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Item 7. Management’s Discussion and Analysis

2022-03-09 compared with 2021-03-11 · 33 added, 31 removed, 329 unchanged (16% of the section changed)

3 unchanged sentences

The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, securities valuation and goodwill.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, securities valuation and goodwill.

Actual results could differ from those estimates.

1 unchanged sentence

The allowance for credit losses represents management's estimate of expected losses inherent within the existing loan portfolio.

The allowance for credit losses is increased by the provision for credit losses charged to expense and reduced by loans charged off, net of recoveries.

The allowance for credit losses is increased by the provision for credit losses charged to

expense and reduced by loans charged off, net of recoveries.

The allowance for credit losses is determined based on management's assessment of several factors:

reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions, nonperforming loans, and reasonable and supportable forecasts.

reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions, nonperforming loans, determination of acquired loans as purchase credit deteriorated, and reasonable and supportable forecasts.

Loans are individually evaluated when they do not share risk characteristics with other loans in the respective pool.

32 unchanged sentences

Net income for 2021 was $53.0 million, or $4.02 per share versus $53.8 million, or $3.93 per share for 2020.

The increase in 2020 net income is primarily due to an increase in net interest income related to full year impact of acquisition.

2019 net income includes the results from the acquisition of HopFed, Inc.

The decrease in 2021 net income is due to increased expenses from the Hancock acquisition, as well as declining interest rates.

Return on average assets at December 31, 2021 decreased 12.00% to 1.10% compared to 1.25% at December 31, 2020.

2 unchanged sentences

The principal source of the Corporation's earnings is net interest income, which represents the difference between interest earned on loans and investments and the interest cost associated with deposits and other sources of funding.

Net interest income increased in 2020 to $146.3 million compared to $131.7 million in 2019.

Net interest income decreased in 2021 to $143.4 million compared to $146.3 million in 2020.

Total average interest earning assets increased to $4.61 billion in 2021 from $3.71 billion in 2020.

The tax-equivalent yield on these assets decreased to 4.43% in 2020 from

4.79% in 2019.

The tax-equivalent yield on these assets decreased to 3.39% in 2021 from 4.43% in 2020.

Total average interest-bearing liabilities increased to $3.43 billion in 2021 from $2.98 billion in 2020.

12 unchanged sentences

Tax-exempt investments (2) 387,935 13,544 3.49 % 322,121 12,731 3.95 % 302,757 11,999 3.96 %

Cash and due from banks 726,412 888 0.12 % — — — % — — — %

Federal funds sold 4,487 42 0.94 % 1,245 71 5.70 % 3,029 143 4.72 %

35 unchanged sentences

Tax-exempt investment securities (2) 2,600 (1,484) (303) 813 767 (33) (2) 732

Cash and due from banks — — 888 888 — — — —

Federal funds sold 185 (59) (155) (29) (84) 30 (18) (72)

12 unchanged sentences

The analysis is governed by Accounting Standards Codification (ASC 326), implemented in 2020, which uses an economic forecast that includes the impact of the COVID-19 pandemic.

For the year ended December 31, 2020, the provision for credit losses was $10.5 million, an increase of $5.8 million, or 124%, compared to 2019.

Additional provisions were primarily recorded to accommodate anticipated losses from the pandemic.

For the year ended December 31, 2021, the provision for credit losses was $2.5 million, a decrease of $8.1 million, or 77%, compared to 2020.

In 2020, along with the adoption of CECL, $4 million was added to allowance to accommodate anticipated losses from the pandemic.

In 2021 when those losses became unrealized, the additional pandemic allowances were removed, as well as CECL performance requiring lower allowance for credit losses.

Continued loan growth in future periods, an increase in charge-offs, or a decline in our current level of recoveries could result in an increase in provision expense.

1 unchanged sentence

Net charge-offs for 2021 were $2.6 million as compared to $3.5 million for 2020 and $5.2 million for 2019.

Non-accrual loans, excluding TDR's, increased to $15.4 million at December 31, 2020 from $9.5 million at December 31, 2019.

Loans past due 90 days and still on accrual increased to $2.3 million compared to $1.6 million at December 31, 2019.

Non-accrual loans, excluding TDR's, decreased to $9.6 million at December 31, 2021 from $15.4 million at December 31, 2020.

Loans past due 90 days and still on accrual decreased to $515 thousand compared to $2.3 million at December 31, 2020.

NON-INTEREST INCOME

Non-interest income of $42.5 million increased $4.0 million from the $38.5 million earned in 2019.

Non-interest income increased primarily due to an increase in gains on sales of mortgage loans.

Non-interest income of $42.1 million decreased $392 thousand from the $42.5 million earned in 2020.

Non-interest income decreased due to a decrease in gains on sales of mortgage loans.

NON-INTEREST EXPENSES

Non-interest expenses increased to $117.4 million in 2021 from $112.8 million in 2020.

The increase was mainly due to a full year of increased expenses from the acquisition of HopFed, Inc.

Salaries and benefits, as well as equipment expense increases were due to recognizing a full year of expenses from the acquisition of HopFed, Inc.

The increase was mainly due to increased expenses from the acquisition of Hancock Bancorp, Inc.

The Corporation's federal income tax provision was $12.6 million in 2021 compared to $11.7 million in 2020.

The overall effective tax rate in 2020 of 17.8% decreased as compared to a 2019 effective rate of 20.0%.

The decrease is primarily due to increase of general business tax credits benefits earned in 2020.

The overall effective tax rate in 2021 of 19.2% increased as compared to a 2020 effective rate of 17.8%.

The increase is primarily due to increase of general business tax credits benefits earned in 2020.

COMPARISON OF 2020 TO 2019

Net income for 2020 was $53.8 million or $3.93 per share compared to $48.9 million in 2019 or $3.80 per share.

The increase in 2019 net income results from the acquisition of HopFed, Inc.

2018 net income includes the recovery of a security previously written down for other-than temporary impairment, which contributed $2.4 million pre-tax to interest income and $4.5 million pre-tax to other income.

The increase in 2020 net income is primarily due to an increase in net interest income related to full year impact of acquisition.

2019 net income includes the results from the acquisition of HopFed, Inc.

Net interest income increased $14.6 million in 2020 compared to 2019.

The provision for loan losses decreased $1.1 million from $5.8 million in 2018 to $4.7 million in 2019.

Non-interest expenses increased $13.1 million and non-interest income increased $246 thousand.

The provision for credit losses increased $5.8 million from $4.7 million in 2019 to $10.5 million in 2020.

Non-interest expenses increased $8.4 million and non-interest income increased $4.0 million.

The increase in non-interest expenses was largely due to the acquisition of HopFed, Inc.

The provision for income taxes increased $1.0 million from 2018 to 2019 and the effective tax rate increased to 20.0% in 2019 from 19.3% in 2018.

The provision for income taxes decreased $492 thousand from 2019 to 2020 and the effective tax rate decreased to 17.8% in 2020 from 20.0% in 2019.

The decrease is primarily due to increase of general business tax credits benefits earned in 2020.

COMPARISON AND DISCUSSION OF 2021 BALANCE SHEET TO 2020

1 unchanged sentence

Available-for-sale securities increased $344.0 million at December 31, 2021, from the previous year.

Loans, net decreased by $73.2 million to $2.56 billion.

Deposits increased $480.6 million while borrowings increased by $10.8 million.

Total shareholders' equity increased $39.4 million to $597.0 million at December 31, 2020.

Loans, net increased by $204.3 million to $2.77 billion.

Deposits increased $653.6 million while borrowings decreased by $12.6 million.

Total shareholders' equity decreased $14.4 million to $582.6 million at December 31, 2021.

In 2021 dividends paid by the Corporation totaled $1.06 per share.

3 unchanged sentences

During 2021 the portfolio's balance increased by 33.7%.

The average life of the portfolio decreased from 4.2 years in 2019 to 3.8 years in 2020.

The average life of the portfolio increased from 3.8 years in 2020 to 5.0 years in 2021.

The portfolio structure will continue to provide cash flows to be reinvested during 2022.

5 unchanged sentences

States and political subdivisions 5,358 3.27 % 34,438 2.97 % 75,506 2.68 % 303,422 2.57 % 418,724

Other securities 3,477 1.40 % 1,245 0.01 % 498 0.01 % — — % 5,220

Collateralized debt obligations — — % — — % — — % 3,359 — % 3,359

48 unchanged sentences

CECL adoption — 17,084 — — —

PCD ACL on acquired loans 4,410 — — — —

Balance at end of year $ 48,305 $ 44,076 $ 19,943 $ 20,436 $ 19,909

12 unchanged sentences

The calculation of historical losses used in the allowance computation averages the net charge off activity and qualitative factors that supplement historical losses and consider internal and external factors, including reasonable and supportable forecasts, that influence management's expectations of loss in the portfolio.

Non-performing loans of $20.7 million at December 31, 2020 increased from $15.3 million at December 31, 2019.

Non-performing loans of $14.9 million at December 31, 2021 decreased from $21.9 million at December 31, 2020.

Management believes the allowance for credit losses balance at year end 2021 is reasonable based on their analysis of specific loans and the credit trends reflected within the loan portfolio.

11 unchanged sentences

The amounts shown below represent non-accrual loans, loans which have been restructured to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower and those loans which are past due more than 90 days where the Corporation continues to accrue interest.

Restructured loans increased slightly in 2020 and decreased in 2019 due to the reduced number and balance of loans added combined with the continued receipt of payments in accordance with the restructuring terms.

Restructured loans increased in 2021 and in 2020 due to the increased number and balance of loans added combined with the continued receipt of payments in accordance with the restructuring terms.

Additional information regarding restructured loans is available in the footnotes to the financial statements.

41 unchanged sentences

Advances from the Federal Home Loan Bank decreased to $15.9 million in 2021 compared to $5.9 million in 2020.

In 2019 other borrowings included trust preferred securities acquired in the assumption of liabilities of HopFed, Inc.

totaling $10.2 million.

The Asset/Liability Committee reviews these funding sources and considers the related strategies on a monthly basis.

70 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis