in 2020 from 2019.

Also, our Next Generation Banking (“NGB”) technology initiative has made substantial progress and the incremental software and technology expenditures of $12.4 million during the first nine months of 2020 were primarily related to this initiative.

Table 6 below shows non-interest expense for the three and nine month periods ended September 30, 2020 and 2019, respectively, as well as changes in 2020 from 2019.

Non-Interest Expense

Three Months Ended

June 30, 2020

Change from Six Months Ended

June 30, 2020

September 30, 2020

Change from Nine Months Ended

September 30, 2020

(Dollars in thousands) 2020 2019 2019 2020 2019 2019

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LOAN PORTFOLIO

Our loan portfolio averaged $14.64 billion and $12.27 billion during the first six months of 2020 and 2019, respectively.

As of June 30, 2020, total loans were $14.61 billion, an increase of $181.2 million from December 31, 2019.

Our loan portfolio averaged $14.53 billion and $12.53 billion during the first nine months of 2020 and 2019, respectively.

As of September 30, 2020, total loans were $14.02 billion, a decrease of $408.3 million from December 31, 2019.

The most significant components of the loan portfolio were loans to businesses (commercial loans, commercial real estate loans and agricultural loans) and individuals (consumer loans, credit card loans and single-family residential real estate loans).

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Loan Portfolio

June 30, December 31,

September 30, December 31,

(In thousands) 2020 2019

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Consumer loans consist of credit card loans and other consumer loans.

Consumer loans were $398.4 million at June 30, 2020, or 2.7% of total loans, compared to $454.0 million, or 3.1% of total loans at December 31, 2019.

The decrease in consumer loans from December 31, 2019, to June 30, 2020, was primarily due to the expected seasonal decline in our credit card portfolio.

Consumer loans were $363.6 million at September 30, 2020, or 2.6% of total loans, compared to $454.0 million, or 3.1% of total loans at December 31, 2019.

The decrease in consumer loans from December 31, 2019, to September 30, 2020, was primarily due to the expected seasonal decline in our credit card portfolio.

Real estate loans consist of construction and development (“C&D”) loans, single-family residential loans and commercial real estate (“CRE”) loans.

Real estate loans were $10.53 billion at June 30, 2020, or 72.1% of total loans, compared to $11.02 billion, or 76.4%, of total loans at December 31, 2019, a decrease of $488.2 million, or 4.4%.

Real estate loans were $9.98 billion at September 30, 2020, or 71.2% of total loans, compared to $11.02 billion, or 76.4%, of total loans at December 31, 2019, a decrease of $1.0 billion, or 9.4%.

Our C&D loans decreased by $395.3 million, or 17.6%, single family residential loans decreased by $417.7 million, or 17.3%, and CRE loans decreased by $225.7 million, or 3.5%.

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Commercial loans consist of non-real estate loans related to business and agricultural loans.

Total commercial loans were $3.26 billion at June 30, 2020, or 22.3% of total loans, compared to $2.64 billion, or 18.3% of total loans at December 31, 2019, an increase of $613.3 million, or 23.2%, that is mostly in our non-agricultural commercial loan portfolio.

The $963.7 million in PPP loan originations drove the increase in commercial loans during the first half of 2020.

Total commercial loans were $3.15 billion at September 30, 2020, or 22.5% of total loans, compared to $2.64 billion, or 18.3% of total loans at December 31, 2019, an increase of $506.8 million, or 19.2%, that is mostly in our non-agricultural commercial loan portfolio.

The $970.5 million in PPP loan originations drove the increase in commercial loans during the first nine months of 2020.

Management believes that loan demand is very weak in almost every aspect of our commercial economy, which we believe we see through our lower loan pipeline.

Our customers appear to be deleveraging and not taking on new risks due to the economic uncertainty stemming from the COVID-19 pandemic.

We believe that trend will continue until our customers are more confident in the economy.

Other loans mainly consists of mortgage warehouse lending.

Mortgage volume surged during second quarter of 2020 due to the low interest rate environment leading to an increase of $111.7 million in other loans primarily from mortgage warehouse lines of credit.

Mortgage volume surged during the second and third quarters of 2020 due to the low interest rate environment leading to an increase of $214.0 million in other loans primarily from mortgage warehouse lines of credit.

ASSET QUALITY

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The credit card recovery group pursues account holders until it is determined, on a case-by-case basis, to be uncollectible.

Total non-performing assets increased $34.9 million from December 31, 2019 to June 30, 2020.

Total non-performing assets increased $67.2 million from December 31, 2019 to September 30, 2020.

Nonaccrual loans increased by $74.4 million during the period and foreclosed assets held for sale and other real estate owned decreased by $6.5 million.

The increase in nonaccrual loans was related to several energy portfolio loans that became reportable as non-performing loans since year-end.

We are actively pursuing an exit of our energy lending portfolio, except for our customers who have a diversified relationship with us.

Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.70% at June 30, 2020, compared to 0.56% at December 31, 2019.

The increase in nonaccrual loans during 2020 is primarily in our CRE loan portfolio.

Approximately $31.1 million and $18.2 million related to hotel real estate and student housing accommodations, respectively, moved to nonaccrual during the first nine months of the year.

The remaining increase was related to various other CRE loans and commercial loan relationships.

We continue to actively pursue an exit of our energy lending portfolio, except for our customers who have a diversified relationship with us.

Non-performing assets, including troubled debt restructurings (“TDRs”) and acquired foreclosed assets, as a percent of total assets were 0.87% at September 30, 2020, compared to 0.57% at December 31, 2019.

From time to time, certain borrowers are experiencing declines in income and cash flow.

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or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place.

Our TDR balance decreased to $4.8 million at June 30, 2020 from $5.3 million at December 31, 2019.

The majority of our TDR balance remains in the commercial portfolio with the largest balance comprised of four relationships.

Our TDR balance increased to $8.6 million at September 30, 2020 from $7.4 million at December 31, 2019.

TDRs are individually evaluated for expected credit losses.

We assess the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determine if a specific allowance for credit losses is needed.

We return TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months.

The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration.

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The Company elected to adopt these provisions of the CARES Act and is following the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by regulatory agencies.

Through June 30, 2020, the Company has modified more than 4,600 loans totaling approximately $ 3.3 billion to loan customers affected by COVID-19.

Of these COVID-19 loan modifications, approximately $3.1 billion are commercial loan modifications, comprised of the following industries:

We have more than 3,900 loans totaling approximately $3.2 billion which have received a COVID-19 modification.

See Note 5, Loans and Allowance for Credit Losses, in the accompanying Condensed Notes to Consolidated Financial Statements for additional information related to these loans.

Of these COVID-19 loan modifications, approximately $550.8 million, or 17.4%, are commercial loan modifications that are in an internal COVID-19 status category of 4-7 as of mid-October 2020, further discussed below, comprised of the following industries:

Commercial COVID-19 Loan Modifications Status Category 4-7 by Industry

(Dollars in thousands) Loan Balance %

Real estate rental and leasing $ 1,404,416 45.0 %

Accommodation and food services 743,940 23.8

Health care and social assistance 272,868 8.8

Construction 197,242 6.3

Retail trade 141,456 4.5

All other categories 362,238 11.6

Hotels $ 319,991 58.1 %

Restaurants - Real Estate 7,209 1.3

Restaurants - Non-Real Estate 1,897 0.4

Retail 15,836 2.9

Nursing/Extended Care 42,674 7.7

Multifamily 62,320 11.3

All Other 100,905 18.3

Total $ 550,832 100.0 %

Commercial COVID-19 Loan Modifications Status Category 4-7

(Dollars in thousands) Loan Balance Number of Loans

Internal Status Category 4 $ 335,798 105

Internal Status Category 5 195,312 71

Internal Status Category 6 17,242 44

Internal Status Category 7 2,480 8

Total $ 550,832 228

As previously discussed, the COVID-19 pandemic has had an unprecedented impact on the hotel, restaurant and retail industries, causing our borrowers in those industries to require loan modifications.

We expect most of the commercial COVID-19 loan modifications listed above, as illustrated in Table 9, to return to regular payments with no credit downgrade or long-term restructure.

Internal COVID-19 status categories are internal status categories that we use in connection with our COVID-19 loan modification program.

A description of the general characteristics of the internal COVID-19 status categories 4-7 is as follows:

• Category 4 – Borrower is still in the modification period and expected to need an additional modification.

Financial projections show return to original terms, but not at the end of six months.

The loan remains collateralized and fully supported by the guarantor.

• Category 5 – Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan.

The guarantors remain engaged and cooperative.

• Category 6 – Financial projections do not support return to regular payments AND collateral deterioration is likely, which would not fully support the loan.

The guarantors remain engaged and cooperative.

• Category 7 – Financial projections do not support return to regular payments OR collateral deterioration is likely, which would not fully support the loan.

The guarantors lack the capacity and are unwilling or unable to develop a new operating strategy.

We developed these status categories for internal purposes only and they are not a substitute or a replacement for loan risk ratings used by us under US GAAP.

We continue to maintain good asset quality, compared to the industry.

Strong asset quality remains a primary focus of our strategy.

The allowance for credit losses as a percent of total loans was 1.59% as of June 30, 2020.

The allowance for credit losses as a percent of total loans was 1.77% as of September 30, 2020.

Non-performing loans equaled 1.20% of total loans.

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The allowance for credit losses was 148% of non-performing loans.

Our annualized net charge-offs to total loans for the first six months of 2020 was 0.56%.

Our annualized net charge-offs to total loans for the first nine months of 2020 was 0.43%.

Excluding credit cards, the annualized net charge-offs to total loans for the same period was 0.41%.

Annualized net credit card charge-offs to total credit card loans were 1.75%, compared to 1.86% during the full year 2019, and 229 basis points better than the most recently published industry average charge-off ratio as reported by the Federal Reserve for all banks.

Table 9 presents information concerning non-performing assets, including nonaccrual loans and foreclosed assets held for sale.

Table 10 presents information concerning non-performing assets, including nonaccrual loans at amortized cost and foreclosed assets held for sale.

Non-performing Assets

June 30, December 31,

September 30, December 31,

(Dollars in thousands) 2020 2019

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_______________________________________

(1) Includes nonaccrual TDRs of approximately $818,000 at June 30, 2020 and $902,000 at December 31, 2019.

There was no interest income on nonaccrual loans recorded for the three and six month periods ended June 30, 2020 and 2019.

(1) Includes nonaccrual TDRs of approximately $5,177,000 at September 30, 2020 and $1,561,000 at December 31, 2019.

There was no interest income on nonaccrual loans recorded for the three and nine month periods ended September 30, 2020 and 2019.

ALLOWANCE FOR CREDIT LOSSES

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Provision for credit losses 75,190 38,337

Balance, June 30 $ 231,643 $ 64,179

Balance, September 30 $ 248,251 $ 66,590

Loans charged off:

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Provision for Credit Losses

The amount of provision added to the allowance during the three and six months ended June 30, 2020 and 2019, and for the year ended December 31, 2019, was based on management’s judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic forecasts and conditions, past due and non-performing loans and net loss experience.

The amount of provision added to the allowance during the three and nine months ended September 30, 2020 and 2019, and for the year ended December 31, 2019, was based on management’s judgment, with consideration given to the composition of the portfolio, historical loan loss experience, assessment of current economic forecasts and conditions, past due and non-performing loans and net loss experience.

It is management’s practice to review the allowance on a monthly basis, and after considering the factors previously noted, to determine the level of provision made to the allowance.

Allowance for Credit Losses Allocation

As of June 30, 2020, the allowance for credit losses reflected an increase of approximately $163.4 million from December 31, 2019 while loans increased $181.2 million over the same six month period.

As of September 30, 2020, the allowance for credit losses reflected an increase of approximately $180.0 million from December 31, 2019 while loans decreased $408.3 million over the same nine month period.

The allocation in each category within the allowance generally reflects the overall changes in the loan portfolio mix.

During the first quarter of 2020, we recorded an additional allowance for credit losses of approximately $151.4 million due to the adoption of CECL.

During the first quarter of 2020, we recorded an additional allowance for credit losses for loans of approximately $151.4 million due to the adoption of CECL.

The significant impact to the allowance for credit losses at the date of adoption was driven by the substantial amount of loans acquired held by the Company.

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As such, the amount of the CECL adoption impact was greater on the Company when compared to a non-acquisitive bank.

The remaining increase in the allowance for credit losses during the first six months of 2020 was predominately related to updated credit loss forecast models using multiple Moody’s economic scenarios previously discussed in Provision for Credit Losses.

The remaining increase in the allowance for credit losses during the first nine months of 2020 was predominately related to updated credit loss forecast models using multiple Moody’s economic scenarios previously discussed in Provision for Credit Losses as well as continued economic uncertainty due to the COVID-19 pandemic.

Certain industries are being more adversely impacted than others by this pandemic, such as the restaurant, retail and hotel industries, and there remains substantial uncertainty regarding how borrowers in these industries will recover.

Our allowance for credit losses at September 30, 2020 was at the high-end of our calculated range, although it was considered appropriate given the considerable amount of uncertainty as to the structure and timing of potential economic recovery, future of government assistance/election, and other related factors.

The following table sets forth the sum of the amounts of the allowance for credit losses attributable to individual loans within each category, or loan categories in general.

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Allocation of Allowance for Credit Losses

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(Dollars in thousands) Allowance

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(1) Percentage of loans in each category to total loans.

Deposits are our primary source of funding for earning assets and are primarily developed through our network of approximately 226 financial centers.

Deposits are our primary source of funding for earning assets and are primarily developed through our network of approximately 226 financial centers as of September 30, 2020.

We offer a variety of products designed to attract and retain customers with a continuing focus on developing core deposits.

Our core deposits consist of all deposits excluding time deposits of $100,000 or more and brokered deposits.

As of June 30, 2020, core deposits comprised 84.1% of our total deposits.

As of September 30, 2020, core deposits comprised 84.9% of our total deposits.

We continually monitor the funding requirements along with competitive interest rates in the markets we serve.

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We are continually monitoring and looking for opportunities to fairly reprice our deposits while remaining competitive in this current challenging rate environment.

Our total deposits as of June 30, 2020, were $16.62 billion, an increase of $507.2 million from December 31, 2019.

Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $13.6 billion at June 30, 2020, compared to $12.8 billion at December 31, 2019, an increase of $754.2 million.

Total time deposits decreased $247.0 million to $3.0 billion at June 30, 2020, from $3.3 billion at December 31, 2019.

We had $552.2 million and $1.1 billion of brokered deposits at June 30, 2020, and December 31, 2019, respectively.

Our total deposits as of September 30, 2020, were $16.25 billion, an increase of $137.7 million from December 31, 2019.

Non-interest bearing transaction accounts, interest bearing transaction accounts and savings accounts totaled $13.4 billion at September 30, 2020, compared to $12.8 billion at December 31, 2019, an increase of $612.7 million.

Total time deposits decreased $475.0 million to $2.8 billion at September 30, 2020, from $3.3 billion at December 31, 2019.

We had $513.4 million and $1.1 billion of brokered deposits at September 30, 2020, and December 31, 2019, respectively.

We are managing our balance sheet and our net interest margin by continuing to eliminate several high-cost deposits related to public funds and brokered deposits.

OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES

Our total debt was $1.78 billion and $1.69 billion at June 30, 2020 and December 31, 2019, respectively.

The outstanding balance for June 30, 2020 includes $1.4 billion in FHLB short-term advances;

Our total debt was $1.73 billion and $1.69 billion at September 30, 2020 and December 31, 2019, respectively.

The outstanding balance for September 30, 2020 includes $1.3 billion in FHLB short-term advances;

$9.0 million in FHLB long-term advances;

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and $33.8 million of other long-term debt.

Most of the FHLB short-term advances outstanding at the end of the second quarter 2020 are FHLB Owns the Option (“FOTO”) advances that are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date.

Our FOTO advances outstanding at June 30, 2020 have 10 to 15 year maturity dates with lockout periods that have expired and, as a result, are considered and monitored as short-term advances.

The FHLB short-term advances outstanding at the end of the third quarter 2020 are FHLB Owns the Option (“FOTO”) advances which are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date.

Our FOTO advances outstanding at September 30, 2020 have 10 to 15 year maturity dates with lockout periods that have expired and, as a result, are considered and monitored as short-term advances.

We analyze the possibility of the FHLB exercising the options along with the market expected rate outcome.

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The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries.

At June 30, 2020, total capital was $2.90 billion.

At September 30, 2020, total capital was $2.94 billion.

Capital represents shareholder ownership in the Company – the book value of assets in excess of liabilities.

At June 30, 2020, our common equity to asset ratio was 13.26% compared to 14.06% at year-end 2019.

At September 30, 2020, our common equity to asset ratio was 13.72% compared to 14.06% at year-end 2019.

Capital Stock

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We anticipate funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow.

During the six month period ended June 30, 2020, we repurchased — shares at an average price of $18.96 under the Program.

During the nine month period ended September 30, 2020, we repurchased 4,922,336 shares at an average price of $18.96 under the Program.

No shares have been repurchased since March 31, 2020.

Market conditions and our capital needs will drive decisions regarding additional future stock repurchases.

We had no stock repurchases during the first six months of 2019.

We had no stock repurchases during the first nine months of 2019.

On October 22, 2020, we announced the resumption of stock repurchases under the Program.

Cash Dividends

We declared cash dividends on our common stock of $0.34 per share for the first six months of 2020 compared to $0.32 per share for the first six months of 2019, an increase of $0.02, or 6%.

We declared cash dividends on our common stock of $0.51 per share for the first nine months of 2020 compared to $0.48 per share for the first nine months of 2019, an increase of $0.03, or 6%.

The timing and amount of future dividends are at the discretion of our Board of Directors and will depend upon our consolidated earnings, financial condition, liquidity and capital requirements, the amount of cash dividends paid to us by our subsidiaries, applicable government regulations and policies and other factors considered relevant by our Board of Directors.

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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, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).

Management believes that, as of June 30, 2020, we meet all capital adequacy requirements to which we are subject.

Management believes that, as of September 30, 2020, we meet all capital adequacy requirements to which we are subject.

As of the most recent notification from regulatory agencies, the bank subsidiary was well capitalized under the regulatory framework for prompt corrective action.

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There are no conditions or events since that notification that management believes have changed the institution’s categories.

Our risk-based capital ratios at June 30, 2020 and December 31, 2019 are presented in Table 12 below:

Our risk-based capital ratios at September 30, 2020 and December 31, 2019 are presented in Table 13 below:

Risk-Based Capital

June 30, December 31,

September 30, December 31,

(Dollars in thousands) 2020 2019

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Tier 1 leverage ratio, excluding average PPP loans is a non-GAAP measurement.

See “GAAP Reconciliation of Non-GAAP Measures” below for the additional discussion of non-GAAP measures.

Regulatory Capital Changes

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As of December 31, 2017, the Company exceeded $15 billion in total assets and the grandfather provisions applicable to its trust preferred securities no longer apply and trust preferred securities are no longer included as Tier 1 capital.

Trust preferred securities and qualifying subordinated debt of $382.6 million is included as Tier 2 and total capital as of June 30, 2020.

Trust preferred securities and qualifying subordinated debt of $382.7 million is included as Tier 2 and total capital as of September 30, 2020.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as “believe,” “budget,” “expect,” “foresee,” “anticipate,” “intend,” “indicate,” “target,” “estimate,” “plan,” “project,” “continue,” “contemplate,” “positions,” “prospects,” “predict,” or “potential,” by future conditional verbs such as “will,” “would,” “should,” “could,” “might” or “may,” or by variations of such words or by similar expressions.

These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company’s stock repurchase program, acquisition strategy, balance sheet and liquidity management, NGB and other digital banking initiatives, the Company’s ability to recruit and retain key employees, the benefits associated with the Company’s early retirement program and completed and future branch closures, the adequacy of the allowance for credit losses, the ability of the Company to manage the impact of the COVID-19 pandemic, the effect of certain new accounting standards on the Company’s financial statements (including, without limitation, the CECL methodology and its anticipated effect on the provision and allowance for credit losses), income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of future litigation, legal and regulatory limitations and compliance and competition.

These forward-looking statements include, without limitation, those relating to the Company’s future growth, revenue, assets, asset quality, profitability and customer service, critical accounting policies, net interest margin, non-interest revenue, market conditions related to the Company’s stock repurchase program, acquisition strategy, balance sheet and liquidity management, NGB and other digital banking initiatives, the Company’s ability to recruit and retain key employees, the benefits associated with the Company’s early retirement program and branch closures, the adequacy of the allowance for credit losses, the ability of the Company to manage the impact of the COVID-19 pandemic, the effect of certain new accounting standards on the Company’s financial statements (including, without limitation, the CECL methodology and its anticipated effect on the provision and allowance for credit losses), income tax deductions, credit quality, the level of credit losses from lending commitments, net interest revenue, interest rate sensitivity, loan loss experience, liquidity, capital resources, market risk, earnings, effect of future litigation, legal and regulatory limitations and compliance and competition.

These forward-looking statements involve risks and uncertainties, and may not be realized due to a variety of factors, including, without limitation:

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changes in the securities markets generally or the price of the Company’s common stock specifically;

the effect of the steps the Company takes in response to COVID-19, the severity and duration of the pandemic, including whether there is a “second wave” as a result of the loosening of governmental restrictions, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein;

the effect of the steps the Company takes in response to COVID-19, the severity and duration of the pandemic, including whether there is a widespread resurgence in COVID-19 infections and whether the impact of the COVID-19 pandemic is exacerbated by the seasonal flu, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein;

the effects of the COVID-19 pandemic on, among other things, the Company’s operations, liquidity, and credit quality;

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changes in the assumptions, forecasts, models, and methodology used to calculate the impact of CECL on the Company’s financial statements;

claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic (including, among other things, the CARES Act);

possible adverse rulings, judgements, settlements and other outcomes of pending or future litigation or government actions (including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic (including, among other things, the PPP loan program authorized by the CARES Act));

the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions;

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the failure of assumptions underlying the establishment of reserves for possible credit losses, fair value for loans, other real estate owned, and other cautionary statements set forth elsewhere in this report.

Please also refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s annual report on Form 10-K for the year ended December 31, 2019, and related disclosures in other filings, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov.

Please also refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this quarterly report and the Company’s annual report on Form 10-K for the year ended December 31, 2019, and related disclosures in other filings, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov.

Many of these factors are beyond our ability to predict or control, and actual results could differ materially from those in the forward-looking statements due to these factors and others.

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GAAP RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The tables below present computations of core earnings (net income excluding non-core items {gain on sale of branches, merger related costs, early retirement program costs and the one-time costs of branch right sizing}) (non-GAAP) and core diluted earnings per share (non-GAAP) as well as a computation of tangible book value per share (non-GAAP), tangible common equity to tangible assets (non-GAAP) and the core net interest margin (non-GAAP).

The tables below present computations of core earnings (net income excluding non-core items {gain on sale of branches, merger related costs, early retirement program costs and the net one-time costs of branch right sizing}) (non-GAAP) and core diluted earnings per share (non-GAAP) as well as a computation of tangible book value per share (non-GAAP), tangible common equity to tangible assets (non-GAAP) and the core net interest margin (non-GAAP).

Non-core items are included in financial results presented in accordance with generally accepted accounting principles (US GAAP).

The tables below also present computations of certain figures that are exclusive of the impact of PPP loans:

the ratios of common equity to total assets and tangible common equity to tangible assets, each adjusted for PPP loans (each non-GAAP), Tier 1 leverage ratio excluding average PPP loans (non-GAAP), core net interest income and core net interest margin, each adjusted for PPP loans and excess liquidity (each non-GAAP), and loan yield excluding PPP loans (non-GAAP).

the ratios of common equity to total assets and tangible common equity to tangible assets, each adjusted for PPP loans (each non-GAAP), Tier 1 leverage ratio excluding average PPP loans (non-GAAP), net interest income and net interest margin, each adjusted for PPP loans and excess liquidity (each non-GAAP), and loan yield excluding PPP loans (non-GAAP).

We believe the exclusion of these non-core items in expressing earnings and certain other financial measures, including “core earnings,” provides a meaningful basis for period-to-period and company-to-company comparisons, which management believes will assist investors and analysts in analyzing the core financial measures of the Company and predicting future performance.

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• Investor presentations of Company performance

We have $1.183 billion total goodwill and other intangible assets for the periods ended June 30, 2020 and December 31, 2019.

We have $1.190 billion and $1.183 billion total goodwill and other intangible assets for the periods ended September 30, 2020 and December 31, 2019, respectively.

Because our acquisition strategy has resulted in a high level of intangible assets, management believes useful calculations include tangible book value per share (non-GAAP) and tangible common equity to tangible assets (non-GAAP).

We believe the exclusion of PPP loans or their impact, as applicable, in expressing earnings and certain other financial measures provides a meaningful basis for period-to-period and company-to-company comparisons because PPP loans are 100% federally guaranteed and have very low interest rates.

The Company’s non-GAAP financial measures that exclude PPP loans or their impact include the ratios of “common equity to total assets” and “tangible common equity to tangible assets,” each adjusted for PPP loans (each non-GAAP), “Tier 1 leverage ratio excluding average PPP loans” (non-GAAP), “core net interest income” and “core net interest margin,” each adjusted for PPP loans and excess liquidity (each non-GAAP), and “loan yield excluding PPP loans” (non-GAAP).

The Company’s non-GAAP financial measures that exclude PPP loans or their impact include the ratios of “common equity to total assets” and “tangible common equity to tangible assets,” each adjusted for PPP loans (each non-GAAP), “Tier 1 leverage ratio excluding average PPP loans” (non-GAAP), “core net interest income” and “net interest margin,” each adjusted for PPP loans and excess liquidity (each non-GAAP), and “loan yield excluding PPP loans” (non-GAAP).

Management believes these non-GAAP presentations will assist investors and analysts in analyzing the core financial measures of the Company, including the performance of the Company’s loan portfolio and the Company’s regulatory capital position, and predicting future performance.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(In thousands, except per share data) 2020 2019 2020 2019

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(In thousands) 2020 2019 2020 2019

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Gain on sale of banking operations — — (8,093) —

Branch right sizing (370) — (370) —

Core other income (non-GAAP) $ 5,010 $ 44,721 $ 19,527 $ 54,942

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Reconciliation of Tangible Book Value per Common Share (non-GAAP)

June 30, December 31,

September 30, December 31,

(In thousands, except per share data) 2020 2019

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Reconciliation of Tangible Common Equity and the Ratio of Tangible Common Equity to Tangible Assets (non-GAAP)

June 30, December 31,

September 30, December 31,

(Dollars in thousands) 2020 2019

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Paycheck Protection Program (“PPP”) loans (970,488)

Total assets less PPP loans $ 20,939,972

Tangible assets less PPP loans $ 19,757,384

Total assets excluding PPP loans $ 20,466,907

Tangible assets excluding PPP loans $ 19,277,142

Ratio of common equity to assets 13.72 % 14.06 %

Ratio of tangible common equity to tangible assets (non-GAAP) 8.65 % 8.99 %

Ratio of common equity to assets less PPP loans (non-GAAP) 13.87 %

Ratio of tangible common equity to tangible assets less PPP loans (non-GAAP) 8.71 %

Ratio of common equity to assets excluding PPP loans (non-GAAP) 14.37 %

Ratio of tangible common equity to tangible assets excluding PPP loans (non-GAAP) 9.09 %

See Table 18 below for the calculation of Tier 1 leverage ratio excluding average PPP loans for the period presented.

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(Dollars in thousands) Three Months Ended

June 30, 2020

September 30, 2020

Total Tier 1 capital $ 1,868,173

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Average PPP loans (967,152)

Adjusted average assets less average PPP loans $ 20,097,652

Adjusted average assets excluding average PPP loans $ 19,685,302

Tier 1 leverage ratio 9.05 %

Tier 1 leverage ratio excluding average PPP loans (non-GAAP) 9.49 %

See Table 18 below for the calculation of core net interest margin and core net interest margin adjusted for PPP loans and additional liquidity for the periods presented.

See Table 19 below for the calculation of core net interest margin and net interest margin adjusted for PPP loans and excess liquidity for the periods presented.

Reconciliation of Core Net Interest Margin (non-GAAP)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(Dollars in thousands) 2020 2019 2020 2019

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PPP loan and excess liquidity interest income (6,131)

Core net interest income adjusted for PPP loans and additional liquidity

Net interest income adjusted for PPP loans and excess liquidity $ 150,343

Average earning assets – quarter-to-date $ 19,415,314 $ 15,680,665 $ 19,172,318 $ 15,174,671

Average PPP loan balance and additional liquidity (2,071,411)

Average earning assets adjusted for PPP loans and additional liquidity

Average PPP loan balance and excess liquidity (2,359,928)

Average earning assets adjusted for PPP loans and excess liquidity $ 17,055,386

Net interest margin 3.21 % 3.82 % 3.43 % 3.88 %

Core net interest margin (non-GAAP) 3.02 % 3.59 % 3.20 % 3.64 %

Core net interest margin adjusted for PPP loans and additional liquidity (non-GAAP)

Net interest margin adjusted for PPP loans and excess liquidity (non-GAAP) 3.51 %

See Table 20 below for the calculation of loan yield excluding PPP loans for the period presented.

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(Dollars in thousands) Three Months Ended

June 30, 2020

September 30, 2020

Loan interest income $ 163,379

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis