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, 2020
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 27, 2020: 25,713,408
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets — September 30, 2020 and December 31, 2019
1
Consolidated Statements of Income — three months and nine months ended September 30, 2020 and 2019
2
Consolidated Statements of Comprehensive Income — three months and nine months ended September 30, 2020 and 2019
3
Consolidated Statements of Changes in Stockholders’ Equity — three months and nine months ended September 30, 2020 and 2019
4
Consolidated Statements of Cash Flows — nine months ended September 30, 2020 and 2019
6
Notes to the Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
60
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
61
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
63
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
64
SIGNATURES
65
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
September 30,
December 31,
2020
2019
(Unaudited)
ASSETS
Cash and due from banks
$
69,106
68,605
Short-term investments
59,975
30,776
Total cash and cash equivalents
129,081
99,381
Securities available-for-sale (carried at fair value)
644,034
608,233
Real estate mortgage loans held-for-sale
10,097
4,527
Loans, net of allowance for loan losses of $60,747 and $50,652
4,529,177
4,015,176
Land, premises and equipment, net
60,309
60,365
Bank owned life insurance
84,919
83,848
Federal Reserve and Federal Home Loan Bank stock
13,772
Accrued interest receivable
18,447
15,391
Goodwill
4,970
Other assets
56,302
41,082
Total assets
5,551,108
4,946,745
LIABILITIES
Noninterest bearing deposits
1,420,853
983,307
Interest bearing deposits
3,347,101
3,150,512
Total deposits
4,767,954
4,133,819
Borrowings
Federal Home Loan Bank advances
75,000
170,000
Miscellaneous borrowings
10,500
0
Total borrowings
85,500
Accrued interest payable
6,303
11,604
Other liabilities
54,512
33,222
Total liabilities
4,914,269
4,348,645
STOCKHOLDERS’ EQUITY
Common stock: 90,000,000 shares authorized, no par value 25,708,915 shares issued and 25,236,371 outstanding as of September 30, 2020 25,623,016 shares issued and 25,444,275 outstanding as of December 31, 2019
114,011
114,858
Retained earnings
512,041
475,247
Accumulated other comprehensive income
25,224
12,059
Treasury stock at cost (472,544 shares as of September 30, 2020, 178,741 shares as of December 31, 2019)
(14,526)
(4,153)
Total stockholders’ equity
636,750
598,011
Noncontrolling interest
89
Total equity
636,839
598,100
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
42,056
50,139
130,759
149,094
Tax exempt
104
234
542
720
Interest and dividends on securities
1,577
2,209
5,419
6,956
2,198
1,819
6,237
5,171
Other interest income
44
368
292
957
Total interest income
45,979
54,769
143,249
162,898
Interest on deposits
5,941
14,692
24,324
44,131
Interest on borrowings
Short-term
51
113
458
1,295
Long-term
74
419
172
1,307
Total interest expense
6,066
15,224
24,954
46,733
39,913
39,545
118,295
116,165
Provision for loan losses
1,750
1,000
13,850
2,985
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
38,163
38,545
104,445
113,180
NONINTEREST INCOME
Wealth advisory fees
1,930
1,736
5,594
5,002
Investment brokerage fees
421
386
1,148
1,300
Service charges on deposit accounts
2,491
3,654
7,452
12,791
Loan and service fees
2,637
2,518
7,470
7,403
Merchant card fee income
670
690
1,933
1,982
Bank owned life insurance income
932
515
1,476
1,246
Interest rate swap fee income
2,143
77
4,105
847
Mortgage banking income
1,005
636
2,945
1,256
Net securities gains
314
363
94
Other income
572
547
2,575
1,957
Total noninterest income
13,115
10,765
35,061
33,878
NONINTEREST EXPENSE
Salaries and employee benefits
12,706
12,478
35,696
36,539
Net occupancy expense
1,404
1,351
4,336
4,000
Equipment costs
1,369
1,385
4,216
4,143
Data processing fees and supplies
3,025
2,620
8,736
7,619
Corporate and business development
586
999
2,324
3,376
FDIC insurance and other regulatory fees
554
(249)
1,224
566
Professional fees
1,306
1,479
3,506
3,487
Other expense
2,175
2,674
6,255
7,572
Total noninterest expense
23,125
22,737
66,293
67,302
INCOME BEFORE INCOME TAX EXPENSE
28,153
26,573
73,213
79,756
Income tax expense
5,377
5,119
13,468
14,907
NET INCOME
22,776
21,454
59,745
64,849
BASIC WEIGHTED AVERAGE COMMON SHARES
25,418,712
25,622,338
25,484,329
25,576,740
BASIC EARNINGS PER COMMON SHARE
0.89
0.84
2.34
2.54
DILUTED WEIGHTED AVERAGE COMMON SHARES
25,487,302
25,796,696
25,618,401
25,745,029
DILUTED EARNINGS PER COMMON SHARE
0.83
2.33
2.52
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited - in thousands)
Three months ended September 30,
Nine months ended September 30,
Net income
Other comprehensive income
Change in securities available-for-sale:
Unrealized holding gain on securities available-for-sale arising during the period
789
4,979
16,848
24,832
Reclassification adjustment for net gains included in net income
(314)
(6)
(363)
(94)
Net securities gain activity during the period
475
4,973
16,485
24,738
Tax effect
(101)
(1,044)
(3,462)
(5,196)
Net of tax amount
374
3,929
13,023
19,542
Defined benefit pension plans:
Amortization of net actuarial loss
189
154
Net gain activity during the period
(15)
(13)
(47)
(38)
48
38
142
116
Total other comprehensive income, net of tax
422
3,967
13,165
19,658
Comprehensive income
23,198
25,421
72,910
84,507
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, 2019
25,442,300
112,689
446,969
9,500
(3,884)
565,274
565,363
Comprehensive income:
Other comprehensive income, net of tax
Cash dividends declared, $0.30 per share
(7,687)
Treasury shares purchased under deferred directors' plan
(4,700)
215
(215)
Stock activity under equity compensation plans
7,800
(20)
Stock based compensation expense
1,359
Balance at September 30, 2019
25,445,400
114,243
460,736
13,467
(4,099)
584,347
584,436
Balance at July 1, 2020
25,233,280
113,424
496,891
24,802
(14,314)
620,803
620,892
(7,626)
(4,709)
212
(212)
375
Balance at September 30, 2020
25,236,371
Balance at January 1, 2019
25,128,773
112,383
419,179
(6,191)
(3,756)
521,615
521,704
Adoption of ASU 2017-08
(1,327)
Cash dividends declared, $0.86 per share
(21,965)
Cashless exercise of warrants
224,066
Treasury shares purchased under deferred directors’ plan
(10,356)
461
(461)
Treasury shares sold and distributed under deferred directors' plan
5,699
(118)
118
97,218
(2,109)
3,626
Balance at January 1, 2020
25,444,275
Cash dividends declared, $0.90 per share
(22,951)
Treasury shares purchased under share repurchase plan
(289,101)
(10,012)
(10,450)
480
(480)
5,748
(119)
119
85,899
(2,030)
822
5
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
4,477
4,428
Amortization of loan servicing rights
563
Net change in loan servicing rights valuation allowance
628
Loans originated for sale, including participations
(93,805)
(43,510)
Net gain on sales of loans
(3,286)
(1,312)
Proceeds from sale of loans, including participations
90,568
39,013
Net (gain) loss on sales of premises and equipment
82
(2)
Net gain on sales and calls of securities available-for-sale
Net securities amortization
3,021
2,917
Earnings on life insurance
(1,476)
(1,246)
Gain on life insurance
(576)
(841)
Tax benefit of stock award issuances
(71)
(529)
Net change:
Interest receivable and other assets
(3,987)
(5,416)
Interest payable and other liabilities
(8,927)
6,638
Total adjustments
1,520
7,025
Net cash from operating activities
61,265
71,874
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale
6,413
38,544
Proceeds from maturities, calls and principal paydowns of securities available-for-sale
69,259
50,959
Purchases of securities available-for-sale
(89,934)
(91,704)
Purchase of life insurance
(361)
(5,492)
Net increase in total loans
(527,886)
(109,286)
Proceeds from sales of land, premises and equipment
651
14
Purchases of land, premises and equipment
(5,154)
(5,974)
Proceeds from life insurance
1,285
1,483
Net cash from investing activities
(545,727)
(121,456)
Cash flows from financing activities:
Net increase in total deposits
634,135
239,325
Net increase in short-term borrowings
(75,555)
Payments on short-term FHLB borrowings
(170,000)
Proceeds from long-term FHLB borrowings
Common dividends paid
(22,938)
(21,952)
Preferred dividends paid
Payments related to equity incentive plans
Purchase of treasury stock
(10,492)
Net cash from financing activities
514,162
(30,765)
Net change in cash and cash equivalents
29,700
(80,347)
Cash and cash equivalents at beginning of the period
216,922
Cash and cash equivalents at end of the period
136,575
Cash paid during the period for:
30,255
45,066
Income taxes
14,380
14,825
Supplemental non-cash disclosures:
Loans transferred to other real estate owned
35
Securities purchases payable
7,712
4,892
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 are results for 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, 2020 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2020. The Company’s 2019 Annual Report on Form 10-K should be read in conjunction with these statements.
Adoption of New Accounting Standards
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 Company adopted this new accounting standard on January 1, 2020.
Adopting this standard did not have an impact on the Company's financial condition or results of operations.
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." These amendments modify the disclosure requirements in Topic 820 as follows:
Removals: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.
Modifications: for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
Additions: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should all be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020 and it did not have a material impact on its financial condition or results of operations.
In August 2018, the FASB issued ASU No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350- 40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. Early adoption is permitted. The Company adopted ASU 2018-15 on January 1, 2020 and it did not have a material impact on its 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 previously required, but still permitted, under 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, subject to optional delay discussed below, for the Company for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years.
During 2019, the Company implemented the CECL methodology and ran it concurrently with the historical incurred method. Under a provision provided by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company elected to delay the adoption of FASB’s new rule covering the CECL standard until the earlier of the termination date of the national emergency declared by President Trump under the National Emergencies Act on March 13, 2020, related to the Coronavirus Disease 2019 (“COVID-19”) outbreak, and December 31, 2020. Once the delay provision is terminated, adoption will be retroactive to January 1, 2020 and the Company’s day one adjustment to the allowance for credit losses will be an increase of $7.67 million with an offset net of taxes, to stockholders’ equity. Upon adoption of this standard, the calculation will require approval by the loan review committee and board of directors in accordance with the Company’s internal controls over financial reporting. Additionally, the Company has evaluated the need to recognize an allowance for credit impairment for available-for-sale debt securities. The impact on available-for-sale debt securities is subject to a limitation, which is based on the fair value of the debt securities. When evaluating the credit quality of our existing portfolio, the Company does not expect the allowance for credit impairment for available-for-sale securities to be significant. The Company will not recast quarterly provision expense during 2020 under the CECL standard. The impact of CECL on the Company’s 2020 financial statements will be reflected with the cumulative effect adjustment to the allowance for credit losses on January 1, 2020 and an annual provision expense for the year ended December 31, 2020. The future impact of CECL on the Company’s allowance for credit losses and provision expense subsequent to the initial adoption will depend on changes in the loan portfolio, economic conditions and refinements to key assumptions including economic forecasting and qualitative factors.
In August 2018, the FASB issued ASU 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The ASU updates the annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans by adding, clarifying and removing certain disclosures. These amendments are effective for fiscal years ending after December 15, 2020, for public business entities, and are to be applied on a retrospective basis to all periods presented. Management has reviewed the standard and does not anticipate ASU 2018-14 will have a material impact on its financial statements.
In December 2019, the FASB issued ASU 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." These amendments remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers' application of income tax- related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is assessing ASU 2019-12 and its impact on its financial statements.
8
On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional working group to lead the transition from LIBOR to a planned adoption of reference rates based on the Secured Overnight Financing Rate (“SOFR”). The Company has identified loans that will renew prior to 2021 and will obtain updated reference rate language at the time of renewal. Loans maturing after 2021 will need loan modifications and fallback language has been implemented for newly originated loans. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop internal milestones during this transitional period. The Company is currently evaluating the International Swaps and Derivatives Association Fallback Protocol that was released on October 23, 2020. The guidance under ASC-848 will be available for a limited time, generally through December 31, 2022. The Company expects to adopt the LIBOR transition relief allowed under this standard.
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.
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, 2020
U.S. government sponsored agencies
10,000
26
10,026
Mortgage-backed securities: residential
238,062
10,232
(28)
248,266
Mortgage-backed securities: commercial
38,026
1,135
39,161
State and municipal securities
324,237
22,533
(189)
346,581
610,325
33,926
(217)
December 31, 2019
283,817
4,751
(387)
288,181
36,712
262
36,972
270,480
12,828
(228)
283,080
591,009
17,841
(617)
Information regarding the fair value and amortized cost of available-for-sale debt securities by maturity as of September 30, 2020 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
2,436
2,454
Due after one year through five years
14,118
14,541
Due after five years through ten years
29,681
31,773
Due after ten years
288,002
307,839
334,237
356,607
Mortgage-backed securities
276,088
287,427
Total debt securities
9
Securities proceeds, gross gains and gross losses are presented below.
Sales of securities available-for-sale
Proceeds
5,265
12,725
Gross gains
13
151
Gross losses
(7)
(57)
Number of securities
12
15
31
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.
Securities with carrying values of $400.7 million and $59.3 million were pledged as of September 30, 2020 and December 31, 2019, respectively, as collateral for borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.
Information regarding securities with unrealized losses as of September 30, 2020 and December 31, 2019 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
4,135
28
21,135
Total temporarily impaired
21,142
25,277
217
23,436
112
14,174
275
37,610
387
4,591
14,188
228
42,215
342
56,389
617
The total number of securities with unrealized losses as of September 30, 2020 and December 31, 2019 is presented below.
Less than
12 months
or more
17
18
20
11
19
25
10
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, 2020, and December 31, 2019, 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
592,560
12.9
%
709,849
17.5
Non-working capital loans
1,256,853
27.3
717,019
17.6
Total commercial and industrial loans
1,849,413
40.2
1,426,868
35.1
Commercial real estate and multi-family residential loans:
Construction and land development loans
393,101
8.5
287,641
7.1
Owner occupied loans
619,820
13.5
573,665
14.1
Nonowner occupied loans
567,674
12.3
571,364
14.0
Multifamily loans
279,713
6.1
240,652
5.9
Total commercial real estate and multi-family residential loans
1,860,308
40.4
1,673,322
41.1
Agri-business and agricultural loans:
Loans secured by farmland
150,503
3.2
174,380
4.3
Loans for agricultural production
187,651
4.1
205,151
5.0
Total agri-business and agricultural loans
338,154
7.3
379,531
9.3
Other commercial loans
97,533
2.1
112,302
2.8
Total commercial loans
4,145,408
90.0
3,592,023
88.3
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans
170,671
3.7
177,227
4.4
Open end and junior lien loans
170,867
186,552
4.6
Residential construction and land development loans
11,012
0.3
12,966
Total consumer 1-4 family mortgage loans
352,550
7.7
376,745
Other consumer loans
105,285
2.3
98,617
2.4
Total consumer loans
457,835
10.0
475,362
11.7
Subtotal
4,603,243
100.0
4,067,385
Less: Allowance for loan losses
(60,747)
(50,652)
Net deferred loan fees
(13,319)
(1,557)
Loans, net
The recorded investment in loans does not include accrued interest.
The Company had $197,000 in residential real estate loans in the process of foreclosure as of September 30, 2020, compared to $1.6 million as of December 31, 2019.
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, 2020 and 2019:
Commercial
Real Estate
and
Agri-business
Consumer
Multifamily
1-4 Family
Industrial
Residential
Agricultural
Mortgage
Unallocated
Three Months Ended September 30, 2020
Beginning balance, July 1
26,744
21,063
3,408
3,434
774
3,054
59,019
1,574
175
30
(50)
237
98
Loans charged-off
(70)
(229)
(305)
Recoveries
177
283
Net loans charged-off
45
(66)
(181)
(22)
Ending balance
28,363
21,415
3,097
3,318
830
3,152
60,747
Three Months Ended September 30, 2019
25,024
15,492
3,906
355
2,153
289
3,345
50,564
943
474
(4)
(93)
67
(415)
(1,123)
(23)
(75)
(1,221)
133
83
23
285
(990)
(52)
(936)
24,977
16,010
3,904
383
2,120
304
2,930
50,628
The following tables present the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2020 and 2019:
Nine Months Ended September 30, 2020
Beginning balance, January 1
25,789
15,796
3,869
447
2,086
345
2,320
50,652
6,264
5,312
(780)
125
1,298
799
832
(4,037)
(83)
(445)
(4,565)
347
307
131
810
(3,690)
(3,755)
Nine Months Ended September 30, 2019
22,518
15,393
4,305
2,292
3,294
48,453
3,260
(407)
(172)
192
(364)
(1,223)
(110)
(256)
(1,589)
156
110
85
779
(801)
(171)
(810)
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, 2020 and December 31, 2019:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
6,345
1,313
328
8,050
Collectively evaluated for impairment
22,018
20,102
3,033
2,990
52,697
Total ending allowance balance
Loans:
Loans individually evaluated for impairment
13,591
6,030
428
2,437
22,486
Loans collectively evaluated for impairment
1,824,156
1,851,790
337,736
97,428
351,287
105,041
4,567,438
Total ending loans balance
1,837,747
1,857,820
338,164
353,724
4,589,924
9,324
538
90
426
10,384
16,465
15,258
3,779
1,660
339
40,268
19,580
4,998
445
2,789
27,829
1,407,246
1,665,842
379,186
112,166
375,210
98,349
4,037,999
1,426,826
1,670,840
379,631
377,999
98,366
4,065,828
The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2020:
Unpaid
Allowance for
Principal
Recorded
Loan Losses
Balance
Investment
Allocated
With no related allowance recorded:
2,053
174
3,070
974
2,039
603
Consumer 1‑4 family loans:
258
91
Residential construction loans
With an allowance recorded:
877
876
444
12,252
11,567
5,901
3,990
3,991
145
Consumer 1‑4 family mortgage loans:
1,468
1,470
293
621
620
27,573
16
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019:
22
2,130
735
3,189
3,010
Loans for ag production
411
330
121
6,214
3,089
13,230
12,609
6,235
1,988
147
1,643
1,646
641
640
53
52
30,422
The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2020:
Cash Basis
Average
Income
Recognized
995
2,054
274
54
1,546
11,970
3,994
146
648
23,701
81
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:
165
1,394
3,266
211
137
6,313
12,088
96
1,676
1,625
433
27,738
124
123
The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2020:
442
766
2,101
Consumer 1-4 family loans:
3,001
11,763
216
3,034
1,589
642
46
24,184
305
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
29
2,112
251
141
6,375
143
11,536
326
1,840
1,634
34
24
25,983
21
The following table presents the aging of the recorded investment in past due loans as of September 30, 2020 by class of loans:
Greater than
30‑89
90 Days
Total Past
Loans Not
Days
Past
Due and
Past Due
Due
Nonaccrual
591,549
41
1,050
1,091
592,640
1,239,596
5,508
5,511
1,245,107
392,078
614,264
5,143
619,407
567,009
567,027
279,308
150,020
150,448
187,716
168,835
813
1,472
170,307
171,669
99
684
783
172,452
10,940
10,965
104,905
136
4,575,317
1,110
13,478
14,607
The following table presents the aging of the recorded investment in past due loans as of December 31, 2019 by class of loans:
703,737
6,236
6,246
709,983
710,557
6,282
6,286
716,843
286,534
569,303
4,056
573,359
570,687
240,260
173,959
430
174,389
205,228
205,242
174,902
1,099
827
1,971
176,873
187,255
188
761
949
188,204
12,870
12,922
98,176
173
190
4,045,634
1,474
18,675
20,194
Troubled Debt Restructurings:
Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $4.7 million and $2.5 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2020 and December 31, 2019, 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
5,658
5,909
Nonaccrual troubled debt restructured loans
6,547
3,188
Total troubled debt restructured loans
12,205
9,097
During the three months ended September 30, 2020, no loans were modified as troubled debt restructurings.
During the nine months ended September 30, 2020, 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.
The following table presents loans by class modified as new troubled debt restructurings that occurred during the nine months ended September 30, 2020:
Modified Repayment Terms
Pre-Modification
Post-Modification
Extension
Outstanding
Period or
Number of
Range
Loans
(in months)
Troubled Debt Restructurings Commercial and industrial loans:
250
315
4,288
3,691
1,528
1,527
5,533
For the three-month period ending September 30, 2020, the commercial and industrial loans and the commercial real estate and multi-family residential loan troubled debt restructurings described above increased the allowance for loan losses by $63,000, and no charge-offs were recorded.
For the nine-month period ended September 30, 2020, the troubled debt restructurings described above increased the allowance for loan losses by $2.4 million, and charge-offs of $666,000 were recorded.
As of September 30, 2020, total deferrals attributed to COVID-19 were $158.4 million representing 102 borrowers. This represented 3.4% of the total loan portfolio. Of that total 71 were commercial loan borrowers representing $155.2 million in loans, or 3.7%, of commercial loans and 31 were retail loan borrowers representing $3.3 million, or 0.9%, of total retail loans. The majority of all loan deferrals were for a period of 90 days. Of the total commercial deferrals attributed to COVID-19, $15.3 million represented a first deferral action, $116.2 million represented a second deferral action and $23.7 million represented a third deferral action. Two borrowers represented 84% of the third deferral population and were commercial real estate nonowner occupied loans supported by adequate collateral and personal guarantors and consist of loans to the hotel and accommodation industry. All COVID-19 related loan deferrals remain on accrual status, as each deferral is evaluated individually, and management has determined that all contractual cashflows are collectable at this time. In accordance with Section 4013 of the CARES Act and the March 22, 2020 Joint Interagency Regulatory Guidance, these were not considered to be troubled debt restructurings and were excluded from the table above.
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:
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.
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, 2020, $557.9 million in PPP loans were included in the "Pass" category of loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA.
As of September 30, 2020, 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
526,206
47,016
19,159
259
1,195,861
25,294
18,747
5,205
579,800
27,945
11,662
560,424
6,603
139,013
10,778
657
136,682
51,034
42,213
1,728
126,366
9,058
162,710
37,042
67,999
3,995,113
168,670
52,662
373,479
As of December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
631,728
40,551
37,278
673,370
18,782
19,381
5,310
535,496
14,804
23,059
569,315
781
591
165,005
7,952
1,432
191,489
13,738
47,405
1,976
127,492
10,845
762
176,597
12,871
27,250
71,099
3,490,863
96,608
84,562
393,795
NOTE 5. BORROWINGS
For the periods ended September 30, 2020 and December 31, 2019, the Company had advances outstanding from the Federal Home Loan Bank (“FHLB”) in the amount of $75.0 million and $170.0 million, respectively. The outstanding FHLB advance at September 30, 2020 is a ten-year fixed-rate putable advance with a rate of 0.39% and is due on March 4, 2030. The outstanding FHLB advance at December 31, 2019 was a short-term fixed rate advance with a rate of 1.61% and was due on January 7, 2020. All FHLB notes require monthly interest payments and are secured by residential real estate loans and securities.
On August 2, 2019 the holding company entered into an unsecured revolving credit agreement with another financial institution allowing the Company to borrow up to $30.0 million. Funds provided under the agreement may be used to repurchase shares of the Company’s common stock under the share repurchase program, which was authorized by the Company’s board of directors on January 14, 2020, and for other general corporate purposes. The Company had drawn $10.5 million on this line at a rate of Prime minus 150 basis points, or 1.75%, as of September 30, 2020. The line matured on July 31, 2020, and was renewed with a new maturity of July 30, 2021. There were no amounts drawn against this line as of December 31, 2019.
NOTE 6. 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, 2020, the fair value of the Company’s Level 3 servicing assets for residential mortgage loans (“MSRs”) was $4.2 million, carried at amortized cost less $628,000 in a valuation reserve, or $3.6 million. These residential mortgage loans have a weighted average interest rate of 3.72%, 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, 2020, the constant prepayment speed (“PSA”) used was 209 and discount rate used was 9.4%. At December 31, 2019, the PSA used was 118 and the discount rate used was 9.4%.
27
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
Assets:
346,436
Total Securities
643,889
Mortgage banking derivative
1,075
Interest rate swap derivative
25,184
670,148
670,293
Liabilities:
25,203
25,244
282,935
608,088
198
7,263
615,549
615,694
7,860
7,874
The fair value of Level 3 available-for-sale securities was immaterial and thus did not require additional recurring fair value disclosure.
The table below presents the balances of assets measured at fair value on a nonrecurring basis:
Impaired loans:
432
5,666
2,678
393
585
Total impaired loans
9,835
Other real estate owned
Mortgage servicing rights, net of valuation allowance
3,565
13,400
3,126
6,374
43
1,449
57
587
12,121
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, 2020:
Fair Value
Valuation Methodology
Unobservable Inputs
Range of Inputs
Commercial and industrial
6,098
Collateral based measurements
Discount to reflect current market conditions and ultimate collectability
21%-100%
Commercial real estate
33
10%-75%
Agribusiness and agricultural
Consumer 1-4 family mortgage
978
6%-17%
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, 2019:
1%-100%
1,492
7%-61%
1,061
5%-100%
Other consumer
36
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $17.7 million, with a valuation allowance of $7.8 million at September 30, 2020. The change in the fair value of impaired loans resulted in increases in the provision for loan losses of $542,000 and decreases of $100,000, respectively, in the nine months and three months ended September 30, 2020. At September 30, 2019, impaired loans had a gross carrying amount of $20.4 million, with a valuation allowance of $10.1 million. 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.
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
126,364
2,717
Securities available-for-sale
Real estate mortgages held-for-sale
10,543
4,491,862
Federal Reserve and Federal Home Loan Bank Stock
N/A
3,535
14,912
Financial Liabilities:
Certificates of deposit
(1,213,390)
(1,223,667)
All other deposits
(3,554,564)
Other short-term borrowings
(10,500)
(75,000)
(69,066)
Standby letters of credit
(657)
(6,303)
(56)
(6,247)
96,603
2,778
4,614
3,979,006
3,729
(1,192,067)
(1,202,060)
(2,941,752)
(169,998)
(915)
(11,604)
(102)
(11,502)
NOTE 7. 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, 2020 and December 31, 2019.
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
Net
Liabilities
Position
Instruments
Amount
Interest Rate Swap Derivatives
Total Assets
(25,480)
(277)
Total Liabilities
(7,560)
300
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 8. EARNINGS PER SHARE
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period, which includes shares held in treasury on behalf of participants in the Company’s Directors Fee Deferral Plan, and share repurchases. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based awards and warrants, none of which were antidilutive.
Three Months Ended September 30,
Weighted average shares outstanding for basic earnings per common share
Dilutive effect of stock options, awards and warrants
68,590
174,358
134,072
168,289
Weighted average shares outstanding for diluted earnings per common share
Basic earnings per common share
Diluted earnings per common share
32
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the three months ended September 30, 2020 and 2019:
Gains and
Defined
(Losses) on
Benefit
Available-
Pension
for-Sales
Gains
Securities
(Losses)
26,256
(1,454)
Other comprehensive income before reclassification
688
Amounts reclassified from accumulated other comprehensive income (loss)
(266)
Net current period other comprehensive income
26,630
(1,406)
10,818
(1,318)
3,934
3,928
14,746
(1,279)
The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the nine months ended September 30, 2020 and 2019:
13,607
(1,548)
13,386
(221)
(4,796)
(1,395)
19,636
Reclassifications out of accumulated comprehensive income for the three months ended September 30, 2020 are as follows:
Details about
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
248
Net of tax
Amortization of defined benefit pension items
(63)
(48)
Total reclassifications for the period
200
Reclassifications out of accumulated comprehensive income for the three months ended September 30, 2019 are as follows:
(1)
(51)
(33)
Reclassifications out of accumulated comprehensive income for the nine months ended September 30, 2020 are as follows:
(76)
287
47
(142)
Reclassifications out of accumulated comprehensive income for the nine months ended September 30, 2019 are as follows:
(154)
(116)
(42)
NOTE 10. 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, 2020:
Operating lease
Years ending December 31, (in thousands)
Obligation
2021
581
2022
595
2023
606
2024
622
2025 and thereafter
2,873
Total undiscounted lease payments
Less imputed interest
(635)
Lease liability
4,784
Right-of-use asset
Lease cost
Operating lease cost
128
402
372
Short-term lease cost
Total lease cost
134
420
390
Other information
Operating cash outflows from operating leases
Weighted-average remaining lease term - operating leases
9.1
years
Weighted average discount rate - operating leases
NOTE 11. COVID-19 AND CURRENT ECONOMIC CONDITIONS
As of October 21, 2020, total COVID-19 related deferrals were $110.5 million, representing 63 borrowers, or 2.4% of the total loan portfolio. Of that total, 37 were commercial loan borrowers representing $107.5 million in loans, or 2.5% of total commercial loans. 26 were retail loan borrowers representing $3.0 million, or 0.8% of total retail loans. Of the total commercial deferrals, $8.1 million represented a first deferral action, $69.8 million represented a second deferral action and $29.7 million represented a third deferral action.
The fair value of certain assets could be impacted by the effects of COVID-19. The carrying value of loans, goodwill, right-of-use lease assets, other real estate owned and mortgage servicing rights could decrease resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets.
The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and when state and local economies will return to operational norms, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company’s business. However, if the pandemic continues to evolve into a prolonged worldwide health crisis, the disease could have a material adverse effect on the Company’s business, results of operations, financial condition, liquidity and cash flows.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Net income in the first nine months of 2020 was $59.7 million, down 7.9% from $64.8 million for the comparable period of 2019. Diluted income per common share was $2.33 in the first nine months of 2020, down 7.5% from $2.52 in the comparable period of 2019. The decrease was primarily due to the Company recording a provision for loan losses of $13.9 million for the first nine months of 2020, an increase of $10.9 million, or 364.0%, compared to $3.0 million for the first nine months of 2019. The higher provision in 2020 was driven by the estimated potential negative impact to the Company’s borrowers as a result of the economic conditions resulting from the COVID-19 pandemic, which was calculated using the incurred loss model. The provision expense for 2020 was partially offset by a $2.1 million increase in net interest income, a $1.2 million increase in noninterest income and a $1.0 million decrease in noninterest expense, in each case compared to the corresponding period for 2019. Pretax pre-provision earnings in the first nine months of 2020 were $87.1 million, an increase of $4.3 million, or 5.2%, compared to $82.7 million for the comparable period of 2019. Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense.
Annualized return on average total equity was 12.96% in the first nine months of 2020 versus 15.68% in the comparable period of 2019. Annualized return on average total assets was 1.50% in the first nine months of 2020 versus 1.76% in the comparable period of 2019. The average equity to average assets ratio was 11.59% in the first nine months of 2020 versus 11.22% in the comparable period of 2019.
Net income in the third quarter of 2020 was $22.8 million, an increase of $1.3 million, or 6.2% from $21.5 million for the comparable period of 2019. Diluted income per common share was $0.89 in the third quarter of 2020, an increase of $0.06, or 7.2%, from $0.83 in the comparable period of 2019. The increase was primarily due to an increase of $2.4 million, or 21.8%, in noninterest income for the third quarter of 2020 versus the comparable period of 2019. Pretax pre-provision earnings in the third quarter of 2020 were $29.9 million, an increase of $2.3 million, or 8.5%, compared to $27.6 million for the comparable period of 2019.
Annualized return on average total equity was 14.36% in the third quarter of 2020 versus 14.78% in the comparable period of 2019. Annualized return on average total assets was 1.64% in the third quarter of 2020 versus 1.72% in the comparable period of 2019. The average equity to average assets ratio was 11.43% in the third quarter of 2020 versus 11.65% in the comparable period of 2019.
Total assets were $5.551 billion as of September 30, 2020 versus $4.947 billion as of December 31, 2019, an increase of $604.4 million, or 12.2%. This increase was primarily due to a $524.1 million increase in gross loans, offset by an increase in the allowance for loan losses of $10.1 million. In addition, this increase was driven by $35.8 million of growth in securities available-for-sale, a $29.7 million increase in cash and cash equivalents and a $15.2 million increase in other assets, driven by higher valuations on the Company’s back-to-back interest rate swap portfolio. Loan growth was driven by Paycheck Protection Program (PPP) loans originated primarily during the second quarter of 2020. The outstanding balance of PPP loans at September 30, 2020, was $557.9 million. Loans excluding PPP loans decreased by $33.8 million from $4.07 billion at December 31, 2019 to $4.03 billion at September 30, 2020. The Paycheck Protection Program has strengthened the company’s borrowers’ balance sheets and improved their operating performance. It has further provided a valuable cash injection for all clients who participated in the program. Yet, it has contributed to a reduction in usage of available credit facilities by clients, which decreased to 41% at September 30, 2020 from 46% at December 31, 2019.
Balance sheet growth was primarily funded through growth in deposits during 2020, which was driven by the deposit of PPP loan proceeds into borrower accounts and government stimulus payments into individual accounts. Deposits increased $634.1 million while total borrowings decreased by $84.5 million since December 31, 2019. Total equity increased by $38.7 million due primarily to net income of $59.7 million, an increase in accumulated other comprehensive income of $13.2 million, offset by share repurchases of $10.0 million and dividends declared and paid of $0.90 per share totaling $23.0 million.
Impact of COVID-19. The progression of the COVID-19 pandemic in the United States has had an impact on our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2020, and may have a complex and significant adverse impact on the economy, the banking industry and our Company in future fiscal periods, all subject to a high degree of uncertainty. As a result of the pandemic, our financial condition, capital levels and results of operations have been and could continue to be significantly adversely affected, as described in further detail below.
During the second quarter, Lake City Bank focused on its response to the crisis for its employees and its customers. The Bank closed branch lobbies on March 21, 2020 and directed its clients and communities to its drive-up facilities and by-appointment visits in addition to digital channels via online and mobile banking. The Bank created a Branch Reopening Task Force, which established guidelines under which the bank could safely open its offices. On June 15, 2020, the Bank reopened all of its branch lobbies. During the third quarter most of all Company employees returned to the workplace in a Lake City Bank facility. The Company invested in personal protective equipment, installed protective barriers and enhanced social distancing measures in order to prioritize the safety of bank customers and employees. These investments have totaled approximately $500,000 since the pandemic began. The Company will keep all safety protocols in place until it determines that the public health risks posed by COVID-19 no longer require them.
Active Management of Credit Risk
The Company’s Commercial Banking and Credit Administration leadership continues to review and refine the list of industries that the Company believes are most likely to be materially impacted by the potential economic impact resulting from the COVID-19 pandemic. The current assessment includes a smaller group of industries as compared to the initial list of potentially affected industries disclosed in the company’s April 27, 2020 first quarter and July 27, 2020 second quarter press releases. The Company’s current list of industries under review represents approximately 5.7%, or $228 million, of the total loan portfolio as of September 30, 2020, versus $765 million, or 18.7%, as of April 27, 2020 and $261 million, or 6.6% as of July 27, 2020, in each case excluding PPP loans. The following industries are included in the 5.7% along with their respective percentage of the loan portfolio: hotel and accommodations – 2.5%, dairy – 1.1%, education – 0.9% entertainment and recreation – 0.8% and full-service restaurants – 0.4%. The Company has no direct exposure to oil and gas and limited exposure to retail shopping centers.
The Company’s commercial loan portfolio is highly diversified, and no industry sector represents more than 8% of the Bank’s loan portfolio as of September 30, 2020. Agri-business and agricultural loans represented the highest specific industry concentration at 8% of total loans. The Company’s Commercial Banking and Credit Administration teams continue to actively work with customers to understand their business challenges and credit needs during this time.
COVID-19 Related Loan Deferrals
As detailed below, loan deferrals peaked on June 17, 2020, at $737 million, which represented 16% of the total loan portfolio. As of October 21, 2020, total deferrals attributable to COVID-19 were $110 million, representing 63 borrowers, or 2% of the total loan portfolio. Total deferrals as of October 21, 2020 represented a decline in deferral balances of 85% from the peak levels. Of the $110 million, 37 borrowers were commercial loan borrowers representing $107 million in loans, or 3% of total commercial loans and 26 borrowers were retail loan borrowers representing $3 million, or 1% of total retail loans. All COVID-19 related loan deferrals remain on accrual status, as each deferral is evaluated individually, and management has determined that all contractual cashflows are collectable at this time.
As of October 21, 2020, 38 borrowers with loans outstanding of $70 million were in their second deferral period, most of which were additional 90 day deferrals. Additionally, 17 borrowers with loans outstanding of $32 million were in their third deferral period. Four borrowers represented 87% of the third deferral population and were commercial real estate nonowner occupied loans supported by adequate collateral and personal guarantors and consist of loans to the hotel and accommodation industry.
The Company’s retail loan portfolio is comprised of 1-4 family mortgage loans, home equity lines of credit and other direct and indirect installment loans. A third-party vendor manages the Company’s retail and commercial credit card program and the Company does not have any balance sheet exposure with respect to this program except for nominal recourse on limited commercial card accounts.
Total Loan Deferrals
Peak
% change
June 17, 2020
June 30, 2020
October 21, 2020
from Peak
Borrowers
487
384
102
(87)
Amount (In millions)
737
653
158
(85)
% of Total Loan Portfolio
NA
Total Commercial Loans Deferrals
351
322
71
(89)
730
647
155
107
% of Commercial Loan Portfolio
Total Retail Loan Deferrals
62
(81)
% of Retail Loan Portfolio
Liquidity Preparedness
Throughout the COVID-19 crisis, the Company has monitored liquidity preparedness. Critical to this effort has been the monitoring of commercial and retail borrowers’ line of credit utilization. The Company’s commercial and retail line of credit utilization at both September 30, 2020 and June 30, 2020 was 41% versus 48% at March 31, 2020 and 46% at December 31, 2019. The Company has a long-standing liquidity plan in place that ensures there are appropriate liquidity resources available to fund the balance sheet.
The Paycheck Protection Program
During the third quarter, the Company continued to fund PPP loans for its customers. In addition, the Bank has engaged a third-party Fintech technology partner to assist the Bank and its customers to automate the forgiveness application process. The software solution provides tools to facilitate communications with borrowers, gathering of information securely, calculation of forgiveness amounts and electronic transmission to the SBA for approval. The Company is utilizing a phased approach for the forgiveness application process and has begun to process forgiveness applications for borrowers. As of October 21, 2020, Lake City Bank has 2,409 PPP loans outstanding representing $561.8 million in loan balances. Most of the PPP loans are for existing customers and 51% of the number of PPP loans are for amounts less than $50,000. As of October 21, 2020, the Bank submitted 36 loan forgiveness applications to the SBA in the amount of $51 million, which represented 9% of total PPP loans outstanding. The SBA has not yet approved any of the Bank’s forgiveness applications.
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 subject to a floor, 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 by portfolio segment using historical loss percentages subject to a floor, supplemented with other environmental factors based on the risks present for each portfolio segment. These factors include consideration of the following: levels of, and trends in, delinquencies and impaired loans; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. 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, subject to a floor, and are adjusted for economic factors and portfolio trends.
40
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 Available-for-Sale 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.
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 income 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, 2020 and 2019 is presented in the following table:
Income Statement Summary:
Net interest income
Noninterest income
Noninterest expense
Other Data:
Efficiency ratio (1)
43.61
45.19
43.23
44.86
Dilutive EPS
Tangible capital ratio (2)
11.41
11.74
Net charge-offs to average loans
0.00
0.09
0.12
0.03
Net interest margin
3.05
3.38
3.16
3.40
Net interest margin excluding PPP loans (3)
3.17
3.22
Noninterest income to total revenue
24.73
21.40
22.86
22.58
Pretax Pre-Provision Earnings (4)
29,903
87,063
82,741
42
A reconciliation of non-GAAP measures is provided below (in thousands, except for per share data).
Total Equity
Less: Goodwill
(4,970)
Plus: Deferred tax assets related to goodwill
1,176
1,191
Tangible Common Equity
633,045
580,657
4,948,155
Tangible Assets
5,547,314
4,944,376
Tangible Common Equity/Tangible Assets
Net Interest Income
Noninterest Income
Noninterest Expense
(23,125)
(22,737)
(66,293)
(67,302)
Pretax Pre-Provision Earnings
Impact of Paycheck Protection Program on Net Interest Margin FTE
Sep. 30,
Total Average Earnings Assets
5,282,569
4,698,937
5,078,509
4,625,820
Less: Average Balance of PPP Loans
557,290
339,149
Total Adjusted Earning Assets
4,725,279
4,739,360
Total Interest Income FTE
46,589
55,308
145,045
164,449
Less: PPP Loan Income
(3,294)
(6,323)
Total Adjusted Interest Income FTE
43,295
138,722
Adjusted Earning Asset Yield, net of PPP Impact
3.65
4.67
3.91
4.75
Total Average Interest Bearing Liabilities
3,433,326
3,356,436
3,393,274
3,408,766
Total Adjusted Interest Bearing Liabilities
3,990,616
3,732,423
Total Interest Expense FTE
Less: PPP Cost of Funds
(350)
(630)
Total Adjusted Interest Expense FTE
5,716
Adjusted Cost of Funds, net of PPP Impact
0.48
1.29
0.69
1.35
Net Interest Margin FTE, net of PPP Impact
Net Income
Net income was $59.7 million in the first nine months of 2020, a decrease of $5.1 million, or 7.9%, versus net income of $64.8 million in the first nine months of 2019. The decrease was primarily due to the Company recording a provision for loan losses of $13.9 million for the first nine months of 2020, an increase of $10.9 million, or 364.0%, compared to $3.0 million for the first nine months of 2019. The higher provision in 2020 was driven by the estimated potential negative impact to the Company’s borrowers as a result of the economic conditions resulting from the COVID-19 pandemic, which was calculated using the incurred loss model. The provision expense for 2020 was partially offset by a $2.1 million increase in net interest income, a $1.2 million increase in noninterest income and a $1.0 million decrease in noninterest expense, in each case compared to the corresponding period for 2019.
Net income was $22.8 million in the third quarter of 2020, an increase of $1.3 million, or 6.2%, versus net income of $21.5 million in the third quarter of 2019. The increase was primarily due to a $2.4 million increase in noninterest income as well as a $368,000 increase in net interest income. These increases were partially offset by increases of $750,000 in the provision for loan losses, a $388,000 increase in noninterest expense and a $258,000 increase in income tax expense.
We anticipate that our net income for future fiscal periods will continue to be impacted as a result of the economic developments resulting from the COVID-19 pandemic. Specifically, while we are not yet able to measure the impact of the COVID-19 crisis on our borrowers, we anticipate provision expense may remain elevated as the economic impact of COVID-19 continues to negatively affect some borrowers, and such effects may not be addressed by any future governmental policy responses. During the third quarter, provision expense declined relative to the first and second quarter provision expense of 2020. This decline was a result of stable asset quality trends and the declining balances of COVID-19 loan deferrals. However, the economic impact of the pandemic continues to evolve and as a result we continue to monitor the impact to borrowers very closely.
In addition, due to the asset-sensitive nature of the Company’s balance sheet, declines in interest rates, including the Federal Reserve Bank’s reductions to the target Federal Funds Rate in the first quarter of 2020, have caused a reduction in net interest margin in the second and third quarters of 2020. Net interest income in 2020 has been negatively impacted by the net interest margin compression, which has been offset by significant loan and deposit growth during the year. Loan and investment security yields have been negatively impacted by the decline in interest rates. Correspondingly, deposit rates have also declined, however, it is possible that loan and investment yield declines may not be fully offset by declines in cost of funds, resulting in potential further net interest margin compression in 2021. Net interest margin compression will further be impacted from the PPP loan program and the low fixed rate of 1.0% on these loans. Borrowers that meet the loan forgiveness requirements outlined in the SBA program will result in loan balance paydowns for the Bank and an acceleration in unamortized PPP net loan fee income accretion through the income statement. The timing and impact to net interest margin will be contingent on how quickly the PPP loans are submitted for forgiveness by borrowers and approved for forgiveness by the SBA. In addition, loans could be repaid by borrowers in lieu of forgiveness over the course of the next few years. The Company also anticipates that potential further federal stimulus payments to retail customers or additional PPP loan program availability may impact net utilization of fee-based financial services and impact net interest margin further.
The following table sets forth consolidated information regarding average balances and rates:
Yield (1)/
(fully tax equivalent basis, dollars in thousands)
Rate
Earning Assets
Taxable (2)(3)
4,339,274
4.03
3,940,812
5.06
Tax exempt (1)
20,248
681
4.49
24,585
897
4.88
Investments: (1)
Available-for-sale
625,887
13,313
2.84
601,098
13,501
3.00
32,671
0.27
6,751
114
2.26
60,429
225
0.50
52,574
843
2.14
Total earning assets
3.82
(57,111)
(49,829)
Nonearning Assets
60,695
137,700
Premises and equipment
60,676
58,910
Other nonearning assets
172,187
155,795
5,314,956
4,928,396
Interest Bearing Liabilities
Savings deposits
260,668
162
0.08
241,322
205
0.11
Interest bearing checking accounts
1,796,270
7,683
0.57
1,636,757
20,242
1.65
Time deposits:
In denominations under $100,000
268,485
3,569
1.78
276,283
3,914
1.89
In denominations over $100,000
969,362
12,910
1,142,633
19,770
2.31
Miscellaneous short-term borrowings
40,460
1.51
80,843
Long-term borrowings and subordinated debentures
58,029
0.40
30,928
5.65
Total interest bearing liabilities
0.98
1.83
Noninterest Bearing Liabilities
Demand deposits
1,252,112
923,253
53,660
43,411
Stockholders' Equity
615,910
552,966
Total liabilities and stockholders' equity
Interest Margin Recap
Interest income/average earning assets
Interest expense/average earning assets
0.66
Net interest income and margin
120,091
117,716
4,541,608
3.68
3,991,572
4.98
15,204
130
24,201
4.78
637,523
4,359
2.72
614,784
4,509
2.91
8,865
0.13
3,478
79,369
0.21
64,902
352
2.15
3.51
(59,519)
(50,732)
61,656
77,921
60,554
59,268
175,601
156,109
5,520,861
4,941,503
282,456
0.07
235,957
0.10
1,827,061
1,405
0.31
1,667,690
6,712
1.60
254,315
982
1.54
278,598
1,383
1.97
972,436
3,501
1.43
1,124,393
6,535
22,058
0.92
18,870
2.38
0.39
5.37
0.70
1.80
1,401,403
961,070
55,154
48,132
630,978
575,865
0.46
40,523
40,084
Net interest income increased $2.1 million, or 1.8%, for the nine months ended September 30, 2020 compared with the first nine months of 2019. The increased level of net interest income during the first nine months of 2020 was largely driven by an increase in average earning assets of $452.7 million, due primarily to loan growth of $394.1 million and growth in investment securities of $24.8 million. Average loans outstanding increased to $4.360 billion during the nine months ended September 30, 2020 compared to $3.965 billion during the same period of 2019, with most of the growth being in fixed rate PPP commercial loans. The average balance of PPP loans was $339.1 million for the nine months ended September 30, 2020. The earning asset growth was funded through an increase in deposits. Average deposits increased $326.6 million to $4.547 billion during the nine months ended September 30, 2020, compared to $4.220 billion for the same period of 2019. During this same period average core deposits increased $427.2 million and average brokered deposits decreased $100.6 million. We define “core deposits” as total deposits (including all deposits by municipalities and other government agencies), excluding brokered deposits. PPP loan proceeds to borrowers impacted the increase in deposits and core deposits during the nine-months ended September 30, 2020 as loan proceeds were deposited into borrower checking and savings accounts at the Bank. Average borrowings decreased by $13.3 million to $98.5 million in the nine months ended September 30, 2020, compared to $111.8 million during the same period of 2019.
The tax equivalent net interest margin was 3.16% for the first nine months of 2020 compared to 3.40% during the first nine months of 2019. The yield on earning assets totaled 3.82% during the nine months ended September 30, 2020 compared to 4.75% in the same period of 2019. Cost of funds (expressed as a percentage of average earning assets) totaled 0.66% during the first nine months of 2020 compared to 1.35% in the same period of 2019. The lower margin in the first nine months of 2020 was due to lower yields on loans and securities, partially offset by a lower cost of funds, driven by the Federal Reserve decreasing the target Federal Funds Rate by 225 basis points since the second half of 2019, inclusive of two Federal Reserve emergency cuts to the target Federal Funds Rate during March 2020. The two emergency cuts reduced the target Federal Funds Rate by 150 basis points and brought the target Federal Funds Rate back to the zero-bound range of 0% to 0.25%. Additionally, the Company’s net interest margin was negatively impacted by six basis points during the first nine months of 2020 due to the lower yield on PPP loans, and net interest margin excluding PPP loans was 3.22% during the period.
Net interest income increased by $368,000, or 0.9%, for the three months ended September 30, 2020 compared with the three months ended September 30, 2019. The increased level of net interest income during the three months ended September 30, 2020 was caused by an increase in average earning assets offset by net interest margin compression. Average earning assets increased by $583.6 million for the three months ended September 30, 2020 compared with the same period of 2019. Average loans outstanding increased $541.0 million during the three months ended September 30, 2020 compared with the same period of 2019, with most of the growth being in fixed rate PPP commercial loans. The average balance of PPP loans was $557.3 million for the three months ended September 30, 2020 and makes up a majority of the loan growth relative to the comparable periods. In addition, investment securities increased by $22.7 million. The earning asset growth was funded through deposit growth as well as an increase in borrowings. Average noninterest bearing demand deposits increased by $440.3 million while average interest bearing deposits increased by $29.6 million and average borrowings increased by $47.3 million.
The tax equivalent net interest margin was 3.05% for the third quarter of 2020 compared to 3.38% during the third quarter of 2019. The yield on earning assets totaled 3.51% during the third quarter of 2020 compared to 4.67% in the same period of 2019, while the cost of funds (expressed as a percentage of average earning assets) totaled 0.46% during the third quarter of 2020 compared to 1.29% in the same period of 2019. Additionally, the Company’s net interest margin was negatively impacted by 12 basis points during the third quarter of 2020 due to the lower yield on PPP loans, and net interest margin excluding PPP loans was 3.17% during the period and during the second quarter of 2020. Earning asset yields and cost of funds each declined by 11 basis points during the third quarter of 2020.
Provision for Loan Losses
The Company elected to delay the adoption of FASB’s new rule covering the Current Expected Credit Loss (“CECL”) standard as permitted by the CARES Act. The Company expects to adopt CECL on the earlier of the termination of the national emergency declaration, or December 31, 2020, whichever comes first, with an effective date of January 1, 2020.
Under the incurred loan loss methodology, the Company recorded provisions for loan loss expense of $13.9 million and $1.8 million in the nine month and three month periods ended September 30, 2020, respectively, compared to a provisions of $3.0 million and $1.0 million during the comparable periods of 2019, respectively. Net charge-offs were $3.8 million and $22,000 in the nine month and three month periods ended September 30, 2020, respectively, compared to net charge-offs of $810,000 and $936,000 during the comparable periods of 2019, respectively. The net charge off activity in 2020 was driven primarily by one commercial manufacturing borrower that was on nonaccrual status and had a loan loss reserve allocation of $4.2 million as of December 31, 2019. The $3.7 million charge-off was due to the restructuring of this relationship during the first quarter of 2020. The primary factor impacting management’s decision to record a higher provision in the nine month and three month periods of 2020 was the potential negative impact to the Company’s borrowers as a result of the economic conditions resulting from the COVID-19 pandemic. Some of the Company’s commercial loan customers have been forced to temporarily suspend or reduce operations and some of the Company’s retail customers are currently without a paycheck, which impairs their abilities to make debt payments. As a result, the Company has granted loan deferrals to customers which peaked on June 17, 2020 at $737 million or 16% of the loan portfolio. As of September 30, 2020, COVID-19 loan deferrals have declined and represent 4% of commercial loans and 1% of retail loans. As of October 21, 2020, total deferrals attributable to COVID-19 were $110 million, representing 63 borrowers, or 2% of the total loan portfolio. Total deferrals as of October 21, 2020 represented a decline in deferral balances of 85% from the peak levels. Of the $110 million, 37 borrowers were commercial loan borrowers representing $107 million in loans, or 3% of total commercial loans and 26 borrowers were retail loan borrowers representing $3 million, or 1% of total retail loans In accordance with provisions of the CARES Act as well as the interagency guidance, loan deferrals granted to our customers that have been made as a result of the impact of COVID-19 and who were not past due are not considered troubled debt restructurings and are therefore not included in the troubled debt restructurings totals as of September 30, 2020. See “Note 4 – Allowance for Loan Losses and Credit Quality.” All COVID-19 related loan deferrals remain on accrual status, as each deferral is evaluated individually, and management has determined that all contractual cashflows are collectable at this time.
Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and 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 categories for the nine-month and three-month periods ended September 30, 2020 and 2019 are shown in the following tables:
Dollar
Percent
Change
592
11.8
(152)
(11.7)
(5,339)
(41.7)
0.9
(49)
(2.5)
230
18.5
3,258
384.7
1,689
134.5
269
286.2
618
31.6
1,183
3.5
194
11.2
(1,163)
(31.8)
4.7
(2.9)
417
81.0
2,066
2,683.1
369
58.0
308
5,133.3
2,350
21.8
The Company’s noninterest income increased $1.2 million, or 3.5%, to $35.1 million for the nine months ended September 30, 2020 compared to $33.9 million in the prior year period. Noninterest income was positively impacted by a $3.3 million increase, or 384.7% growth, in swap fee income generated from commercial lending transactions, a $1.7 million increase, or 134.5% growth, in mortgage banking income, and a $592,000 increase, or 11.8% growth, in wealth management fees over the corresponding prior year period. The credit valuation adjustments on interest rate swaps, which is included in other income, increased noninterest income by $1.2 million in the nine months ended September 30, 2020 compared to the corresponding prior year period. Noninterest income was negatively impacted by a $5.3 million, or 41.7%, decrease in service charges on deposit accounts. Service charges on deposit accounts for the nine months ended September 30, 2019 included $4.5 million of fees from a former commercial customer.
49
The Company’s noninterest income increased $2.4 million, or 21.8%, to $13.1 million for the third quarter of 2020 compared to $10.8 million for the third quarter of 2019. Noninterest income was positively impacted by a $2.1 million increase in interest rate swap fee income, a $369,000 increase, or 58.0% growth, in mortgage banking income and a $194,000 increase, or 11.2% growth, in wealth management fees over the prior year third quarter. Bank owned life insurance income increased $417,000, or 81.0%, primarily due to a variable bank owned life insurance product that contains equity based investments. Net securities gains increased $308,000 due to repositioning of the available-for-sale securities portfolio. Offsetting these increases were decreases of $1.2 million, or 31.8%, in service charges on deposit accounts driven by lower treasury management fees and lower transaction-based fees. Overdraft fee income declined by $344,000, or 36%, during the third quarter as compared to the prior year third quarter, which is included in service charges on deposit accounts.
Future noninterest income may continue to be impacted due to the effects of the COVID-19 pandemic, and the scope of any future governmental policy responses. For example, reduced economic activity may result in lower merchant card fee income and lower interchange revenue that is reported in services charges on deposits accounts and loan and service fees.
Noninterest expense categories for the nine-month and three-month periods ended September 30, 2020 and 2019 are shown in the following tables:
(843)
(2.3)
336
8.4
73
1.8
1,117
14.7
(1,052)
(31.2)
658
116.3
0.5
(1,317)
(17.4)
(1,009)
(1.5)
3.9
(16)
(1.2)
405
15.5
(413)
(41.3)
803
322.5
(173)
(499)
(18.7)
388
1.7
The Company’s noninterest expense decreased by $1.0 million, or 1.5%, to $66.3 million in the first nine months of 2020 compared to $67.3 million in the corresponding prior year period. The decrease was driven by corporate and business development, which decreased $1.1 million, or 31.2%, due to reduced business development and training expense. Salaries and employee benefits decreased by $843,000, or 2.3%, primarily due to lower incentive-based compensation expense. Offsetting the decreases were increases of $1.1 million, or 14.7%, in data processing fees and supplies. In addition, FDIC insurance and other regulatory fees increased $658,000, or 116.3%, as insurance assessment credits have expired.
50
The Company’s noninterest expense increased $388,000, or 1.7%, to $23.1 million in the third quarter of 2020, compared to $22.7 million in the third quarter of 2019. FDIC insurance and regulatory fees increased $803,000 as all FDIC deposit insurance credits due the Company were received by the end of the first quarter of 2020. Data processing fees increased $405,000, or 15.5%, driven by the Company’s continued investment in customer focused, technology-based solutions and ongoing cybersecurity and data management enhancements. Offsetting these increases were decreases in corporate and business development of $413,000, or 41.3%, due to reduced business development and training expense, which is deemed temporary due to the pandemic.
The Company’s efficiency ratio was 43.6% for the third quarter of 2020, compared to 45.2% for the third quarter of 2019 and 41.6% for the linked second quarter of 2020. The company’s efficiency ratio was 43.2% for the nine months ended September 30, 2020 compared to 44.9% in the prior year period due to revenue growth outpacing expense growth during 2020.
As previously disclosed, in the third quarter of 2019 the Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks. The client subsequently filed a bankruptcy case, captioned In re Interlogic Outsourcing, Inc. et al., which is pending in the United States Bankruptcy Court for the Western District of Michigan. The Bank and the other banks are currently subject to document and information requests in the bankruptcy case, and various parties in the bankruptcy case have threatened to bring claims against the Bank and other banks. Based on current information, the Company has determined that a loss is neither probable nor estimable at this time, and the Bank intends to vigorously defend itself if any claim is filed.
Future noninterest expense may continue to be reduced due to the COVID-19 pandemic. For example, continued protracted economic inactivity may reduce balance sheet growth and resulting revenue growth which could decrease the amount the Company pays in incentive-based compensation. In addition, elevated provision expense may reduce net income and diluted earnings per share, another key performance metric that impacts the incentive-based compensation targets.
The Company’s income tax expense decreased $1.4 million and increased $258,000, respectively, in the nine-month and three-month periods ended September 30, 2020 compared to the same periods in 2019. The effective tax rate was 18.4% and 19.1%, respectively, in the nine-month and three-month periods ended September 30, 2020, compared to 18.7% and 19.3% for the comparable periods of 2019. The year-to-date effective tax rate for 2020 decreased as compared to the prior year period primarily due a lower state tax rate as well as a higher percentage of income being derived from tax-advantaged sources.
FINANCIAL CONDITION
Total assets of the Company were $5.551 billion as of September 30, 2020, an increase of $604.4 million, or 12.2%, when compared to $4.947 billion as of December 31, 2019. This increase was primarily due to a $524.1 million, or 12.9%, increase in gross loans, offset by an increase in the allowance for loan losses of $10.1 million, or 19.9%. In addition, the balance sheet increased due to growth in securities available-for-sale to $644.0 million at September 30, 2020 from $608.2 million at December 31, 2019, an increase of $29.7 million, or 29.9%, in cash and cash equivalents to $129.1 million at September 30, 2020 from $99.4 million at December 31, 2019 and an increase of $15.2 million, or 37.0%, in other assets driven by higher valuations on the Company’s swap portfolio. Total deposits increased $634.1 million, or 15.3%, while total borrowings decreased by $84.5 million, or 49.7%. The increase in deposits was primarily driven by growth in core deposits of $718.0 million offset by a decrease in wholesale funding of $83.8 million. Core deposits were $4.738 billion as of September 30, 2020 compared to $4.020 billion as of December 31, 2019, an increase of $718.0 million, or 17.9%. Loan growth was driven by Paycheck Protection Program (PPP) loans originated primarily during the second quarter of 2020. The outstanding balance of PPP loans at September 30, 2020, was $557.9 million. Loans excluding PPP loans decreased by $33.8 million, or -0.8%, from $4.07 billion at December 31, 2019 to $4.03 billion at September 30, 2020. Additionally, commercial deposits increased by $527.8 million, or 41.4%, to $1.804 billion at September 30, 2020 compared to $1.276 billion at December 31, 2019. The increase in commercial and retail core deposits has resulted from proceeds from the PPP loan program, federal stimulus payments made to individuals and an increase in the savings rate during the pandemic.
Uses of Funds
Total Cash and Cash Equivalents
Total cash and cash equivalents increased by $29.7 million, or 29.9% to $129.1 million at September 30, 2020, from $99.4 million at December 31, 2019. Cash and cash equivalents at September 30, 2020 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 and cash letter deposits in transit. 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, 2020 and December 31, 2019 were as follows:
U.S government sponsored agencies
At September 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer, other than the U.S. 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 $89.9 million in the first nine months of 2020. 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 $63.0 million were received in the first nine months of 2020, and the amortization of premiums, net of the accretion of discounts, was $3.0 million. The increase in net amortization expense from the prior year is being driven by increased prepayment speeds given the current rate environment and prior period levels were elevated due to the adoption of ASU 2017-08. Maturities and calls of securities totaled $6.3 million in the first nine months of 2020. Sales of securities totaled $6.4 million in the first nine months of 2020. No other-than-temporary impairment was recognized in the first nine months of 2020.
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. No other-than-temporary impairment was recognized in the first nine months of 2019.
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 $5.6 million, or 123.0%, to $10.1 million at September 30, 2020, from $4.5 million at December 31, 2019. 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 conforming qualifying mortgage loans it originates on the secondary market. Proceeds from sales of residential mortgages totaled $90.6 million in the first nine months of 2020 compared to $39.0 million in the first nine months of 2019. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $359.7 million and $337.9 million, respectively, as of September 30, 2020 and December 31, 2019.
Loan Portfolio
The loan portfolio by portfolio segment as of September 30, 2020 and December 31, 2019 is summarized as follows:
Current
Period
Commercial and industrial loans
422,545
Commercial real estate and multi-family residential loans
186,986
Agri-business and agricultural loans
(41,377)
(14,769)
Consumer 1-4 family mortgage loans
(24,195)
6,668
Subtotal, gross loans
535,858
(10,095)
(11,762)
514,001
Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, increased by $535.9 million to $4.603 billion at September 30, 2020 from $4.067 billion at December 31, 2019. The increase was concentrated in the commercial real estate and commercial and industrial categories and was driven by $570.5 million in loans originated under the PPP, with $557.9 million of the PPP loans remaining outstanding at September 30, 2020. We anticipate that the portion of our loan portfolio attributable to PPP loans will continue to decline in future quarters, as borrowers avail themselves of loan forgiveness opportunities under the PPP. Total loans excluding PPP loans increased by $8.9 million, as of September 30, 2020 as compared to September 30, 2019. On a linked quarter basis, total loans excluding PPP loans were $4.0 billion, an increase of $96.2 million, or 2%, as of September 30, 2020 as compared to the second quarter of 2020. The balance of net deferred loans fees attributable to PPP loans was $11.5 million as of September 30, 2020.
The following table summarizes the Company’s non-performing assets as of September 30, 2020 and December 31, 2019:
Nonaccrual loans including nonaccrual troubled debt restructured loans
Loans past due over 90 days and still accruing
Total nonperforming loans
13,497
18,720
316
Repossessions
Total nonperforming assets
13,813
19,036
Impaired loans including troubled debt restructurings
22,484
27,763
Nonperforming loans to total loans
0.29
Nonperforming assets to total assets
0.25
0.38
Performing troubled debt restructured loans
Nonperforming troubled debt restructured loans (included in nonaccrual loans)
Total nonperforming assets decreased by $5.2 million, or 27.4%, to $13.8 million during the nine-month period ended September 30, 2020. The ratio of nonperforming assets to total assets at September 30, 2020 decreased from 0.38% at December 31, 2019 to 0.25% at September 30, 2020. The decrease in nonperforming assets was primarily due to a $3.7 million charge-off taken on a single commercial manufacturing borrower during the first quarter of 2020.
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 decreased by $5.3 million, or 19.0%, to $22.5 million at September 30, 2020 from $27.8 million at December 31, 2019. The decrease in the impaired loans category was primarily due to the $3.7 million charge-off on the single commercial relationship that was on nonaccrual status as of December 31, 2019.
As a result of the COVID-19 pandemic, we anticipate that our commercial, commercial real estate, residential and consumer borrowers may continue to encounter economic difficulties, which could lead to increases in our levels of nonperforming assets, impaired loans and troubled debt restructurings in future periods.
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, 2020, the allowance for loan losses was 1.32% of total loans outstanding, versus 1.25% of total loans outstanding at December 31, 2019. The allowance for loan losses was 1.51% of total loans outstanding, excluding PPP loans of $557.9 million, as of September 30, 2020. This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for loan losses calculation. At September 30, 2020, 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 fail to recover or continue to deteriorate due to the COVID-19 pandemic, 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 extended to businesses with a broad range of revenue and within a wide variety of industries. Traditionally, this type of lending may have more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by utilizing conservative credit structures, 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, 2020, based on management’s review of the loan portfolio, the Company had 97 credits totaling $221.3 million on the classified loan list versus 103 credits totaling $181.2 million on December 31, 2019. The increase in classified loans for the first nine months of 2020 resulted primarily from three commercial borrowers recorded on the non-impaired portion of the watchlist. As of September 30, 2020, the Company had $168.7 million of assets classified as Special Mention, $52.7 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to $96.6 million, $84.6 million, $0 and $0, respectively, at December 31, 2019.
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 the incurred loan loss reserve 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 19.9%, or $10.1 million, from $50.7 million at December 31, 2019 to $60.7 million at September 30, 2020. Pooled loan allocations increased from $40.3 million at December 31, 2019 to $52.7 million at September 30, 2020, which was primarily due to management’s view of current credit quality, the current economic environment, the impacts of COVID-19 and loan growth. Impaired loan allocations were $8.0 million at September 30, 2020 and $10.4 million at December 31, 2019. The unallocated component of the allowance for loan losses was $3.2 million at September 30, 2020 and $2.3 million at December 31, 2019. The Company believes that the unallocated component is appropriate given the high level of 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.
55
Total loans declined by $33.8 million for the first nine months of 2020, excluding the $557.9 million in PPP loans. On a linked quarter basis, total loans excluding PPP loans were $4.0 billion, an increase of $96.2 million, or 2%, as of September 30, 2020 as compared to the second quarter of 2020. Prior to the pandemic, economic conditions in the Company’s markets were stable. During the last six months some industries have performed well during the pandemic, while others have not. The Company is monitoring industries and borrowers impacted by the pandemic as discussed. Watch list loans are $40.1 million higher at $221.3 million compared to $181.2 million at December 31, 2019, which represents 4.82% of total loans at September 30, 2020 compared to 4.43% at December 31, 2019. When excluding PPP loans of $557.9 million as of September 30, 2020, watch list loans were 5.49% of total loans. This reflects a more comparable ratio to prior periods, as PPP loans are fully guaranteed by the SBA and have not been allocated for within the allowance for loan losses calculation. Total impaired and watch list loans increased by $17.5 million, or 8.6%, to $221.3 million at September 30, 2020 versus $203.8 million as of September 30, 2019. On a linked quarter basis, total impaired and watch list loans increased by $13.1 million, or 6.3%, from $208.2 million at June 30, 2020. The increase in total impaired and watch list loans was due primarily to an increase in non-impaired watch list credits. Impaired watch list loans decreased by $5.6 million, or 19.9%, to $22.5 million at September 30, 2020 versus September 30, 2019. On a linked quarter basis, impaired watch list loans decreased by $1.5 million, or 6.3%, from $24.0 million at June 30, 2020. 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.
As of September 30, 2020, total deferrals attributed to COVID-19 were $158.4 million representing 102 borrowers. This represented 3.4% of the total loan portfolio. Of that total 71 were commercial loan borrowers representing $155.1 million in loans, or 3.7%, of commercial loans and 31 were retail loan borrowers representing $3.3 million, or 0.9%, of total retail loans.
A summary of loan deferrals, by loan segment, as of September 30, 2020 is as follows:
CRE - Nonowner Occupied
13.7
69,219
43.7
36,944
23.3
CRE - Owner Occupied
20.5
33,588
21.2
CRE - Construction
6,299
4.0
2.6
Residential mortgage
23.9
4,533
2.9
Installment - other consumer
5.1
1,627
1.0
346
0.2
755
Total*
117
158,430
* The number of borrowers in the table is higher due to one single borrower impacting multiple loan segments.
As of September 30, 2020, 77 borrowers with loans outstanding of $117 million were in their second deferral period, most of which were additional 90 day deferrals. Additionally, 12 borrowers with loans outstanding of $26 million were in their third deferral period. Two borrowers represented 84% of the third deferral population and were commercial real estate non-owner occupied loans supported by adequate collateral and personal guarantors and consist primarily of loans to the hotel and accommodation industry.
56
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, 2020 and 2019 are summarized in the following table:
Noninterest bearing demand deposits
Savings and transaction accounts:
Interest bearing demand deposits
Deposits of $100,000 or more
Other time deposits
4,546,897
0.71
4,220,248
1.40
FHLB advances and other borrowings
98,489
0.85
111,771
3.11
Total funding sources
4,645,386
0.72
4,332,019
1.44
Deposits and Borrowings
As of September 30, 2020, total deposits increased by $634.1 million, or 15.3%, from December 31, 2019. Core deposits increased by $718.0 million to $4.738 billion as of September 30, 2020 from $4.020 billion as of December 31, 2019. Total brokered deposits were $29.7 million at September 30, 2020 compared to $113.5 million at December 31, 2019 reflecting an $83.8 million decrease during the first nine months of 2020. PPP loan proceeds to borrowers impacted the increase in deposits during 2020 as loan proceeds were deposited into borrower checking and savings accounts at the Bank.
Since December 31, 2019, the change in core deposits was comprised of increases in commercial deposits of $527.8 million, retail deposits of $105.1 million and public funds deposits of $85.0 million. Total public funds deposits, including public funds transaction accounts, were $1.212 billion at September 30, 2020 and $1.127 billion at December 31, 2019.
The following table summarizes deposit composition at September 30, 2020 and December 31, 2019:
Retail
1,722,248
1,617,133
105,115
1,803,872
1,276,048
527,824
Public funds
1,212,131
1,127,111
85,020
Core deposits
4,738,251
4,020,292
717,959
Brokered deposits
29,703
113,527
(83,824)
Total borrowings decreased by $84.5 million, or 49.7%, from December 31, 2019, primarily due to FHLB advance net repayments of $95.0 million. The Company also drew $10.5 million on its holding company line of credit with a correspondent bank during the first quarter of 2020 to repurchase Company stock. 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. Additionally, management has completed the actions required to activate participation in the Federal Reserve Bank’s Paycheck Protection Program Lending Facility (PPPLF); however, there were no PPP loans pledged to the PPPLF as of September 30, 2020. Management anticipates that the Company’s deposit balances may fluctuate more than usual during the remainder of 2020 due to the impact of PPP loan fundings, which are made to PPP loan recipient deposit accounts. In addition, there will be fluctuations due to IRS stimulus payments direct deposited into the accounts of retail customers. The timing and use of these funds in addition to draws on unfunded commitments could impact our need to borrow throughout the year.
Capital
As of September 30, 2020, total stockholders’ equity was $636.8 million, an increase of $38.7 million, or 6.5%, from $598.0 million at December 31, 2019. In addition to net income of $59.7 million, other increases in equity during the first nine months of 2020 included a $13.2 million increase 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. Offsetting the increases to stockholders’ equity were decreases due to the repurchase of 289,101 common shares for $10.0 million under the share repurchase plan, dividends declared and paid in the amount of $23.0 million and $2.0 million in stock activity under equity compensation plans.
During the first quarter of 2020, the Company repurchased 289,101 shares of its common stock for $10 million at a weighted average price per share of $34.63. Share repurchases under the repurchase plan were suspended in March with $20 million of authorization remaining available under the plan. No shares were repurchased under the plan during the second or third quarters of 2020. The Company continues to evaluate the share repurchase program pursuant to its previously established criteria for execution.
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, 2020, 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, 2020 and December 31, 2019, are presented in the table below. Capital ratios for September 30, 2020 are preliminary until Call Report and FR Y-9C are filed.
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, 2020:
Total Capital (to Risk Weighted Assets)
Consolidated
662,267
14.90
355,578
8.00
466,696
Bank
658,231
14.84
465,646
10.50
443,472
10.00
Tier I Capital (to Risk Weighted Assets)
606,555
13.65
266,683
6.00
377,801
602,642
13.59
266,083
376,951
8.50
354,778
Common Equity Tier 1 (CET1)
200,012
4.50
311,130
199,562
310,430
7.00
288,257
6.50
Tier I Capital (to Average Assets)
11.07
219,246
4.00
11.02
218,751
273,439
5.00
As of December 31, 2019:
631,723
14.36
351,894
461,862
616,386
14.04
351,227
460,985
10.500
439,034
580,982
13.21
263,921
373,887
565,645
12.88
263,420
373,179
8.500
197,941
307,908
197,565
307,324
7.000
285,372
11.67
199,099
11.43
197,923
247,404
58
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 federal securities law. Forward-looking statements are not historical facts and are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “project,” “possible,” “continue,” “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 and, accordingly, the reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including, without limitation:
59
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
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 2020. 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 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, 2020. 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
Base
(25 Basis Points)
(50 Basis Points)
(100 Basis Points)
(200 Basis Points)
(300 Basis Points)
166,827
164,697
168,770
170,737
175,133
183,325
191,945
Variance from Base
(2,130)
1,943
3,910
8,306
16,498
25,118
Percent of change from Base
(1.28)
1.16
9.89
15.06
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, 2020. 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 SEC 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, 2020, 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, 2019, except as set forth below. 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.
The outbreak of Coronavirus Disease 2019 (“COVID-19”) is having an adverse impact on our business and results of operations, and could have an adverse impact on our financial condition or capital levels, any of which could be material.
The spread of COVID-19 has had a significant economic impact on the communities in which we operate, our borrowers and depositors, and the national economy generally, including a general curtailment of business activity and increased levels of unemployment in our Indiana markets. We expect this impact could worsen and last for a significant and indeterminate period. These developments have adversely affected our business and results of operations, and we believe they could adversely impact our financial condition and capital levels, the amounts of which cannot be determined and could be material. In particular, certain of our borrowers and depositors are in or have exposure to industries, such as hotel and accommodations, dairy, education, entertainment and recreation, and full-service restaurants, that have reduced or suspended operations. Any continued decrease in economic activity as a result of COVID-19 could have a negative adverse impact on certain of our borrowers and their financial condition, which could impact their ability to meet their financial obligations and could result in elevated levels of delinquencies, defaults, foreclosures and loan losses. See “Note 11 – COVID-19 and Current Economic Conditions” for additional information.
In addition, the COVID-19 pandemic could have a material impact on our operations. We rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the outbreak could negatively impact our employees and customers’ ability to engage in banking and other financial transactions and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas.
The pandemic has also increased our exposure to related business risks, including the following:
In addition, we depend upon the management skills of our executive officers and directors. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
We may experience increases to, and volatility in, the balance of the allowance for credit losses and related provision expense due to the adoption of the current expected credit losses (“CECL”) methodology.
As permitted by the CARES Act, we have delayed adoption of CECL until the earlier of the termination date of the national emergency declared by President Trump under the National Emergencies Act on March 31, 2020, related to the outbreak of COVID-19, and December 31, 2020. Once the delay provision is terminated, adoption will be retroactive to January 1, 2020 and the Company’s day one adjustment to the allowance for credit losses is expected to be an increase of $7.67 million with an offset, net of taxes, to stockholders’ equity. We will then true up provision expense in the fourth quarter as if CECL had been adopted for the full year.
The CECL methodology differs substantially from the incurred loss methodology currently used in that it is forward looking, requiring measurement to occur when a financial asset is first added to the balance sheet and periodically thereafter. The measurements will require increased use of management judgments as well as forward-looking information and forecasts. Although every effort is made to ensure that the judgements are correct and the forecasts accurate, the future is uncertain, and there can be no guarantee that the judgments and forecasts will prove to be correct.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
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 expired on December 31, 2019, and it was reauthorized by the Company’s board of directors on January 14, 2020 through January 31, 2021, with an aggregate purchase price cap of $30 million. 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.
Share repurchases under the repurchase plan were suspended in March with $20 million of authorization remaining available under the plan. No shares were repurchased under the plan during the third quarter of 2020. The Company continues to evaluate the share repurchase program pursuant to its previously established criteria for execution.
The following table provides information as of September 30, 2020 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(a)
Paid per Share
Programs
July 1-31
3,492
45.11
19,988,273
August 1-31
1,217
44.83
September 1-30
4,709
45.03
Item 3. Defaults Upon Senior Securities
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.
101
Interactive Data File
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three months and nine months ended September 30, 2020 and September 30, 2019; (iii) Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2020 and September 30, 2019; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months and nine months ended September 30, 2020 and September 30, 2019; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019; and (vi) Notes to Unaudited Consolidated Financial Statements.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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: October 28, 2020
/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)