UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
◻TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35654
NATIONAL BANK HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
27-0563799
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
7800 East Orchard, Suite 300, Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant’s telephone, including area code: (720) 529-3336
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, a 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
◻ (do not check if a smaller reporting company)
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 ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
Class A Common Stock
NBHC
NYSE
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 7, 2019, the registrant had outstanding 30,992,140 shares of Class A voting common stock, each with $0.01 par value per share, excluding 126,821 shares of restricted Class A common stock issued but not yet vested.
Page
Part I. Financial Information
Item 1.
Financial Statements (Unaudited)
6
Consolidated Statements of Financial Condition as of March 31, 2019 and December 31, 2018
Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
7
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018
8
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and 2018
9
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
10
Notes to Consolidated Financial Statements
11
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
65
Item 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
66
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
2
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “would,” “should,” “could,” “may,” “predict,” “seek,” “potential,” “will,” “estimate,” “target,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “intend” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties. We have based these statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, liquidity, results of operations, business strategy and growth prospects.
Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements and, therefore, you are cautioned not to place undue reliance on such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
our ability to execute our business strategy, as well as changes in our business strategy or development plans;
business and economic conditions generally and in the financial services industry;
effects of a prolonged government shutdown;
economic, market, operational, liquidity, credit and interest rate risks associated with our business;
effects of any changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
changes imposed by regulatory agencies to increase our capital to a level greater than the current level required for well-capitalized financial institutions;
effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations;
changes in the economy or supply-demand imbalances affecting local real estate values;
changes in consumer spending, borrowings and savings habits;
with respect to our mortgage business, our inability to negotiate our fees with Fannie Mae, Freddie Mac, Ginnie Mae or other investors for the purchase of our loans, our obligation to indemnify purchasers or to repurchase the related loans if the loans fail to meet certain criteria, or higher rate of delinquencies and defaults as a result of the geographic concentration of our servicing portfolio;
our ability to identify potential candidates for, obtain regulatory approval for, and consummate, acquisitions, consolidations or other expansion opportunities on attractive terms, or at all;
our ability to integrate acquisitions or consolidations and to achieve synergies, operating efficiencies and/or other expected benefits within expected time-frames, or at all, or within expected cost projections, and to preserve the goodwill of acquired financial institutions;
our ability to realize the anticipated benefits from enhancements or updates to our core operating systems from time to time without significant change in our client service or risk to our control environment;
our dependence on information technology and telecommunications systems of third party service providers and the risk of system failures, interruptions or breaches of security, including those that could result in disclosure or misuse of confidential or proprietary client or other information;
3
our ability to achieve organic loan and deposit growth and the composition of such growth;
changes in sources and uses of funds, including loans, deposits and borrowings;
increased competition in the financial services industry, nationally, regionally or locally, resulting in, among other things, lower returns;
continued consolidation in the financial services industry;
our ability to maintain or increase market share and control expenses;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
the trading price of shares of the Company's stock;
the effects of tax legislation, including the potential of future increases to prevailing tax rates, or challenges to our tax position;
our ability to realize deferred tax assets or the need for a valuation allowance, or the effects of changes in tax laws on our deferred tax assets;
costs and effects of changes in laws and regulations and of other legal and regulatory developments, including, but not limited to, changes in regulation that affect the fees that we charge, the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations, reviews or other inquiries; and changes in regulations that apply to us as a Colorado state-chartered bank;
technological changes;
the timely development and acceptance of new products and services and perceived overall value of these products and services by our clients;
changes in our management personnel and our continued ability to attract, hire and retain qualified personnel;
ability to implement and/or improve operational management and other internal risk controls and processes and our reporting system and procedures;
regulatory limitations on dividends from our bank subsidiary;
changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
widespread natural and other disasters, dislocations, political instability, acts of war or terrorist activities, cyberattacks or international hostilities through impacts on the economy and financial markets generally or on us or our counterparties specifically;
a cyber-security incident, data breach or a failure of a key information technology system;
impact of reputational risk on such matters as business generation and retention;
other risks and uncertainties listed from time to time in the Company’s reports and documents filed with the Securities and Exchange Commission; and
our success at managing the risks involved in the foregoing items.
4
Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.
5
PART I: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
NATIONAL BANK HOLDINGS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
(In thousands, except share and per share data)
March 31, 2019
December 31, 2018
ASSETS
Cash and due from banks
$
104,758
109,056
Interest bearing bank deposits
500
Cash and cash equivalents
105,258
109,556
Investment securities available-for-sale (at fair value)
749,537
791,102
Investment securities held-to-maturity (fair value of $219,607 and $230,926 at March 31, 2019 and December 31, 2018, respectively)
221,727
235,398
Non-marketable securities
24,574
27,555
Loans
4,246,941
4,092,308
Allowance for loan losses
(37,055)
(35,692)
Loans, net
4,209,886
4,056,616
Loans held for sale
59,324
48,120
Other real estate owned
9,394
10,596
Premises and equipment, net
109,594
109,986
Goodwill
115,027
Intangible assets, net
12,981
13,470
Other assets
185,364
159,240
Total assets
5,802,666
5,676,666
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing demand deposits
1,172,683
1,072,029
Interest bearing demand deposits
696,332
688,255
Savings and money market
1,764,341
1,694,808
Time deposits
1,081,092
1,080,529
Total deposits
4,714,448
4,535,621
Securities sold under agreements to repurchase
59,543
66,047
Federal Home Loan Bank advances
228,421
301,660
Other liabilities
85,252
78,332
Total liabilities
5,087,664
4,981,660
Shareholders’ equity:
Common stock, par value $0.01 per share: 400,000,000 shares authorized; 51,487,907 and 51,498,016 shares issued; 30,958,581 and 30,769,063 shares outstanding at March 31, 2019 and December 31, 2018, respectively
515
Additional paid-in capital
1,012,974
1,014,399
Retained earnings
120,879
106,990
Treasury stock of 20,421,540 and 20,582,459 shares at March 31, 2019 and December 31, 2018, respectively, at cost
(413,226)
(415,623)
Accumulated other comprehensive loss, net of tax
(6,140)
(11,275)
Total shareholders’ equity
715,002
695,006
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated interim financial statements.
Consolidated Statements of Operations (Unaudited)
For the three months ended
March 31,
2019
2018
Interest and dividend income:
Interest and fees on loans
52,775
45,280
Interest and dividends on investment securities
6,012
6,526
Dividends on non-marketable securities
423
244
Interest on interest-bearing bank deposits
210
741
Total interest and dividend income
59,420
52,791
Interest expense:
Interest on deposits
6,615
4,634
Interest on borrowings
1,639
510
Total interest expense
8,254
5,144
Net interest income before provision for loan losses
51,166
47,647
Provision for loan losses
1,534
41
Net interest income after provision for loan losses
49,632
47,606
Non-interest income:
Service charges
4,321
4,510
Bank card fees
3,428
3,362
Mortgage banking income
6,937
7,971
Bank-owned life insurance income
421
452
Other non-interest income
1,883
1,150
OREO related income
61
390
Total non-interest income
17,051
17,835
Non-interest expense:
Salaries and benefits
27,890
30,672
Occupancy and equipment
6,882
7,955
Telecommunications and data processing
2,290
4,366
Marketing and business development
986
1,224
FDIC deposit insurance
498
753
Bank card expenses
810
2,136
Professional fees
814
2,819
Other non-interest expense
3,173
3,845
Problem asset workout
1,123
781
(Gain) loss on OREO sales, net
(368)
78
Core deposit intangible asset amortization
296
653
Total non-interest expense
44,394
55,282
Income before income taxes
22,289
10,159
Income tax expense
3,367
1,695
Net income
18,922
8,464
Income per share—basic
0.61
0.28
Income per share—diluted
0.60
0.27
Weighted average number of common shares outstanding:
Basic
30,961,187
30,493,689
Diluted
31,497,538
31,143,528
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Other comprehensive income (loss), net of tax:
Securities available-for-sale:
Net unrealized gains (losses) arising during the period, net of tax (expense) benefit of ($1,706) and $2,301 for the three months ended March 31, 2019 and 2018, respectively
5,417
(6,780)
Less: amortization of net unrealized holding gains to income, net of tax benefit of $90 and $70 for the three months ended March 31, 2019 and 2018, respectively
(282)
(387)
Other comprehensive income (loss)
5,135
(7,167)
Comprehensive income
24,057
1,297
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
Three months ended March 31, 2019 and 2018
Accumulated
Additional
other
Common
paid-in
Retained
Treasury
comprehensive
stock
capital
earnings
(loss) income, net
Total
Balance, December 31, 2017
970,668
60,795
(493,329)
(6,242)
532,407
—
Stock-based compensation
833
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $3,566, net
(1,476)
5,319
3,843
Reissuance of treasury stock of 3,398,477 shares for acquisition of Peoples, Inc.
42,243
67,970
110,213
Cash dividends declared ($0.09 per share)
(2,756)
Reclassification of certain tax effects from accumulated other comprehensive income(1)
1,479
(1,479)
Cumulative effect adjustment(2)
26
Other comprehensive loss
Balance, March 31, 2018
1,012,268
68,008
(420,040)
(14,888)
645,863
Balance, December 31, 2018
376
Issuance of stock under purchase and equity compensation plans, including gain on reissuance of treasury stock of $2,291 net
(1,801)
2,397
596
Cash dividends declared ($0.17 per share)
(5,289)
Cumulative effect adjustment(3)
256
Other comprehensive income
Balance, March 31, 2019
Related to the adoption of Accounting Standards Update No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
Related to the adoption of Accounting Standards Update No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.
Related to the adoption of Accounting Standards Update No. 2016-02, Leases. Refer to note 2 – Recent Accounting Pronouncements of our consolidated financial statements for further details.
Consolidated Statements of Cash Flows (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization
2,527
Current income tax receivable
2,968
Deferred income taxes
1,929
Net excess tax benefit on stock-based compensation
(753)
(371)
Discount accretion, net of premium amortization on securities
442
Loan accretion
(4,193)
Gain on sale of mortgages, net
(6,276)
Origination of loans held for sale, net of repayments
(176,105)
Proceeds from sales of loans held for sale
171,330
(421)
Gain on the sale of other real estate owned, net
Impairment on other real estate owned
38
375
Operating lease payments
(1,406)
Acquisition-related costs
Increase in other assets
716
(Decrease) increase in other liabilities
(15,437)
Net cash (used in) provided by operating activities
(3,620)
10,509
Cash flows from investing activities:
Purchase of FHLB stock
(4,248)
(2,950)
Proceeds from redemption of FHLB stock
7,229
8,690
Proceeds from maturities of investment securities held-to-maturity
13,217
15,526
Proceeds from maturities of investment securities available-for-sale
48,328
Proceeds from sales of investment securities available-for-sale
33,202
Purchase of investment securities held-to-maturity
(40,735)
Purchase of investment securities available-for-sale
Net (increase) decrease in loans
(159,027)
9,135
Purchases of premises and equipment, net
(1,688)
(1,905)
Proceeds from sales of other real estate owned
1,262
36
Net cash activity from acquisition
68,984
Net cash (used in) provided by investing activities
(94,927)
102,936
Cash flows from financing activities:
Net increase (decrease) in deposits
178,826
(160)
(Decrease) increase in repurchase agreements
(6,504)
10,724
Advances from FHLB
319,041
FHLB repayments
(392,280)
(85,605)
Issuance of stock under purchase and equity compensation plans
(1,646)
(517)
Proceeds from exercise of stock options
2,221
4,360
Payment of dividends
(5,409)
(2,741)
Net cash provided by (used in) financing activities
94,249
(73,939)
(Decrease) increase in cash, cash equivalents and restricted cash
(4,298)
39,506
Cash, cash equivalents and restricted cash at beginning of the year
119,556
257,364
Cash, cash equivalents and restricted cash at end of period
115,258
296,870
Supplemental disclosure of cash flow information during the period:
Cash paid for interest
6,539
3,723
Net tax (payments) refunds
(86)
164
Supplemental schedule of non-cash activities:
Loans transferred to other real estate owned at fair value
288
127
Decrease in loans purchased but not settled
(7,974)
(15,068)
Loans transferred from loans held for sale to loans
198
878
Lease right-of-use assets obtained in exchange for operating lease liabilities
30,474
Treasury stock reissued for acquisition
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 Basis of Presentation
National Bank Holdings Corporation ("NBHC" or the "Company") is a bank holding company that was incorporated in the State of Delaware in 2009. The Company is headquartered in Denver, Colorado, and its primary operations are conducted through its wholly owned subsidiary, NBH Bank, (the "Bank"), a Colorado state-chartered bank and a member of the Federal Reserve System. The Company provides a variety of banking products to both commercial and consumer clients through a network of 104 banking centers, as of March 31, 2019, located primarily in Colorado and the greater Kansas City region, and through online and mobile banking products and services.
The accompanying interim unaudited consolidated financial statements serve to update the National Bank Holdings Corporation Annual Report on Form 10-K for the year ended December 31, 2018 and include the accounts of the Company and its wholly owned subsidiary, NBH Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and where applicable, with general practices in the banking industry or guidelines prescribed by bank regulatory agencies. However, they may not include all information and notes necessary to constitute a complete set of financial statements under GAAP applicable to annual periods and accordingly should be read in conjunction with the financial information contained in the Company's most recent Form 10-K. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results presented. All such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior years' amounts are made whenever necessary to conform to current period presentation The results of operations for the interim period is not necessarily indicative of the results that may be expected for the full year or any other interim period. All amounts are in thousands, except share data, or as otherwise noted.
GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. By their nature, estimates are based on judgment and available information. Management has made significant estimates in certain areas, such as the amount and timing of expected cash flows from assets, the valuation of other real estate owned (“OREO”), the fair value adjustments on assets acquired and liabilities assumed, the valuation of core deposit intangible assets, the valuation of investment securities for other-than-temporary impairment (“OTTI”), the valuation of stock-based compensation, the valuation of mortgage servicing rights, the fair values of financial instruments, the allowance for loan losses (“ALL”) and contingent liabilities. Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.
The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in note 2 of the audited financial statements and notes for the year ended December 31, 2018 and are contained in the Company's Annual Report on Form 10-K. There have not been any significant changes to the application of significant accounting policies since December 31, 2018.
Note 2 Recent Accounting Pronouncements
Leases—In February 2016, the FASB issued ASU 2016-02, Leases. The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statements. ASU 2016-02 became effective for the Company on January 1, 2019 and initially required a transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the Financial Accounting Standards Board issued ASU 2018-11 which, among other things, provides an additional transition method that allows entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). The updates did not significantly change lease accounting requirements applicable to lessors and did not significantly impact our financial statements in relation to contracts whereby we act as a lessor. We applied the modified-retrospective transition
approach prescribed by ASU 2018-11. Upon adoption of ASU 2016-02 and ASU 2018-11 on January 1, 2019, we recognized right-of-use assets and related lease liabilities totaling $30.5 million with a cumulative-effect adjustment to beginning retained earnings of $0.3 million. Refer to note 6 – Leases of our consolidated financial statements for further detail.
Financial Instruments - Credit Losses—In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This update replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This amendment broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, the update amends the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. ASU 2016-13 becomes effective for us on January 1, 2020. We have formed a cross-functional working group, including our credit, finance, risk management, and enterprise technology departments, to address the adoption and implementation of ASU 2016-13. We are currently working through our implementation plan and are in the process of implementing a third-party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements.
Other Pronouncements— The Company reviewed ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment and ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement and does not expect the adoption of these pronouncements to have a material impact on its financial statements.
Note 3 Investment Securities
The Company’s investment securities portfolio is comprised of available-for-sale and held-to-maturity investment securities. These investment securities totaled $1.0 billion at March 31, 2019 and included $0.8 billion of available-for-sale securities and $0.2 billion of held-to-maturity securities. At December 31, 2018, investment securities totaled $1.0 billion and included $0.8 billion of available-for-sale securities and $0.2 billion of held-to-maturity securities.
Available-for-sale
At March 31, 2019 and December 31, 2018, the Company held $749.5 million and $791.1 million of available-for-sale investment securities, respectively. Available-for-sale securities are summarized as follows as of the dates indicated:
Amortized
Gross
cost
unrealized gains
unrealized losses
Fair value
Mortgage-backed securities (“MBS”):
Residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises
134,173
1,269
(954)
134,488
Other residential MBS issued or guaranteed by U.S. Government agencies or sponsored enterprises
625,776
1,675
(13,481)
613,970
Municipal securities
619
(9)
610
Other securities
469
Total investment securities available-for-sale
761,037
2,944
(14,444)
12
Mortgage-backed securities:
147,283
1,232
(1,873)
146,642
661,354
1,056
(19,029)
643,381
809,725
2,288
(20,911)
At March 31, 2019 and December 31, 2018, mortgage-backed securities represented primarily all of the Company’s available-for-sale investment portfolio and all mortgage-backed securities were backed by government sponsored enterprises (“GSE”) collateral such as Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”), and the government sponsored agency Government National Mortgage Association (“GNMA”).
The tables below summarize the available-for-sale securities with unrealized losses as of the dates shown, along with the length of the impairment period:
Less than 12 months
12 months or more
Fair
Unrealized
value
losses
235
86,197
86,432
15,941
513,936
(13,472)
529,877
441
16,176
600,574
(14,435)
616,750
30,853
(392)
69,169
(1,481)
100,022
127,767
(1,150)
454,662
(17,879)
582,429
159,061
(1,551)
523,831
(19,360)
682,892
The unrealized losses in the Company's investment portfolio at March 31, 2019 were caused by changes in interest rates. The portfolio included 183 securities, having an aggregate fair value of $616.8 million, which were in an unrealized loss position at March 31, 2019, compared to 211 securities, with an aggregate fair value of $682.9 million at December 31, 2018.
Management evaluated all of the available for sale securities in an unrealized loss position at March 31, 2019 and December 31, 2018 and concluded no OTTI existed. No OTTI charges were recorded during the three months ended March 31, 2019 and 2018. The Company has no intention to sell these securities before recovery of their amortized cost and believes it will not be required to sell the securities before the recovery of their amortized cost.
Certain securities are pledged as collateral for public deposits, securities sold under agreements to repurchase, and to secure borrowing capacity at the Federal Reserve Bank and FHLB, if needed. The fair value of available-for-sale investment securities pledged as
13
collateral totaled $336.2 million and $318.1 million at March 31, 2019 and December 31, 2018, respectively. Certain investment securities may also be pledged as collateral for the line of credit at the FHLB; at March 31, 2019 or December 31, 2018, no securities were pledged for this purpose.
Mortgage-backed securities do not have a single maturity date and actual maturities may differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. As of March 31, 2019, municipal securities with an amortized cost and fair value of $0.2 million were due after one year through five years, while municipal securities with an amortized cost and fair value of $0.4 million were due after five years through ten years. Other securities of $0.5 million as of March 31, 2019, have no stated contractual maturity date.
Held-to-maturity
At March 31, 2019 and December 31, 2018, the Company held $221.7 million and $235.4 million of held-to-maturity investment securities, respectively. Held-to-maturity investment securities are summarized as follows as of the dates indicated:
unrealized
gains
147,221
33
(938)
146,316
74,506
76
(1,291)
73,291
Total investment securities held-to-maturity
109
(2,229)
219,607
157,115
(2,705)
154,412
78,283
(1,769)
76,514
(4,474)
230,926
The tables below summarize the held-to-maturity securities with unrealized losses as of the dates shown, along with the length of the impairment period:
141,907
39,410
181,317
14
26,660
(381)
126,475
(2,324)
153,135
35,235
(79)
41,279
(1,690)
61,895
(460)
167,754
(4,014)
229,649
The held-to-maturity portfolio included 43 securities, having an aggregate fair value of $181.3 million, which were in an unrealized loss position at March 31, 2019, compared to 49 securities, with a fair value of $229.6 million, at December 31, 2018.
The unrealized losses in the Company’s investments at March 31, 2019 and December 31, 2018 were caused by changes in interest rates. Management evaluated all of the held-to-maturity securities in an unrealized loss position and concluded that no OTTI existed at March 31, 2019 or December 31, 2018. The Company has no intention to sell these securities before recovery of their amortized cost and believes it will not be required to sell the securities before the recovery of their amortized cost.
The carrying value of held-to-maturity investment securities pledged as collateral totaled $128.9 million and $133.1 million at March 31, 2019 and December 31, 2018, respectively.
Actual maturities of mortgage-backed securities may differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments.
Note 4 Loans
The loan portfolio is comprised of loans originated by the Company and loans that were acquired in connection with the Company’s acquisitions.
The tables below show the loan portfolio composition including carrying value by segment of originated and acquired loans and loans accounted for under ASC 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, as of the dates shown. The carrying value of originated and acquired loans is net of discounts, fees, cost and fair value marks of $10.1 million and $10.2 million as of March 31, 2019 and December 31, 2018, respectively.
Originated and
ASC
acquired loans
310-30 loans
Total loans
% of total
Commercial
2,737,005
19,139
2,756,144
Commercial real estate non-owner occupied
609,076
36,878
645,954
Residential real estate
815,144
7,508
822,652
Consumer
22,189
22,191
4,183,414
63,527
2,624,173
20,398
2,644,571
551,819
40,393
592,212
820,820
9,995
830,815
24,617
93
24,710
4,021,429
70,879
15
Delinquency for originated and acquired loans is shown in the following tables at March 31, 2019 and December 31, 2018:
Greater
30-89 days
than 90 days
Total past
past due and
Non-accrual
due and
accruing
loans
non-accrual
Current
Originated and acquired loans:
Commercial:
Commercial and industrial
3,388
6,136
9,537
2,010,349
2,019,886
Owner occupied commercial real estate
124
530
6,710
7,364
421,359
428,723
Food and agriculture
759
1,047
231,981
233,028
Energy
804
54,564
55,368
Total commercial
3,800
543
14,409
18,752
2,718,253
Commercial real estate non-owner occupied:
Construction
355
1,208
1,563
92,767
94,330
Acquisition/development
35
725
115
875
17,493
18,368
Multifamily
60,635
Non-owner occupied
199
897
1,096
434,647
435,743
Total commercial real estate
589
2,220
3,534
605,542
Residential real estate:
Senior lien
1,398
91
8,768
10,257
707,162
717,419
Junior lien
416
832
1,248
96,477
97,725
Total residential real estate
1,814
9,600
11,505
803,639
42
81
123
22,066
Total originated and acquired loans
6,245
1,359
26,310
33,914
4,149,500
495
74
5,510
6,079
1,925,068
1,931,147
893
6,931
7,824
413,842
421,666
141
125
768
1,034
221,122
222,156
742
48,462
49,204
1,529
13,951
15,679
2,608,494
93,646
94,854
121
19,529
19,650
56,685
328
132
572
1,032
379,598
380,630
1,901
2,361
549,458
2,106
548
7,790
10,444
712,592
723,036
556
772
1,328
96,456
97,784
2,662
8,562
11,772
809,048
16
149
24,468
4,610
895
24,456
29,961
3,991,468
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Pooled loans accounted for under ASC 310-30 that are 90 days or more past due and still accreting are generally considered to be performing and therefore are not included in the tables above. Non-accrual loans include non-accrual loans and troubled debt restructurings on non-accrual status. Non-accrual originated and acquired loans totaled $26.3 million at March 31, 2019, increasing $1.9 million, or 7.6% from December 31, 2018.
The Company’s internal risk rating system uses a series of grades which reflect our assessment of the credit quality of loans based on an analysis of the borrower's financial condition, liquidity and ability to meet contractual debt service requirements and are categorized as “Pass”, “Special mention”, “Substandard” and “Doubtful”. A description of the general characteristics of the risk grades is set forth in the Company’s 2018 Annual Report on Form 10-K.
Credit exposure for all loans as determined by the Company’s internal risk rating system was as follows at March 31, 2019 and December 31, 2018, respectively:
Special
Pass
mention
Substandard
Doubtful
1,980,564
19,051
18,934
1,337
397,240
19,941
11,457
85
230,558
1,220
1,218
32
2,662,926
40,212
32,413
1,454
92,690
432
17,486
767
60,119
516
419,021
15,122
37
589,316
16,837
2,886
704,303
3,455
9,661
96,343
417
965
800,646
3,872
10,626
22,108
4,074,996
60,921
46,006
1,491
Loans accounted for under ASC 310-30:
16,452
518
2,169
35,839
242
797
5,243
849
1,416
Total loans accounted for under ASC 310-30
57,536
1,609
4,382
4,132,532
62,530
50,388
1,890,710
16,531
22,919
987
393,404
16,349
11,828
220,004
1,260
847
45
2,552,580
34,140
36,336
1,117
92,731
915
355,776
23,243
1,611
524,721
24,158
2,940
710,972
3,571
8,493
415
913
807,428
3,986
9,406
24,575
3,909,304
62,284
48,724
17,579
537
2,282
39,322
246
825
7,484
908
1,598
9,990
98
64,385
1,691
4,803
3,973,689
63,975
53,527
17
Impaired Loans
Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans are comprised of originated and acquired loans on non-accrual status, loans in bankruptcy, and troubled debt restructurings (“TDRs”) described below. If a specific allowance is warranted based on the borrower’s overall financial condition, the specific allowance is calculated based on discounted cash flows using the loan’s initial contractual effective interest rate or the fair value of the collateral less selling costs for collateral dependent loans.
At March 31, 2019 and December 31, 2018, the Company’s recorded investment in impaired loans were $32.7 million and $31.1 million, respectively, of which $2.2 million and $4.1 million, respectively, were accruing TDRs. Impaired loans had a collective related allowance for loan losses allocated to them of $1.5 million and $1.2 million at March 31, 2019 and December 31, 2018, respectively.
Additional information regarding impaired loans at March 31, 2019 and December 31, 2018 is set forth in the table below:
Allowance
Unpaid
for loan
principal
Recorded
balance
investment
allocated
With no related allowance recorded:
4,558
4,374
3,029
6,975
6,405
7,130
6,609
1,468
5,429
5,366
18,430
11,602
18,338
11,640
1,435
377
378
642
546
641
547
2,454
1,869
1,876
4,667
4,310
4,229
3,814
430
358
409
341
5,097
4,668
4,638
4,155
86
46
Total impaired loans with no related allowance recorded
26,067
18,220
25,476
17,713
With a related allowance recorded:
7,736
5,109
1,348
7,252
4,627
996
1,317
1,115
90
1,362
1,169
997
960
883
845
10,050
7,184
1,471
9,497
6,641
1,132
620
561
39
313
254
6,492
5,582
28
6,032
5,178
27
1,320
1,196
1,408
1,293
7,812
6,778
7,440
6,471
Total impaired loans with a related allowance recorded
18,482
14,523
1,546
17,250
13,366
Total impaired loans
44,549
32,743
42,726
31,079
18
The table below shows additional information regarding the average recorded investment and interest income recognized on impaired loans for the periods presented:
March 31, 2018
Averagerecordedinvestment
Interestincomerecognized
3,189
5,534
83
6,425
7,487
1
1,259
777
2,353
20
11,611
16,633
117
886
876
1,871
1,762
4,325
1,612
363
305
4,688
1,917
18,181
20,326
131
5,113
4,339
1,125
1,265
961
2,126
7,199
7,730
29
566
196
225
5,629
25
5,601
1,205
1,151
6,834
6,752
22
72
24
14,671
14,731
30
32,852
96
35,057
161
Interest income recognized on impaired loans noted in the tables above primarily represents interest earned on accruing TDRs. Interest income recognized on impaired loans during the three months ended March 31, 2019 and 2018 was $0.1 million and $0.2 million, respectively.
Troubled debt restructurings
The Company’s policy is to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include restructuring a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment.
19
Additionally, if a borrower’s repayment obligation has been discharged by a court, and that debt has not been reaffirmed by the borrower, regardless of past due status, the loan is considered to be a TDR.
During the three months ended March 31, 2019, the Company restructured four loans with a recorded investment of $0.4 million to facilitate repayment. All of the loan modifications were a reduction of the principal payment, a reduction in interest rate, or an extension of term. Loan modifications to loans accounted for under ASC 310-30 are not considered TDRs. The tables below provide additional information related to accruing TDRs at March 31, 2019 and December 31, 2018:
Average year-to-date
Unfunded commitments
recorded investment
principal balance
to fund TDRs
941
943
1,061
150
195
240
1,071
1,079
1,078
2,207
2,379
162
2,730
2,827
3,155
229
260
280
1,114
1,163
1,121
4,073
4,250
4,556
The following table summarizes the Company’s carrying value of non-accrual TDRs as of March 31, 2019 and December 31, 2018:
1,667
1,854
1,828
1,584
Total non-accruing TDRs
3,495
3,438
At March 31, 2019 and December 31, 2018, the Company had $2.2 million and $4.1 million, respectively, of accruing TDRs that had been restructured from the original terms in order to facilitate repayment. Non-accruing TDRs totaled $3.5 million as of March 31, 2019 and increased $0.1 million from December 31, 2018.
Accrual of interest is resumed on loans that were previously on non-accrual only after the loan has performed sufficiently for a period of time. The Company had two TDRs totaling $0.2 million that were modified within the past twelve months and had defaulted on their restructured terms during the three months ended March 31, 2019. During the three months ended March 31, 2018, the Company had one TDR that was modified within the past twelve months and had defaulted on its restructured terms. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due on principal or interest. The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as TDRs.
Loans accounted for under ASC 310-30
Loan pools accounted for under ASC Topic 310-30 are periodically remeasured to determine expected future cash flows. In determining the expected cash flows, the timing of cash flows and prepayment assumptions for smaller homogeneous loans are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans are fixed or variable rate loans. Prepayments may be assumed on loans if circumstances
specific to that loan warrant a prepayment assumption. The remeasurement of loans accounted for under ASC 310-30 resulted in the following changes in the carrying amount of accretable yield during the three months ended March 31, 2019 and 2018:
Accretable yield beginning balance
35,901
46,568
Reclassification from non-accretable difference
1,524
5,409
Reclassification to non-accretable difference
(1,390)
Accretion
(3,687)
(5,394)
Accretable yield ending balance
33,317
45,193
Below is the composition of the net book value for loans accounted for under ASC 310-30 at March 31, 2019 and December 31, 2018:
Contractual cash flows
409,942
420,994
Non-accretable difference
(313,098)
(314,214)
Accretable yield
(33,317)
(35,901)
Note 5 Allowance for Loan Losses
The tables below detail the Company’s allowance for loan losses and recorded investment in loans as of and for the three months ended March 31, 2019 and 2018:
Three months ended March 31, 2019
Non-owner
occupied
commercial
Residential
real estate
Beginning balance
27,137
4,406
349
35,692
Originated and acquired beginning balance
26,946
3,760
35,461
Charge-offs
(12)
(23)
(233)
(268)
Recoveries
97
Provision
933
497
(66)
186
1,550
Originated and acquired ending balance
27,894
4,914
3,684
348
36,840
ASC 310-30 beginning balance
191
231
Recoupment
(10)
(6)
(16)
ASC 310-30 ending balance
181
34
215
Ending balance
28,075
3,718
37,055
Ending allowance balance attributable to:
Originated and acquired loans individually evaluated for impairment
Originated and acquired loans collectively evaluated for impairment
26,423
4,875
3,648
35,294
ASC 310-30 loans
Total ending allowance balance
Loans:
18,786
2,430
4,583
6,944
2,718,219
606,646
810,561
15,245
4,150,671
21
Three months ended March 31, 2018
21,385
5,609
3,965
31,264
21,340
5,583
31,193
(437)
(279)
(716)
53
540
(712)
(39)
211
21,485
4,871
3,928
290
30,574
71
Provision (recoupment)
48
(7)
112
21,578
4,890
30,686
1,185
31
20,300
4,868
3,897
29,355
113
24,175
8,558
34,672
2,057,022
633,537
838,597
26,197
3,555,353
24,702
75,277
12,000
330
112,309
2,105,899
710,715
859,155
26,565
3,702,334
In evaluating the loan portfolio for an appropriate ALL level, non-impaired originated and acquired loans were grouped into segments based on broad characteristics such as primary use and underlying collateral. Within the segments, the portfolio was further disaggregated into classes of loans with similar attributes and risk characteristics for purposes of applying loss ratios and determining applicable subjective adjustments to the ALL. The application of subjective adjustments was based upon qualitative risk factors, including economic trends and conditions, industry conditions, asset quality, loss trends, lending management, portfolio growth and loan review/internal audit results.
Net charge-offs on originated and acquired loans during the three months ended March 31, 2019 were $0.2 million. Management’s evaluation of credit quality resulted in provision for originated and acquired loan losses of $1.6 million during the three months ended March 31, 2019. No provision was recorded for loan losses on originated and acquired loans during the three months ended March 31, 2018.
During the three months ended March 31, 2019 and 2018, the Company re-estimated the expected cash flows of the loan pools accounted for under ASC 310-30. The remeasurement during the three months ended March 31, 2019 resulted in a net recoupment of $16 thousand. The remeasurement during the three months ended March 31, 2018 resulted in a net provision of $41 thousand.
Note 6 Leases
The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019. As a result of the adoption, the Company recorded lease right-of-use (“ROU”) assets and lease liabilities of $30.5 million with a cumulative effect adjustment to beginning retained
earnings of $0.3 million. As of March 31, 2019, right-of-use lease assets and related lease liabilities totaled $29.4 million and were included within other assets and other liabilities, respectively, on the consolidated statements of financial condition.
The ROU assets represent the Company’s right to use, or control the use of, an underlying asset for the lease term and the lease liabilities represent the Company’s obligation to make lease payments arising from the lease terms. The updates did not significantly change lease accounting requirements applicable to lessors and did not significantly impact our financial statements in relation to contracts whereby we act as a lessor.
The Company has operating leases for banking centers, corporate offices and ATMs, with remaining lease terms ranging from one year to 9 years. The Company only included reasonably certain renewal options in the lease terms. The weighted-average remaining lease term for our operating leases was 5.3 years at March 31, 2019. As of March 31, 2019, the weighted-average discount rate was 3.42%, utilizing the Company’s incremental FHLB borrowing rate for borrowings of a similar term at the date of lease commencement.
Rent expense totaled $1.4 million for the three months ended March 31, 2019 and was recorded within occupancy and equipment on the consolidated statements of operations. Lease payments do not include non-lease components such as real estate taxes, insurance, and common area maintenance.
Below is a summary of undiscounted future minimum lease payments as of March 31, 2019 per ASC Topic 842, Leases:
Amount
For the nine months ending December 31, 2019
4,295
For the year ending December 31, 2020
5,172
For the year ending December 31, 2021
4,843
For the year ending December 31, 2022
4,324
For the year ending December 31, 2023
3,921
Thereafter
16,570
Total lease payments
39,125
Less: Imputed interest
9,719
Present value of operating lease liabilities
29,406
Below is a summary of undiscounted future minimum lease payments as of December 31, 2018 per ASC Topic 840, Leases:
Years ending December 31,
3,092
2020
2,981
2021
3,091
2022
3,052
2023
2,047
10,163
24,426
Note 7 Other Real Estate Owned
A summary of the activity in the OREO balances during the three months ended March 31, 2019 and 2018 is as follows:
For the three months ended March 31,
10,491
Acquired through acquisition
1,409
Transfers from loan portfolio, at fair value
Impairments
(596)
(38)
Sales
(894)
(114)
11,875
23
OREO totaled $9.4 million at March 31, 2019 and decreased $1.2 million from December 31, 2018. During the three months ended March 31, 2019, the Company sold $0.9 million of OREO. OREO net gains of $0.4 million and net losses of $0.1 million were included in the consolidated statement of operations for the three months ended March 31, 2019 and 2018, respectively.
Note 8 Goodwill and Intangible Assets
Goodwill and core deposit intangible
In connection with all of our acquisitions, the Company recorded goodwill of $115.0 million and core deposit intangible assets of $48.8 million. The goodwill is measured as the excess of the fair value of consideration paid over the fair value of net assets acquired. No goodwill impairment was recorded during the three months ended March 31, 2019 or the year ended December 31, 2018.
The gross carrying amount of the core deposit intangibles and the associated accumulated amortization at March 31, 2019 and December 31, 2018, are presented as follows:
Net
carrying
amount
amortization
Core deposit intangible
48,834
39,215
9,619
38,920
9,914
The Company is amortizing the core deposit intangibles from acquisitions on a straight line basis over 7-10 years from the date of the respective acquisitions, which represents the expected useful life of the assets. The Company recognized core deposit intangible amortization expense of $0.3 million and $0.7 million during the three months ended March 31, 2019 and 2018, respectively.
The following table shows the estimated future amortization expense for the core deposit intangibles as of March 31, 2019:
887
1,183
1,127
1,048
Mortgage servicing rights
Mortgage servicing rights represent rights to service loans originated by the Company and sold to government sponsored enterprises including FHLMC, FNMA, GNMA and FHLB. Mortgage loans serviced for others were $376.0 million and $441.0 million at March 31, 2019 and 2018, respectively.
Below are the changes in the mortgage servicing rights for the periods presented:
3,556
4,301
Originations
Impairment
(54)
Amortization
(153)
(171)
4,130
Fair value of mortgage servicing rights
3,564
4,712
The fair value of mortgage servicing rights was determined based upon a discounted cash flow analysis. The cash flow analysis included assumptions for discount rates and prepayment speeds. Discount rates ranged from 9.5% to 10.5% and the constant prepayment speed ranged from 13.4% to 19.8% for the March 31, 2019 valuation. Included in mortgage banking income in the consolidated statements of operations were service fees of $0.3 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively.
Mortgage servicing rights are evaluated, and impairment is recognized to the extent fair value is less than the carrying amount. The Company evaluates impairment by type (FHLMC, FNMA, GNMA and FHLB) and interest rate. The Company is amortizing the mortgage servicing rights in proportion to and over the period of the estimated net servicing income of the underlying loans. The Company recognized mortgage servicing rights amortization expense of $0.2 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively.
The following table shows the estimated future amortization expense for the mortgage servicing rights as of March 31, 2019:
449
519
427
351
Note 9 Borrowings
The company enters into repurchase agreements to facilitate the needs of its clients. As of March 31, 2019 and December 31, 2018, the Company sold securities under agreements to repurchase totaling $59.5 million and $66.0 million, respectively, and none were for periods longer than one day. The Company pledged mortgage-backed securities with a fair value of approximately $72.9 million and $73.9 million as of March 31, 2019 and December 31, 2018, respectively, for these agreements. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. As of March 31, 2019 and December 31, 2018, the Company had $11.5 million and $5.9 million of excess collateral pledged for repurchase agreements.
As a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $1.1 billion at March 31, 2019. At March 31, 2019 and December 31, 2018, the Bank had $161.1 million and $234.3 million in line of credit advances from the FHLB, respectively, that matured within a day. At March 31, 2019 and December 31, 2018, the Bank had $67.3 million and $67.3 million in term advances from the FHLB, respectively. The term advances have fixed interest rates of 1.55%-2.33%, with maturity dates of 2019 - 2020. The Bank had investment securities pledged as collateral for FHLB advances in the amount of $16.4 million at March 31, 2019 and $16.0 million at December 31, 2018. Loans pledged were $1.6 billion at March 31, 2019 and $1.6 billion at December 31, 2018. Interest expense related to FHLB advances totaled $1.5 million and $460 thousand for the three months ended March 31, 2019 and 2018, respectively.
Note 10 Regulatory Capital
As a bank holding company, the Company is subject to regulatory capital adequacy requirements implemented by the Federal Reserve. The federal banking agencies have risk-based capital adequacy regulations intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations. Under these regulations, assets are assigned to one of several risk categories, and nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by a risk adjustment percentage for the category.
The Basel III rules, effective January 1, 2015, changed the components of regulatory capital, changed the way in which risk ratings are assigned to various categories of bank assets and defined a new Tier 1 common risk-based ratio. In addition, a capital conservation buffer requirement, which was fully phased in on January 1, 2019, added a 2.5% capital requirement above existing regulatory minimum ratios.
Under the Basel III requirements, at March 31, 2019 and December 31, 2018, the Company and the Bank met all capital requirements and the Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as detailed in the tables below.
Required to be
well capitalized under
considered
prompt corrective
adequately
Actual
action provisions
capitalized
Ratio
Tier 1 leverage ratio:
Consolidated
595,782
N/A
224,123
NBH Bank
499,314
279,602
223,682
Common equity tier 1 risk-based capital:
392,215
363,483
391,443
Tier 1 risk-based capital ratio:
394,452
370,298
393,441
Total risk-based capital ratio:
636,902
487,264
540,434
462,872
486,016
580,504
220,988
498,283
275,703
220,563
386,728
358,414
385,984
382,306
358,938
381,372
620,275
472,261
538,054
448,672
471,106
(1)
As of the fully phased-in date of January 1, 2019, including the capital conservation buffer.
f
Note 11 Revenue from Contracts with Clients
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Substantially all of the Company’s revenue is generated from contracts with clients. Topic 606 is applicable to non-interest revenue streams such as deposit related fees, interchange fees and merchant income. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, financial guarantees and derivatives are also not in scope of the new guidance. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Service Charges and other fees
Service charge fees are primarily comprised of monthly service fees, check orders, and other deposit account related fees. Other fees include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to clients’ accounts.
Bank card fees are primarily comprised of debit card income, ATM fees, merchant services income, and other fees. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit card transactions. The Company’s performance obligation for bank card fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Loss (gain) on OREO Sales, net
Loss (gain) on OREO Sales, net is recognized when the Company meets its performance obligation to transfer title to the buyer. The gain or loss is measured as the excess of the proceeds received compared to the OREO carrying value. Sales proceeds are received in cash at the time of transfer.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, and non-interest expense in-scope of Topic 606 for the three months ended March 31, 2019 and 2018.
Non-interest income
In-scope of Topic 606:
5,175
Non-interest income (in-scope of Topic 606)
8,271
8,537
Non-interest income (out-of-scope of Topic 606)
8,780
9,298
Non-interest expense
Total revenue in-scope of Topic 606
7,903
8,615
Contract Balances
A contract asset balance occurs when an entity performs a service for a client before the client pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a client for which the entity has already received payment (or payment is due) from the client. The Company’s non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with clients, and therefore, does not experience significant contract balances. As of March 31, 2019 and December 31, 2018, the Company did not have any contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a client if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a client that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company has not capitalized any contract acquisition costs.
Note 12 Stock-based Compensation and Benefits
The Company provides stock-based compensation in accordance with shareholder-approved plans. During the second quarter of 2014, shareholders approved the 2014 Omnibus Incentive Plan (the "2014 Plan"). The 2014 Plan replaces the NBH Holdings Corp. 2009 Equity Incentive Plan (the "Prior Plan"), pursuant to which the Company granted equity awards prior to the approval of the 2014 Plan. Pursuant to the 2014 Plan, the Compensation Committee of the Board of Directors has the authority to grant, from time to time, awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, other stock-based awards, or any combination thereof to eligible persons.
Stock options
The Company issues stock options which are primarily time-vesting with 1/3 vesting on each of the first, second and third anniversary of the date of grant or date of hire.
The expense associated with the awarded stock options was measured at fair value using a Black-Scholes option-pricing model. The outstanding option awards vest or have vested on a graded basis over 1-3 years of continuous service and have a 10-year contractual term.
The following table summarizes stock option activity for the three months ended March 31, 2019:
Weighted
average
remaining
contractual
Aggregate
exercise
term in
intrinsic
Options
price
years
Outstanding at December 31, 2018
1,264,876
22.33
3.92
11,387
Granted
3,749
35.75
Exercised
(117,618)
20.37
Forfeited
(40,023)
30.72
Outstanding at March 31, 2019
1,110,984
22.28
3.68
12,292
Options exercisable at March 31, 2019
892,922
20.14
2.53
11,731
Options vested and expected to vest
1,093,498
22.11
3.60
12,282
Stock option expense is a component of salaries and benefits in the consolidated statements of operations and totaled $47 thousand and $173 thousand for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019, there was $0.5 million of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted average period of 1.9 years.
Restricted stock awards
The Company issues primarily time-based restricted stock awards that vest over a range of a 1-3 year period. Restricted stock with time-based vesting was valued at the fair value of the shares on the date of grant as they are assumed to be held beyond the vesting period.
Performance stock units
The Company grants performance stock units which represent initial target awards and do not reflect potential increases or decreases resulting from the final performance results, which are to be determined at the end of the three-year performance period (vesting date). The actual number of shares to be awarded at the end of the performance period will range from 0% - 150% of the initial target awards. 60% of the award is based on the Company’s cumulative earnings per share (EPS target) during the performance period, and 40% of the award is based on the Company’s cumulative total shareholder return (TSR target), or TSR, during the performance period. On the vesting date, the Company’s TSR will be compared to the respective TSRs of the companies comprising the KBW Regional Index at the grant date to determine the shares awarded. The fair value of the EPS target portion of the award was determined based on the closing stock price of the Company’s common stock on the grant date. The fair value of the TSR target portion of the award was determined using a Monte Carlo Simulation at the grant date.
The following table summarizes restricted stock and performance stock unit activity during the three months ended March 31, 2019:
Restricted
average grant-
Performance
stock shares
date fair value
stock units
Unvested at December 31, 2018
146,494
28.19
192,049
26.40
Net adjustment due to performance
22,246
17.36
Vested
(26,594)
11.28
(95,308)
18.02
(15,863)
31.57
(19,401)
31.54
Unvested at March 31, 2019
107,786
32.13
99,586
31.40
As of March 31, 2019, the total unrecognized compensation cost related to the non-vested restricted stock awards and performance stock units totaled $1.5 million and $1.8 million, respectively, and is expected to be recognized over a weighted average period of approximately 2.0 years and 1.7 years, respectively. Expense related to non-vested restricted stock awards totaled $0.2 million and $0.4 million during the three months ended March 31, 2019 and 2018, respectively. Expense related to non-vested performance stock units totaled $0.2 million and $0.2 million during the three months ended March 31, 2019 and 2018, respectively. Expense related to non-vested restricted stock awards and units is a component of salaries and benefits in the Company’s consolidated statements of operations.
Employee Stock Purchase Plan
The 2014 Employee Stock Purchase Plan (“ESPP”) is intended to be a qualified plan within the meaning of Section 423 of the Internal Revenue Code of 1986 and allows eligible employees to purchase shares of common stock through payroll deductions up to a limit of $25,000 per calendar year and 2,000 shares per offering period. The price an employee pays for shares is 90.0% of the fair market value of Company common stock on the last day of the offering period. The offering periods are the six-month periods commencing on March 1 and September 1 of each year and ending on August 31 and February 28 (or February 29 in the case of a leap year) of each year. There are no vesting or other restrictions on the stock purchased by employees under the ESPP. Under the ESPP, the total number of shares of common stock reserved for issuance totaled 400,000 shares, of which 336,443 was available for issuance.
Under the ESPP, employees purchased 6,201 shares and 5,960 shares during the three months ended March 31, 2019 and 2018, respectively.
Note 13 Common Stock
The Company had 30,958,581 and 30,769,063 shares of Class A common stock outstanding at March 31, 2019 and December 31, 2018, respectively, exclusive of issued non-vested restricted shares. Additionally, the Company had 107,786 and 146,494 shares outstanding at March 31, 2019 and December 31, 2018, respectively, of restricted Class A common stock issued but not yet vested under the 2014 Omnibus Incentive Plan that are not included in shares outstanding until such time that they are vested; however, these shares do have voting and certain dividend rights during the vesting period.
On August 5, 2016, the Board of Directors authorized a new share repurchase program for up to $50.0 million from time to time in either the open market or through privately negotiated transactions. The remaining authorization under this program as of March 31, 2019 was $12.6 million.
Note 14 Earnings Per Share
The Company calculates earnings per share under the two-class method, as certain non-vested share awards contain non-forfeitable rights to dividends. As such, these awards are considered securities that participate in the earnings of the Company. Non-vested shares are discussed further in note 12.
The Company had 30,958,581 and 30,479,969 shares of Class A common stock outstanding as of March 31, 2019 and 2018, respectively, exclusive of issued non-vested restricted shares. Certain stock options and non-vested restricted shares are potentially dilutive securities, but are not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive for the three months ended March 31, 2019 and 2018.
The following table illustrates the computation of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018:
Less: income allocated to participating securities
(18)
(13)
Income allocated to common shareholders
18,904
8,451
Weighted average shares outstanding for basic earnings per common share
Dilutive effect of equity awards
536,351
649,839
Weighted average shares outstanding for diluted earnings per common share
Basic earnings per share
Diluted earnings per share
The Company had 1,110,984 and 1,516,044 outstanding stock options to purchase common stock at weighted average exercise prices of $22.28 and $21.89 per share at March 31, 2019 and 2018, respectively, which have time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those stock options is dilutive. The Company had 207,372 and 418,638 unvested restricted shares and units issued as of March 31, 2019 and 2018, respectively, which have performance, market and/or time-vesting criteria, and as such, any dilution is derived only for the time frame in which the vesting criteria had been met and where the inclusion of those restricted shares and units is dilutive.
Note 15 Derivatives
Risk management objective of using derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company has established policies that neither carrying value nor fair value at risk should exceed established guidelines. The Company has designed strategies to confine these risks within the established limits and identify appropriate trade-offs in the financial structure of its balance sheet. These strategies include the use of derivative financial instruments to help achieve the desired balance sheet repricing structure while meeting the desired objectives of its clients. Currently, the Company employs certain interest rate swaps that are designated as fair value hedges as well as economic hedges. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
Fair values of derivative instruments on the balance sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of financial condition as of March 31, 2019 and December 31, 2018.
Information about the valuation methods used to measure fair value is provided in note 17.
Asset derivatives fair value
Liability derivatives fair value
Balance Sheet
December 31,
location
Location
Derivatives designated as hedging instruments:
Interest rate products
9,102
17,436
2,414
228
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments:
4,933
3,191
5,358
3,349
Interest rate lock commitments
1,539
871
110
Forward contracts
472
Total derivatives not designated as hedging instruments
6,485
4,062
6,169
3,893
Fair value hedges
Interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2019, the Company had interest rate swaps with a notional amount of $471.8 million, which were designated as fair value hedges of interest rate risk. As of December 31, 2018, the Company had interest rate swaps with a notional amount of $473.4 million that were designated as fair value hedges. These interest rate swaps were associated with $530.9 million and $522.7 million of the Company’s fixed-rate loans as of March 31, 2019 and December 31, 2018, respectively, before a $3.0 million and $13.2 million fair value loss hedge adjustment in the carrying amount, included in loans receivable on the statements of financial condition as of March 31, 2019 and December 31, 2018, respectively.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.
Non-designated hedges
Derivatives not designated as hedges are not speculative and consist of interest rate swaps with commercial banking clients that facilitate their respective risk management strategies. Interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the client swaps and the offsetting swaps are recognized directly in earnings. As of March 31, 2019, the Company had matched interest rate swap transactions with an aggregate notional amount of $486.4 million related to this program. As of December 31, 2018, the Company had matched interest rate swap transactions with an aggregate notional amount of $206.8 million related to this program.
As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Fair value changes of certain loans under interest rate lock commitments are hedged with forward sales contracts of MBS. Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in non-interest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.
Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Company does not expect any counterparty to any MBS contract to fail to meet its obligation.
Additional risks inherent in mandatory delivery programs include the risk that, if the Company fails to deliver the loans subject to interest rate risk lock commitments, it will still be obligated to “pair off” MBS to the counterparty. Should this be required, the Company could incur significant costs in acquiring replacement loans and such costs could have an adverse effect on the consolidated financial statements.
The fair value of the mortgage banking derivative is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.
The Company had interest rate lock commitments with a notional value of $96.9 million and forward contracts with a notional value of $118.6 million at March 31, 2019. At December 31, 2018, the Company had interest rate lock commitments with a notional value of $50.1 million and forward contracts with a notional value of $77.6 million.
Effect of derivative instruments on the consolidated statements of operations
The tables below present the effect of the Company’s derivative financial instruments in the consolidated statements of operations for the three months ended March 31, 2019 and 2018:
Location of gain (loss)
Amount of gain recognized in income on derivatives
Derivatives in fair value
recognized in income on
hedging relationships
derivatives
10,136
12,052
Amount of (loss) recognized in income on hedged items
Hedged items
hedged items
(10,515)
(11,917)
Amount of gain (loss) recognized in income on derivatives
Derivatives not designated
as hedging instruments
273
122
1,152
(800)
1,108
625
1,605
Credit-risk-related contingent features
The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness for reasons other than an error or omission of an administrative or operational nature, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty has the right to terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
As of March 31, 2019, the termination value of derivatives in a net liability position related to these agreements was $1.2 million, which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and as of March 31, 2019 the Company had posted $2.1 million in eligible collateral. If the Company had breached any of these provisions at March 31, 2019, it could have been required to settle its obligations under the agreements at the termination value.
Note 16 Commitments and Contingencies
In the normal course of business, the Company enters into various off-balance sheet commitments to help meet the financing needs of clients. These financial instruments include commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. The same credit policies are applied to these commitments as the loans on the consolidated statements of financial condition; however, these commitments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of financial condition. At March 31, 2019 and December 31, 2018, the Company had loan commitments totaling $738.4 million and $773.5 million, respectively, and standby letters of credit that totaled $11.2 million and $10.6 million, respectively. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. However, the contractual amount of these commitments, offset by any additional collateral pledged, represents the Company’s potential credit loss exposure.
Total unfunded commitments at March 31, 2019 and December 31, 2018 were as follows:
Commitments to fund loans
204,282
183,946
Unfunded commitments under lines of credit
534,112
589,573
Commercial and standby letters of credit
11,155
10,558
Total unfunded commitments
749,549
784,077
Commitments to fund loans—Commitments to fund loans are legally binding agreements to lend to clients in accordance with predetermined contractual provisions providing there have been no violations of any conditions specified in the contract. These commitments are generally at variable interest rates and are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments are not necessarily representative of future credit exposure or cash requirements, as commitments often expire without being drawn upon.
Unfunded commitments under lines of credit—In the ordinary course of business, the Company extends revolving credit to its clients. These arrangements may require the payment of a fee.
Commercial and standby letters of credit—As a provider of financial services, the Company routinely issues commercial and standby letters of credit, which may be financial standby letters of credit or performance standby letters of credit. These are various forms of “back-up” commitments to guarantee the performance of a client to a third party. While these arrangements represent a potential cash outlay for the Company, the majority of these letters of credit will expire without being drawn upon. Letters of credit are subject to the same underwriting and credit approval process as traditional loans, and as such, many of them have various forms of collateral securing the commitment, which may include real estate, personal property, receivables or marketable securities.
Contingencies
Mortgage loans sold to investors may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company has established a reserve liability for expected losses related to these representations and warranties based upon management’s evaluation of actual and historic loss history, delinquency trends in the portfolio and economic conditions. The Company recorded a repurchase reserve of $3.4 million and $4.3 million at March 31, 2019 and 2018, respectively, which is included in other liabilities on the consolidated statements of financial condition.
In the ordinary course of business, the Company and the Bank may be subject to litigation. Based upon the available information and advice from the Company’s legal counsel, management does not believe that any potential, threatened or pending litigation to which it is a party will have a material adverse effect on the Company’s liquidity, financial condition or results of operations.
Note 17 Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For disclosure purposes, the Company groups its financial and non-financial assets and liabilities into three different levels based on the nature of the instrument and the availability and reliability of the information that is used to determine fair value. The three levels are defined as follows:
·
Level 1—Includes assets or liabilities in which the valuation methodologies are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Includes assets or liabilities in which the inputs to the valuation methodologies are based on similar assets or liabilities in inactive markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs other than quoted prices that are observable, such as interest rates, yield curves, volatilities, prepayment speeds, and other inputs obtained from observable market input.
Level 3—Includes assets or liabilities in which the inputs to the valuation methodology are based on at least one significant assumption that is not observable in the marketplace. These valuations may rely on management’s judgment and may include internally-developed model-based valuation techniques.
Level 1 inputs are considered to be the most transparent and reliable and level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although, in some instances, third party price indications may be available, limited trading activity can challenge the observability of these quotations.
Changes in the valuation inputs used for measuring the fair value of financial instruments may occur due to changes in current market conditions or other factors. Such changes may necessitate a transfer of the financial instruments to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfer occurs. During the three months ended March 31, 2019 and 2018, there were no transfers of financial instruments between the hierarchy levels.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of each instrument under the valuation hierarchy:
Fair Value of Financial Instruments Measured on a Recurring Basis
Investment securities available-for-sale—Investment securities available-for-sale are carried at fair value on a recurring basis. To the extent possible, observable quoted prices in an active market are used to determine fair value and, as such, these securities are classified as level 1. At March 31, 2019 and December 31, 2018, the Company did not hold any level 1 securities. When quoted market prices in active markets for identical assets or liabilities are not available, quoted prices of securities with similar characteristics, discounted cash flows or other pricing characteristics are used to estimate fair values and the securities are then classified as level 2.
Loans held for sale—The Company has elected to record loans originated and intended for sale in the secondary market at estimated fair value. The portfolio consists primarily of fixed rate residential mortgage loans that are sold within 45 days. The Company estimates fair value based on quoted market prices for similar loans in the secondary market and is classified as Level 2.
Interest rate swap derivatives—The Company's derivative instruments are limited to interest rate swaps that may be accounted for as fair value hedges or non-designated hedges. The fair values of the swaps incorporate credit valuation adjustments in order to appropriately reflect nonperformance risk in the fair value measurements. The credit valuation adjustment is the dollar amount of the fair value adjustment related to credit risk and utilizes a probability weighted calculation to quantify the potential loss over the life of the trade. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the respective counterparties’ credit spreads to the exposure offset by marketable collateral posted, if any. Certain derivative transactions are executed with counterparties who are large financial institutions ("dealers"). International Swaps and Derivative Association Master Agreements ("ISDA") and Credit Support Annexes ("CSA") are employed for all contracts with dealers. These contracts contain bilateral collateral arrangements. The fair value inputs of these financial instruments are determined using discounted cash flow analysis through the use of third-party models whose significant inputs are readily observable market parameters, primarily yield curves, with appropriate adjustments for liquidity and credit risk, and are classified as level 2.
Mortgage banking derivatives—The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups. The Company also relies on an external valuation model to estimate the fair value of its forward commitments to sell residential mortgage loans (i.e., an estimate of what the Company would receive or pay to terminate the forward delivery contract based on market prices for similar financial instruments), which includes matching specific terms and maturities of the forward commitments against applicable investor pricing.
The tables below present the financial instruments measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 on the consolidated statements of financial condition utilizing the hierarchy structure described above:
Level 1
Level 2
Level 3
Assets:
Investment securities available-for-sale:
Interest rate swap derivatives
14,035
Mortgage banking derivatives
1,552
Total assets at fair value
822,258
823,810
7,772
811
Total liabilities at fair value
8,583
20,627
859,211
3,577
544
4,121
The table below details the changes in level 3 financial instruments during the three months ended March 31, 2019:
Mortgage banking
derivatives, net
Balance at December 31, 2018
327
Gain included in earnings, net
414
Balance at March 31, 2019
Fair Value of Financial Instruments Measured on a Non-recurring Basis
Certain assets may be recorded at fair value on a non-recurring basis as conditions warrant. These non-recurring fair value measurements typically result from the application of lower of cost or fair value accounting or a write-down occurring during the period.
Impaired loans—The Company records collateral dependent loans that are considered to be impaired at their estimated fair value. A loan is considered impaired when it is probable that the Company will be unable to collect all contractual amounts due in accordance with the terms of the loan agreement. Collateral dependent impaired loans are measured based on the fair value of the collateral. The Company relies on third-party appraisals and internal assessments, utilizing a discount rate in the range of 0% - 25%, in determining the estimated fair values of these loans. The inputs used to determine the fair values of loans are considered level 3 inputs in the fair value hierarchy. At March 31, 2019, the Company recorded a specific reserve of $1.5 million related to six originated and acquired loans with a carrying balance of $5.6 million. At March 31, 2018, the Company recorded a specific reserve of $1.2 million related to six loans with a carrying balance of $6.4 million.
OREO—OREO is recorded at the fair value of the collateral less estimated selling costs. The estimated fair values of OREO are updated periodically and further write-downs may be taken to reflect a new basis. The Company recognized $596 thousand and $38 thousand of OREO impairments in its consolidated statements of operations during the three months ended March 31, 2019 and 2018, respectively. The fair values of OREO are derived from third party price opinions or appraisals that generally use an income approach or a market value approach. If reasonable comparable appraisals are not available, then the Company may use internally developed models to determine fair values. The inputs used to determine the fair value of OREO properties are considered level 3 inputs in the fair value hierarchy.
Mortgage servicing rights—Mortgage servicing rights represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates ranging from 9.5% to 10.5% at March 31, 2019 and prepayment speed assumption ranges of 13.4% to 19.8% at March 31, 2019 as inputs. Mortgage servicing rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. There was a $0.1 million impairment of mortgage servicing rights recorded during the three months ended March 31, 2019, which is included in mortgage banking income on the consolidated statements of operations. No impairment of mortgage servicing rights was recorded for the three months ended March 31, 2018. The inputs used to determine the fair values of mortgage servicing rights are considered level 3 inputs in the fair value hierarchy.
The Company may be required to record fair value adjustments on other available-for-sale and municipal securities valued at par on a non-recurring basis.
The tables below provide information regarding the assets recorded at fair value on a non-recurring basis during the three months ended March 31, 2019 and 2018:
Losses from fair value changes
Impaired loans
245
54
45,499
715
50,677
The Company did not record any liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2019 and 2018.
Note 18 Fair Value of Financial Instruments
The fair value of a financial instrument is the amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is determined based upon quoted market prices to the extent possible; however, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques that may be significantly impacted by the assumptions used, including the discount rate and estimates of future cash flows. Changes in any of these assumptions could significantly affect the fair value estimates. The fair value of the financial instruments listed below does not reflect a premium or discount that could result from offering all of the Company’s holdings of financial instruments at one time, nor does it reflect the underlying value of the Company, as ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are based on the exit price concept within ASC Topic 825 and applied to this disclosure on a prospective basis. Considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.
The fair value of financial instruments at March 31, 2019 and December 31, 2018, including methods and assumptions utilized for determining fair value of financial instruments, are set forth below:
Level in fair value
measurement
Carrying
Estimated
hierarchy
fair value
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises available-for-sale
169
Other available-for-sale securities
Mortgage-backed securities—residential mortgage pass-through securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity
Mortgage-backed securities—other residential mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored enterprises held-to-maturity
Loans receivable
4,279,916
4,082,146
Accrued interest receivable
22,362
17,852
LIABILITIES
Deposit transaction accounts
3,633,356
3,445,092
1,072,986
1,068,233
228,810
301,933
Accrued interest payable
8,731
6,889
Note 19 Acquisition Activities
On January 1, 2018, the Company completed its acquisition of Peoples, Inc., the bank holding company of Colorado-based Peoples National Bank and Kansas-based Peoples Bank. Immediately following the completion of the acquisition, Peoples National Bank and Peoples Bank merged into NBH Bank. Pursuant to the merger agreement executed in June 2017, the Company paid $36.2 million of cash consideration and 3,398,477 shares of the Company’s Class A common stock in exchange for all of the outstanding common stock of Peoples. Included in the cash consideration is $10.0 million of restricted cash placed in escrow for certain potential liabilities the Company is indemnified for pursuant to the merger agreement. The restricted cash is included in other assets in the Company’s consolidated statements of financial condition at March 31, 2019. The transaction was valued at $146.4 million in the aggregate, based on the Company’s closing price of $32.43 on the acquisition date. Acquisition related costs of $7.6 million on a pre-tax basis were included in the Company’s consolidated statements of operations for the three months ended March 31, 2018. The results of Peoples are included in the results of the Company subsequent to the acquisition date.
The Company determined that this acquisition constitutes a business combination as defined in ASC Topic 805, Business Combinations. Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in ASC Topic 820, Fair Value Measurements and Disclosures. Fair value is established by discounting the expected future cash flows with a market discount rate for like maturities and risk instruments. The estimation of expected future cash flows, market conditions and other future events and actual results could differ materially. The determination of the fair values of fixed assets, loans, OREO, core deposit intangible, mortgage servicing rights and mortgage repurchase reserve involves a high degree of judgment and complexity.
The table below summarizes the net assets acquired (at fair value) and consideration transferred in connection with the Peoples acquisition:
105,173
Investment securities available-for-sale
118,512
4,796
542,707
54,260
1,253
Premises and equipment
18,584
Core deposit intangible asset
10,477
15,361
Total assets acquired
875,424
729,911
FHLB borrowings
33,825
20,683
Total liabilities assumed
784,419
Identifiable net assets acquired
91,005
Consideration:
NBHC common stock paid at January 1, 2018, closing price of $32.43
Cash
36,189
146,402
55,397
In connection with the Peoples acquisition, the Company recorded $55.4 million of goodwill, a $10.5 million core deposit intangible asset, a $4.3 million mortgage servicing rights intangible asset and a $4.0 million mortgage repurchase reserve, included in other liabilities. The core deposit intangible is being amortized straight-line over ten years and the mortgage servicing rights intangible is amortized in proportion to and over the period of the estimated net servicing income. The Federal Home Loan Bank (“FHLB”) borrowings of $33.8 million were paid off during the first quarter of 2018. The goodwill associated with this transaction is not tax deductible.
At the date of acquisition, the gross contractual amounts receivable, inclusive of all principal and interest, was $713.6 million. The Company’s best estimate of the contractual principal cash flows for loans not expected to be collected was $2.1 million.
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three months ended March 31, 2019, and with our annual report on Form 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2018, 2017 and 2016. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” located elsewhere in this quarterly report and in Item 1A “Risk Factors” in the annual report on Form 10-K, referenced above, and should be read herewith.
All amounts are in thousands, except share and per share data, or as otherwise noted.
Overview
Our focus is on building relationships by creating a win-win scenario for our clients and our company. We believe in providing simple and fair solutions while offering personal service to our clients. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We also believe that our established presence in core markets that are outperforming national averages positions us well for growth opportunities. As of March 31, 2019, we had $5.8 billion in assets, $4.2 billion in loans, $4.7 billion in deposits and $0.7 billion in equity.
Operating Highlights and Key Challenges
Increased profitability and returns
Net income was $18.9 million, or $0.60 per diluted share, for the first quarter of 2019 compared to net income of $8.5 million, or $0.27 per diluted share, for the first quarter of 2018. Net income during the first quarter of 2018 included $6.0 million, after tax, of non-recurring expenses related to the acquisition of Peoples. Adjusting for these expenses, net income would have been $14.5 million, or $0.47 per diluted share, for the first quarter of 2018.
The return on average tangible assets was 1.39% for the first quarter of 2019, compared to 0.66% for the first quarter of 2018. Adjusting for the non-recurring Peoples acquisition expenses, the return on average tangible assets was 1.11% for the first quarter of 2018.
The return on average tangible common equity was 13.15% for the first quarter of 2019, compared to 6.95% for the first quarter of 2018. Adjusting for the non-recurring Peoples expenses, the return on average tangible common equity was 11.63% for the first quarter of 2018.
Strategic execution
Announced expansion into Utah in January 2019, with a focus on serving commercial and business banking clients in Salt Lake City’s Wasatch Front.
Grew originated and acquired loans outstanding to $4.2 billion, an increase of $162.0 million, or 16.3% annualized, since December 31, 2018, led by originated commercial loan growth of $112.8 million, or 17.4% annualized.
Maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most industry sector concentrations at 5% or less of total loans, and all concentration levels remain well below our self-imposed limits.
Continued to build and deepen relationships with our clients, resulting in spot transaction deposit growth of $178.3 million since December 31, 2018.
Loan portfolio
Total loans ended the quarter at $4.2 billion and increased $154.6 million, or 15.3% annualized, since December 31, 2018.
Originated loans increased $191.9 million, or 21.8% annualized, primarily due to strong growth in commercial loans of $121.9 million, or 19.9% annualized.
Total first quarter loan originations were $311.0 million, led by commercial loan originations of $201.3 million.
Credit quality
Provision for loan losses totaled $1.5 million during the three months ended March 31, 2019, compared to $41 thousand during the three months ended March 31, 2018. The current provision was recorded to support the current quarter’s originated loan growth.
Annualized net charge-offs to average total loans totaled 0.02%, annualized, for the three months ended March 31, 2019, compared to 0.06% for the full year ended December 31, 2018.
Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual TDRs) were 0.62% of total loans, compared to 0.60% at December 31, 2018. Non-performing assets to total loans and OREO totaled 0.84% at March 31, 2019, compared to 0.85% at December 31, 2018.
Client deposit funded balance sheet
Average non-interest bearing demand deposits increased $50.5 million, compared to the first quarter of 2018.
Total deposits averaged $4.6 billion during the first quarter 2019, decreasing $36.6 million, compared to the first quarter of 2018.
Time deposits averaged $1.1 billion during the first quarter of 2019, decreasing $88.7 million, or 7.6%, from the first quarter of 2018.
Spot transaction deposits increased $71.5 million to $3.6 billion at March 31, 2019, compared to the first quarter of 2018.
The mix of transaction deposits to total deposits improved to 77.1% from 75.6% at March 31, 2018, due to our continued focus on developing long-term banking relationships.
Cost of deposits totaled 0.58%, increasing six basis points from December 31, 2018, and the cost of funds increased 12 basis points from December 31, 2018.
Revenues
Fully taxable equivalent (FTE) net interest income totaled $52.4 million and increased $3.7 million, or 7.6%, compared to the first quarter of 2018.
The FTE net interest margin widened 21 basis points to 4.05% from the first quarter of 2018. The yield on earning assets increased 44 basis points, led by a 56 basis point increase in the originated portfolio yields due to higher new loan yields and short-term rate increases, partially offset by an increase in the cost of funds of 33 basis points from 0.55% to 0.88% from the first quarter of 2018. Our ability to maintain a low deposit beta was a key contributor in the expansion of our net interest margin.
Non-interest income totaled $17.1 million during the three months ended March 31, 2019, decreasing $0.8 million from the three months ended March 31, 2018, primarily due to $1.0 million lower mortgage banking income and $0.3 million lower OREO related income. These decreases were partially offset by $0.7 million higher other non-interest income due to an increase in swap fee income during the period.
Expenses
Non-interest expense totaled $44.4 million during the three months ended March 31, 2019, representing a decrease of $10.9 million from the three months ended March 31, 2018, primarily driven by $7.6 million of acquisition costs during the first quarter of 2018 and efficiencies gained from the integration of the Peoples acquisition.
Income tax expense totaled $3.4 million and increased $1.7 million from the three months ended March 31, 2018. The March 31, 2019 effective tax rate was 15.1%. Included in income tax expense was $0.8 million and $0.4 million of tax benefit from stock compensation activity during the first quarters 2019 and 2018, respectively.
Strong capital position
Capital ratios are strong as our capital position remains in excess of federal bank regulatory thresholds. As of March 31, 2019, our consolidated tier 1 leverage ratio was 10.6% and our consolidated tier 1 risk-based capital and common equity tier 1 risk-based capital ratios were both 12.8%.
At March 31, 2019, common book value per share was $23.10, while tangible common book value per share was $19.31, or $19.89 after consideration of the excess accretable yield value of $0.58 per share.
Since early 2013, we have repurchased 26.6 million shares, or 50.9% of the outstanding shares, at an attractive weighted average price of $20.03 per share.
Key Challenges
There are a number of significant challenges confronting us and our industry. We began banking operations in 2010 by acquiring distressed financial institutions, and sought to rebuild them and implement operational efficiencies across the enterprise as a whole. We face continual challenges implementing our business strategy, including growing the assets, particularly loans, and deposits of our business amidst intense competition, the rise of interest rates from an extended low interest rate environment, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive environment.
General economic conditions remained stable in the first quarter of 2019. Residential real estate values remain strong in our markets and nationally, with many markets, including Denver, hitting new post-crisis highs. Commercial real estate property fundamentals also remain strong, with stable occupancy and increasing lease rates, along with cyclically low capitalization rates leading to increasing valuations. A significant portion of our loan portfolio is secured by real estate and any deterioration in real estate values or credit quality or elevated levels of non-performing assets would ultimately have a negative impact on the quality of our loan portfolio.
The agriculture industry is in the fourth year of depressed commodity prices. Our food and agriculture portfolio is only 5.5% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 24.3% of the food and agriculture loan portfolio. We have maintained relationships with agriculture clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.
Our originated and acquired loans outstanding portfolio at March 31, 2019 totaled $4.2 billion, representing an increase of $162.0 million, or 4.0%, compared to December 31, 2018. Our 310-30 loans have produced higher yields than our originated and acquired loans, due to accretion of fair value adjustments. During the three months ended March 31, 2019, our weighted average rate on new loans funded at the time of origination was 5.40% (fully taxable equivalent), compared to the first quarter 2018 weighted average yield of our originated loan portfolio of 4.40% (fully taxable equivalent). Fully taxable equivalent net interest income reached an inflection point in the second quarter of 2017 and continued through the first quarter of 2019 as the yields and volumes of originated and acquired loans outpaced the decrease in higher yielding 310-30 loan balances. The inflection point was driven by both the strong new loan originations as well as short-term market rate increases. Future growth in our interest income will ultimately be dependent on our ability to continue to generate sufficient volumes of high-quality originated loans.
Continued regulation, impending new liquidity and capital constraints, and a continual need to bolster cybersecurity are adding costs and uncertainty to all U.S. banks and could affect profitability. Also, nontraditional participants in the market may offer increased competition as non-bank payment businesses, including fintechs, are expanding into traditional banking products. While certain external factors are out of our control and may provide obstacles to our business strategy, we are prepared to deal with these challenges. We seek to remain flexible, yet methodical and proactive, in our strategic decision making so that we can quickly respond to market changes and the inherent challenges and opportunities that accompany such changes.
Performance Overview
In evaluating our consolidated statements of financial condition and results of operations financial statement line items, we evaluate and manage our performance based on key earnings indicators, balance sheet ratios, asset quality metrics and regulatory capital ratios, among others. The table below presents some of the primary performance indicators that we use to analyze our business on a regular basis for the periods indicated:
As of and for the three months ended
Key Ratios(1)
Return on average assets
Return on average tangible assets(2)
Return on average tangible assets, adjusted(2)
Return on average equity
Return on average tangible common equity(2)
Return on average tangible common equity, adjusted(2)
Loan to deposit ratio (end of period)
Non-interest bearing deposits to total deposits (end of period)
Net interest margin(4)
Net interest margin FTE(2)(4)(9)
Interest rate spread FTE(5)(9)
Yield on earning assets(3)
Yield on earning assets FTE(2)(3)(9)
Cost of interest bearing liabilities(3)
Cost of deposits
Non-interest income to total revenue FTE
Non-interest expense to average assets
Non-interest expense to average assets, adjusted
Efficiency ratio(2)
Efficiency ratio FTE(2)(9)
Total Loans Asset Quality Data(6)(7)(8)
Non-performing loans to total loans
Non-performing assets to total loans and OREO
Allowance for loan losses to total loans
Allowance for loan losses to non-performing loans
Net charge-offs to average loans
Ratios are annualized.
(2)
Ratio represents non-GAAP financial measure. See non-GAAP reconciliations below.
(3)
Interest earning assets include assets that earn interest/accretion or dividends. Any market value adjustments on investment securities are excluded from interest-earning assets. Interest bearing liabilities include liabilities that must be paid interest.
(4)
Net interest margin represents net interest income, including accretion income on interest earning assets, as a percentage of average interest earning assets.
(5)
Interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average cost of interest bearing liabilities.
Non-performing loans consist of non-accruing loans and restructured loans on non-accrual, but exclude any loans accounted for under ASC 310-30 in which the pool is still performing. These ratios may, therefore, not be comparable to similar ratios of our peers.
Non-performing assets include non-performing loans, other real estate owned and other repossessed assets.
(8)
Total loans are net of unearned discounts and fees.
Presented on a fully taxable equivalent basis using the statutory rate of 21% for the three months ended March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The taxable equivalent adjustments included above are $1,227, $1,195 and $1,063 the three months ended March 31, 2019, December 31, 2018 and March 31, 2018, respectively.
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About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including “tangible assets,” “return on average tangible assets,” “return on average tangible common equity,” “tangible common book value per share,” “tangible common book value, excluding accumulated other comprehensive loss, net of tax,” “tangible common book value per share, excluding accumulated other comprehensive loss, net of tax,” “tangible common equity,” “tangible common equity to tangible assets,” “adjusted efficiency ratio,” “adjusted non-interest expense,” “adjusted non-interest expense to average assets,” “adjusted net income,” “adjusted earnings per share - diluted,” “adjusted return on average tangible assets,” “adjusted return on average tangible common equity,” and “fully taxable equivalent” metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as “non-GAAP financial measures.” We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.
These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.
A reconciliation of our GAAP financial measures to the comparable non-GAAP financial measures is as follows.
44
Tangible Common Book Value Ratios
Less: goodwill and core deposit intangible assets, net
(124,645)
(124,941)
(126,340)
Add: deferred tax liability related to goodwill
7,555
7,327
6,878
Tangible common equity (non-GAAP)
597,912
577,392
526,401
5,657,583
Tangible assets (non-GAAP)
5,685,576
5,559,052
5,538,121
Tangible common equity to tangible assets calculations:
Total shareholders' equity to total assets
Less: impact of goodwill and core deposit intangible assets, net
(1.80)%
(1.85)%
(1.91)%
Tangible common equity to tangible assets (non-GAAP)
Tangible common book value per share calculations:
Divided by: ending shares outstanding
30,958,581
30,769,063
30,479,969
Tangible common book value per share (non-GAAP)
19.31
18.77
17.27
Tangible common book value per share, excluding accumulated other comprehensive loss (AOCI) calculations:
6,140
11,275
14,888
Tangible common book value, excluding AOCI, net of tax (non-GAAP)
604,052
588,667
541,289
Tangible common book value per share, excluding AOCI, net of tax (non-GAAP)
19.51
19.13
17.76
Return on Average Tangible Assets and Return on Average Tangible Equity
17,235
Add: impact of core deposit intangible amortization expense, after tax
268
496
Net income adjusted for impact of core deposit intangible amortization expense, after tax
19,147
17,503
8,960
Average assets
5,711,020
5,620,451
5,615,684
Less: average goodwill and core deposit intangible asset, net of deferred tax liability related to goodwill
(117,235)
(117,760)
(119,158)
Average tangible assets (non-GAAP)
5,593,785
5,502,691
5,496,526
Average shareholders' equity
707,832
682,726
642,275
Average tangible common equity (non-GAAP)
590,597
564,966
523,117
Return on average tangible assets (non-GAAP)
Return on average tangible common equity (non-GAAP)
Fully Taxable Equivalent Yield on Earning Assets and Net Interest Margin
Interest income
57,780
Add: impact of taxable equivalent adjustment
1,227
1,195
1,063
Interest income FTE (non-GAAP)
60,647
58,975
53,854
Net interest income
50,632
Net interest income FTE (non-GAAP)
52,393
51,827
48,710
Average earning assets
5,247,265
5,152,934
5,140,602
Yield on earning assets
Yield on earning assets FTE (non-GAAP)
Net interest margin
Net interest margin FTE (non-GAAP)
Efficiency Ratio
Net interest income, FTE (non-GAAP)
15,317
42,857
Less: core deposit intangible asset amortization
(296)
(353)
(653)
Non-interest expense, adjusted for core deposit intangible asset amortization
44,098
42,504
54,629
Efficiency ratio
Efficiency ratio FTE (non-GAAP)
Adjusted Financial Results
Adjustments to net income:
Adjustments(1)
6,046
Adjusted net income (non-GAAP)
14,510
Adjustments to income per share:
Earnings per share
0.55
0.20
Adjusted earnings per share - diluted (non-GAAP)
0.47
Adjustments to return on average tangible assets:
Adjusted net income (non-GAAP)(1)
15,006
Adjusted return on average tangible assets (non-GAAP)
Adjustments to return on average tangible common equity:
Adjusted return on average tangible common equity (non-GAAP)
(1) Adjustments:
Non-interest expense adjustments:
Non-recurring Peoples acquisition-related expenses
7,598
Total pre-tax adjustments (non-GAAP)
Collective tax expense impact
(1,552)
Adjustments (non-GAAP)
Application of Critical Accounting Policies
We use accounting principles and methods that conform to GAAP and general banking practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. The most significant of these estimates relate to the accounting for acquired loans and the determination of the ALL. These critical accounting policies and estimates are summarized in the sections captioned “Application of Critical Accounting Policies” in Management's Discussion and Analysis in our 2018 Annual Report on Form 10-K, and are further analyzed with other significant accounting policies in note 2, “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements for the year ended December 31, 2018.
Financial Condition
Total assets increased to $5.8 billion at March 31, 2019 from $5.7 billion at December 31, 2018, primarily driven by increases in total loans of $154.6 million, or 3.8%, and other assets of $26.1 million, or 16.4%, which were partially offset by a decrease in total investment securities of $58.2 million, or 5.5%. The increase in other assets was primarily due to the addition of right of use lease assets totaling $30.5 million due to the adoption of the new lease accounting standard further described in notes 2 and 6.
During the first quarter of 2019, lower cost demand, savings, and money market deposits ("transaction deposits") increased $178.3 million, or 5.2%, as we continued to develop full banking relationships with our clients. The increase in transaction deposits drove a decrease in FHLB borrowings of $73.2 million, or 24.3%, during the quarter as the low-cost deposit growth was utilized to fund loan growth.
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Investment Securities
Total investment securities available-for-sale were $749.5 million at March 31, 2019 and $791.1 million at December 31, 2018, a decrease of $41.6 million, or 5.3%, due to paydowns and maturities. During the three months ended March 31, 2019 and 2018, maturities and pay downs of available-for-sale securities totaled $48.3 million and $55.2 million, respectively. Purchases of available-for-sale securities during the three months ended March 31, 2019 and 2018 totaled $0 and $42.2 million, respectively.
Our available-for-sale investment securities portfolio is summarized as follows for the periods indicated:
Percent of
portfolio
yield
As of March 31, 2019 and December 31, 2018, generally the entire available-for-sale investment portfolio was backed by mortgages. The residential mortgage pass-through securities portfolio is comprised of both fixed rate and adjustable rate FHLMC, FNMA and GNMA securities. The other mortgage-backed securities are comprised of securities backed by FHLMC, FNMA and GNMA securities.
Mortgage-backed securities do not have a single maturity date and actual maturities may differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 3.1 years and 3.2 years at March 31, 2019 and December 31, 2018, respectively. This estimate is based on assumptions and actual results may differ. At March 31, 2019 and December 31, 2018, the duration of the total available-for-sale investment portfolio was 2.8 years and 3.0 years, respectively.
At March 31, 2019 and December 31, 2018, adjustable rate securities comprised 3.4% and 3.7%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 2.39% per annum and 2.39% per annum at March 31, 2019 and December 31, 2018, respectively.
The available-for-sale investment portfolio included $14.4 million and $20.9 million of gross unrealized losses at March 31, 2019 and December 31, 2018, respectively, which were partially offset by $2.9 million and $2.3 million of gross unrealized gains, respectively. We believe any unrecognized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were other-than-temporarily-impaired.
At March 31, 2019, we held $221.7 million of held-to-maturity investment securities, compared to $235.4 million at December 31, 2018, a decrease of $13.7 million, or 5.8%. During the three months ended March 31, 2019 and 2018, maturities and pay downs of held-to-maturity securities totaled $13.2 million and $15.5 million. Purchases of held-to-maturity securities during the three months ended March 31, 2019 and 2018 totaled $0.0 and $40.7 million, respectively.
Held-to-maturity investment securities are summarized as follows as of the date indicated:
The residential mortgage pass-through and other residential MBS held-to-maturity investment portfolios are comprised of fixed rate FHLMC, FNMA and GNMA securities.
The fair value of the held-to-maturity investment portfolio was $219.6 million and $230.9 million at March 31, 2019 and December 31, 2018, respectively, and included $2.1 million and $4.5 million of net unrealized losses for the respective periods.
Mortgage-backed securities do not have a single maturity date and actual maturities may differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of March 31, 2019 and December 31, 2018 was 2.7 years and 2.8 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 2.5 years and 2.5 years as of March 31, 2019 and December 31, 2018, respectively.
Loans Overview
At March 31, 2019, our loan portfolio was comprised of new loans that we have originated and loans that were acquired in connection with our six acquisitions to date. Loans that exhibit signs of credit deterioration at the date of acquisition are accounted for in accordance with the provisions of ASC 310-30.
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The table below shows the loan portfolio composition at the respective dates:
March 31, 2019 vs.
% Change
Originated:
1,971,692
1,877,221
Owner-occupied commercial real estate
347,064
337,258
228,765
217,294
2,602,889
2,480,977
472,073
407,431
664,852
657,633
21,070
22,895
(8.0)%
Total originated
3,760,884
3,568,936
Acquired:
48,194
53,926
(10.6)%
81,659
84,408
(3.3)%
4,263
4,862
(12.3)%
134,116
143,196
(6.3)%
137,003
144,388
(5.1)%
150,292
163,187
(7.9)%
1,119
1,722
(35.0)%
Total acquired
422,530
452,493
(6.6)%
(10.4)%
Our loan portfolio totaled $4.2 billion at March 31, 2019, increasing $154.6 million, or 3.8%, since December 31, 2018, driven by new loan originations. Originated and acquired loans grew $162.0 million, or 16.3% annualized, primarily due to growth in commercial loans of $112.8 million, or 17.4% annualized. The acquired 310-30 loan portfolio declined $7.4 million, or 10.4%, from December 31, 2018.
We have successfully generated new relationships with small to medium-sized businesses and consumers, experiencing particularly strong loan growth in our commercial and industrial portfolio, which at March 31, 2019, was comprised of diverse industry segments. These segments included government and municipal loans of $502.4 million, finance and financial services loans, primarily lender finance, of $377.0 million, healthcare-related loans of $191.0 million, manufacturing-related loans of $166.0 million and a variety of smaller subcategories of commercial and industrial loans. Food and agriculture loans were 36.6% of the Company’s risk based capital and 5.5% of total loans, and are well-diversified across crop and livestock types.
Originated and acquired non-owner occupied CRE loans were 95.6% of the Company’s risk based capital, or 14.3% of total loans, and no specific property type comprised more than 4.0% of total loans. The Company maintains very little exposure to retail properties, comprising less than 2.0% of total loans. Multi-family loans totaled $62.0 million, or 1.5% of total loans as of March 31, 2019.
New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan originations totaled $1.3 billion over the past twelve months, led by commercial and industrial loan originations of $723.0 million. Originations are defined as closed end funded loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of originations to better approximate the impact of originations on loans outstanding and ultimately net interest income.
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The following tables represent new loan originations during the first quarter 2019 and 2018:
First quarter
Fourth quarter
Third quarter
Second quarter
153,547
213,335
123,440
232,643
123,984
26,405
34,727
35,549
19,009
23,576
15,213
14,046
23,833
38,220
25,873
6,138
7,640
5,412
(929)
(10,778)
201,303
269,748
188,234
288,943
162,655
69,125
41,031
42,300
28,316
20,694
38,627
51,017
40,293
30,259
21,698
1,958
2,592
3,797
3,588
3,238
311,013
364,388
274,624
351,106
208,285
Included in originations are net fundings under revolving lines of credit of $105,235, $6,263, $34,070, $151,888 and $59,236 as of the first quarter 2019, fourth quarter 2018, third quarter 2018, second quarter 2018 and first quarter 2018, respectively.
The tables below show the contractual maturities of our total loans for the dates indicated:
Due within
Due after 1 but
Due after
1 year
within 5 years
5 years
222,014
900,041
898,663
2,020,718
34,379
117,520
289,723
441,622
45,235
163,303
29,898
238,436
9,788
45,580
311,416
1,226,444
1,218,284
78,179
392,664
175,111
27,599
56,522
738,531
6,303
12,444
3,444
423,497
1,688,074
2,135,370
191,088
844,015
896,910
1,932,013
37,284
124,289
273,737
435,310
53,845
143,909
30,290
228,044
9,397
39,807
291,614
1,152,020
1,200,937
87,581
330,282
174,349
30,376
56,914
743,525
7,748
12,997
417,319
1,552,213
2,122,776
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The stated interest rate (which excludes the effects of non-refundable loan origination and commitment fees, net of costs and the accretion of fair value marks) of originated and acquired loans with maturities over one year is as follows at the dates indicated:
Fixed
Variable
Balance
average rate
Commercial and industrial(1)
952,452
845,679
1,798,131
198,865
198,545
397,410
47,002
141,027
188,029
45,561
1,198,338
1,230,812
2,429,150
235,894
311,152
547,046
354,006
434,067
788,073
12,978
2,908
15,886
Total loans with > 1 year maturity
1,801,216
1,978,939
3,780,155
933,202
807,139
1,740,341
195,354
192,133
387,487
44,351
124,234
168,585
39,786
1,172,928
1,163,292
2,336,220
209,759
273,115
482,874
361,147
429,909
791,056
13,672
3,196
16,868
1,757,506
1,869,512
3,627,018
Included in commercial fixed rate loans are loans totaling $471,837 and $473,440 that have been swapped to variables rates at current market pricing at March 31, 2019 and December 31, 2018, respectively. Included in the commercial segment are tax exempt loans totaling $680,443 and $685,644 with a weighted average rate of 3.44% and 3.27% at March 31, 2019 and December 31, 2018, respectively.
Accretable Yield
At March 31, 2019, the accretable yield balance on loans accounted for under ASC 310-30 was $33.3 million compared to $35.9 million at December 31, 2018. We remeasure the expected cash flows quarterly for all 24 remaining loan pools accounted for under ASC 310-30 utilizing the same cash flow methodology used at the time of acquisition. This remeasurement resulted in a net $1.1 million and $4.0 million reclassification from non-accretable difference to accretable yield during the three months ended March 31, 2019 and 2018, respectively.
In addition to the accretable yield on loans accounted for under ASC 310-30, the fair value adjustments on loans outside the scope of ASC 310-30 are also accreted to interest income over the life of the loans. Total remaining accretable yield and fair value mark was as follows for the dates indicated:
Remaining accretable yield on loans accounted for under ASC 310-30
Remaining accretable fair value mark on originated and acquired loans
8,391
8,659
Total remaining accretable yield and fair value mark
41,708
44,560
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Asset Quality
Asset quality is fundamental to our success and remains a strong point, driven by our disciplined adherence to our self-imposed concentration limits across industry sector and real estate property type. Accordingly, for the origination of loans, we have established a credit policy that allows for responsive, yet controlled lending with credit approval requirements that are scaled to loan size. Within the scope of the credit policy, each prospective loan is reviewed in order to determine the appropriateness and the adequacy of the loan characteristics and the security or collateral prior to making a loan. We have established underwriting standards and loan origination procedures that require appropriate documentation, including financial data and credit reports. For loans secured by real property, we require property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, in each case where appropriate.
Additionally, we have implemented procedures to timely identify loans that may become problematic in order to ensure the most beneficial resolution to the Company. Asset quality is monitored by our credit risk management department and evaluated based on quantitative and subjective factors such as the timeliness of contractual payments received. Additional factors that are considered, particularly with commercial loans over $500,000, include the financial condition and liquidity of individual borrowers and guarantors, if any, and the value of our collateral. To facilitate the oversight of asset quality, loans are categorized based on the number of days past due and on an internal risk rating system, and both are discussed in more detail below.
In the event of borrower default, we may seek recovery in compliance with state lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying or restructuring a loan from its original terms, for economic or legal reasons, to provide a concession to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such restructured loans are considered TDRs in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors. Under this guidance, modifications to loans that fall within the scope of ASC 310-30 are not considered troubled debt restructurings, regardless of otherwise meeting the definition of a troubled debt restructuring. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the lower of the related loan balance or the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ALL and any subsequent declines in carrying value charged to impairments on OREO.
Non-performing Assets and Past Due Loans
Non-performing assets consist of non-accrual loans, TDRs on non-accrual, OREO and other repossessed assets. Non-accrual loans and TDRs on non-accrual accounted for under ASC 310-30, as described below, may be excluded from our non-performing assets to the extent that the cash flows of the loan pools are still estimable. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three months ended March 31, 2019 and 2018 was $0.3 million and $0.3 million, respectively.
All loans accounted for under ASC 310-30 were classified as performing assets at March 31, 2019, as the future cash flows on the loan pools were considered estimable. While individual loans making up the pools may be accounted for on a cost recovery basis, the cash flows on the loan pools are considered estimable and, therefore, interest income, through accretion of the difference between the carrying value of the loans in the pool and the pool's expected future cash flows, is being recognized on all acquired loan pools accounted for under ASC 310-30.
Past due status is monitored as an indicator of credit deterioration. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. Originated and acquired loans that are 90 days or more past due are put on non-accrual status unless the loan is well secured and in the process of collection.
The following table sets forth the non-performing assets and past due loans as of the dates presented:
Non-accrual loans:
Total non-accrual loans, excluding restructured loans
22,815
21,017
Total restructured loans on non-accrual
3,439
Total non-performing loans
OREO
Total non-performing assets
35,704
35,052
Loans 30-89 days past due and still accruing interest
Loans 90 days past due and still accruing interest
Total non-accrual loans
Total past due and non-accrual loans
Accruing restructured loans
2,206
5,944
ALL
Total non-performing loans to total loans
Loans 90 days or more past due and still accruing interest to total loans
Total 90 days past due and still accruing interest and non-accrual loans to total originated and acquired loans
Total non-performing assets to total loans and OREO
ALL to non-performing loans
During the first quarter of 2019, total non-performing loans increased $1.9 million, or 7.6%, from December 31, 2018. During the first quarter of 2019, accruing TDRs decreased $3.7 million due to paydowns. Total non-performing assets to total loans and OREO was 0.84% and 0.85% at March 31, 2019 and December 31, 2018, respectively.
Loans 30-89 days past due and still accruing interest increased $1.6 million from December 31, 2018 to March 31, 2019, and loans 90 days or more past due and still accruing interest increased $0.5 million from December 31, 2018 to March 31, 2019, for a collective increase in total past due loans of $2.1 million. There were no ASC 310-30 loan pools past due or on non-accrual at March 31, 2019 or December 31, 2018.
Allowance for Loan Losses
The ALL represents the amount that we believe is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. Determination of the ALL is based on an evaluation of the collectability of loans, the realizable value of underlying collateral, economic conditions, historical net loan losses, the estimated loss emergence period, estimated default rates, any declines in cash flow assumptions from acquisition, loan structures, growth factors and other elements that warrant recognition and, to the extent applicable, prior loss experience. The ALL is critical to the portrayal and understanding of our financial condition, liquidity and results of operations. The determination and application of the ALL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.
In accordance with the applicable guidance for business combinations, acquired loans were recorded at their acquisition date fair values, which were based on expected future cash flows and included an estimate for future loan losses; therefore, no ALL was recorded as of the acquisition date. Any estimated losses on acquired loans that arise after the acquisition date are reflected in a charge to the provision for loan losses on the consolidated statements of operations.
310-30 ALL
Loans accounted for under the accounting guidance provided in ASC 310-30 have been grouped into pools based on the predominant risk characteristics of purpose and/or type of loan. The timing and receipt of expected principal, interest and any other cash flows of these loans are periodically remeasured and the expected future cash flows of the collective pools are compared to the carrying value of the pools. To the extent that the expected future cash flows of each pool is less than the book value of the pool, an allowance for loan losses will be established through a charge to the provision for loan losses. If the remeasured expected future cash flows are greater than the book value of the pools, then the improvement in the expected future cash flows is accreted into interest income over
the remaining expected life of the loan pool. During the three months ended March 31, 2019 and 2018, these remeasurements resulted in overall increases in expected cash flows in certain loan pools, which, absent previous valuation allowances within the same pool, are reflected in increased accretion as well as an increased amount of accretable yield and are recognized over the expected remaining lives of the underlying loans as an adjustment to yield.
During the three months ended March 31, 2019 and 2018, loans accounted for under ASC 310-30 had recoupment of $16 thousand and a provision of $41 thousand, respectively.
Originated and Acquired ALL
For all originated and acquired loans, the determination of the ALL follows a process to determine the appropriate level of ALL that is designed to account for changes in credit quality and other risk factors. This process provides an ALL consisting of a specific allowance component based on certain individually evaluated loans and a general allowance component based on estimates of reserves needed for all other loans, segmented based on similar risk characteristics.
Impaired loans less than $250,000 are included in the general allowance population. Impaired loans over $250,000 are subject to individual evaluation on a regular basis to determine the need, if any, to allocate a specific reserve to the impaired loan. Typically, these loans consist of commercial, commercial real estate and agriculture loans and exclude homogeneous loans such as residential real estate and consumer loans. Specific allowances are determined by collectively analyzing:
the borrower's resources, ability, and willingness to repay in accordance with the terms of the loan agreement;
the likelihood of receiving financial support from any guarantors;
the adequacy and present value of future cash flows, less disposal costs, of any collateral; and
the impact current economic conditions may have on the borrower's financial condition and liquidity or the value of the collateral.
In evaluating the loan portfolio for an appropriate ALL level, unimpaired loans are grouped into segments based on broad characteristics such as primary use and underlying collateral. We have identified four primary loan segments that are further stratified into eleven loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific factors affecting each loan class. Following are the loan classes within each of the four primary loan segments:
commercial real estate
Total Consumer
Acquisition and development
Appropriate ALL levels are determined by segment and class utilizing risk ratings, loss history, peer loss history and qualitative adjustments. The qualitative adjustments consider the following risk factors:
economic/external conditions;
loan administration, loan structure and procedures;
risk tolerance/experience;
loan growth;
trends;
concentrations; and
other.
Management derives an estimated annual loss rate adjusted for an estimated loss emergence period based on historical loss data categorized by segment and class. The loss rates are applied at the loan segment and class level. In order to address our lack of historical loss data encompassing a full economic cycle, we incorporate not only our own historical loss rates since the beginning of 2012, but we also utilize peer historical loss data, including a historical average net charge-off ratio on each loan type, relying on the Uniform Bank Performance Reports compiled by the Federal Financial Institutions Examinations Council (“FFIEC”). We may also apply a long-term estimated loss rate to pass rated credits as necessary to account for inherent risks to the portfolio. For originated
55
loans, we assign a slightly higher portion of our loss history, but still rely on the peer loss history to account for our limited historical data. For acquired loans, we use solely our internal loss history as those loans are more seasoned and more of the actual losses in the portfolio have been from the acquired portfolio.
The collective resulting ALL for originated and acquired loans is calculated as the sum of the specific reserves and the general reserves. While these amounts are calculated by individual loan or segment and class, the entire ALL is available for any loan that, in our judgment, should be charged-off.
During the three months ended March 31, 2019, provision for loan losses on originated and acquired loans of $1.6 million was recorded to support originated loan growth. Net charge-offs were $0.2 million, or 0.02%, annualized, and specific reserves on impaired loans totaled $1.5 million at March 31, 2019.
During the three months ended March 31, 2018, $0.0 originated and acquired provision for loan losses was recorded due to strong credit trends and low net charge-offs of $0.6 million, or 0.07%, annualized. Specific reserves on impaired loans totaled $1.2 million at March 31, 2018.
Total ALL
After considering the above mentioned factors, we believe that the ALL of $37.1 million is adequate to cover probable losses inherent in the loan portfolio at March 31, 2019. However, it is likely that future adjustments to the ALL will be necessary and any changes to the assumptions, circumstances or estimates used in determining the ALL could adversely affect the Company's results of operations, liquidity or financial condition.
The following schedules present, by class stratification, the changes in the ALL during the periods listed:
Originated
and acquired
310-30
Beginning allowance for loan losses
33,606
207
33,813
Charge-offs:
(652)
Total charge-offs
Net charge-offs
(597)
(619)
Provision (recoupment) for loan loss
2,452
2,476
Ending allowance for loan losses
Ratio of net charge-offs to average total loans during the period, respectively
Ratio of ALL to total loans outstanding at period end, respectively
Ratio of ALL to total non-performing loans at period end, respectively
3,590,025
Average total loans outstanding during the period
4,063,167
64,920
4,128,087
3,892,770
72,634
3,965,404
3,594,417
115,432
3,709,849
Non-performing loans
23,669
The following tables present the allocation of the ALL and the percentage of the total amount of loans in each loan category listed as of the dates presented:
ALL as a %
% of total loans
Related ALL
of total ALL
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Deposits
Deposits from banking clients serve as a primary funding source for our banking operations and our ability to gather and manage deposit levels is critical to our success. Deposits not only provide a low-cost funding source for our loans, but also provide a foundation for the client relationships that are critical to future loan growth. The following table presents information regarding our deposit composition at March 31, 2019 and December 31, 2018:
Increase (decrease)
100,654
8,077
Savings accounts
553,721
540,481
13,240
Money market accounts
1,210,620
1,154,327
56,293
Total transaction deposits
3,455,092
178,264
Time deposits < $250,000
938,666
943,201
(4,535)
(0.5)%
Time deposits > $250,000
142,426
137,328
5,098
Total time deposits
563
178,827
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $250,000 as of March 31, 2019:
Three months or less
20,039
Over 3 months through 6 months
21,390
Over 6 months through 12 months
38,046
62,951
Total time deposits > $250,000
Total deposits increased $178.8 million during the three months ended March 31, 2019. Non-interest bearing demand deposits increased $100.7 million, interest-bearing demand deposits increased $8.1 million, savings and money market accounts increased $69.5 million and time deposits increased $0.6 million. The mix of transaction deposits (defined as total deposits less time deposits) to total deposits improved to 77.1% at March 31, 2019, from 76.2% at December 31, 2018, due to our continued focus on developing long-term banking relationships.
At March 31, 2019 and December 31 2018, time deposits that were scheduled to mature within 12 months totaled $661.1 million and $685.4 million, respectively. Of the time deposits scheduled to mature within 12 months at March 31, 2019, $79.5 million were in denominations of $250,000 or more, and $581.6 million were in denominations less than $250,000.
Other Borrowings
As of March 31, 2019 and December 31, 2018, the Company sold securities under agreements to repurchase totaling $59.5 million and $66.0 million, respectively. In addition, as a member of the FHLB, the Bank has access to a line of credit and term financing from the FHLB with total available credit of $1.1 billion. The Company utilized its FHLB line of credit as a funding mechanism for originated loans. At March 31, 2019 and December 31, 2018, the Bank had $161.1 million and $234.3 million in line of credit advances from the
57
FHLB, respectively. The Bank’s FHLB term advances totaled $67.3 million and $67.3 million at March 31, 2019 and December 31, 2018, respectively. The term advances have fixed rates between 1.55% - 2.33%, with maturity dates of 2018 – 2020.
Results of Operations
Our net income depends largely on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Our results of operations are also affected by provisions for loan losses and non-interest income, such as service charges, bank card income, swap fee income, and gain on sale of mortgages, net. Our primary operating expenses, aside from interest expense, consist of salaries and benefits, occupancy costs, telecommunications data processing expense and intangible asset amortization. Any expenses related to the resolution of problem assets are also included in non-interest expense.
Overview of Results of Operations
We recorded net income of $18.9 million, or $0.60 per diluted share, during the three months ended March 31, 2019, compared to net income of $8.5 million, or $0.27 per diluted share, during the three months ended March 31, 2018. Net income during the three months ended March 31, 2018 included $6.0 million in after-tax one-time expenses related to the acquisition of Peoples. Adjusting for these items, net income would have been $14.5 million, or $0.47 per diluted share, during the three months ended March 31, 2018.
Net Interest Income
We regularly review net interest income metrics to provide us with indicators of how the various components of net interest income are performing. We regularly review: (i) our loan mix and the yield on loans; (ii) the investment portfolio and the related yields; (iii) our deposit mix and the cost of deposits; and (iv) net interest income simulations for various forecast periods.
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The table below presents the components of net interest income on a fully taxable equivalent basis for the three months ended March 31, 2019 and 2018. The effects of trade-date accounting of investment securities for which the cash had not settled are not considered interest earning assets and are excluded from this presentation for time frames prior to their cash settlement, as are the market value adjustments on the investment securities available-for-sale.
Average
Interest
rate
Interest earning assets:
Originated loans FTE(1)(2)(3)
3,624,793
43,573
2,954,865
31,454
Acquired loans
438,374
6,254
639,552
8,930
3,687
5,393
42,868
488
54,358
787,367
4,361
935,359
4,775
Investment securities held-to-maturity
229,401
1,651
256,646
1,751
26,885
16,072
Interest earning deposits and securities purchased under agreements to resell
32,657
168,318
Total interest earning assets FTE(2)
77,954
99,798
421,615
406,903
(35,814)
(31,619)
Interest bearing liabilities:
Interest bearing demand, savings and money market deposits
2,410,009
3,008
2,408,387
1,844
1,078,554
3,607
1,167,302
2,790
60,589
153
132,339
248,779
1,486
115,683
460
Total interest bearing liabilities
3,797,931
3,823,711
Demand deposits
1,108,150
1,057,622
97,107
92,076
5,003,188
4,973,409
Shareholders' equity
Total liabilities and shareholders' equity
Net interest income FTE(2)
Interest rate spread FTE(2)
Net interest earning assets
1,449,334
1,316,891
Net interest margin FTE(2)
Average transaction deposits
3,518,159
3,466,009
Average total deposits
4,596,713
4,633,311
Ratio of average interest earning assets to average interest bearing liabilities
Originated loans are net of deferred loan fees, less costs, which are included in interest income over the life of the loan.
Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for the three months ended March 31, 2019 and 2018. The taxable equivalent adjustments included above are $1,227 and $1,063 for the three months ended March 31, 2019 and 2018, respectively.
Loan fees included in interest income totaled $1,325 and $1,789 for the three months ended March 31, 2019 and 2018, respectively.
Net interest income totaled $51.2 million and $47.6 million during the three months ended March 31, 2019 and 2018, respectively. Fully taxable equivalent net interest income totaled $52.4 million for the three months ended March 31, 2019, and increased $3.7 million, or 7.6%, from the three months ended March 31, 2018. The fully taxable equivalent net interest margin widened 21 basis
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points to 4.05%. The yield on earning assets increased 44 basis points, led by a 56 basis point increase in the originated portfolio yields due to short-term rate increases, partially offset by an increase in the cost of funds of 33 basis points from 0.55% to 0.88%.
Average loans comprised $4.1 billion, or 78.7%, of total average interest earning assets during the three months ended March 31, 2019, compared to $3.8 billion, or 73.2%, during the three months ended March 31, 2018. The increase in average loan balances was driven by a $669.9 million increase in originated loans. The originated loan portfolio yield increased to 4.88% during the three months ended March 31, 2019, compared to 4.32% during the three months ended March 31, 2018, benefitting from higher new loan yields and increases in short-term market rates. The yield on the ASC 310-30 loan portfolio was 22.72% and 18.69% during the three months ended March 31, 2019 and 2018, respectively.
Average investment securities comprised 19.4% and 23.2% of total interest earning assets during the three months ended March 31, 2019 and 2018, respectively. The decrease in the investment portfolio was a result of scheduled paydowns and reflects the re-mixing of the interest-earning assets as we have utilized the paydowns of the investment portfolio to fund loan originations.
Average balances of interest bearing liabilities decreased $25.8 million during the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The decrease was driven by decreases in time deposits of $88.7 million and securities sold under agreement to repurchase of $71.8 million, partially offset by increases in FHLB advances of $133.1 million and interest bearing demand, savings and money market deposits of $1.6 million. Total interest expense related to interest bearing liabilities was $8.3 million and $5.1 million during the three months ended March 31, 2019 and 2018, respectively, at an average cost of 0.88% and 0.55% during the three months ended March 31, 2019 and 2018, respectively. Additionally, the cost of deposits increased 17 basis points to 0.58% during the three months ended March 31, 2019, compared to 0.41% during the three months ended March 31, 2018, due to higher cost of FHLB advances and savings, money market and time deposits.
The following table summarizes the changes in net interest income on a fully taxable equivalent basis by major category of interest earning assets and interest bearing liabilities, identifying changes related to volume and changes related to rates for the three months ended March 31, 2019 compared to the three months ended March 31, 2018:
compared to
Increase (decrease) due to
Volume
Rate
Interest income:
8,053
4,066
12,119
(2,870)
194
(2,676)
(2,869)
(1,706)
(131)
(78)
(820)
406
(414)
(196)
(100)
170
179
(872)
(531)
Total interest income
465
6,328
6,793
1,162
1,164
(297)
817
(181)
284
103
795
1,026
319
2,791
3,110
Net change in net interest income
146
3,537
3,683
Presented on a fully taxable equivalent basis using the statutory tax rate of 21% for the three months ended March 31, 2019 and 2018. The taxable equivalent adjustments included above are $1,227 and $1,063 for three months ended March 31, 2019 and 2018, respectively.
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Below is a breakdown of average deposits and the average rates paid during the periods indicated:
paid
Non-interest bearing demand
Interest bearing demand
690,932
663,159
1,170,040
1,172,067
549,037
573,161
Total average deposits
Provision for Loan Losses
The provision for loan losses represents the amount of expense that is necessary to bring the ALL to a level that we deem appropriate to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The ALL is in addition to the remaining purchase accounting marks of $8.4 million on originated and acquired loans that were established at the time of acquisition. The determination of the ALL, and the resultant provision for loan losses, is subjective and involves significant estimates and assumptions.
Below is a summary of the provision for loan losses recorded in the consolidated statements of operations for the periods indicated:
(Recoupment) provision for loans accounted for under ASC 310-30
Provision for loan losses on originated and acquired loans
Total provision for loan losses
Provision for loan losses on originated and acquired loans of $1.6 million was recorded during the first quarter of 2019 to support originated loan growth. The originated and acquired allowance for loan losses totaled 0.88% of originated and acquired loans at March 31, 2019, compared to 0.85% at March 31, 2018.
For the three months ended March 31, 2019 and 2018, we recorded recoupment of $16 thousand and provision of $41 thousand, respectively, for loans accounted for under ASC 310-30 in connection with our re-measurements of expected cash flows.
Non-Interest Income
The table below details the components of non-interest income for the periods presented:
2019 vs 2018
(189)
(4.2)%
2.0 %
(1,034)
(13.0)%
(31)
(6.9)%
733
63.7 %
(329)
(84.4)%
(784)
(4.4)%
Non-interest income totaled $17.1 million and $17.8 million for the three months ended March 31, 2019 and 2018, respectively, decreasing $0.8 million primarily due to lower mortgage banking income and OREO related income. These decreases were partially offset by higher swap fee income included within other non-interest income.
Non-Interest Expense
The table below details the components of non-interest expense for the periods presented:
(2,782)
(9.1)%
(1,073)
(13.5)%
(2,076)
(47.5)%
(238)
(19.4)%
(255)
(33.9)%
(1,326)
(62.1)%
(2,005)
(71.1)%
(672)
(17.5)%
342
43.8 %
(446)
>(100.0)%
(357)
(54.7)%
(10,888)
(19.7)%
Non-interest expense totaled $44.4 million for the three months ended March 31, 2019, compared to $55.3 million for the three months ended March 31, 2018, representing a decrease of $10.9 million primarily driven by $7.6 million of acquisition costs during the first quarter of 2018 and efficiencies gained from the integration of the Peoples acquisition.
Income taxes
Income tax expense attributable to income before income taxes was $3.4 million for the three months ended March 31, 2019, compared to an income tax expense of $1.7 million for the three months ended March 31, 2018. The tax expense recorded for the three months ended March 31, 2019 and 2018 was lowered by an $0.8 million and $0.4 million discrete tax benefit from stock compensation activity, respectively. Without the discrete items related to stock compensation activity, the tax rate for the three months ended March 31, 2019, was 18.5% compared to 20.3% for the three months ended March 31, 2018. The effective tax rate differs from the federal statutory rate primarily due to tax benefits from stock compensation activity, interest income from tax-exempt lending, bank-owned life insurance income, and the relationship of these items to pre-tax income. The Company forecasts the full year estimated effective tax rate in accordance with ASC 740; as a result, the relationship between pre-tax income and tax-exempt income within each reporting period can create fluctuations in the effective tax rate from period-to-period.
Additional information regarding income taxes can be found in note 20 of our audited consolidated financial statements in our 2018 Annual Report on Form 10-K.
Liquidity and Capital Resources
Liquidity is monitored and managed to ensure that sufficient funds are available to operate our business and pay our obligations to depositors and other creditors, while providing ample available funds for opportunistic and strategic investments. On-balance sheet liquidity is represented by our cash and cash equivalents, and unencumbered investment securities, and is detailed in the table below as of March 31, 2019 and December 31, 2018:
Unencumbered investment securities, at fair value
505,182
573,637
610,440
683,193
Total on-balance sheet liquidity decreased $72.8 million at March 31, 2019 compared to December 31, 2018. The decrease was due to a reduction of $68.5 million in unencumbered available-for-sale and held-to-maturity securities balances and lower cash and due from banks of $4.3 million.
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Our primary sources of funds are deposits, securities sold under agreements to repurchase, prepayments and maturities of loans and investment securities, the sale of investment securities, and funds provided from operations. We anticipate having access to other third party funding sources, including the ability to raise funds through the issuance of shares of our common stock or other equity or equity-related securities, incurrence of debt, and federal funds purchased, that may also be a source of liquidity. We anticipate that these sources of liquidity will provide adequate funding and liquidity for at least a twelve-month period.
Our primary uses of funds are loan originations, investment security purchases, withdrawals of deposits, settlement of repurchase agreements, capital expenditures, operating expenses, and share repurchases. For additional information regarding our operating, investing, and financing cash flows, see our consolidated statements of cash flows in the accompanying unaudited consolidated financial statements.
Exclusive from the investing activities related to acquisitions, our primary investing activities are originations and pay-offs and pay downs of loans and purchases and sales of investment securities. At March 31, 2019, pledgeable investment securities represented a significant source of liquidity. Our available-for-sale investment securities are carried at fair value and our held-to-maturity securities are carried at amortized cost. Our collective investment securities portfolio totaled $1.0 billion at March 31, 2019, inclusive of pre-tax net unrealized losses of $11.5 million on the available-for-sale securities portfolio. Additionally, our held-to-maturity securities portfolio had $2.1 million of pre-tax net unrealized losses at March 31, 2019. The gross unrealized gains and losses are detailed in note 3 of our consolidated financial statements. As of March 31, 2019, our investment securities portfolio consisted primarily of mortgage-backed securities, all of which were issued or guaranteed by U.S. Government agencies or sponsored enterprises. The anticipated repayments and marketability of these securities offer substantial resources and flexibility to meet new loan demand, reinvest in the investment securities portfolio, or provide optionality for reductions in our deposit funding base.
At present, financing activities primarily consist of changes in deposits and repurchase agreements, and advances from the FHLB, in addition to the payment of dividends and the repurchase of our common stock. Maturing time deposits represent a potential use of funds. As of March 31, 2019, $661.1 million of time deposits were scheduled to mature within 12 months. Based on the current interest rate environment, market conditions, and our consumer banking strategy focusing on both lower cost transaction accounts and term deposits, our strategy is to replace a portion of those maturing time deposits with transaction deposits and market-rate time deposits.
Through our relationship with the FHLB, we have pledged qualifying loans and investment securities allowing us to obtain additional liquidity through FHLB advances and lines of credit. FHLB advances and lines of credit available totaled $1.1 billion, of which $228.4 million was used at March 31, 2019. We can obtain additional liquidity through FHLB advances if required. The Bank also has access to federal funds lines of credit with corresponding banks.
Under the Basel III requirements, at March 31, 2019, the Company and the Bank met all capital adequacy requirements and the Bank had regulatory capital ratios in excess of the levels established for well-capitalized institutions. For more information on regulatory capital, see note 10 in our consolidated financial statements.
Our shareholders' equity is impacted by earnings, changes in unrealized gains and losses on securities, net of tax, stock-based compensation activity, share repurchases and the payment of dividends.
The Board of Directors has authorized multiple programs to repurchase shares of the Company’s common stock from time to time either in open market or in privately negotiated transactions in accordance with applicable regulations of the SEC.
On August 5, 2016, the Company announced that its Board of Directors authorized a program to repurchase up to an additional $50.0 million of the Company’s common stock. The remaining authorization under this program as of March 31, 2019 was $12.6 million. During the three months ended March 31, 2019, we did not repurchase any shares of our common stock.
On May 9, 2019, our Board of Directors declared a quarterly dividend of $0.19 per common share, payable on June 14, 2019 to shareholders of record at the close of business on May 31, 2019.
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Asset/Liability Management and Interest Rate Risk
Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows.
The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the Asset Liability Committee from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.
Our interest rate risk model indicated that the Company was asset sensitive in terms of interest rate sensitivity at March 31, 2019. During the three months ended March 31, 2019, we increased our asset sensitivity as a result of the balance sheet mix towards more variable rate assets, even after adjusting our models for the excess capital deployment. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 basis point decrease in interest rates on net interest income based on the interest rate risk model at March 31, 2019 and December 31, 2018:
Hypothetical
shift in interest
% change in projected net interest income
rates (in bps)
200
100
(5.37)%
(4.84)%
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.
As part of the asset/liability management strategy to manage primary market risk exposures expected to be in effect in future reporting periods, management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. The strategy with respect to liabilities has been to emphasize transaction accounts, particularly non-interest or low interest bearing non-maturing deposit accounts which are less sensitive to changes in interest rates. Non-maturing deposit accounts have grown $178.3 million during the three months March 31, 2019, and totaled 77.1% of total deposits at March 31, 2019 compared to 76.2% at December 31, 2018. We currently have no brokered time deposits and intend to continue to focus on our strategy of increasing non-interest or low-cost interest bearing non-maturing deposit accounts.
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Off-Balance Sheet Activities
In the normal course of business, we are a party to various contractual obligations, commitments and other off-balance sheet activities that contain credit, market, and operational risk that are not required to be reflected in our consolidated financial statements. The most significant of these are the loan commitments that we enter into to meet the financing needs of clients, including commitments to extend credit, commercial and consumer lines of credit and standby letters of credit. As of March 31, 2019 and December 31, 2018, we had loan commitments totaling $738.4 million and $773.5 million, respectively, and standby letters of credit that totaled $11.2 million and $10.6 million, respectively. Unused commitments do not necessarily represent future credit exposure or cash requirements, as commitments often expire without being drawn upon. We do not anticipate any material losses arising from commitments or contingent liabilities and we do not believe that there are any material commitments to extend credit that represent risks of an unusual nature.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of March 31, 2019. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.
During the most recently completed fiscal quarter, there were no changes made in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
Item 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Maximum number
Total number of
(or approximate dollar
shares (or units)
value) of shares (or
Total number
purchased as part of
units) that may yet be
of shares (or
price paid per
publicly announced
purchased under the
Period
units) purchased
share (or unit)
plans or programs
plans or programs (2)
January 1 - January 31, 2019(1)
12,562,825
February 1 - February 28, 2019(1)
4,872
35.92
March 1 - March 31, 2019(1)
51,331
36.00
56,203
35.99
These shares represent shares purchased other than through publicly announced plans and were purchased pursuant to the Company’s stock incentive plans. Pursuant to the plans, shares were purchased from plan participants at the then current market value in satisfaction of stock option exercise prices, settlements of restricted stock and tax withholdings.
On August 5, 2016, the Company’s Board of Directors authorized the repurchase of up to an additional $50.0 million of common stock. Under this authorization, $12,562,825 remained available for purchase at March 31, 2019.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
3.1
Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration Statement (Registration No. 333-177971), filed August 22, 2012)
3.2
Second Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014, filed November 7, 2014)
31.1
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail
SIGNATURES
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.
National Bank Holdings Corporation
/s/ Aldis Birkans
Aldis Birkans
Chief Financial Officer and Treasurer
(principal financial officer)
Date: May 9, 2019
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