Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the transition period from ____________ to _____________
Commission File Number: 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana
35-1559596
(State or Other Jurisdiction
(IRS Employer
of Incorporation or Organization)
Identification No.)
202 East Center Street,
Warsaw, Indiana
46580
(Address of principal executive offices)
(Zip Code)
(574) 267‑6144
(Registrant’s Telephone Number, Including Area Code)
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, No par value
LKFN
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.
Large accelerated filer ⌧ Accelerated filer ◻ Non-accelerated filer◻
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding at October 31, 2019: 25,623,016
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
1
Consolidated Balance Sheets — September 30, 2019 and December 31, 2018
Consolidated Statements of Income — three months and nine months ended September 30, 2019 and 2018
2
Consolidated Statements of Comprehensive Income — three months and nine months ended September 30, 2019 and 2018
3
Consolidated Statements of Changes in Stockholders’ Equity — three months and nine months ended September 30, 2019 and 2018
4
Consolidated Statements of Cash Flows — nine months ended September 30, 2019 and 2018
5
Notes to the Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
52
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
53
SIGNATURES
54
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
September 30,
December 31,
2019
2018
(Unaudited)
ASSETS
Cash and due from banks
$
90,442
192,290
Short-term investments
46,133
24,632
Total cash and cash equivalents
136,575
216,922
Securities available-for-sale (carried at fair value)
613,230
585,549
Real estate mortgage loans held-for-sale
7,424
2,293
Loans, net of allowance for loan losses of $50,628 and $48,453
3,972,593
3,866,292
Land, premises and equipment, net
59,631
58,097
Bank owned life insurance
83,153
77,106
Federal Reserve and Federal Home Loan Bank stock
13,772
Accrued interest receivable
15,823
15,518
Goodwill
4,970
Other assets
40,984
34,735
Total assets
4,948,155
4,875,254
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Noninterest bearing deposits
1,011,336
946,838
Interest bearing deposits
3,272,054
3,097,227
Total deposits
4,283,390
4,044,065
Borrowings
Securities sold under agreements to repurchase
0
75,555
Federal Home Loan Bank advances
170,000
Subordinated debentures
30,928
Total borrowings
276,483
Accrued interest payable
12,071
10,404
Other liabilities
37,330
22,598
Total liabilities
4,363,719
4,353,550
STOCKHOLDERS’ EQUITY
Common stock: 90,000,000 shares authorized, no par value 25,623,016 shares issued and 25,445,400 outstanding as of September 30, 2019 25,301,732 shares issued and 25,128,773 outstanding as of December 31, 2018
114,243
112,383
Retained earnings
460,736
419,179
Accumulated other comprehensive income (loss)
13,467
(6,191)
Treasury stock at cost (177,616 shares as of September 30, 2019, 172,959 shares as of December 31, 2018)
(4,099)
(3,756)
Total stockholders’ equity
584,347
521,615
Noncontrolling interest
89
Total equity
584,436
521,704
Total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (unaudited - in thousands, except share and per share data)
Three Months Ended
Nine Months Ended
NET INTEREST INCOME
Interest and fees on loans
Taxable
50,139
46,127
149,094
132,360
Tax exempt
234
208
720
627
Interest and dividends on securities
2,209
2,275
6,956
7,201
1,819
1,570
5,171
4,367
Other interest income
368
199
957
687
Total interest income
54,769
50,379
162,898
145,242
Interest on deposits
14,692
11,473
44,131
31,488
Interest on borrowings
Short-term
113
555
1,295
861
Long-term
419
426
1,307
1,212
Total interest expense
15,224
12,454
46,733
33,561
39,545
37,925
116,165
111,681
Provision for loan losses
1,000
1,100
2,985
6,100
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
38,545
36,825
113,180
105,581
NONINTEREST INCOME
Wealth advisory fees
1,736
1,627
5,002
4,676
Investment brokerage fees
386
376
1,300
1,043
Service charges on deposit accounts
3,654
4,114
12,791
11,542
Loan and service fees
2,518
2,327
7,403
6,925
Merchant card fee income
690
643
1,982
1,834
Bank owned life insurance income
515
466
1,246
1,177
Mortgage banking income
636
319
1,256
998
Net securities gains (losses)
94
(6)
Other income
624
752
2,804
2,036
Total noninterest income
10,765
10,624
33,878
30,225
NONINTEREST EXPENSE
Salaries and employee benefits
12,837
12,755
37,231
36,267
Net occupancy expense
1,351
1,229
4,000
3,892
Equipment costs
1,385
1,316
4,143
3,840
Data processing fees and supplies
2,620
2,489
7,619
7,292
Corporate and business development
999
891
3,376
3,070
FDIC insurance and other regulatory fees
(249)
412
566
1,282
Professional fees
1,479
934
3,487
2,716
Other expense
2,315
2,174
6,880
5,346
Total noninterest expense
22,737
22,200
67,302
63,705
INCOME BEFORE INCOME TAX EXPENSE
26,573
25,249
79,756
72,101
Income tax expense
5,119
4,679
14,907
13,053
NET INCOME
21,454
20,570
64,849
59,048
BASIC WEIGHTED AVERAGE COMMON SHARES
25,622,338
25,301,033
25,576,740
25,284,085
BASIC EARNINGS PER COMMON SHARE
0.84
0.81
2.54
2.33
DILUTED WEIGHTED AVERAGE COMMON SHARES
25,796,696
25,745,151
25,745,029
25,719,693
DILUTED EARNINGS PER COMMON SHARE
0.83
0.80
2.52
2.30
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited - in thousands)
Three months ended September 30,
Nine months ended September 30,
Net income
Other comprehensive income (loss)
Change in securities available for sale:
Unrealized holding gain (loss) on securities available-for-sale arising during the period
4,979
(4,576)
24,832
(15,978)
Reclassification adjustment for (gains) losses included in net income
(94)
Net securities gain (loss) activity during the period
4,973
24,738
(15,972)
Tax effect
(1,044)
960
(5,196)
3,459
Net of tax amount
3,929
(3,616)
19,542
(12,513)
Defined benefit pension plans:
Amortization of net actuarial loss
67
154
200
Net gain activity during the period
(13)
(17)
(38)
(52)
38
50
116
148
Total other comprehensive income (loss), net of tax
3,967
(3,566)
19,658
(12,365)
Comprehensive income
25,421
17,004
84,507
46,683
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - in thousands, except share and per share data)
Accumulated
Other
Total
Common Stock
Retained
Comprehensive
Treasury
Stockholders’
Noncontrolling
Shares
Stock
Earnings
Income (Loss)
Equity
Interest
Balance at July 1, 2018
25,126,537
109,223
390,404
(9,710)
(3,522)
486,395
486,484
Comprehensive income:
Other comprehensive loss, net of tax
Cash dividends declared, $0.26 per share
(6,580)
Treasury shares purchased under deferred directors’ plan
(3,891)
189
(189)
Stock activity under equity compensation plans
7,150
Stock based compensation expense
1,633
Balance at September 30, 2018
25,129,796
111,045
404,394
(13,276)
(3,711)
498,452
498,541
Balance at July 1, 2019
25,442,300
112,689
446,969
9,500
(3,884)
565,274
565,363
Other comprehensive income, net of tax
Cash dividends declared, $0.30 per share
(7,687)
(4,700)
215
(215)
7,800
(20)
1,359
Balance at September 30, 2019
25,445,400
Stockholders'
Balance at January 1, 2018
25,025,933
108,862
363,794
(670)
(3,408)
468,578
468,667
Adoption of ASU 2018-02
173
(173)
Adoption of ASU 2014-09
24
Adoption of ASU 2016-01
68
(68)
Cash dividends declared, $0.74 per share
(18,713)
Treasury shares purchased under deferred directors' plan
(8,602)
418
(418)
Treasury shares sold and distributed under deferred directors' plan
5,636
(115)
115
106,829
(2,435)
4,315
Balance at January 1, 2019
25,128,773
Adoption of ASU 2017-08 (See Note 1)
(1,327)
Cash dividends declared, $0.86 per share
(21,965)
Cashless exercise of warrants
224,066
(10,356)
461
(461)
5,699
(118)
118
97,218
(2,109)
3,626
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)
Nine Months Ended September 30
Cash flows from operating activities:
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
4,428
4,199
Net loss on sale and write down of other real estate owned
16
Amortization of loan servicing rights
379
Loans originated for sale
(43,510)
(38,926)
Net gain on sales of loans
(1,312)
(1,333)
Proceeds from sale of loans
39,013
39,448
Net (gain) loss on sales of premises and equipment
(2)
Net (gain) loss on sales and calls of securities available-for-sale
Net securities amortization
2,917
2,463
Earnings on life insurance
(1,246)
(1,177)
Gain on life insurance
(841)
(206)
Tax benefit of stock award issuances
(529)
(761)
Net change:
Interest receivable and other assets
(5,416)
(4,607)
Interest payable and other liabilities
6,638
6,180
Total adjustments
7,025
16,120
Net cash from operating activities
71,874
75,168
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale
38,544
12,322
Proceeds from maturities, calls and principal paydowns of securities available-for-sale
50,959
42,021
Purchases of securities available-for-sale
(91,704)
(100,702)
Purchase of life insurance
(5,492)
(371)
Net increase in total loans
(109,286)
(29,860)
Proceeds from sales of land, premises and equipment
14
29
Purchases of land, premises and equipment
(5,974)
(5,430)
Proceeds from sales of other real estate
21
Proceeds from life insurance
1,483
569
Net cash from investing activities
(121,456)
(81,401)
Cash flows from financing activities:
Net increase in total deposits
239,325
7,269
Net increase (decrease) in short-term borrowings
(75,555)
26,700
Net increase (decrease) in short-term FHLB borrowings
(170,000)
80,000
Payments on long-term FHLB borrowings
(80,030)
Common dividends paid
(21,952)
(18,700)
Preferred dividends paid
Payments related to equity incentive plans
Purchase of treasury stock
Net cash from financing activities
(30,765)
12,373
Net change in cash and cash equivalents
(80,347)
6,140
Cash and cash equivalents at beginning of the period
176,180
Cash and cash equivalents at end of the period
182,320
Cash paid during the period for:
45,066
31,130
Income taxes
14,825
13,033
Supplemental non-cash disclosures:
Loans transferred to other real estate owned
316
Securities purchases payable
4,892
4,018
Right-of-use assets obtained in exchange for lease liabilities
5,483
NOTE 1. BASIS OF PRESENTATION
This report is filed for Lakeland Financial Corporation (the "Company"), which has two wholly owned subsidiaries, Lake City Bank (the "Bank") and LCB Risk Management, a captive insurance company. Also included in this report is the Bank’s wholly owned subsidiary, LCB Investments II, Inc. ("LCB Investments"), which manages the Bank’s investment portfolio. LCB Investments owns LCB Funding, Inc. ("LCB Funding"), a real estate investment trust. All significant inter-company balances and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three-months and nine-months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2019. The Company’s 2018 Annual Report on Form 10-K should be read in conjunction with these statements.
Adoption of New Accounting Standards
The Company accounts for leases in accordance with ASU 2016-02, “Leases”, which the Company adopted on January 1, 2019. This guidance replaced existing lease guidance in GAAP and requires lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. Lessees and lessors are required to recognize and measure leases that exist at the beginning of the earliest period presented using a modified retrospective approach. The Company recorded a right-of-use asset of $5.5 million and a lease liability of $5.5 million upon adoption, and there was no cumulative period adjustment made to retained earnings. This standard did not have a material impact on the Company’s consolidated balance sheets or cash flows from operations and had no impact on the Company’s operating results. The most significant impact was the recognition of right-of-use assets and lease obligations for operating leases. The Company elected to adopt the package of practical expedients for this standard.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities.” This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB has shortened the amortization period for the premium to the earliest call date. Under legacy GAAP, entities generally amortized the premium as an adjustment of yield over the contractual life of the instrument. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company adopted this new accounting standard on January 1, 2019. The effect of adoption was a reduction in retained earnings of approximately $1.3 million, net of tax, to reflect the acceleration of amortization of premiums on available-for-sale debt securities.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”. The purpose of this updated guidance is to better align a company's financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted ASU 2017-12 on January 1, 2019. ASU 2017-12 required a modified retrospective transition method in which the Company recognized the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption. Adopting this standard did not have an impact on the Company’s financial condition or results of operations.
Newly Issued But Not Yet Effective Accounting Standards
In June 2016, the FASB issued guidance related to credit losses on financial instruments. This update, commonly referred to as the current expected credit losses methodology ("CECL"), will change the accounting for credit losses on loans and debt securities. Under the new guidance, the Company's measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. For loans, this measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. In addition, the guidance will modify the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which will
allow for reversal of credit impairments in future periods. This guidance is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years. This amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective.
The Company formed a cross-functional committee that has evaluated existing technology and other solutions to assist with calculating losses under this new standard, selected a vendor to validate data currently loaded in the technology solution, and reviewed the validation assessment report. Additionally, the committee has selected a probability of default/loss given default model, run parallel calculations and evaluated changes to the overall internal control structure under the new model. Upon adoption of this standard, the Company will recognize credit losses earlier than it historically has done under the current incurred credit loss model. The Company intends to utilize a one to two year reasonable and supportable forecast period.
Due to this change in methodology, the Company anticipates larger increases in credit loss allowances for its longer-lived retail portfolios and smaller increases for its shorter-lived commercial portfolio. Based upon the Company’s loan portfolio composition at September 30, 2019, and the current economic environment and management's current forecast and qualitative adjustment assumptions, we currently estimate a 5% - 15% increase in our allowance for credit losses upon adoption of this standard. The final effect of CECL on our allowance for credit losses will depend on the size and composition of our portfolio, the portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our model, methodology and other key assumptions. Additionally, we will evaluate the need to recognize an allowance for credit impairment for available-for-sale debt securities. The impact on available-for-sale debt securities will be subject to a limitation, which is based on the fair value of the debt securities. When evaluating the credit quality of our existing portfolio, we do not expect the allowance for credit impairment for available-for-sale securities to be significant.
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment." These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. Management does not expect the adoption of this new accounting standard to have a material impact on our financial statements.
Reclassifications
Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.
7
NOTE 2. SECURITIES
Information related to the fair value and amortized cost of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income is provided in the tables below.
Gross
Amortized
Unrealized
Fair
(dollars in thousands)
Cost
Gain
Losses
Value
September 30, 2019
U.S. Treasury securities
995
12
1,007
U.S. government sponsored agencies
2,303
2,308
Mortgage-backed securities: residential
291,427
5,217
(412)
296,232
Mortgage-backed securities: commercial
37,335
334
37,669
State and municipal securities
262,504
13,624
(114)
276,014
594,564
19,192
(526)
December 31, 2018
994
(7)
987
4,435
(85)
4,350
329,516
1,392
(5,496)
325,412
38,712
(571)
38,141
217,964
1,403
(2,708)
216,659
591,621
2,795
(8,867)
Information regarding the fair value and amortized cost of available-for-sale debt securities by maturity as of September 30, 2019 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.
Due in one year or less
4,003
4,013
Due after one year through five years
18,138
18,529
Due after five years through ten years
28,136
29,341
Due after ten years
215,525
227,446
265,802
279,329
Mortgage-backed securities
328,762
333,901
Total debt securities
Securities proceeds, gross gains and gross losses are presented below.
Sales of securities available-for-sale
Proceeds
12,725
Gross gains
13
151
Gross losses
(57)
(27)
Number of securities
31
22
In accordance with ASU No. 2017-08, purchase premiums for callable securities are amortized to the earliest call date and premiums on non-callable securities as well as discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives of mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.
8
Securities with carrying values of $61.3 million and $164.7 million were pledged as of September 30, 2019 and December 31, 2018, respectively, as collateral for securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law. The Company has no securities sold under agreements to repurchase or Federal Home Loan Bank borrowings as of September 30, 2019, causing the decline in pledged securities.
Information regarding securities with unrealized losses as of September 30, 2019 and December 31, 2018 is presented below. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.
Less than 12 months
12 months or more
20,200
84
19,456
328
39,656
7,103
105
2,761
9
9,864
114
Total temporarily impaired
27,303
22,217
337
49,520
526
85
11,619
217,182
5,484
228,801
5,496
571
26,229
124
85,982
2,584
112,211
2,708
37,848
136
346,642
8,731
384,490
8,867
The total number of securities with unrealized losses as of September 30, 2019 and December 31, 2018 is presented below.
Less than
12 months
or more
10
18
15
25
111
146
40
207
247
The following factors are considered in determining whether or not the impairment of these securities is other-than-temporary. In making this determination, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer, as well as the underlying fundamentals of the relevant market and the outlook for such market in the near future. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. Credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As of September 30, 2019 and December 31, 2018, all of the securities in the Company’s portfolio were backed by the U.S. government, government agencies, government sponsored entities or were A-rated or
better, except for certain non-local or local municipal securities, which are not rated. For the government, government agency, government-sponsored entity and municipal securities, management did not believe that there would be credit losses or that full principal would not be received. Management considers the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell, and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.
NOTE 3. LOANS
Commercial and industrial loans:
Working capital lines of credit loans
730,557
18.2
%
690,620
17.6
Non-working capital loans
701,773
17.4
714,759
18.3
Total commercial and industrial loans
1,432,330
35.6
1,405,379
35.9
Commercial real estate and multi-family residential loans:
Construction and land development loans
319,420
7.9
266,805
6.8
Owner occupied loans
556,536
13.8
586,325
15.0
Nonowner occupied loans
545,444
13.5
520,901
13.3
Multifamily loans
259,408
6.5
195,604
5.0
Total commercial real estate and multi-family residential loans
1,680,808
41.7
1,569,635
40.1
Agri-business and agricultural loans:
Loans secured by farmland
176,024
4.4
177,503
4.6
Loans for agricultural production
153,943
3.8
193,010
4.9
Total agri-business and agricultural loans
329,967
8.2
370,513
9.5
Other commercial loans
100,100
2.5
95,657
2.4
Total commercial loans
3,543,205
88.0
3,441,184
87.9
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans
187,404
185,822
4.7
Open end and junior lien loans
191,597
4.8
187,030
Residential construction and land development loans
11,774
0.3
16,226
0.4
Total consumer 1-4 family mortgage loans
390,775
9.7
389,078
9.9
Other consumer loans
90,631
2.3
86,064
2.2
Total consumer loans
481,406
12.0
475,142
12.1
Subtotal
4,024,611
100.0
3,916,326
Less: Allowance for loan losses
(50,628)
(48,453)
Net deferred loan fees
(1,390)
(1,581)
Loans, net
The recorded investment in loans does not include accrued interest.
The Company had $1.5 million in residential real estate loans in the process of foreclosure as of September 30, 2019, compared to $586,000 as of December 31, 2018.
NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY
The following tables present the activity in the allowance for loan losses by portfolio segment for the three-month periods ended September 30, 2019 and 2018:
Commercial
Real Estate
and
Agri-business
Consumer
Multifamily
1-4 Family
Industrial
Residential
Agricultural
Mortgage
Unallocated
Three Months Ended September 30, 2019
Beginning balance, July 1
25,024
15,492
3,906
355
2,153
289
3,345
50,564
943
474
(4)
28
(93)
(415)
Loans charged-off
(1,123)
(23)
(75)
(1,221)
Recoveries
133
44
83
23
285
Net loans charged-off
(990)
60
(936)
Ending balance
24,977
16,010
3,904
383
2,120
304
2,930
50,628
Three Months Ended September 30, 2018
22,524
14,954
4,585
464
1,953
266
2,960
47,706
952
140
(506)
321
62
(474)
(24)
(83)
(581)
69
(405)
(18)
(463)
23,071
15,101
4,084
441
2,256
276
3,114
48,343
The following tables present the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2019 and 2018:
Nine Months Ended September 30, 2019
Beginning balance, January 1
22,518
15,393
4,305
2,292
283
3,294
48,453
3,260
(407)
(172)
192
(364)
(1,223)
(110)
(256)
(1,589)
422
156
110
779
(801)
(171)
(810)
Nine Months Ended September 30, 2018
21,097
14,714
4,920
577
2,768
2,666
47,121
6,246
855
(850)
(136)
(541)
78
448
(4,891)
(491)
(31)
(273)
(5,686)
619
92
808
(4,272)
(468)
(181)
(4,878)
11
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2019 and December 31, 2018:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
9,231
702
90
405
10,428
Collectively evaluated for impairment
15,746
15,308
3,814
1,715
40,200
Total ending allowance balance
Loans:
Loans individually evaluated for impairment
20,123
4,919
430
2,608
28,080
Loans collectively evaluated for impairment
1,412,274
1,673,467
329,642
99,969
389,415
90,374
3,995,141
Total ending loans balance
1,432,397
1,678,386
330,072
392,023
4,023,221
8,552
921
73
457
26
10,029
13,966
14,472
4,232
1,835
257
38,424
19,734
4,266
433
2,240
26,717
1,385,604
1,562,899
370,174
95,520
388,053
85,778
3,888,028
1,405,338
1,567,165
370,607
390,293
85,822
3,914,745
The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2019:
Unpaid
Allowance for
Principal
Recorded
Loan Losses
Balance
Investment
Allocated
With no related allowance recorded:
251
250
4,189
2,110
3,424
3,244
603
Consumer 1‑4 family loans:
290
209
137
With an allowance recorded:
6,208
3,056
11,547
11,555
6,175
1,675
147
Consumer 1‑4 family mortgage loans:
1,618
1,622
352
641
640
30,730
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018:
3,284
1,889
1,773
1,527
583
502
220
9,691
6,694
2,602
11,099
11,151
5,950
291
142
2,938
2,448
150
1,517
1,518
45
32,194
The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2019:
Cash Basis
Average
Income
Recognized
165
1,394
3,266
211
6,313
12,088
96
1,676
1,625
27,738
123
The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2018:
955
2,027
19
17
41
1,903
503
244
4,019
6,385
37
307
2,183
1,374
46
20,270
108
The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2019:
203
1,292
39
2,112
141
6,375
143
81
11,536
326
1,840
1,634
34
145
25,983
651
542
The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2018:
992
1,831
48
77
2,443
194
2,878
4,371
42
506
1,473
1,112
27
16,785
218
197
The following table presents the aging of the recorded investment in past due loans as of September 30, 2019 by class of loans:
30‑89
Greater than
Total Past
Loans Not
Days
90 Days
Due and
Past Due
Nonaccrual
724,404
6,309
730,713
695,127
6,515
6,557
701,684
318,369
552,276
3,952
556,228
544,778
259,011
175,604
436
176,040
154,017
154,032
185,219
850
675
1,832
187,051
192,365
101
777
878
193,243
Residential construction loans
11,677
11,729
90,236
138
4,003,052
1,204
18,658
20,169
The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 by class of loans:
90 Days Past
Due and Still
Accruing
684,191
4,328
2,245
6,573
690,764
709,629
3,368
1,577
4,945
714,574
265,544
583,214
486
2,269
2,755
585,969
520,431
57
520,488
Multi-family loans
195,164
177,080
177,513
193,094
183,420
1,370
671
2,041
185,461
188,320
98
318
188,638
16,194
85,654
168
3,897,455
10,025
7,265
17,290
Troubled Debt Restructurings:
Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.7 million and $3.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2019 and December 31, 2018, respectively. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.
September 30
December 31
Accruing troubled debt restructured loans
5,975
8,016
Nonaccrual troubled debt restructured loans
3,422
4,384
Total troubled debt restructured loans
9,397
12,400
During the three months ended September 30, 2019, no loans were modified as troubled debt restructurings.
During the nine months ending September 30, 2019, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.
Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the period. One of the loans is for a commercial real estate building where the cash flow does not support the loan with a recorded investment of $533,000. The other loan is for commercial and industrial non-working capital purposes and this borrower had a recorded investment of $70,000 that was subsequently paid off prior to March 31, 2019. These concessions are not included in table below.
The following table presents loans by class modified as new troubled debt restructurings that occurred during the nine months ended September 30, 2019:
Modified Repayment Terms
Pre-Modification
Post-Modification
Extension
Outstanding
Period or
Number of
Range
Loans
(in months)
Troubled Debt Restructurings
For the three month and nine month periods ending September 30, 2019, the troubled debt restructurings described above did not impact the allowance for loan losses and no charge-offs were recorded.
During the three months ending September 30, 2018, two commercial and industrial loans were modified as troubled debt restructurings due to a modification of the repayment terms which delays principal repayment for an extended period of time. These concessions are included in the table below.
Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three-month period ended September 30, 2018. The loan to one of the borrowers is for a commercial real estate building where the collateral value and cash flows from the company occupying the building do not support the loan with a recorded investment of $852,000. The loan to another one of the borrowers is for a vacant commercial real estate building that does not generate cash flow to support the loan with a recorded investment of $321,000. The other loans are to a borrower for an investment in land for residential development which has not had sales activity to support loans with a recorded investment of $109,000. These troubled debt restructured loans with additional concessions decreased the allowance by $7,000 as a result of payments received during the period and resulted in no charge-offs for the three-month period ending September 30, 2018. These concessions are not included in the table below.
20
The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended September 30, 2018:
824
0-6
During the nine months ended September 30, 2018, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal. These concessions are included in the table below.
Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the nine-month period ended September 30, 2018. There were three commercial real estate loans with recorded investments totaling $1.3 million and three commercial and industrial loans with recorded investments totaling $1.4 million where the collateral value and/or cash flows do not support those loans. The other three loans are to borrowers for investments in land for residential development which have not had sales activity to support loans with a recorded investments totaling $593,000. These troubled debt restructured loans with additional concessions increased the allowance by $255,000 and resulted in no charge-offs for the nine-month period ending September 30, 2018. These concessions are not included in the table below.
The following table presents loans by class modified as new troubled debt restructurings that occurred during the nine months ended September 30, 2018:
600
2,244
387
198
239
4,253
4,252
0‑239
For the three-month period ended September 30, 2018, the troubled debt restructuring described above did not impact the allowance for loan losses and no charge-off was recorded. For the nine-month period ending September 30, 2018, the commercial real estate and multi-family residential troubled debt restructurings described above decreased the allowance for loan losses by $196,000, and resulted in charge-offs of $1.6 million. All other troubled debt restructurings described above had no impact to the allowance and no charge-offs were recorded for the nine month period ending September 30, 2018.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current
economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.
The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with Not Rated loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status.
As of September 30, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Special
Not
Pass
Mention
Substandard
Doubtful
Rated
635,786
56,133
38,538
256
655,100
19,066
22,364
5,154
516,448
16,162
23,618
542,717
1,456
605
163,731
11,055
1,254
143,123
10,909
49,839
1,830
135,382
11,067
181,399
16,036
74,338
3,411,196
114,781
88,986
408,258
As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
618,612
43,240
28,563
349
664,787
15,992
27,548
6,247
264,900
353
541,734
21,864
22,371
517,356
2,491
194,948
216
166,623
9,107
1,783
183,189
8,155
1,750
95,516
54,879
2,021
128,561
8,810
179,608
12,700
73,078
3,324,054
101,418
85,232
404,041
NOTE 5. FAIR VALUE DISCLOSURES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Securities: Securities available-for-sale are valued primarily by a third party pricing service. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).
The Company’s Finance Department, which is responsible for all accounting and SEC compliance, and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that determine the Company’s valuation policies and procedures. Both of these areas report directly to the Executive Vice President and Chief Financial Officer of the Company. For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two departments and the Executive Vice President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration. If there are new assets or liabilities that are determined to be Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board are made aware of such assets at their next scheduled meeting.
Securities pricing is obtained on securities from a third party pricing service and all security prices are tested annually against prices from another third party provider and reviewed with a market value price tolerance variance that varies by sector: municipal securities +/- 5%, government mbs/cmo +/- 3% and U.S. treasuries +/-1%. If any securities fall outside the tolerance threshold and have a variance of $100,000 or more, a determination of materiality is made for the amount over the threshold. Any security that would have a material threshold difference would be further investigated to determine why the variance exists and if any action is needed concerning the security pricing for that individual security. Changes in market value are reviewed monthly in aggregate by security type and any material differences are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.
Mortgage banking derivative: The fair values of mortgage banking derivatives are based on observable market data as of the measurement date (Level 2).
Interest rate swap derivatives: Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).
Impaired loans: Impaired loans with specific allocations of the allowance for loan losses are generally based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of impaired loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods (b) finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good (c) work in process inventory is typically discounted by 50-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) marketable securities are discounted by 10-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.
Mortgage servicing rights: As of September 30, 2019, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $4.7 million, none of which are currently impaired and therefore are carried at amortized cost. These residential mortgage loans have a weighted average interest rate of 3.94%, a weighted average maturity of 20 years and are secured by homes generally within the Company’s market area of Northern Indiana and Indianapolis. A valuation model is used to estimate fair value by stratifying the portfolios on the basis of certain risk characteristics, including loan type and interest rate. Impairment is
estimated based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income. The most significant assumption used to value MSRs is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At September 30, 2019, the constant prepayment speed (“PSA”) used was 65 and discount rate used was 9.4%. At December 31, 2018, the PSA used was 81 and the discount rate used was 9.4%.
Other real estate owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are reviewed by the Company’s internal appraisal officer. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable properties used to determine value. Such adjustments are usually significant and result in a Level 3 classification. In addition, the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Real estate mortgage loans held for sale: Real estate mortgage loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.
The table below presents the balances of assets measured at fair value on a recurring basis:
Fair Value Measurements Using
Assets
Level 1
Level 2
Level 3
at Fair Value
U.S. government sponsored agency securities
275,864
Total Securities
612,073
Mortgage banking derivative
393
Interest rate swap derivative
8,992
621,458
622,615
Liabilities
9,802
9,812
216,509
584,412
95
3,869
588,376
589,513
4,025
4,048
There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2019 and there were no transfers between Level 1 and Level 2 during 2018.
The fair value of Level 3 available for sale securities was immaterial to warrant additional recurring fair value disclosure.
The table below presents the balances of assets measured at fair value on a nonrecurring basis:
Impaired loans:
3,152
5,103
973
587
Total impaired loans
10,329
Other real estate owned
4,092
4,967
1,669
553
11,506
11,822
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2019:
Fair Value
Valuation Methodology
Unobservable Inputs
Range of Inputs
Commercial and industrial
8,255
Collateral based measurements
Discount to reflect current market conditions and ultimate collectability
-
100
Commercial real estate
30
Agri-business and agricultural
61
Consumer 1‑4 family mortgage
1,044
The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2018:
9,059
1,817
49
64
Discount to reflect current market conditions
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $20.4 million, with a valuation allowance of $10.1 million at September 30, 2019. The change in the fair value of impaired loans resulted in increases in the provision for loan losses of $600,000 and $500,000, respectively, over the nine months and three months ended September 30, 2019, respectively. At September 30, 2018, impaired loans had a gross carrying amount of $15.0 million, with a valuation allowance of $5.5 million. The change in the fair value of impaired loans resulted in a net increase in the provision for loan losses of $8.3 million and $3.8 million, respectively, in the nine months and three months ended September 30, 2018, respectively, primarily due to a partial charge-off on one commercial lending relationship in the amount of $4.6 million, during the first quarter of 2018.
The following table contains the estimated fair values and the related carrying values of the Company’s financial instruments. Items which are not financial instruments are not included.
Carrying
Estimated Fair Value
Financial Assets:
Cash and cash equivalents
133,799
2,776
Securities available-for-sale
Real estate mortgages held-for-sale
7,506
3,933,560
N/A
3,373
12,442
Financial Liabilities:
Certificates of deposit
(1,383,366)
(1,394,467)
All other deposits
(2,900,024)
(30,928)
(31,158)
Standby letters of credit
(926)
(12,071)
(92)
(11,975)
214,452
2,470
2,314
3,786,175
3,569
11,946
(1,419,754)
(1,424,553)
(2,624,311)
(169,996)
(31,195)
(978)
(10,404)
(10,289)
(5)
NOTE 6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase represent collateralized borrowings with customers located primarily within the Company’s service area. These repurchase liabilities are not covered by federal deposit insurance and are secured by securities owned. The Company retains the right to substitute similar type securities and has the right to withdraw all excess collateral applicable to the repurchase liabilities whenever the collateral values are in excess of the related repurchase liabilities. However, as a means of mitigating market risk, the Company maintains excess collateral to cover normal changes in the repurchase liability by monitoring daily usage. The Company maintains control of the securities through the use of third-party safekeeping arrangements.
There were no securities sold under agreements to repurchase at September 30, 2019. Securities sold under agreements to repurchase of $75.6 million, which matured on demand, were secured by mortgage-backed securities with a carrying amount of $100.7 million at December 31, 2018. Additional information concerning recognition of these liabilities is disclosed in Note 8.
NOTE 7. EMPLOYEE BENEFIT PLANS
Components of net periodic benefit cost:
Three Months Ended September 30,
Nine Months Ended September 30,
Pension Benefits
SERP Benefits
Service cost
Interest cost
66
70
Expected return on plan assets
(34)
(35)
(15)
(103)
(104)
(41)
(46)
Recognized net actuarial (gain) loss
33
99
55
Net pension expense (benefit)
The Company previously disclosed in its financial statements for the year ended December 31, 2018 that it expected to contribute $0 to its pension plan and $0 to its Supplemental Executive Retirement Plan ("SERP") in 2019. The Company has contributed $27,000 to its pension plan and $0 to its SERP as of September 30, 2019. The contribution to the pension plan was made in order to keep the plan fully funded, based upon the final actuarial calculation. The Company does not expect to make any additional contributions to its pension plan or SERP during the remainder of 2019. As a result of freezing the plan effective April 1, 2000, there is no service cost to record on the pension plan or the SERP for the nine-month periods ending September 30, 2019 and 2018. All other components of cost noted in the table above were recorded in other expense under noninterest expenses on the Consolidated Statements of Income for all periods presented.
NOTE 8. OFFSETTING ASSETS AND LIABILITIES
The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to an enforceable master netting arrangement at September 30, 2019 and December 31, 2018.
Amounts
Net Amounts
Gross Amounts Not
Amounts of
Offset in the
presented in
Offset in the Statement
Statement of
the Statement
of Financial Position
Assets/
Financial
of Financial
Cash Collateral
Position
Instruments
Net
Interest Rate Swap Derivatives
Total Assets
(10,260)
(458)
Repurchase Agreements
Total Liabilities
Cash
(760)
3,109
(560)
3,465
79,580
If an event of default occurs causing an early termination of an interest rate swap derivative, any early termination amount payable to one party by the other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.
NOTE 9. EARNINGS PER SHARE
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period, including shares held in treasury on behalf of participants in the Company’s Directors Fee Deferral Plan. Diluted
earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, stock awards and warrants, none of which were antidilutive.
Weighted average shares outstanding for basic earnings per common share
Dilutive effect of stock options, awards and warrants
174,358
444,118
168,289
435,608
Weighted average shares outstanding for diluted earnings per common share
Basic earnings per common share
Diluted earnings per common share
NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) net of tax for the three months ended September 30, 2019 and 2018:
Gains and
Defined
(Losses) on
Benefit
Available-
Pension
for-Sales
Gains
Securities
(Losses)
10,818
(1,318)
Other comprehensive income before reclassification
3,935
Amounts reclassified from accumulated other comprehensive income (loss)
32
Net current period other comprehensive income
14,747
(1,280)
(8,041)
(1,669)
(11,657)
(1,619)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) net of tax for the nine months ended September 30, 2019 and 2018:
(4,796)
(1,395)
19,636
14,746
(1,279)
784
(1,454)
(12,519)
Adoption of ASU 2018‑02
(313)
Adoption of ASU 2016‑01
Reclassifications out of accumulated comprehensive income for the three months ended September 30, 2019 are as follows:
Details about
Amount
Affected Line Item
Accumulated Other
Reclassified From
in the Statement
Where Net
Income Components
Comprehensive Income
Income is Presented
Unrealized gains and losses on available-for-sale securities
Net of tax
Amortization of defined benefit pension items
(51)
Total reclassifications for the period
(32)
Reclassifications out of accumulated comprehensive income for the three months ended September 30, 2018 are as follows:
(67)
(50)
Reclassifications out of accumulated comprehensive income for the nine months ended September 30, 2019 are as follows:
(154)
(116)
(22)
Reclassifications out of accumulated comprehensive income for the nine months ended September 30, 2018 are as follows:
(200)
(148)
NOTE 11. LEASES
The Company leases certain office facilities under long-term operating lease agreements. The leases expire at various dates through 2029 and some include renewal options. Many of these leases require the payment of property taxes, insurance premiums, maintenance, utilities and other costs. In many cases, rentals are subject to increase in relation to a cost-of-living index. The Company accounts for lease and non-lease components together as a single lease component. The Company determines if an arrangement is a lease at inception. Operating leases are recorded as a right-of-use ("ROU") lease assets and are included in other assets on the consolidated balance sheet. The Company's corresponding lease obligations are included in other liabilities on the consolidated
balance sheet. ROU lease assets represent the Company's right to use an underlying asset for the lease term and lease obligations represent the Company's obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Short-term leases are leases having a term of twelve months or less. The Company recognizes short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases, as allowed as practical expedient of the standard. The following is a maturity analysis of the operating lease liabilities as of September 30, 2019:
Operating lease
Years ending December 31, (in thousands)
Obligation
2020
561
2021
581
2022
595
2023
606
2024 - 2029
3,495
Total undiscounted lease payments
5,974
Less imputed interest
(773)
Lease liability
5,201
Right-of-use asset
Three months ended
Nine months ended
Lease cost
Operating lease cost
128
372
Short-term lease cost
Total lease cost
134
390
Other information
Operating cash outflows from operating leases
Weighted-average remaining lease term - operating leases
10.1 years
Weighted average discount rate - operating leases
2.8
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income in the first nine months of 2019 was $64.8 million, up 9.8% from $59.0 million for the comparable period of 2018. Diluted income per common share was $2.52 in the first nine months of 2019, up 9.6% from $2.30 in the comparable period of 2018. Annualized return on average total equity was 15.68% in the first nine months of 2019 versus 16.42% in the comparable period of 2018. Average equity increased at a faster pace than net income in 2019 due to an increase in the fair value adjustment for investment securities, net of tax, which increases equity but does not affect net income. Annualized return on average total assets was 1.76% in the first nine months of 2019 versus 1.67% in the comparable period of 2018. The average equity to average assets ratio was 11.22% in the first nine months of 2019 versus 10.16% in the comparable period of 2018.
Net income in the third quarter of 2019 was $21.5 million, up 4.3% from $20.6 million for the comparable period of 2018. Diluted income per common share was $0.83 in the third quarter of 2019, up 3.8% from $0.80 in the comparable period of 2018. Return on average total equity was 14.78% in the third quarter of 2019 versus 16.55% in the comparable period of 2018. Return on average total assets was 1.72% in the third quarters of 2019 and 2018. The average equity to average assets ratio was 11.65% in the third quarter of 2019 versus 10.38% in the comparable period of 2018.
Total assets were $4.948 billion as of September 30, 2019 versus $4.875 billion as of December 31, 2018, an increase of $72.9 million, or 1.5%. This increase was primarily due to a $106.3 million increase in net loans as well as a $27.7 million increase in securities available-for-sale and an increase in bank owned life insurance of $6.0 million, offset by a $80.3 million decrease in cash and cash equivalents. Balance sheet growth was primarily funded through growth in net income during 2019. Total deposits increased by $239.3 million while total borrowings decreased by $245.6 million. Securities sold under agreements to repurchase declined by $75.6 million to zero at September 30, 2019. Total equity increased by $62.7 million as a result of net income of $64.8 million as well as an increase in accumulated other comprehensive income of $19.7 million offset by dividends declared of $0.86 per share totaling $22.0 million.
CRITICAL ACCOUNTING POLICIES
Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation and other-than-temporary impairment of investment securities.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to provide for probable incurred credit losses. Loan losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for loan losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the loan loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.
The level of loan loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision.
The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for loan losses that generally includes
consideration of the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. With respect to specific allocation levels for individual credits, management considers the current valuation of collateral and the amounts and timing of expected future cash flows as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, allocations are assigned based upon historical experience unless the rate of loss is expected to be greater than historical losses as noted below. A detailed analysis is performed on loans that are classified but determined not to be impaired which incorporates different scenarios where the risk that the borrower will be unable or unwilling to repay its debt in full or on time is combined with an estimate of loss in the event the borrower cannot pay to develop non-specific allocations for such loan pools. These allocations may be adjusted based on the other factors cited above. An appropriate level of general allowance for pooled loans is determined after considering the following: application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentration, new industry lending activity and general economic conditions. It is also possible that the following could affect the overall process: social, political, economic and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover probable losses inherent in the loan portfolio.
Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a consensus is reached by credit administration and the loan review officer. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate the loan is impaired. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) does the customer’s cash flow or net worth appear insufficient to repay the loan; (b) is there adequate collateral to repay the loan; (c) has the loan been criticized in a regulatory examination; (d) is the loan impaired; (e) are there other reasons where the ultimate collectability of the loan is in question; or (f) are there unique loan characteristics that require special monitoring.
Allocations are also applied to categories of loans considered not to be individually impaired, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. In addition, general allocations are made for other pools of loans, including non-classified loans. These general pooled loan allocations are performed for portfolio segments of commercial and industrial, commercial real estate and multi-family, agri-business and agricultural, other commercial, consumer 1-4 family mortgage and other consumer loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a three-year historical average for loan losses for these portfolios, and are subjectively adjusted for economic factors and portfolio trends.
Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes an unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends and trends in the composition of the Company’s large commercial loan portfolio and related large dollar exposures to individual borrowers.
Valuation and Other-Than-Temporary Impairment of Investment Securities
The fair values of securities available-for-sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models, which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Different judgments and assumptions used in pricing could result in different estimates of value. The fair value of certain securities is determined using unobservable inputs, primarily observable inputs of similar securities.
At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with current accounting guidance. Impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received.
36
Significant judgments are required in determining impairment, which includes making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.
We consider the following factors when determining other-than-temporary impairment for a security or investment:
The assessment of whether a decline exists that is other-than-temporary, involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. If, in management’s judgment, other-than-temporary impairment exists, the cost basis of the security will be written down to the computed net present value, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings (as if the loss had been realized in the period of other-than-temporary impairment).
RESULTS OF OPERATIONS
Overview
Selected income statement information for the three months and nine months ended September 30, 2019 and 2018 is presented in the following table:
Income Statement Summary:
Net interest income
Noninterest income
Noninterest expense
Other Data:
Efficiency ratio (1)
45.19
45.51
44.86
44.81
Dilutive EPS
Tangible capital ratio (2)
11.74
10.41
Net charge-offs/(recoveries) to average loans
0.09
0.05
0.03
0.17
Net interest margin
3.38
3.42
3.40
Noninterest income to total revenue
21.40
21.88
22.58
21.30
See reconciliation below.
Total Equity
Less: Goodwill
(4,970)
Plus: Deferred tax assets related to goodwill
1,191
1,180
Tangible Common Equity
580,657
494,751
4,757,619
Tangible Assets
4,944,376
4,753,829
Tangible Common Equity/Tangible Assets
Net Income
Net income was $64.8 million in the first nine months of 2019, an increase of $5.8 million, or 9.8%, versus net income of $59.0 million in the first nine months of 2018. The growth in net income of $5.8 million for the first nine months of 2019 as compared to the prior year period resulted primarily from growth in net interest income of $4.5 million, growth in noninterest income of $3.7 million and a decrease in provision expenses of $3.1 million. These increases were offset by an increase in noninterest expense of $3.6 million and an increase in income tax expense of $1.9 million.
Net income was $21.5 million in the third quarter of 2019, an increase of $884,000, or 4.3%, versus net income of $20.6 million in the third quarter of 2018. The increase was driven by growth in net interest income of $1.6 million, an increase in noninterest income of $141,000 and a decrease in provision expense of $100,000. These increases were offset by increased noninterest expense of $537,000 and an increase in income tax expense of $440,000.
Net Interest Income
The following tables set forth consolidated information regarding average balances and rates:
Yield (1)/
(fully tax equivalent basis, dollars in thousands)
Rate
Earning Assets
Taxable (2)(3)
3,940,812
5.06
3,799,844
4.66
Tax exempt (1)
24,585
897
4.88
23,309
783
4.49
Investments: (1)
Available for sale
601,098
13,501
3.00
558,784
12,729
3.05
6,751
2.26
4,042
1.12
52,574
843
2.14
54,514
653
1.60
Total earning assets
4,625,820
164,449
4.75
4,440,493
146,559
4.41
(49,829)
(47,276)
Nonearning Assets
137,700
140,698
Premises and equipment
58,910
56,615
Other nonearning assets
155,795
141,239
4,928,396
4,731,769
Interest Bearing Liabilities
Savings deposits
241,322
205
0.11
260,387
255
0.13
Interest bearing checking accounts
1,636,757
20,242
1.65
1,475,695
1.13
Time deposits:
In denominations under $100,000
276,283
3,914
1.89
263,384
2,849
1.45
In denominations over $100,000
1,142,633
19,770
2.31
1,229,302
15,942
1.73
Miscellaneous short-term borrowings
80,843
120,231
0.96
Long-term borrowings and subordinated debentures
5.65
30,930
5.24
Total interest bearing liabilities
3,408,766
1.83
3,379,929
1.33
Noninterest Bearing Liabilities
Demand deposits
923,253
841,797
43,411
29,147
Stockholders’ Equity
552,966
480,896
Total liabilities and stockholders’ equity
Interest Margin Recap
Interest income/average earning assets
Interest expense/average earning assets
1.35
1.01
Net interest income and margin
117,716
112,998
3,991,572
4.98
3,814,831
4.80
24,201
292
4.78
22,764
4.48
614,784
4,509
2.91
569,567
4,263
2.97
3,478
3,480
64,902
2.15
40,807
185
1.80
4,698,937
55,308
4.67
4,451,449
50,846
4.53
(50,732)
(48,137)
77,921
144,605
59,268
57,545
156,109
143,491
4,941,503
4,748,953
235,957
0.10
253,244
79
0.12
1,667,690
6,712
1,407,460
4,455
1.26
278,598
1,383
1.97
270,480
1,055
1.55
1,124,393
6,535
1,235,951
5,884
18,870
2.38
165,520
5.37
5.46
3,356,436
3,363,583
1.47
961,070
858,263
48,132
33,962
575,865
493,145
1.29
1.11
40,084
38,392
Net interest income increased $4.5 million, or 4.0%, for the nine months ended September 30, 2019 compared with the first nine months of 2018. The increased level of net interest income during the first nine months of 2019 was largely driven by an increase in average earning assets of $185.3 million, due primarily to loan growth of $142.2 million and growth in investment securities of $42.3 million. Average loans outstanding increased $142.2 million to $3.965 billion during the nine months ended September 30, 2019 compared to $3.823 billion during the same period of 2018, with most of the growth being in commercial loans. The earning
asset growth was funded through an increase in deposits. Average deposits increased $149.7 million to $4.220 billion during the nine months ended September 30, 2019 compared to $4.071 billion for the same period of 2018. During this same period average core deposits increased $200.2 million and average brokered deposits decreased $50.5 million. We define "core deposits" as total deposits (including all deposits by municipalities and other government agencies), excluding only brokered deposits. Average borrowings decreased by $39.4 million to $111.8 million in the nine months ended September 30, 2019, compared to $151.2 million during the same period of 2018.
The tax equivalent net interest margin was 3.40% for the first nine months of 2019 and 2018. The yield on earning assets totaled 4.75% during the nine months ended September 30, 2019 compared to 4.41% in the same period of 2018. Cost of funds (expressed as a percentage of average earning assets) totaled 1.35% during the first nine months of 2019 compared to 1.01% in the same period of 2018.
Average earning assets increased by $247.5 million for the three months ended September 30, 2019 compared with the same period of 2018. Average loans outstanding increased $178.2 million during the three months ended September 30, 2019 compared with the same period of 2018, with most of the growth being in commercial loans. In addition, investment securities increased by $45.2 million. The earning asset growth was funded through deposit growth offset by a decrease in borrowings. Average interest bearing deposits increased by $139.5 million, average noninterest bearing demand deposits increased by $102.8 million and average borrowings decreased by $146.7 million.
The tax equivalent net interest margin was 3.38% for the third quarter of 2019 compared to 3.42% during the third quarter of 2018. The decline in net interest margin during the third quarter of 2019 as compared to the prior year period resulted from increased costs of deposits that were not fully absorbed by increases in earning assets. The yield on earning assets totaled 4.67% during the third quarter of 2019 compared to 4.53% in the same period of 2018, while the cost of funds (expressed as a percentage of average earning assets) totaled 1.29% during the third quarter of 2019 compared to 1.11% in the same period of 2018.
Provision for Loan Losses
The Company recorded a provision for loan loss expense of $3.0 million and $1.0 million, respectively, in the nine-month and three-month periods ended September 30, 2019, compared to a provision of $6.1 million and $1.1 million, respectively, during the comparable periods of 2018. The primary factors impacting management’s decision to record a lower the provision in the first nine months of 2019 were lower net charge-offs during the first nine months of 2019 versus the comparable period of 2018. Net charge-offs were $810,000 and $936,000, respectively, in the nine-month and three month periods ended September 30, 2019, compared to $4.9 million and $463,000 respectively, during the comparable periods of 2018. Additional factors considered by management included the continued stability in key loan quality metrics, including appropriate reserve coverage of nonperforming loans and stable economic conditions in the Company’s markets, and changes in the allocation for specific watch list credits. Management’s overall view on current credit quality was also a factor in the determination of the provision for loan losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans.
Noninterest Income
Noninterest income categories for the nine month and three-month periods ended September 30, 2019 and 2018 are shown in the following tables:
Dollar
Percent
Change
7.0
24.6
1,249
10.8
478
6.9
8.1
5.9
258
25.9
NA
768
37.7
3,653
109
6.7
2.7
(460)
(11.2)
191
47
7.3
10.5
317
99.4
(128)
(17.0)
1.3
The Company’s noninterest income increased $3.7 million, or 12.1%, to $33.9 million for the nine months ended September 30, 2019, compared to $30.2 million for the prior period. Noninterest income was positively impacted by a $1.2 million increase over the prior year period in fee income for service charges on deposit accounts. In addition, due to continued growth in client relationships, loan and service fees increased $478,000, wealth advisory fees increased by $326,000, mortgage banking income increased by $258,000 and investment brokerage fees increased $257,000. Other income increased primarily due to a gain related to proceeds from bank owned life insurance.
The Company’s noninterest income increased $141,000, or 1.3%, to $10.8 million for the third quarter of 2019, compared to $10.6 million for the third quarter of 2018. Mortgage banking income increased $317,000, driven by mortgage refinance volumes. Loan and service fees increased $191,000 and wealth advisory fees increased $109,000. Offsetting the increases was a decrease of $460,000 in service charges on deposit accounts driven by lower treasury management fees due to the discontinuance of a treasury management relationship in July, 2019. Third quarter service charges on deposits included approximately $789,000 of fees from the previously disclosed discontinued treasury management relationship as June fees were collected in July, 2019.
Noninterest Expense
Noninterest expense categories for the nine month and three-month periods ended September 30, 2019 and 2018 are shown in the following tables:
964
303
327
4.5
306
10.0
(716)
(55.9)
771
28.4
1,534
28.7
3,597
5.6
The Company’s noninterest expense increased by $3.6 million, or 5.6%, to $67.3 million in the first nine months of 2019 compared to $63.7 million in the prior year period. The increase was driven by salaries and employee benefits, which increased by 2.7%, or $964,000, primarily due to staffing increases in revenue producing areas and normal merit increases. Other expense increased by $1.5 million or 28.7% to $6.9 million from $5.3 million in the nine month period ended September 30, 2019. Professional fees increased $771,000 driven by higher legal fees and costs related to CECL implementation. Data processing fees increased $327,000 as a result of the Company’s continued investment in technology driven solutions. Offsetting these increases was a decrease in FDIC insurance and regulatory fees driven by credits received against the Banks’s FDIC deposit insurance assessment. In the third quarter of 2019, the FDIC announced that due to the reserve ratio exceeding 1.38%, banks with consolidated assets of under $10 billion would be receiving credits against their deposit insurance assessments. The Company anticipates receiving a total of $1.1 million in credits which will be fully utilized in the first quarter of 2020.
82
0.6
122
5.2
131
5.3
(661)
(160.4)
545
58.4
537
The Company’s noninterest expense increased $537,000, or 2.4%, to $22.7 million in the third quarter of 2019, compared to $22.2 million in the third quarter of 2018. Professional fees increased $545,000 driven by higher legal fees and costs related to CECL implementation. Data processing fees increased $131,000 as a result of the Company’s continued investment in technology driven solutions. Net occupancy expense increased $122,000 due to higher depreciation and rent expense related to new branch locations as well as remodeling and improvements made to existing branches and other offices. Offsetting these increases was a $661,000 decrease in FDIC insurance and other regulatory fees driven by the credits received against the Bank’s FDIC assessment.
43
The Company’s income tax expense increased $1.9 million and $440,000, respectively, in the nine-month and three-month periods ended September 30, 2019, compared to the same periods in 2018. The effective tax rate was 18.7% and 19.3%, respectively, in the nine-month and three-month periods ended September 30, 2019, compared to 18.1% and 18.5% for the comparable periods of 2018. The year to date effective tax rate for 2019 increased as compared to the prior year period primarily due to a reduced benefit related to employee long-term incentive stock awards.
FINANCIAL CONDITION
Total assets of the Company were $4.948 billion as of September 30, 2019, an increase of $72.9 million, or 1.5%, when compared to $4.875 billion as of December 31, 2018. Overall asset growth was primarily driven by a $106.3 million, or 2.8%, increase in net loans to $3.973 billion at September 30, 2019 from $3.866 billion December 31, 2018 and an increase of $27.7 million or 4.7% in securities available for sale to $613.2 million at September 30, 2019 from $585.5 billion at December 31, 2018. Offsetting these increases was a $80.3 million, or 37.0%, decrease in cash and cash equivalents. Total deposits increased $239.3 million while total borrowings decreased by $245.6 million. The increase is deposits was primarily driven by growth in core deposits of $287.5 million offset by a decrease in wholesale funding of $48.2 million. Core deposits were $4.167 billion as of September 30, 2019, an increase of $287.5 million, or 7.4%, when compared to $3.879 billion as of December 31, 2018. Additionally, commercial deposits increased by $231.9 million, or 21.6%, to $1.307 billion at September 30, 2019 compared to $1.075 billion at December 31, 2018.
Uses of Funds
Total Cash and Cash Equivalents
Total cash and cash equivalents decreased by $80.3 million, or 37% to $136.6 million at September 30, 2019, from $216.9 million at December 31, 2018. Cash and cash equivalents at December 31, 2018 reflect larger items in the process of clearing such as public funds checks outstanding for matured certificates of deposit which were distributed in the form of checks. Short-term investments include cash on deposit that earn interest such as excess liquidity maintained at the Federal Reserve Bank. Cash and cash equivalents balances will vary depending on the cyclical nature of the bank’s liquidity position.
Investment Portfolio
The amortized cost and the fair value of securities as of September 30, 2019 and December 31, 2018 were as follows:
At September 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. government, government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity. Management is aware that, as interest rates rise, any unrealized loss in the investment portfolio will increase, and as interest rates fall the unrealized gain in the investment portfolio will rise. Since the majority of the bonds in the investment portfolio are fixed-rate, with only a few adjustable-rate bonds, we would expect our investment portfolio to follow this market value pattern. This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for other-than-temporary impairment.
Purchases of securities available for sale totaled $91.7 million in the first nine months of 2019. The purchases consisted primarily of state and municipal securities and purchases of mortgage-backed securities issued by government sponsored entities. Paydowns from prepayments and scheduled payments of $37.0 million were received in the first nine months of 2019, and the
amortization of premiums, net of the accretion of discounts, was $2.9 million. Sales of securities totaled $38.5 million in the first nine months of 2019. Maturities and calls of securities totaled $14.0 million in the first nine months of 2019, as well as increased prepayment assumptions. The increase in the amortization of premiums, net of the accretion of discounts was primarily driven by the adoption of ASU 2017-08 on January 1, 2019, as well as the increase in prepayments that have resulted from decreased interest rates. No other-than-temporary impairment was recognized in the first nine months of 2019.
Purchases of securities available for sale totaled $100.7 million in the first nine months of 2018. The purchases consisted primarily of mortgage-backed securities issued by government sponsored entities and also purchases of state and municipal securities. Paydowns from prepayments and scheduled payments of $32.1 million were received in the first nine months of 2018, and the amortization of premiums, net of the accretion of discounts, was $2.5 million. Sales of securities totaled $12.3 million in the first nine months of 2018. Maturities and calls of securities totaled $9.9 million in the first nine months of 2018. No other-than-temporary impairment was recognized in the first nine months of 2018.
The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio to an acceptable level. The Company does not trade or invest in or sponsor certain unregistered investment companies defined as hedge funds and private equity funds under what is commonly referred to as the “Volcker Rule” of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Real Estate Mortgage Loans Held-for-Sale
Real estate mortgage loans held-for-sale increased by $5.1 million, or 223.8%, to $7.4 million at September 30, 2019, from $2.3 million at December 31, 2018. The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company generally sells all of the qualifying mortgage loans it originates on the secondary market. Proceeds from sales totaled $39.0 million in the first nine months of 2019 compared to $39.4 million in the first nine months of 2018.
Loan Portfolio
The loan portfolio by portfolio segment as of September 30, 2019 and December 31, 2018 is summarized as follows:
Current
Period
Commercial and industrial loans
26,951
Commercial real estate and multi-family residential loans
111,173
Agri-business and agricultural loans
(40,546)
4,443
Consumer 1‑4 family mortgage loans
1,697
4,567
Subtotal, gross loans
108,285
(2,175)
106,301
Total loans, excluding real estate mortgage loans held for sale and deferred fees, increased by $108.3 million to $4.025 billion at September 30, 2019 from $3.916 billion at December 31, 2018. The increase was concentrated in the commercial real estate and commercial and industrial categories and reflects the Company’s long standing strategic plan that is focused on expanding and growing the commercial lending business throughout our market areas. The increase was partially offset by loan repayments in agri-business and agricultural loans which have declined since year-end due to seasonal loan repayments as well as declines in volume due to the impact of the flattened yield curve and clients opting for long-term fixed rate financing from other financial services firms.
The following table summarizes the Company’s non-performing assets as of September 30, 2019 and December 31, 2018:
Nonaccrual loans including nonaccrual troubled debt restructured loans
18,657
7,260
Loans past due over 90 days and still accruing
Total nonperforming loans
18,963
Repossessions
Total nonperforming assets
19,286
7,576
Impaired loans including troubled debt restructurings
28,070
26,661
Nonperforming loans to total loans
0.47
0.19
Nonperforming assets to total assets
0.39
0.16
Performing troubled debt restructured loans
Nonperforming troubled debt restructured loans (included in nonaccrual loans)
Total nonperforming assets increased by $11.7 million, or 154.6%, to $19.3 million during the nine-month period ended September 30, 2019. The increase in nonperforming assets was primarily due to four commercial relationships being placed in nonaccrual status.
A loan is impaired when full payment under the original loan terms is not expected. Impairment for smaller loans that are similar in nature and which are not in nonaccrual or troubled debt restructured status, such as residential mortgage, consumer, and credit card loans, is determined based on the class of loans and impairment is determined on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral.
Total impaired loans increased by $1.4 million, or 5.3%, to $28.1 million at September 30, 2019 from $26.7 million at December 31, 2018. The increase in the impaired loans category was primarily due to the increase in nonaccrual loans.
Loans are charged against the allowance for loan losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other probable incurred losses inherent in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of general allowance is determined after considering the following factors: application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention applies to loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for loan losses for any assets where management has identified conditions or circumstances that indicate an asset is impaired. If an asset or portion thereof is classified as a loss, the Company’s policy is to either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.
At September 30, 2019, the allowance for loan losses was 1.26% of total loans outstanding, versus 1.24% of total loans outstanding at December 31, 2018. At September 30, 2019, management believed the allowance for loan losses was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions do not remain stable, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the allowance for loan losses. The process of identifying probable incurred credit losses is a subjective process. Therefore,
the Company maintains a general allowance to cover probable credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.
The Company has a relatively high percentage of commercial and commercial real estate loans, most of which are extended to small or medium-sized businesses from a wide variety of industries. Generally, this type of lending has more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and market area.
As of September 30, 2019, on the basis of management’s review of the loan portfolio, the Company had 94 credits totaling $202.9 million on the classified loan list versus 91 credits totaling $186.6 million on December 31, 2018. The increased in classified loans for the first nine months of 2019 resulted primarily from three commercial borrowers. As of September 30, 2019, the Company had $114.8 million of assets classified as Special Mention, $89.0 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $101.4 million, $85.2 million, $0 and $0, respectively, at December 31, 2018.
Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions. The Company has regular discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio and are applied to individual loans based on loan type. In accordance with current accounting guidance, the allowance is provided for losses that have been incurred as of the balance sheet date and is based on past events and current economic conditions and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. For a more thorough discussion of the allowance for loan losses methodology see the Critical Accounting Policies section of this Item 2.
The allowance for loan losses increased 4.5%, or $2.2 million, from $48.5 million at December 31, 2018 to $50.6 million at September 30, 2019. Pooled loan allocations increased from $35.1 million at December 31, 2018 to $37.3 million at September 30, 2019, which was primarily due to management’s view of current credit quality, the current economic environment and loan growth. Impaired loan allocations were $10.4 million at September 30, 2019 and $10.0 million at December 31, 2018. The unallocated component of the allowance for loan losses was $2.9 million at September 30, 2019 and $3.3 million at December 31, 2018. While general trends in the overall economy and credit quality were stable, the Company believes that the unallocated component is appropriate given the uncertainty that exists regarding near term economic conditions. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends and trends in the composition of the Company’s large commercial loan portfolio and related large dollar exposures to individual borrowers.
Most of the Company’s recent loan growth has been concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining loan loss allocations. Management believes that it is prudent to continue to provide for loan losses in a manner consistent with its historical approach due to the loan growth described above and current economic conditions.
Loan growth for the first nine months of 2019 has been moderate and economic conditions in the Company’s markets have been stable. While there has been an increase of $11.7 million in nonperforming assets since year-end, management does not believe that the increase is reflective of any broader concerns and watch list loans are stable at $203.8 million compared to $186.6 million at December 31, 2018, which represents 5.04% of total loans at September 30, 2019 compared to 4.77% at December 31, 2018. The increase in watch list loans since year end was primarily impacted by an increase of $15.8 million in non-impaired watch list loans as well as an increase of $1.4 million in impaired watch list loans. While the growth is not robust, commercial real estate activity and manufacturing growth is occurring. The Company’s continued growth strategy promotes diversification among industries as well as continued focus on the enforcement of a disciplined credit culture and a conservative position in loan work-out situations. The Company believes that historical industry-specific issues in the Company’s markets have are stable and continue to be somewhat mitigated by its overall expansion strategy.
Sources of Funds
The average daily deposits and borrowings together with average rates paid on those deposits and borrowings for the nine months ended September 30, 2019 and 2018 are summarized in the following table:
Noninterest bearing demand deposits
0.00
Savings and transaction accounts:
Interest bearing demand deposits
Deposits of $100,000 or more
Other time deposits
4,220,248
1.40
4,070,565
1.03
FHLB advances and other borrowings
111,771
3.11
151,161
Total funding sources
4,332,019
1.44
4,221,726
1.06
Deposits and Borrowings
As of September 30, 2019, total deposits increased by $239.3 million, or 5.9%, from December 31, 2018. Core deposits increased by $287.5 million to $4.167 billion as of September 30, 2019 from $3.879 billion as of December 31, 2018. Total brokered deposits were $116.7 million at September 30, 2019 compared to $164.9 million at December 31, 2018 reflecting a $48.2 million decrease during the first nine months of 2019.
Since December 31, 2018, the change in core deposits was comprised of increases in commercial deposits of $231.9 million and in public funds deposits of $65.9 million, which were offset by a decrease in retail deposits of $10.3 million. Total public funds deposits, including public funds transaction accounts, were $1.281 billion at September 30, 2019 and $1.216 billion at December 31, 2018.
The following table summarizes deposit composition at September 30, 2019 and December 31, 2018:
Retail
1,577,880
1,588,225
(10,345)
1,307,361
1,075,419
231,942
Public funds
1,281,451
1,215,533
65,918
Core deposits
4,166,692
3,879,177
287,515
Brokered deposits
116,698
164,888
(48,190)
Total borrowings decreased by $245.6 million, or 88.8%, from December 31, 2018. The decrease consisted of $170.0 million in Federal home Loan Bank advances due to repayments, as well as $75.6 million in securities sold under agreements to repurchase. The Company utilizes wholesale funding, including brokered deposits and Federal Home Loan Bank advances, to supplement funding of assets, which is primarily used for loan and investment securities growth.
Capital
As of September 30, 2019, total stockholders’ equity was $584.3 million, an increase of $62.7 million, or 12.0%, from $521.6 million at December 31, 2018. In addition to net income of $64.8 million, other increases in equity during the first nine months of 2019 included a $19.7 million change in accumulated other comprehensive income component of equity, which was primarily driven by a net increase in the fair value of available-for-sale securities and $3.6 million in stock based compensation expense. Offsetting the
increases to stockholders’ equity were decreases due to dividends declared and paid in the amount of $22.0 million and $2.1 million in stock activity under equity compensation plans. As of September 30, 2019 the Company has not made any share repurchases under the share repurchase program approved by the Company’s board of directors on January 8, 2019.
The impact on equity by other comprehensive income (loss) is not included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1, or core capital, as a percentage of average assets, to measure the soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for U.S. banking organizations. As of September 30, 2019, the Company's capital levels remained characterized as "well-capitalized" under the new rules.
The actual capital amounts and ratios of the Company and the Bank as of September 30, 2019 and December 31, 2018, are presented in the table below:
Minimum Required to
Minimum Required
For Capital Adequacy
Be Well Capitalized
For Capital
Purposes Plus Capital
Under Prompt Corrective
Actual
Adequacy Purposes
Conservation Buffer
Action Regulations
Ratio
As of September 30, 2019:
Total Capital (to Risk Weighted Assets)
Consolidated
646,626
14.78
349,958
8.00
459,320
Bank
625,805
14.34
349,234
458,369
10.50
436,558
10.00
Tier I Capital (to Risk Weighted Assets)
595,909
13.62
262,469
6.00
371,831
575,087
13.17
261,925
371,061
8.50
Common Equity Tier 1 (CET1)
565,909
12.94
196,851
4.50
306,213
196,444
305,580
7.00
283,753
6.50
Tier I Capital (to Average Assets)
12.07
197,479
4.00
11.73
196,134
245,168
5.00
As of December 31, 2018:
601,379
14.20
338,690
418,070
583,206
13.80
338,098
417,340
9.875
422,623
552,836
13.06
254,017
333,398
534,664
12.65
253,574
332,815
7.875
522,836
12.35
190,513
269,893
190,180
269,422
6.375
274,705
11.44
193,305
11.06
193,312
241,639
FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. A number of factors, many of which are beyond the Company to control or predict, could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These factors include, but are not limited to, the following:
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk represents the Company’s primary market risk exposure. The Company does not have a material exposure to foreign currency exchange risk, does not have any material amount of derivative financial instruments and does not maintain a trading portfolio. The Corporate Risk Committee of the Board of Directors annually reviews and approves the policy used to manage interest rate risk. The policy was last reviewed and approved in July 2019. The policy sets guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income but do not necessarily indicate the effect on future net interest income. The Company, through its Asset and Liability Committee, manages interest rate risk by monitoring the computer simulated earnings impact of various rate scenarios and general market conditions. The Company then modifies its long-term risk parameters by attempting to generate the types of loans, investments, and deposits that currently fit the Company’s needs, as determined by its Asset and Liability Committee. This computer simulation analysis measures the net interest income impact of various interest rate scenario changes during the next twelve months. The Company continually evaluates the assumptions used in the model. The current balance sheet structure is considered to be within acceptable risk levels.
Interest rate scenarios for the base, falling 100 basis points, falling 50 basis points, falling 25 basis points, rising 25 basis points, rising 50 basis points, rising 100 basis points, rising 200 basis points and rising 300 basis points are listed below based upon the Company’s rate sensitive assets and liabilities at September 30, 2019. The net interest income shown represents cumulative net interest income over a twelve-month time horizon. Balance sheet assumptions used for the base scenario are the same for the rising and falling simulations.
The base scenario is an annual calculation that is highly dependent on numerous assumptions embedded in the model. While the base sensitivity analysis incorporates management’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For certain assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate maturity core deposit products, such as savings, money market, NOW and demand deposits reflect management’s best estimate of expected future behavior.
Falling
Rising
(100 Basis
(50 Basis
(25 Basis
(200 Basis
(300 Basis
Base
Points)
160,465
149,468
155,266
157,959
162,609
164,700
168,806
176,517
183,878
Variance from Base
(10,997)
(5,199)
(2,506)
2,144
4,235
8,341
16,052
23,413
Percent of change from Base
(6.85)
(3.24)
(1.56)
1.34
2.64
5.20
14.59
ITEM 4 – CONTROLS AND PROCEDURES
As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2019. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
During the quarter ended September 30, 2019, there were no changes to the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal proceedings
There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A. of Part I of the Company’s Form 10-K for the year ended December 31, 2018. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 8, 2019, the Company issued 224,066 shares of common stock to the holder of a warrant the Company originally issued to the Treasury in February 2009. The aggregate exercise price was approximately $4.2 million, which was paid pursuant to a cashless exercise of the warrant. The issuance of the shares was exempt from registration pursuant to Section 3(a)(9) under the Securities Act of 1933.
ISSUER PURCHASES OF EQUITY SECURITIES
On January 8, 2019, the Company's board of directors approved a share repurchase program, under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company's common stock with an aggregate purchase price of up to $30 million. Repurchases may be made in the open market, through block trades or otherwise, and in privately negotiated transactions. The repurchase program expires on December 31, 2019. The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, suspended or discontinued at any time.
The following table provides information as of September 30, 2019 with respect to shares of common stock repurchased by the Company during the quarter then ended:
Maximum Number (or
Total Number of
Appropriate Dollar
Shares Purchased as
Value) of Shares that
Part of Publicly
May Yet Be Purchased
Average Price
Announced Plans or
Under the Plans or
Shares Purchased
Paid per Share
Programs
July 1-31
3,497
46.48
30,000,000
August 1-31
1,203
43.98
September 1-30
4,700
45.84
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Interactive Data File
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Income for the three months and nine months ended September 30, 2019 and September 30, 2018; (iii) Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2019 and September 30, 2018; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months and nine months ended September 30, 2019 and September 30, 2018; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and September 30, 2018; and (vi) Notes to Unaudited Consolidated Financial Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 1, 2019
/s/ David M. Findlay
David M. Findlay – President and
Chief Executive Officer
/s/ Lisa M. O’Neill
Lisa M. O’Neill – Executive Vice President and
Chief Financial Officer
(principal financial officer)
/s/ Brok A. Lahrman
Brok A. Lahrman – Senior Vice President and Chief Accounting Officer
(principal accounting officer)