Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents our consolidated financial condition and results of operations for the years ended December 31, 2022, 2021 and 2020. This discussion should be read together with the “Summary Consolidated Financial Data,” our consolidated financial statements and the notes thereto, and other financial data included in this document. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these estimates and in the forward-looking statements as a result of certain factors, including those discussed in the section of this document captioned “Risk Factors,” and elsewhere in this document. Unless the context requires otherwise, the terms “Company,” “HBI,” “us,” “we” and “our” refer to Home BancShares, Inc. on a consolidated basis.
General
We are a bank holding company headquartered in Conway, Arkansas, offering a broad array of financial services through our wholly owned bank subsidiary, Centennial Bank (“Centennial”). As of December 31, 2022, we had, on a consolidated basis, total assets of $22.88 billion, loans receivable, net, of $14.12 billion, total deposits of $17.94 billion, and stockholders’ equity of $3.53 billion.
We generate most of our revenue from interest on loans and investments, service charges, and mortgage banking income. Deposits and FHLB borrowed funds are our primary source of funding. Our largest expenses are interest on our funding sources, salaries and related employee benefits and occupancy and equipment. We measure our performance by calculating our net interest margin, return on average assets and return on average common equity. We also measure our performance by our efficiency ratio and efficiency ratio, as adjusted (non-GAAP). The efficiency ratio is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP measure for management, as it excludes certain items and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding certain items such as merger expenses, hurricane expenses and/or gains and losses.
Table 1: Key Financial Measures
| | | | | | | | | | | | | | | | | |
| As of or for the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in thousands, except per share data) |
Total assets | $ | 22,883,588 | | | $ | 18,052,138 | | | $ | 16,398,804 | |
Loans receivable | 14,409,480 | | | 9,836,089 | | | 11,220,721 | |
Allowance for credit losses | (289,669) | | | (236,714) | | | (245,473) | |
Total deposits | 17,938,783 | | | 14,260,570 | | | 12,725,790 | |
Total stockholders’ equity | 3,526,362 | | | 2,765,721 | | | 2,605,758 | |
Net income | 305,262 | | | 319,021 | | | 214,488 | |
Basic earnings per share | $ | 1.57 | | | $ | 1.94 | | | $ | 1.30 | |
Diluted earnings per share | 1.57 | | | 1.94 | | | 1.30 | |
Book value per share | 17.33 | | | 16.90 | | | 15.78 | |
Tangible book value per share (non-GAAP)(1) | 10.17 | | | 10.80 | | | 9.70 | |
Net interest margin(2) | 3.81 | % | | 3.66 | % | | 4.06 | % |
Efficiency ratio | 49.53 | | | 40.81 | | | 40.20 | |
Efficiency ratio, as adjusted (non-GAAP)(3) | 44.55 | | | 42.12 | | | 40.36 | |
Return on average assets | 1.35 | | | 1.83 | | | 1.33 | |
Return on average common equity | 9.17 | | | 11.89 | | | 8.57 | |
(1)See Table 25 for the non-GAAP tabular reconciliation.
(2)Fully taxable equivalent (assuming an income tax rate of 26.135% for 2020, 25.740% for 2021 and 24.6735% for 2022).
(3)See Table 29 for the non-GAAP tabular reconciliation.
2022 Overview
Results of Operations for the Years Ended December 31, 2022 and 2021
Our net income decreased $13.8 million, or 4.3%, to $305.3 million for the year ended December 31, 2022, from $319.0 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $1.57 per share for the year ended December 31, 2022 and $1.94 per share for the year ended December 31, 2021. As a result of the acquisition of Happy Bancshares, Inc. ("Happy"), which we completed on April 1, 2022, we incurred $49.6 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments and a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced net income by $81.6 million ($108.2 million pre-tax) and earnings per share by $0.42 per share for the year ended December 31, 2022. Excluding the impact of the acquisition of Happy, the Company determined that an additional $5.0 million provision for credit losses on loans was necessary due to increased loan growth during the year. However, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments or investment securities was necessary as of December 31, 2022. During the year ended December 31, 2022, the Company recorded $10.0 million in income from the settlement of a lawsuit brought by the Company, net of legal expense, $6.7 million in recoveries on historic losses from loans charged off prior to acquisition, and $1.4 million in special dividends from equity investments, which were partially offset by $2.1 million in trust preferred securities ("TRUPS") redemption fees, $1.3 million loss for the decrease in fair value of marketable securities and $176,000 in hurricane expenses.
Total interest income increased by $252.6 million, or 40.4%, and non-interest income increased by $37.5 million, or 27.3%. This was partially offset by a $177.1 million, or 59.3%, increase in non-interest expense and a $66.9 million, or 128.1%, increase in interest expense. These fluctuations are primarily due to the acquisition of Happy during the second quarter of 2022 and the rising rate environment. The increase in interest income resulted from a $156.4 million, or 27.3%, increase in loan interest income, a $70.6 million, or 142.0%, increase in investment income and a $25.6 million, or 728.2%, increase in interest income on deposits at other banks. The increase in non-interest income was primarily due to a $27.6 million, or 133.2%, increase in other income, a $14.8 million, or 66.6%, increase in service charges on deposit accounts, a $10.9 million, or 555.9%, increase in trust fees, an $8.1 million, or 22.3%, increase in other service charges and fees and a $1.8 million, or 85.5%, increase in the cash value of life insurance. These increases were partially offset by an $8.5 million, or 117.7%, decrease in income for the fair value adjustment for marketable securities resulting from a $1.3 million decrease in the fair value of marketable securities for the year ended December 31, 2022, compared to a $7.2 million increase for the year ended December 31, 2021, an $8.0 million, or 31.2%, decrease in mortgage lending income, a $5.6 million, or 38.0%, decrease in dividends from FHLB, FRB, FNBB and other, a $2.2 million, or 92.3%, decrease in the gain on sale of SBA loans and a $1.5 million, or 75.0%, decrease in gain on OREO. Included within other income was $15.0 million in income from the settlement of a lawsuit brought by the Company and $6.7 million in recoveries on historic losses from loans charged off prior to acquisition, and included within dividends from FHLB, FRB, FNBB and other were $1.4 million in special dividends. The increase in non-interest expense was due to a $68.1 million, or 39.9%, increase in salaries and employee benefits, $49.6 million in merger and acquisition expenses, a $33.8 million, or 52.1%, increase in other operating expenses, a $16.8 million, or 45.8%, increase in occupancy and equipment and a $10.7 million, or 43.9%, increase in data processing expense. Included within other operating expense were $5.0 million in legal expenses from a lawsuit brought by the Company, $2.1 million in TRUPS redemption fees and $176,000 in hurricane expenses. The increase in interest expense was primarily due to a $61.1 million, or 244.8%, increase in interest on deposits, a $3.5 million, or 45.7%, increase in interest on FHLB and other borrowed funds and a $1.4 million, or 7.5%, increase in interest on subordinated debentures as a result of the acquisition of $140.0 million of subordinated debt and $23.2 million in trust preferred securities from Happy during the second quarter of 2022. Income tax expense decreased by $8.4 million, or 8.6%, during 2022 due to the decrease in net income and the reduction in the marginal tax rate related to the Happy acquisition.
Our net interest margin on a fully taxable equivalent basis increased from 3.66% for the year ended December 31, 2021 to 3.81% for the year ended December 31, 2022. The yield on interest earning assets was 4.40% and 3.99% for the year ended December 31, 2022 and 2021, respectively, as average interest earning assets increased from $15.86 billion to $20.15 billion. The increase in average earning assets is primarily the result of a $2.57 billion increase in average loans receivable and a $1.87 billion increase in average investment securities, largely resulting from the acquisition of Happy, which were partially offset by a $151.9 million decrease in average interest-bearing balances due from banks. For the years ended December 31, 2022 and 2021, we recognized $16.3 million and $20.2 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by approximately 2 basis points. During 2022, the Company experienced a $31.8 million reduction in interest income from PPP loans due to the forgiveness of the PPP loans and the acceleration of the deferred fees for the loans that were forgiven. This reduction in income was dilutive to the net interest margin by approximately 8 basis points. We recognized $3.8 million in event interest income for the year ended December 31, 2022 compared to $6.7 million in event income for the year ended December 31, 2021. This was dilutive to the net interest margin by approximately 2 basis points. The overall increase in the net interest margin was due to an increase in interest income due to an increase in both average earning assets at higher yields, which was partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities at higher interest rates primarily as a result of the Happy acquisition and the current rising interest rate environment.
Our efficiency ratio was 49.53% for the year ended December 31, 2022, compared to 40.81% for the same period in 2021. For the year ended December 31, 2022, our efficiency ratio, as adjusted (non-GAAP), was 44.55%, compared to 42.12% reported for the year ended December 31, 2021. (See Table 29 for the non-GAAP tabular reconciliation).
Our return on average assets was 1.35% for the year ended December 31, 2022, compared to 1.83% for the same period in 2021, and our return on average assets, as adjusted (non-GAAP) was 1.67% or the year ended December 31, 2022, compared to 1.73% for the same period in 2021. Our return on average common equity was 9.17% for the year ended December 31, 2022, compared to 11.89% for the same period in 2021.
Financial Condition as of and for the Years Ended December 31, 2022 and 2021
Our total assets as of December 31, 2022 increased $4.83 billion to $22.88 billion from the $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.69 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $2.93 billion, or 80.14%. Our loan portfolio balance increased $4.57 billion to $14.41 billion as of December 31, 2022, from $9.84 billion as of December 31, 2021. The increase in loans was due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $678.6 million in organic loan growth during 2022. Total deposits increased $3.68 billion to $17.94 billion as of December 31, 2022 compared to $14.26 billion as of December 31, 2021. The increase in deposits was primarily due to the acquisition of $5.86 billion in deposits, net of purchase accounting adjustments, from Happy in the second quarter of 2022, partially offset by $2.18 billion in deposit decline during the year. Stockholders’ equity increased $760.6 million to $3.53 billion as of December 31, 2022, compared to $2.77 billion as of December 31, 2021. The increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and $305.3 million in net income, which were partially offset by the $315.9 million decrease in accumulated other comprehensive income, $128.4 million of shareholder dividends paid and the repurchase of $70.9 million of our common stock during 2022. The improvement in stockholders’ equity was 27.5% for the year ended December 31, 2022 compared to December 31, 2021.
As of December 31, 2022, our non-performing loans increased to $60.9 million, or 0.42%, of total loans from $50.2 million, or 0.51%, of total loans as of December 31, 2021. The allowance for credit losses as a percentage of non-performing loans increased to 475.99% as of December 31, 2022, compared to 471.61% as of December 31, 2021. Non-performing loans from our Arkansas franchise were $8.4 million at December 31, 2022 compared to $13.9 million as of December 31, 2021. Non-performing loans from our Florida franchise were $20.5 million at December 31, 2022 compared to $26.8 million as of December 31, 2021. Non-performing loans from our new Texas franchise were $22.2 million at December 31, 2022. Non-performing loans from our Alabama franchise were $404,000 at December 31, 2022 compared to $470,000 as of December 31, 2021. Non-performing loans from our SPF franchise were $2.3 million at December 31, 2022 compared to $1.5 million as of December 31, 2021. Non-performing loans from our Centennial CFG franchise were $7.1 million at December 31, 2022 compared to $7.5 million as of December 31, 2021.
As of December 31, 2022, our non-performing assets increased to $61.5 million, or 0.27%, of total assets from $51.8 million, or 0.29%, of total assets as of December 31, 2021. Non-performing assets from our Arkansas franchise were $8.5 million at December 31, 2022 compared to $14.4 million as of December 31, 2021. Non-performing assets from our Florida franchise were $20.8 million at December 31, 2022 compared to $27.9 million as of December 31, 2021. Non-performing assets from our new Texas franchise were $22.4 million at December 31, 2022. Non-performing assets from our Alabama franchise were $404,000 at December 31, 2022 compared to $470,000 as of December 31, 2021. Non-performing assets from our SPF franchise were $2.3 million at December 31, 2022 compared to $1.5 million as of December 31, 2021. Non-performing assets from our CFG franchise were $7.1 million at December 31, 2022 compared to $7.5 million as of December 31, 2021.
The $7.1 million balance of non-accrual loans for our Centennial CFG market balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for credit risk by the Federal Reserve under the Shared National Credit Program. Due to the condition of the two loans, partial charge-offs for a total of $5.4 million were taken on these loans during 2022. The loans are not current on either principal or interest, and we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve. Any interest payments that are received will be applied to the principal balance.
2021 Overview
Results of Operations for the Years Ended December 31, 2021 and 2020
Our net income increased $104.6 million, or 48.8%, to $319.0 million for the year ended December 31, 2021, from $214.4 million for the same period in 2020. On a diluted earnings per share basis, our earnings were $1.94 per share for the year ended December 31, 2021 and $1.30 per share for the year ended December 31, 2020. During the year ended December 31, 2021, the Company did not record a provision for credit losses but did record a $4.8 million negative provision for unfunded commitments compared to a $112.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of $129.3 million for the year ended December 31, 2020. The $4.8 million negative provision for the year ended December 31, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $129.3 million of total credit loss expense for the year ended December 31, 2020 was primarily due to the uncertainty created by the COVID-19 pandemic, with $9.3 million as a result of the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which continued to improve following the fourth quarter of 2020. The Company determined that an additional provision for credit losses was not necessary. Despite the improvements in the economic and public health outlooks in the United States during 2021, the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter resulted in significant uncertainty about the future impact of the pandemic on our business, results of operations and financial condition. As a result, the Company determined that a negative provision for credit losses was not appropriate at the end of 2021, and the level of the allowance for credit losses was considered adequate as of December 31, 2021. The Company also recorded a $7.2 million adjustment for the increase in fair market value of marketable securities, $12.5 million of special dividend income from our equity investments, $5.1 million recovery on historic losses from loans charged-off prior to acquisition, $1.9 million of merger and acquisition expense and a $219,000 gain on sale of investment securities.
Total interest expense decreased by $41.2 million, or 44.1%, and non-interest income increased by $25.8 million, or 23.1%. This was partially offset by a $50.8 million, or 7.5%, decrease in total interest income and a $11.1 million, or 3.9%, increase in non-interest expense. The decrease in interest expense was primarily due to a $38.2 million decrease in interest on deposits and a $1.9 million decrease in interest on FHLB borrowed funds. The increase in non-interest income was primarily due to a $9.2 million increase in the fair value adjustment on marketable securities, an $8.3 million increase in other income, a $5.8 million increase in other service charges and fees, a $2.4 million increase in dividends from FHLB, FRB, FNBB & other and a $1.7 million increase in gain on sale of SBA loans and was partially offset by a $3.4 million decrease in mortgage lending income. The decrease in interest income was primarily due to a $53.4 million decrease in loan interest income. The increase in non-interest expense was due to a $6.8 million increase in salaries and employee benefits, a $5.2 million increase in data processing expense and a $1.2 million increase in merger and acquisition expense and was partially offset by a $1.8 million decrease in occupancy and equipment expense. Income tax expense increased by $34.5 million during 2021 due to an increase in net income.
Our net interest margin on a fully taxable equivalent basis decreased from 4.06% for the year ended December 31, 2020 to 3.66% for the year ended December 31, 2021. The yield on interest earning assets was 3.99% and 4.70% for the year ended December 31, 2021 and 2020, respectively, as average interest earning assets increased from $14.50 billion to $15.86 billion. The increase in average earning assets was primarily the result of a $1.84 billion increase in average interest-bearing balances due from banks and a $659.0 million increase in average investment securities, partially offset by the $1.13 billion decrease in average loans receivable. Average PPP loan balances were $434.7 million for the year ended December 31, 2021. These loans bore interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $35.6 million on PPP loans for the year ended December 31, 2021. The PPP loans were accretive to the net interest margin by 13 basis points for the year ended December 31, 2021. This was primarily due to approximately $910.1 million of the Company’s PPP loans being forgiven during 2021 which included the acceleration of $24.8 million in deferred fees for the loans that were forgiven. As of December 31, 2021, the Company had $3.6 million in remaining unamortized PPP fees. The COVID-19 pandemic and the resulting governmental response created a significant amount of excess liquidity in the market. As a result, we had an increase of $1.84 billion in average interest-bearing cash balances for the year ended December 31, 2021 compared to the year ended December 31, 2020. This excess liquidity was dilutive to the net interest margin by 46 basis points. For the years ended December 31, 2021 and 2020, we recognized $20.2 million and $27.4 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 4 basis points. We recognized $6.7 million in event interest income for the year ended December 31, 2021 compared to $2.1 million in event income for the year ended December 31, 2020. This increased the net interest margin by 3 basis points.
Our efficiency ratio was 40.81% for the year ended December 31, 2021, compared to 40.20% for the same period in 2020. For the year ended December 31, 2021, our efficiency ratio, as adjusted (non-GAAP), was 42.12%, compared to 40.36% reported for the year ended December 31, 2020. (See Table 29 for the non-GAAP tabular reconciliation).
Our return on average assets was 1.83% for the year ended December 31, 2021, compared to 1.33% for the same period in 2020. Our return on average common equity was 11.89% for the year ended December 31, 2021, compared to 8.57% for the same period in 2020.
Financial Condition as of and for the Years Ended December 31, 2021 and 2020
Our total assets as of December 31, 2021 increased $1.65 billion to $18.05 billion from the $16.40 billion reported as of December 31, 2020. Cash and cash equivalents increased $2.39 billion, or 188.8%. The increase in cash and cash equivalents was due to loan paydowns as well as the significant amount of excess liquidity in the market as a continued result of the COVID-19 pandemic and the accompanying governmental response. Our loan portfolio balance decreased $1.38 billion to $9.84 billion as of December 31, 2021, from $11.22 billion as of December 31, 2020. The decrease in the loan portfolio was due to organic loan decline of $822.2 million and $910.1 million of the Company’s PPP loans being forgiven during 2021, which were partially offset by $347.7 million in new PPP loan originations during 2021. Total deposits increased $1.53 billion to $14.26 billion as of December 31, 2021 compared to $12.73 billion as of December 31, 2020, which was due to customers holding higher deposit balances in response to the COVID-19 pandemic as well as the resulting governmental response to the pandemic. Stockholders’ equity increased $160.0 million to $2.77 billion as of December 31, 2021, compared to $2.61 billion as of December 31, 2020. The increase in stockholders’ equity was primarily associated with the $319.0 million in net income, partially offset by the $33.7 million decrease in accumulated other comprehensive income, $92.1 million of shareholder dividends paid and the repurchase of $44.5 million of our common stock during 2021. The improvement in stockholders’ equity was 6.1% for the year ended December 31, 2021 compared to December 31, 2020.
As of December 31, 2021, our non-performing loans decreased to $50.2 million, or 0.51%, of total loans from $74.1 million, or 0.66%, of total loans as of December 31, 2020. The allowance for credit losses as a percentage of non-performing loans increased to 471.61% as of December 31, 2021, compared to 331.10% as of December 31, 2020. Non-performing loans from our Arkansas franchise were $13.9 million at December 31, 2021 compared to $24.1 million as of December 31, 2020. Non-performing loans from our Florida franchise were $26.8 million at December 31, 2021 compared to $43.1 million as of December 31, 2020. Non-performing loans from our Alabama franchise were $470,000 at December 31, 2021 compared to $530,000 as of December 31, 2020. Non-performing loans from our SPF franchise were $1.5 million at December 31, 2021 compared to $3.6 million as of December 31, 2020. Non-performing loans from our Centennial CFG franchise were $7.5 million at December 31, 2021 compared to $2.8 million as of December 31, 2020.
As of December 31, 2021, our non-performing assets decreased to $51.8 million, or 0.29%, of total assets from $78.6 million, or 0.48%, of total assets as of December 31, 2020. Non-performing assets from our Arkansas franchise were $14.4 million at December 31, 2021 compared to $25.6 million as of December 31, 2020. Non-performing assets from our Florida franchise were $27.9 million at December 31, 2021 compared to $46.0 million as of December 31, 2020. Non-performing assets from our Alabama franchise were $470,000 at December 31, 2021 compared to $564,000 as of December 31, 2020. Non-performing assets from our SPF franchise were $1.5 million at December 31, 2021 compared to $3.6 million as of December 31, 2020. Non-performing assets from our CFG franchise were $7.5 million at December 31, 2021 compared to $2.8 million as of December 31, 2020.
The $7.5 million balance of non-accrual loans for our Centennial CFG market consisted of two loans that are assessed for Credit risk by the Federal Reserve under the Shared National Credit Program. The decision to place these loans on non-accrual status was made by the Federal Reserve and not the Company. The loans that made up the total balance were still current on both principal and interest at December 31, 2021. However, all interest payments were currently being applied to the principal balance. Because the Federal Reserve required us to place these loans on non-accrual status, we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve.
Critical Accounting Policies and Estimates
Overview. We prepare our consolidated financial statements based on the selection of certain accounting policies, generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. Our accounting policies are described in detail in the notes to our consolidated financial statements included as part of this document.
We consider a policy critical if (i) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate; and (ii) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that the accounting policies most critical to us are those associated with our lending practices, including the accounting for the allowance for credit losses, foreclosed assets, investments, intangible assets, income taxes and stock options.
Revenue Recognition. Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit, investment securities and mortgage lending income, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our income statements as components of non-interest income are as follows:
•Service charges on deposit accounts – These represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.
•Other service charges and fees – These represent credit card interchange fees and Centennial CFG loan fees. The interchange fees are recorded in the period the performance obligation is satisfied which is generally the cash basis based on agreed upon contracts. Centennial CFG loan fees are based on loan or other negotiated agreements with customers and are accounted for under ASC Topic 310. Interchange fees were $22.1 million and $16.4 million for the years ended December 31, 2022 and December 31, 2021, respectively. Centennial CFG loan fees were $11.8 million and $11.9 million for the years ended December 31, 2022 and December 31, 2021, respectively.
•Trust fees - The Company enters into contracts with its customers to manage assets for investment, and/or transact on their accounts. The Company generally satisfies its performance obligations as services are rendered. The management fees are percentage based, flat, percentage of income or a fixed percentage calculated upon the average balance of assets depending upon account type. Fees are collected on a monthly or annual basis.
Credit Losses. We account for credit losses in accordance with ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"). The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.
Investments – Available-for-sale. Securities available-for-sale ("AFS") are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity and other comprehensive income (loss), net of taxes. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. The Company has made the election to exclude accrued interest receivable on AFS securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Investments – Held-to-Maturity. Debt securities held-to-maturity ("HTM"), which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed.
Loans Receivable and Allowance for Credit Losses. Except for loans acquired during our acquisitions, substantially all of our loans receivable are reported at their outstanding principal balance adjusted for any charge-offs, as it is management’s intent to hold them for the foreseeable future or until maturity or payoff, except for mortgage loans held for sale. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding.
The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed and expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, rental vacancy rate, housing price indices and rental vacancy rate index.
The allowance for credit losses is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan segments are as follows:
•1-4 family construction
•All other construction
•1-4 family revolving home equity lines of credit (“HELOC”) & junior liens
•1-4 family senior liens
•Multifamily
•Owner occupies commercial real estate
•Non-owner occupied commercial real estate
•Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
•Consumer auto
•Other consumer
•Other consumer - SPF
The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans evaluated individually that are considered to be impaired are not included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. For loans for which a specific reserve is not recorded, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:
•Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.
•The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factors ("Q-Factors") and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system and (ix) economic conditions.
Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Purchase credit deteriorated (“PCD”) loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit loss.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Foreclosed Assets Held for Sale. Real estate and personal properties acquired through or in lieu of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Valuations are periodically performed by management, and the real estate and personal properties are carried at fair value less costs to sell. Gains and losses from the sale of other real estate and personal properties are recorded in non-interest income, and expenses used to maintain the properties are included in non-interest expenses.
Intangible Assets. Intangible assets consist of goodwill and core deposit intangibles. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. The core deposit intangibles are being amortized over 48 months to 121 months on a straight-line basis. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We perform an annual impairment test of goodwill and core deposit intangibles as required by FASB ASC 350, Intangibles - Goodwill and Other, in the fourth quarter or more often if events and circumstances indicate there may be an impairment.
Income Taxes. We account for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Both we and our subsidiary file consolidated tax returns. Our subsidiary provides for income taxes on a separate return basis, and remits to us amounts determined to be currently payable.
Stock Compensation. In accordance with FASB ASC 718, Compensation - Stock Compensation, and FASB ASC 505-50, Equity-Based Payments to Non-Employees, the fair value of each option award is estimated on the date of grant. We recognize compensation expense for the grant-date fair value of the option award over the vesting period of the award.
Acquisitions
Acquisition of Happy Bancshares, Inc.
On April 1, 2022, the Company completed the acquisition of Happy Bancshares, Inc. (“Happy”), and merged Happy State Bank into Centennial Bank. The Company issued approximately 42.4 million shares of its common stock valued at approximately $958.8 million as of April 1, 2022. In addition, the holders of certain Happy stock-based awards received approximately $3.7 million in cash in cancellation of such awards, for a total transaction value of approximately $962.5 million. The acquisition added new markets for expansion and brought complementary businesses together to drive synergies and growth.
Including the effects of the known purchase accounting adjustments, as of the acquisition date, Happy had approximately $6.69 billion in total assets, $3.65 billion in loans and $5.86 billion in customer deposits. Happy formerly operated its banking business from 62 locations in Texas.
For further discussion of the acquisition, see Note 2 "Business Combinations" to the Condensed Notes to Consolidated Financial Statements.
Acquisition of Marine Portfolio
On February 4, 2022, the Company completed the purchase of the performing marine loan portfolio of Utah-based LendingClub Bank (“LendingClub”). Under the terms of the purchase agreement with LendingClub, the Company acquired yacht loans totaling approximately $242.2 million. This portfolio of loans is housed within the Company's Shore Premier Finance division, which is responsible for servicing the acquired loan portfolio and originating new loan production.
LH-Finance
On February 29, 2020, the Company completed the acquisition of LH-Finance, the marine lending division of People’s United Bank, N.A. The Company paid a purchase price of approximately $421.2 million in cash. LH-Finance provided direct consumer financing for USCG registered high-end sail and power boats. Additionally, LH-Finance provided inventory floor plan lines of credit to marine dealers, primarily those selling USCG documented vessels.
Including the purchase accounting adjustments, as of the acquisition date, LH-Finance had approximately $409.1 million in total assets, including $407.4 million in total loans, which resulted in goodwill of $14.6 million being recorded.
The acquired portfolio of loans is now housed in our SPF division. The SPF division is responsible for servicing the acquired loan portfolio and originating new loan production. In connection with this acquisition, we opened a new loan production office in Baltimore, Maryland.
See Note 2 “Business Combinations” in the Notes to Consolidated Financial Statements for additional information regarding the acquisition of LH-Finance.
We will continue evaluating all types of potential bank acquisitions, which may include FDIC-assisted acquisitions as opportunities arise, to determine what is in the best interest of our Company. Our goal in making these decisions is to maximize the return to our investors.
Branches
As opportunities arise, we will continue to open new (commonly referred to as de novo) branches in our current markets and in other attractive market areas. We opened one de novo branch location in 2022 in Ft. Worth, Texas.
As of December 31, 2022, we had 223 branch locations. There were 76 branches in Arkansas, 78 branches in Florida, 63 branches in Texas, five branches in Alabama and one branch in New York City.
Results of Operations for the Years Ended December 31, 2022, 2021 and 2020
Our net income decreased $13.8 million, or 4.3%, to $305.3 million for the year ended December 31, 2022, from $319.0 million for the same period in 2021. On a diluted earnings per share basis, our earnings were $1.57 per share for the year ended December 31, 2022 and $1.94 per share for the year ended December 31, 2021. As a result of the acquisition of Happy, which we completed on April 1, 2022, we incurred $49.6 million in merger expenses and recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments and a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. The summation of these items reduced net income by $81.6 million ($108.2 million pre-tax) and earnings per share by $0.42 per share for the year ended December 31, 2022. Excluding the impact of the acquisition of Happy, the Company determined that an additional $5.0 million provision for credit losses on loans was necessary due to increased loan growth during the year. However, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments or investment securities was necessary as of December 31, 2022. During the year ended December 31, 2022, the Company recorded $10.0 million in income from the settlement of a lawsuit brought by the Company, net of legal expense, $6.7 million in recoveries on historic losses from loans charged off prior to acquisition, and $1.4 million in special dividends from equity investments, which were partially offset by $2.1 million in TRUPS redemption fees, $1.3 million loss for the decrease in fair value of marketable securities and $176,000 in hurricane expenses.
Our net income increased $104.6 million, or 48.8%, to $319.0 million for the year ended December 31, 2021, from $214.4 million for the same period in 2020. On a diluted earnings per share basis, our earnings were $1.94 per share for the year ended December 31, 2021 and $1.30 per share for the year ended December 31, 2020. During the year ended December 31, 2021, the Company did not record a provision for credit losses but did record a $4.8 million negative provision for unfunded commitments compared to a $112.3 million provision for credit losses and a $17.0 million provision for unfunded commitments for a total credit loss expense of $129.3 million for the year ended December 31, 2020. The $4.8 million negative provision for the year ended December 31, 2021 was due to a single commercial & industrial loan for which a reserve was no longer considered necessary due to the borrower’s current cash flow position. The $129.3 million of total credit loss expense for the year ended December 31, 2020 was primarily due to the uncertainty created by the COVID-19 pandemic, with $9.3 million as a result of the acquisition of LH-Finance on February 29, 2020. The Company’s provisioning model is closely tied to unemployment rate projections which continued to improve following the fourth quarter of 2020. The Company determined that an additional provision for credit losses was not necessary. Despite the improvements in the economic and public health outlooks in the United States during 2021, the emergence of the Delta variant during the second quarter and the Omicron variant during the fourth quarter resulted in significant uncertainty about the future impact of the pandemic on our business, results of operations and financial condition. As a result, the Company determined that a negative provision for credit losses was not appropriate at the end of 2021, and the level of the allowance for credit losses was considered adequate as of December 31, 2021. The Company also recorded a $7.2 million adjustment for the increase in fair market value of marketable securities, $12.5 million of special dividend income from our equity investments, $5.1 million recovery on historic losses from loans charged-off prior to acquisition, $1.9 million of merger and acquisition expense and a $219,000 gain on sale of investment securities.
Net Interest Income
Net interest income, our principal source of earnings, is the difference between the interest income generated by earning assets and the total interest cost of the deposits and borrowings obtained to fund those assets. Factors affecting the level of net interest income include the volume of earning assets and interest-bearing liabilities, yields earned on loans and investments and rates paid on deposits and other borrowings, the level of non-performing loans and the amount of non-interest-bearing liabilities supporting earning assets. Net interest income is analyzed in the discussion and tables below on a fully taxable equivalent basis. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the combined federal and state income tax rate (24.6735% for the year ended December 31, 2022, 25.740% for the year ended December 31, 2021 and 26.135% for year ended December 31, 2020).
The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. In 2020, the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in effect throughout all of 2021. The Federal Reserve increased the target rate seven times during 2022. First, on March 16, 2022, the target rate was increased to 0.25% to 0.50%. Second, on May 4, 2022, the target rate was increased to 0.75% to 1.00%. Third, on June 15, 2022, the target rate was increased to 1.50% to 1.75%. Fourth, on July 27, 2022, the target rate was increased to 2.25% to 2.50%. Fifth, on September 21, 2022, the target rate was increased to 3.00% to 3.25%. Sixth, on November 2, 2022, the target rate was increased to 3.75% to 4.00%. Seventh, on December 14, 2022, the target rate was increased to 4.25% to 4.50%. The Federal Reserve increased the target rate to 4.50% to 4.75% on February 1, 2023.
Our net interest margin on a fully taxable equivalent basis increased from 3.66% for the year ended December 31, 2021 to 3.81% for the year ended December 31, 2022. The yield on interest earning assets was 4.40% and 3.99% for the year ended December 31, 2022 and 2021, respectively, as average interest earning assets increased from $15.86 billion to $20.15 billion. The increase in average earning assets is primarily the result of a $2.57 billion increase in average loans receivable and a $1.87 billion increase in average investment securities, largely resulting from the acquisition of Happy, which were partially offset by a $151.9 million decrease in average interest-bearing balances due from banks. For the years ended December 31, 2022 and 2021, we recognized $16.3 million and $20.2 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by approximately 2 basis points. During 2022, the Company experienced a $31.8 million reduction in interest income from PPP loans due to the forgiveness of the PPP loans and the acceleration of the deferred fees for the loans that were forgiven. This reduction in income was dilutive to the net interest margin by approximately 8 basis points. We recognized $3.8 million in event interest income for the year ended December 31, 2022 compared to $6.7 million in event income for the year ended December 31, 2021. This was dilutive to the net interest margin by approximately 2 basis points. The overall increase in the net interest margin was due to an increase in interest income due to an increase in both average earning assets at higher yields which was partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities at higher interest rates primarily as a result of the Happy acquisition and the current rising interest rate environment.
Net interest income on a fully taxable equivalent basis increased $187.3 million, or 32.3%, to $767.3 million for the year ended December 31, 2022, from $580.1 million for the same period in 2021. This increase in net interest income was the result of a $254.2 million increase in interest income, partially offset by a $66.9 million increase in interest expense on a fully taxable equivalent basis. The $254.2 million increase in interest income was primarily the result of the higher level of average interest earnings assets due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The increase in earning assets resulted in an increase in interest income of approximately $185.5 million, and the higher yield on earning assets resulted in a decrease in interest income of approximately $68.7 million. The $66.9 million increase in interest expense was primarily the result of the higher level of average interest bearing liabilities due to the acquisition of Happy during the second quarter of 2022 and the increasing interest rate environment. The higher rates on interest bearing liabilities resulted in an increase in interest expense of approximately $52.8 million, and the increase in interest bearing liabilities resulted in an increase in interest expense of approximately $14.0 million.
Our net interest margin on a fully taxable equivalent basis decreased from 4.06% for the year ended December 31, 2020 to 3.66% for the year ended December 31, 2021. The yield on interest earning assets was 3.99% and 4.70% for the year ended December 31, 2021 and 2020, respectively, as average interest earning assets increased from $14.50 billion to $15.86 billion. The increase in average earning assets was primarily the result of a $1.84 billion increase in average interest-bearing balances due from banks and a $659.0 million increase in average investment securities, partially offset by the $1.13 billion decrease in average loans receivable. Average PPP loan balances were $434.7 million for the year ended December 31, 2021. These loans bore interest at 1.00% plus the accretion of the deferred origination fee. Including deferred fees, we recognized total interest income of $35.6 million on PPP loans for the year ended December 31, 2021. The PPP loans were accretive to the net interest margin by 13 basis points for the year ended December 31, 2021. This was primarily due to approximately $910.1 million of the Company’s PPP loans being forgiven during 2021 which included the acceleration of $24.8 million in deferred fees for the loans that were forgiven. As of December 31, 2021, the Company had $3.6 million in remaining unamortized PPP fees. The COVID-19 pandemic and the resulting governmental response created a significant amount of excess liquidity in the market. As a result, we had an increase of $1.84 billion in average interest-bearing cash balances for the year ended December 31, 2021 compared to the year ended December 31, 2020. This excess liquidity was dilutive to the net interest margin by 46 basis points. For the years ended December 31, 2021 and 2020, we recognized $20.2 million and $27.4 million, respectively, in total net accretion for acquired loans and deposits. The reduction in accretion was dilutive to the net interest margin by 4 basis points. We recognized $6.7 million in event interest income for the year ended December 31, 2021 compared to $2.1 million in event income for the year ended December 31, 2020. This increased the net interest margin by 3 basis points.
Net interest income on a fully taxable equivalent basis decreased $8.5 million, or 1.45%, to $580.1 million for the year ended December 31, 2021, from $588.6 million for the same period in 2020. This decrease in net interest income was the result of a $49.7 million decrease in interest income, partially offset by a $41.2 million decrease in interest expense on a fully taxable equivalent basis. The $49.7 million decrease in interest income was primarily the result of higher levels of earning assets at lower yields. Although our interest earning assets increased, our average loan balances decreased by $1.13 billion while average interest-bearing balances due from banks increased by $1.84 billion. The lower yield on earning assets resulted in a decrease in interest income of approximately $5.9 million, and the change in composition of earning assets at lower yields resulted in a decrease in interest income of approximately $43.8 million. The lower yield was primarily driven by the decrease in income on loans of $53.6 million, which was partially offset by an increase in income on investment securities of $2.2 million and a $1.7 million increase in income on interest-bearing balances due from banks. The decrease in interest income also reflected a $7.2 million decrease in loan accretion income. The $41.2 million decrease in interest expense was primarily the result of interest-bearing liabilities repricing in a decreasing interest rate environment, which lowered interest expense by $34.9 million, as well as a $6.3 million decrease in interest expense resulting from a change in the composition of average interest bearing liabilities. The decrease in interest expense was primarily driven by a $38.2 million decrease in interest expense on deposits and a $1.9 million decrease in interest expense on FHLB borrowed funds.
Tables 2 and 3 reflect an analysis of net interest income on a fully taxable equivalent basis for the years ended December 31, 2022, 2021 and 2020, as well as changes in fully taxable equivalent net interest margin for the years 2022 compared to 2021 and 2021 compared to 2020.
Table 2: Analysis of Net Interest Income
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in thousands) |
Interest income | $ | 877,766 | | | $ | 625,171 | | | $ | 675,962 | |
Fully taxable equivalent adjustment | 8,663 | | | 7,079 | | | 6,015 | |
Interest income – fully taxable equivalent | 886,429 | | | 632,250 | | | 681,977 | |
Interest expense | 119,090 | | | 52,200 | | | 93,407 | |
Net interest income – fully taxable equivalent | $ | 767,339 | | | $ | 580,050 | | | $ | 588,570 | |
Yield on earning assets – fully taxable equivalent | 4.40 | % | | 3.99 | % | | 4.70 | % |
Cost of interest-bearing liabilities | 0.87 | | | 0.49 | | | 0.89 | |
Net interest spread – fully taxable equivalent | 3.53 | | | 3.50 | | | 3.81 | |
Net interest margin – fully taxable equivalent | 3.81 | | | 3.66 | | | 4.06 | |
Table 3: Changes in Fully Taxable Equivalent Net Interest Margin
| | | | | | | | | | | |
| December 31, |
| 2022 vs. 2021 | | 2021 vs. 2020 |
| (In thousands) |
Increase (decrease) in interest income due to change in earning assets | $ | 185,499 | | | $ | (43,840) | |
Increase (decrease) in interest income due to change in earning asset yields | 68,680 | | | (5,887) | |
(Increase) decrease in interest expense due to change in interest-bearing liabilities | (14,048) | | | 6,325 | |
(Increase) decrease in interest expense due to change in interest rates paid on interest-bearing liabilities | (52,842) | | | 34,882 | |
Increase (decrease) in net interest income | $ | 187,289 | | | $ | (8,520) | |
Table 4 shows, for each major category of earning assets and interest-bearing liabilities, the average amount outstanding, the interest income or expense on that amount and the average rate earned or expensed for the years ended December 31, 2022, 2021 and 2020. The table also shows the average rate earned on all earning assets, the average rate expensed on all interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The analysis is presented on a fully taxable equivalent basis. Non-accrual loans were included in average loans for the purpose of calculating the rate earned on total loans.
Table 4: Average Balance Sheets and Net Interest Income Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate | | Average Balance | | Income / Expense | | Yield / Rate |
| (Dollars in thousands) |
ASSETS | | | | | | | | | | | | | | | | | |
Earnings assets | | | | | | | | | | | | | | | | | |
Interest-bearing balances due from banks | $ | 2,444,541 | | | $ | 29,110 | | | 1.19 | % | | $ | 2,596,460 | | | $ | 3,515 | | | 0.14 | % | | $ | 761,174 | | | $ | 1,849 | | | 0.24 | % |
Federal funds sold | 1,519 | | | 25 | | | 1.65 | | | 71 | | | — | | | — | | | 1,330 | | | 21 | | | 1.58 | |
Investment securities – taxable | 3,582,664 | | | 91,933 | | | 2.57 | | | 2,031,139 | | | 30,054 | | | 1.48 | | | 1,653,159 | | | 32,596 | | | 1.97 | |
Investment securities – non-taxable | 1,178,561 | | | 36,363 | | | 3.09 | | | 858,503 | | | 26,017 | | | 3.03 | | | 577,444 | | | 21,262 | | | 3.68 | |
Loans receivable | 12,940,998 | | | 728,998 | | | 5.63 | | | 10,375,457 | | | 572,664 | | | 5.52 | | | 11,504,123 | | | 626,249 | | | 5.44 | |
Total interest-earning assets | 20,148,283 | | | 886,429 | | | 4.40 | | | 15,861,630 | | | 632,250 | | | 3.99 | | | 14,497,230 | | | 681,977 | | | 4.70 | |
Non-earning assets | 2,405,057 | | | | | | | 1,597,355 | | | | | | | 1,640,064 | | | | | |
Total assets | $ | 22,553,340 | | | | | | | $ | 17,458,985 | | | | | | | $ | 16,137,294 | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Savings and interest- bearing transaction accounts | $ | 11,520,781 | | | $ | 81,061 | | | 0.70 | % | | $ | 8,716,004 | | | $ | 15,956 | | | 0.18 | % | | $ | 7,686,621 | | | $ | 36,084 | | | 0.47 | % |
Time deposits | 1,033,431 | | | 4,928 | | | 0.48 | | | 1,087,875 | | | 8,980 | | | 0.83 | | | 1,756,138 | | | 27,026 | | | 1.54 | |
Total interest-bearing deposits | 12,554,212 | | | 85,989 | | | 0.68 | | | 9,803,879 | | | 24,936 | | | 0.25 | | | 9,442,759 | | | 63,110 | | | 0.67 | |
Federal funds purchased | 220 | | | 2 | | | 0.91 | | | — | | | — | | | — | | | 1,557 | | | 13 | | | 0.83 | |
Securities sold under agreement to repurchase | 129,006 | | | 1,430 | | | 1.11 | | | 151,190 | | | 497 | | | 0.33 | | | 151,573 | | | 1,167 | | | 0.77 | |
FHLB borrowed funds | 473,839 | | | 11,076 | | | 2.34 | | | 400,000 | | | 7,604 | | | 1.90 | | | 534,608 | | | 9,506 | | | 1.78 | |
Subordinated debentures | 515,049 | | | 20,593 | | | 4.00 | | | 370,712 | | | 19,163 | | | 5.17 | | | 369,943 | | | 19,611 | | | 5.30 | |
Total interest-bearing liabilities | 13,672,326 | | | 119,090 | | | 0.87 | | | 10,725,781 | | | 52,200 | | | 0.49 | | | 10,500,440 | | | 93,407 | | | 0.89 | |
Non-interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Non-interest-bearing deposits | 5,378,906 | | | | | | | 3,924,341 | | | | | | | 2,998,560 | | | | | |
Other liabilities | 171,390 | | | | | | | 124,724 | | | | | | | 135,094 | | | | | |
Total liabilities | 19,222,622 | | | | | | | 14,774,846 | | | | | | | 13,634,094 | | | | | |
Stockholders’ equity | 3,330,718 | | | | | | | 2,684,139 | | | | | | | 2,503,200 | | | | | |
Total liabilities and stockholders’ equity | $ | 22,553,340 | | | | | | | $ | 17,458,985 | | | | | | | $ | 16,137,294 | | | | | |
Net interest spread | | | | | 3.53 | % | | | | | | 3.50 | % | | | | | | 3.81 | % |
Net interest income and margin | | | $ | 767,339 | | | 3.81 | | | | | $ | 580,050 | | | 3.66 | | | | | $ | 588,570 | | | 4.06 | |
Table 5 shows changes in interest income and interest expense resulting from changes in volume and changes in interest rates for the year ended December 31, 2022 compared to 2021 and 2021 compared to 2020 on a fully taxable equivalent basis. The changes in interest rate and volume have been allocated to changes in average volume and changes in average rates, in proportion to the relationship of absolute dollar amounts of the changes in rates and volume.
Table 5: Volume/Rate Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 over 2021 | | 2021 over 2020 |
| Volume | | Yield / Rate | | Total | | Volume | | Yield / Rate | | Total |
| (In thousands) |
Increase (decrease) in: | | | | | | | | | | | |
Interest income: | | | | | | | | | | | |
Interest-bearing balances due from banks | $ | (218) | | | $ | 25,813 | | | $ | 25,595 | | | $ | 2,791 | | | $ | (1,125) | | | $ | 1,666 | |
Federal funds sold | — | | | 25 | | | 25 | | | (10) | | | (11) | | | (21) | |
Investment securities – taxable | 31,552 | | | 30,327 | | | 61,879 | | | 6,563 | | | (9,105) | | | (2,542) | |
Investment securities – non-taxable | 9,867 | | | 479 | | | 10,346 | | | 9,006 | | | (4,251) | | | 4,755 | |
Loans receivable | 144,298 | | | 12,036 | | | 156,334 | | | (62,190) | | | 8,605 | | | (53,585) | |
Total interest income | 185,499 | | | 68,680 | | | 254,179 | | | (43,840) | | | (5,887) | | | (49,727) | |
Interest expense: | | | | | | | | | | | |
Interest-bearing transaction and savings deposits | 6,619 | | | 58,486 | | | 65,105 | | | 4,302 | | | (24,430) | | | (20,128) | |
Time deposits | (429) | | | (3,623) | | | (4,052) | | | (8,135) | | | (9,911) | | | (18,046) | |
Federal funds purchased | 1 | | | 1 | | | 2 | | | (7) | | | (6) | | | (13) | |
Securities sold under agreement to repurchase | (83) | | | 1,016 | | | 933 | | | (3) | | | (667) | | | (670) | |
FHLB borrowed funds | 1,547 | | | 1,925 | | | 3,472 | | | (2,523) | | | 621 | | | (1,902) | |
Subordinated debentures | 6,393 | | | (4,963) | | | 1,430 | | | 41 | | | (489) | | | (448) | |
Total interest expense | 14,048 | | | 52,842 | | | 66,890 | | | (6,325) | | | (34,882) | | | (41,207) | |
Increase (decrease) in net interest income | $ | 171,451 | | | $ | 15,838 | | | $ | 187,289 | | | $ | (37,515) | | | $ | 28,995 | | | $ | (8,520) | |
Provision for Credit Losses
The Company accounts for credit losses in accordance with ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.
Credit Loss Expense: As a result of the acquisition of Happy, which we completed on April 1, 2022, the Company recorded a $45.2 million provision for credit losses on acquired loans for the CECL "double count," an $11.4 million provision for credit losses on acquired unfunded commitments, and a $2.0 million provision for credit losses on acquired held-to-maturity investment securities. Excluding the impact of the acquisition of Happy, the Company determined that an additional $5.0 million provision for credit losses on loans was necessary due to increased loan growth during the year. However, excluding the impact of the acquisition of Happy, the Company determined no additional provision for unfunded commitments or investment securities was necessary as of December 31, 2022.
Net charge-offs to average total loans increased to 0.11% for the year ended December 31, 2022 from 0.08% for the year ended December 31, 2021. In addition, non-performing loans to total loans decreased from 0.51% as of December 31, 2021 to 0.42% as of December 31, 2022.
Loans. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, national retail sales index, housing price indices and rental vacancy rate index.
Acquired loans. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. This is commonly referred to as “double accounting" or "double count."
The allowance for credit losses is measured based on call report segment as these types of loan exhibit similar risk characteristics. The identified loan segments are as follows:
•1-4 family construction
•All other construction
•1-4 family revolving home equity lines of credit (“HELOC”) & junior liens
•1-4 family senior liens
•Multifamily
•Owner occupies commercial real estate
•Non-owner occupied commercial real estate
•Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
•Consumer auto
•Other consumer
•Other consumer - SPF
The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans evaluated individually that are considered to be impaired are not included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. For loans for which a specific reserve is not recorded, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded.
Investments – Available-for-sale: The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, and changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. The Company has made the election to exclude accrued interest receivable on AFS securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Investments – Held-to-Maturity. The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326. The Company measures expected credit losses on HTM securities on a collective basis by major security type, with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed.
The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.11 billion, or 86.2%, are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. government-sponsored enterprises and mortgage-backed securities all of which are guaranteed by the U.S. government. Due to the inherent low risk in these U.S. government guaranteed securities, no provision for credit loss was established on this portion of the portfolio.
At December 31 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio, and the allowance for credit losses for the HTM portfolio resulting from the Happy acquisition was considered adequate. No additional provision for credit losses was considered necessary for the portfolio.
Non-Interest Income
Total non-interest income was $175.1 million in 2022, compared to $137.6 million in 2021 and $111.8 million in 2020. Our recurring non-interest income includes service charges on deposit accounts, other service charges and fees, trust fees, mortgage lending, insurance commissions, increase in cash value of life insurance, fair value adjustment for marketable securities and dividends.
Table 6 measures the various components of our non-interest income for the years ended December 31, 2022, 2021, and 2020, respectively, as well as changes for the years 2022 compared to 2021 and 2021 compared to 2020.
Table 6: Non-Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | 2022 Change from 2021 | | 2021 Change from 2020 |
| 2022 | | 2021 | | 2020 | | |
| (Dollars in thousands) |
Service charges on deposit accounts | $ | 37,114 | | | $ | 22,276 | | | $ | 21,381 | | | $ | 14,838 | | | 66.6 | % | | $ | 895 | | | 4.2 | % |
Other service charges and fees | 44,588 | | | 36,451 | | | 30,686 | | | 8,137 | | | 22.3 | | | 5,765 | | | 18.8 | |
Trust fees | 12,855 | | | 1,960 | | | 1,633 | | | 10,895 | | | 555.9 | | | 327 | | | 20.0 | |
Mortgage lending income | 17,657 | | | 25,676 | | | 29,065 | | | (8,019) | | | (31.2) | | | (3,389) | | | (11.7) | |
Insurance commissions | 2,192 | | | 1,943 | | | 1,848 | | | 249 | | | 12.8 | | | 95 | | | 5.1 | |
Increase in cash value of life insurance | 3,800 | | | 2,049 | | | 2,200 | | | 1,751 | | | 85.5 | | | (151) | | | (6.9) | |
Dividends from FHLB, FRB, FNBB & other | 9,198 | | | 14,835 | | | 12,472 | | | (5,637) | | | (38.0) | | | 2,363 | | | 18.9 | |
Gain on sale of SBA loans | 183 | | | 2,380 | | | 645 | | | (2,197) | | | (92.3) | | | 1,735 | | | 269.0 | |
Gain (loss) on sale of branches, equipment and other assets, net | 15 | | | (105) | | | 326 | | | 120 | | | 114.3 | | | (431) | | | (132.2) | |
Gain on OREO, net | 500 | | | 2,003 | | | 1,132 | | | (1,503) | | | -75.0 | | | 871 | | | 76.9 | |
Gain on securities, net | — | | | 219 | | | — | | | (219) | | | -100.0 | | | 219 | | | 100.0 | |
Fair value adjustment for marketable securities | (1,272) | | | 7,178 | | | (1,978) | | | (8,450) | | | (117.7) | | | 9,156 | | | 462.9 | |
Other income | 48,281 | | | 20,704 | | | 12,376 | | | 27,577 | | 133.2 | | | 8,328 | | | 67.3 | |
Total non-interest income | $ | 175,111 | | | $ | 137,569 | | | $ | 111,786 | | | $ | 37,542 | | | 27.3 | % | | $ | 25,783 | | | 23.1 | |
Non-interest income increased $37.5 million, or 27.3%, to $175.1 million for the year ended December 31, 2022 from $137.6 million for the same period in 2021. The primary factors that resulted in this increase were the $27.6 million increase in other income, the $14.8 million increase in service charges on deposit accounts and the $10.9 million increase in trust fees. Other factors were changes related to other service charges and fees, mortgage lending income, cash value of life insurance, dividends from FHLB, FRB, FNBB & other, gain on sale of SBA loans, gain on OREO and fair value adjustment for marketable securities.
Additional details for the year ended December 31, 2022 on some of the more significant changes are as follows:
•The $14.8 million increase in service charges on deposit accounts is primarily due to an increase in overdraft and service charge fees related to the acquisition of Happy.
•The $8.1 million increase in other service charges and fees is primarily due to an increase in interchange fees related to the acquisition of Happy.
•The $10.9 million increase in trust fees is primarily related to an increase in trust fees resulting from the acquisition of Happy.
•The $8.0 million decrease in mortgage lending income is primarily related to a decrease in volume of secondary market loans from the high volume of loans during 2021. The decrease in volume is due to the increase in interest rates.
•The $1.8 million increase in cash value of life insurance is primarily related to the increase in bank owned life insurance resulting from the acquisition of Happy.
•The $5.6 million decrease in dividends from FHLB, FRB, FNBB & other is primarily due to a decrease in special dividends from equity investments, partially offset by an increase in dividend income from marketable securities and an increase in FRB stock holdings related to the acquisition of Happy.
•The $2.2 million decrease in gain on sale of SBA loans is primarily due to the decrease in the volume of SBA loan sales during 2022.
•The $1.5 million decrease in gain on OREO resulted from a reduction in the level of sales of OREO during 2022.
•The $8.5 million decrease in the fair value adjustment for marketable securities is due to a reduction in the fair market value of marketable securities held by the Company.
•The $27.6 million increase in other income is primarily due to $15.0 million in income from the settlement of a lawsuit brought by the Company and a $6.3 million adjustment for equity method investments. Other factors include a $2.1 million increase in additional income for items previously charged off, $2.5 million increase in rental income and a $2.0 million increase in investment brokerage fee income, partially offset by a $478,000 decrease in gain on life insurance.
Non-interest income increased $25.8 million, or 23.1%, to $137.6 million for the year ended December 31, 2021 from $111.8 million for the same period in 2020. The primary factors that resulted in this increase were the impact of fair value adjustment for marketable securities which increased non-interest income by $9.2 million, the $8.3 million increase in other income and the $5.8 million increase in other service charges and fees. Other factors were changes related mortgage lending income, dividends from FHLB, FRB, FNBB & other and gain on sale of SBA loans.
Additional details for the year ended December 31, 2021 on some of the more significant changes are as follows:
•The $5.8 million increase in other service charges and fees is primarily due to an increase in Centennial CFG property finance loan fees and Mastercard income.
• The $3.4 million decrease in mortgage lending income is primarily due to a decrease in volume of secondary market loans from the peak in 2020.
• The $2.4 million increase in dividends from FHLB, FRB, FNBB & other is primarily due to an increase in special dividends from equity investments.
• The $1.7 million increase in gain on sale of SBA loans is primarily due to the increase in loan sales during 2021.
• The $9.2 million gain in the fair value adjustment for marketable securities is related to an increase in the fair market value of marketable securities held by the Company.
• The $8.3 million increase in other income is primarily due to a $6.3 million increase in additional income for items previously charged off and a $2.2 million increase in investment brokerage fee income.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefits, occupancy and equipment, data processing, and other expenses such as advertising, merger and acquisition expenses, amortization of intangibles, electronic banking expense, FDIC and state assessment, insurance, legal and accounting fees and other professional fees.
Table 7 below sets forth a summary of non-interest expense for the years ended December 31, 2022, 2021, and 2020, as well as changes for the years ended 2022 compared to 2021 and 2021 compared to 2020.
Table 7: Non-Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | 2022 Change from 2021 | | 2021 Change from 2020 |
| 2022 | | 2021 | | 2020 | | |
| (Dollars in thousands) |
Salaries and employee benefits | $ | 238,885 | | | $ | 170,755 | | | $ | 163,950 | | | $ | 68,130 | | | 39.9 | % | | $ | 6,805 | | | 4.2 | % |
Occupancy and equipment | 53,417 | | | 36,631 | | | 38,412 | | | 16,786 | | | 45.8 | | | (1,781) | | | (4.6) | |
Data processing expense | 34,942 | | | 24,280 | | | 19,032 | | | 10,662 | | | 43.9 | | | 5,248 | | | 27.6 | |
Merger expense | 49,594 | | | 1,886 | | | 711 | | | 47,708 | | | 2529.6 | | | 1,175 | | | 165.3 | |
Other operating expenses: | | | | | | | | | | | | | |
Advertising | 7,974 | | | 4,855 | | | 3,999 | | | 3,119 | | | 64.2 | | | 856 | | | 21.4 | |
Amortization of intangibles | 8,853 | | | 5,683 | | | 5,844 | | | 3,170 | | | 55.8 | | | (161) | | | (2.8) | |
Electronic banking expense | 13,632 | | | 9,817 | | | 8,477 | | | 3,815 | | | 38.9 | | | 1,340 | | | 15.8 | |
Directors' fees | 1,491 | | | 1,614 | | | 1,624 | | | (123) | | | (7.6) | | | (10) | | | (0.6) | |
Due from bank service charges | 1,255 | | | 1,044 | | | 975 | | | 211 | | | 20.2 | | | 69 | | | 7.1 | |
FDIC and state assessment | 8,428 | | | 5,472 | | | 6,494 | | | 2,956 | | | 54.0 | | | (1,022) | | | (15.7) | |
Hurricane expense | 176 | | | — | | | — | | | 176 | | | 100.0 | | | — | | | — | |
Insurance | 3,705 | | | 3,118 | | | 3,018 | | | 587 | | | 18.8 | | | 100 | | | 3.3 | |
Legal and accounting | 9,401 | | | 3,703 | | | 4,222 | | | 5,698 | | | 153.9 | | | (519) | | | (12.3) | |
Other professional fees | 8,881 | | | 6,950 | | | 8,150 | | | 1,931 | | | 27.8 | | | (1,200) | | | (14.7) | |
Operating supplies | 3,120 | | | 1,915 | | | 1,988 | | | 1,205 | | | 62.9 | | | (73) | | | (3.7) | |
Postage | 2,078 | | | 1,283 | | | 1,283 | | | 795 | | | 62.0 | | | — | | | — | |
Telephone | 1,890 | | | 1,425 | | | 1,302 | | | 465 | | | 32.6 | | | 123 | | | 9.4 | |
Other expense | 27,905 | | | 18,086 | | | 17,904 | | | 9,819 | | | 54.3 | | | 182 | | | 1.0 | |
Total non-interest expense | $ | 475,627 | | | $ | 298,517 | | | $ | 287,385 | | | $ | 177,110 | | | 59.3 | % | | $ | 11,132 | | | 3.9 | % |
Non-interest expense increased $177.1 million, or 59.3%, to $475.6 million for the year ended December 31, 2022, from $298.5 million for the same period in 2021. The primary factors that resulted in this increase was the increase in salaries and employee benefits expense and merger expense. Other factors were changes related to occupancy and equipment expenses, data processing expenses, electronic banking expense, FDIC and state assessment, legal and accounting, other professional fees and other expense.
Additional details for the year ended December 31, 2022 on some of the more significant changes are as follows:
•The $68.1 million increase in salaries and employee benefits expense is primarily due to the acquisition of Happy.
•The $16.8 million increase in occupancy and equipment expense is primarily due to increases in depreciation on buildings, machinery and equipment; utility expenses; lease expense; equipment maintenance and repairs; janitorial expenses; property taxes and other occupancy expenses related to the acquisition of Happy.
•The $10.7 million increase in data processing expense is primarily due to increases in telecommunication fees, computer software fees, licensing fees, mobile banking, internet banking and cash management expenses related to the acquisition of Happy.
•The $47.7 million increase in merger and acquisition expense is due to costs associated with the acquisition of Happy.
•The $3.1 million increase in advertising expense is primarily related to the acquisition of Happy.
•The $3.2 million increase in amortization of intangibles is due to the acquisition of Happy.
•The $3.8 million increase in electronic banking expenses is primarily due to the increased debit card processing fees and interchange network expense resulting from the acquisition of Happy.
•The $3.0 million increase in FDIC and state assessment is primarily due to FDIC assessment reductions for 2021 and the acquisition of Happy during the second quarter of 2022.
•The $5.7 million increase in legal and accounting expense is primarily due to expenses related to a lawsuit brought by the Company.
•The $1.9 million increase in other professional fees is primarily related to the acquisition of Happy.
•The $1.2 million increase in operating expense is primarily due to the acquisition of Happy.
•The $9.8 million increase in other expenses is primarily related to the acquisition of Happy as well as $2.1 million in TRUPS redemption fees.
Non-interest expense increased $11.1 million, or 3.9%, to $298.5 million for the year ended December 31, 2021, from $287.4 million for the same period in 2020. The primary factor that resulted in this increase was the increase in salaries and employee benefits expense. Other factors were changes related to occupancy and equipment expenses, data processing expenses, merger and acquisition expenses, electronic banking expense, FDIC and state assessment, hurricane expense, legal and accounting, other professional fees and other expense.
Additional details for the year ended December 31, 2021 on some of the more significant changes are as follows:
•The $6.8 million increase in salaries and employee benefits expense is primarily due to increased salary expenses related to the normal increased cost of doing business.
•The $1.8 million decrease in occupancy and equipment is related to a decrease in depreciation - building and improvements, lease expenses and janitorial services and supplies. During the second quarter of 2020, the Company made the strategic decision to demolish and rebuild the Marathon, Florida branch office at its existing location. This increased depreciation expense during the second quarter of 2020 as the building was written off.
•The $5.2 million increase in data processing expense is primarily related to the normal increased cost of doing business such as the increase in software, licensing, core processing expense, telecommunication services, internet banking and cash management expenses, mobile banking and bill pay expenses.
•The $1.2 million increase in merger and acquisition expense costs associated with the acquisition of Happy.
•The $856,000 increase in advertising expense is primarily due to increase in advertising campaigns during 2021.
•The $1.3 million increase in electronic banking expenses is primarily due to the normal increased cost of doing business such as the increase in fees charged for network expenses and debit card processing fees.
•The $1.0 million decrease in FDIC and state assessment is primarily related to an improvement in the FDIC assessment rate. In addition, the State of Arkansas announced a 25% reduction in assessments for January 1, 2021 through June 30, 2021 and a 30% reduction in assessments for July 1, 2021 through December 31, 2021.
•The $1.2 million decrease in other professional fees is primarily related to a reduction outsourced special projects and professional fees for the Bank. This was partially offset by an increase in consulting fees.
Income Taxes
During 2022, the Company lowered its marginal tax rate from 25.740% to 24.6735%. In an effort to more accurately reflect current state income apportionment and state tax rates, the state tax rate was lowered to 4.65%. This lowered the blended rate to 24.6735%. Apportionment changes related to the acquisition of Happy and statutory tax rate changes were the main drivers in the tax rate reduction.
During 2021, the Company lowered its marginal tax rate from 26.135% to 25.740%. In an effort to more accurately reflect current state income apportionment and state tax rates, the state tax rate was lowered to 6.0%, lowering the blended rate to 25.74%. Florida and Arkansas were the main drivers in the tax rate reduction.
During 2020, the Company began filing income tax returns in several new states. To account for the slight increase in state income tax expense due to respective state income tax rates, the Company raised its marginal tax rate from 25.819% to 26.135% for 2020.
Income tax expense decreased $8.4 million, or 8.6%, to $89.3 million for the year ended December 31, 2022, from $97.8 million for 2021. Income tax expense increased $34.5 million, or 54.5%, to $97.8 million for the year ended December 31, 2021, from $63.3 million for 2020. The effective tax rates for the years ended December 31, 2022, 2021 and 2020 were 22.64%, 23.45% and 22.78%, respectively. The Company’s marginal tax rate was 24.6735%, 25.740% and 26.135% for years ended December 31, 2022, 2021 and 2020, respectively.
Financial Condition as of and for the Years Ended December 31, 2022 and 2021
Our total assets as of December 31, 2022 increased $4.83 billion to $22.88 billion from the $18.05 billion reported as of December 31, 2021. The increase in total assets is primarily due to the acquisition of $6.69 billion in total assets, net of purchase accounting adjustments, from Happy during the second quarter of 2022. Cash and cash equivalents decreased $2.93 billion, or 80.14%. Our loan portfolio balance increased $4.57 billion to $14.41 billion as of December 31, 2022, from $9.84 billion as of December 31, 2021. The increase in loans was due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy in the second quarter of 2022 and $242.2 million in marine loans from LendingClub Bank during the first quarter of 2022, as well as $678.6 million in organic loan growth during 2022. Total deposits increased $3.68 billion to $17.94 billion as of December 31, 2022 compared to $14.26 billion as of December 31, 2021. The increase in deposits was primarily due to the acquisition of $5.86 billion in deposits, net of purchase accounting adjustments, from Happy in the second quarter of 2022, partially offset by $2.18 billion in deposit decline during the year. Stockholders’ equity increased $760.6 million to $3.53 billion as of December 31, 2022, compared to $2.77 billion as of December 31, 2021. The increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and $305.3 million in net income, which were partially offset by the $315.9 million decrease in accumulated other comprehensive income, $128.4 million of shareholder dividends paid and the repurchase of $70.9 million of our common stock during 2022. The improvement in stockholders’ equity was 27.5% for the year ended December 31, 2022 compared to December 31, 2021.
Our total assets as of December 31, 2021 increased $1.65 billion to $18.05 billion from the $16.40 billion reported as of December 31, 2020. Cash and cash equivalents increased $2.39 billion, or 188.8%. The increase in cash and cash equivalents was due to loan paydowns as well as the significant amount of excess liquidity in the market as a continued result of the COVID-19 pandemic and the accompanying governmental response. Our loan portfolio balance decreased $1.38 billion to $9.84 billion as of December 31, 2021, from $11.22 billion as of December 31, 2020. The decrease in the loan portfolio was due to organic loan decline of $822.2 million and $910.1 million of the Company’s PPP loans being forgiven during 2021, which were partially offset by $347.7 million in new PPP loan originations during 2021. Total deposits increased $1.53 billion to $14.26 billion as of December 31, 2021 compared to $12.73 billion as of December 31, 2020, which was due to customers holding higher deposit balances in response to the COVID-19 pandemic as well as the resulting governmental response to the pandemic. Stockholders’ equity increased $160.0 million to $2.77 billion as of December 31, 2021, compared to $2.61 billion as of December 31, 2020. The increase in stockholders’ equity was primarily associated with the $319.0 million in net income, partially offset by the $33.7 million decrease in accumulated other comprehensive income, $92.1 million of shareholder dividends paid and the repurchase of $44.5 million of our common stock during 2021. The improvement in stockholders’ equity was 6.1% for the year ended December 31, 2021 compared to December 31, 2020.
Loan Portfolio
Our loan portfolio averaged $12.94 billion and $10.38 billion during the years ended December 31, 2022 and 2021, respectively. Loans receivable were $14.41 billion as of December 31, 2022 compared to $9.84 billion as of December 31, 2021, an increase of $4.57 billion, or 46.5%.
During 2022, the Company experienced an increase of approximately $4.57 billion in loans. The increase in loans was primarily due to the acquisition of $3.65 billion in loans, net of purchase accounting adjustments, from Happy and $242.2 million in marine loans from LendingClub Bank during 2022, as well as $678.6 million in organic loan growth. The $678.6 million in organic loan growth included $352.7 million in loan growth for Centennial CFG and $483.6 million in loan growth within the remaining footprint, partially offset by a $157.7 million decline in PPP loans during 2022.
During 2021, the Company experienced a decline of approximately $1.38 billion in loans compared to 2020. The decrease in the loan portfolio was primarily due to $822.2 million in organic loan decline as well as $562.4 million in PPP loan decline. The $822.2 million in organic loan decline included $385.3 million in loan growth for Centennial CFG, while the remaining footprint experienced $1.20 billion in loan decline during 2021. The $562.4 million in PPP loan decline was the result of $910.1 million of PPP loans being forgiven, partially offset by $347.7 million in new PPP loans during 2021.
The most significant components of the loan portfolio were commercial real estate, residential real estate, consumer and commercial and industrial loans. These loans are generally secured by residential or commercial real estate or business or personal property. Although these loans are primarily originated within our franchises in Arkansas, Florida, Texas, South Alabama and Centennial CFG, the property securing these loans may not physically be located within our market areas of Arkansas, Florida, Texas, Alabama and New York. Loans receivable were approximately $3.09 billion, $3.85 billion, $3.80 billion, $172.9 million, $1.22 billion and $2.27 billion as of December 31, 2022 in Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG, respectively.
As of December 31, 2022, we had $732.6 million of construction/land development loans which were collateralized by land. This consisted of $89.2 million for raw land and $643.4 million for land with commercial and/or residential lots.
Table 8 presents our loans receivable balances by category as of December 31, 2022 and 2021.
Table 8: Loans Receivable
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (In thousands) |
Real estate: | | | |
Commercial real estate loans: | | | |
Non-farm/non-residential | $ | 5,632,063 | | | $ | 3,889,284 | |
Construction/land development | 2,135,266 | | | 1,850,050 | |
Agricultural | 346,811 | | | 130,674 | |
Residential real estate loans: | | | |
Residential 1-4 family | 1,748,551 | | | 1,274,953 | |
Multifamily residential | 578,052 | | | 280,837 | |
Total real estate | 10,440,743 | | | 7,425,798 | |
Consumer | 1,149,896 | | | 825,519 | |
Commercial and industrial | 2,349,263 | | | 1,386,747 | |
Agricultural | 285,235 | | | 43,920 | |
Other | 184,343 | | | 154,105 | |
Total loans receivable | $ | 14,409,480 | | | $ | 9,836,089 | |
Commercial Real Estate Loans. We originate non-farm and non-residential loans (primarily secured by commercial real estate), construction/land development loans, and agricultural loans, which are generally secured by real estate located in our market areas. Our commercial mortgage loans are generally collateralized by first liens on real estate and amortized (where defined) over a 15 to 30-year period with balloon payments due at the end of one to five years. These loans are generally underwritten by assessing cash flow (debt service coverage), primary and secondary source of repayment, the financial strength of any guarantor, the strength of the tenant (if any), the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, we will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.
As of December 31, 2022, commercial real estate loans totaled $8.11 billion, or 56.3% of loans receivable, as compared to $5.87 billion, or 59.7% of loans receivable, as of December 31, 2021. Commercial real estate loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $1.96 billion, $2.49 billion, $2.27 billion, $75.3 million, zero and $1.32 billion at December 31, 2022, respectively.
Residential Real Estate Loans. We originate one to four family, residential mortgage loans generally secured by property located in our primary market areas. Approximately 42.3% and 47.6% of our residential mortgage loans consist of owner occupied 1-4 family properties and non-owner occupied 1-4 family properties (rental), respectively, as of December 31, 2022, with the remaining 10.1% relating to condos and mobile homes. Residential real estate loans generally have a loan-to-value ratio of up to 90%. These loans are underwritten by giving consideration to many factors including the borrower’s ability to pay, stability of employment or source of income, debt-to-income ratio, credit history and loan-to-value ratio.
As of December 31, 2022, residential real estate loans totaled $2.33 billion, or 16.1%, of loans receivable, compared to $1.56 billion, or 15.8% of loans receivable, as of December 31, 2021. Residential real estate loans originated in our franchises in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $447.0 million, $967.7 million, $573.4 million, $43.2 million, zero and $295.3 million at December 31, 2022, respectively.
Consumer Loans. Our consumer loans are composed of secured and unsecured loans originated by our bank, the primary portion of which consists of loans to finance USCG registered high-end sail and power boats within our SPF division The performance of consumer loans will be affected by the local and regional economies as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.
As of December 31, 2022, consumer loans totaled $1.15 billion, or 8.0% of loans receivable, compared to $825.5 million, or 8.4% of loans receivable, as of December 31, 2021. Consumer loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $35.1 million, $8.1 million, $25.2 million, $1.0 million, $1.08 billion and zero at December 31, 2022, respectively.
Commercial and Industrial Loans. Commercial and industrial loans are made for a variety of business purposes, including working capital, inventory, equipment and capital expansion. The terms for commercial loans are generally one to seven years. Commercial loan applications must be supported by current financial information on the borrower and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary sources of repayment, the financial strength of any guarantor, the borrower’s liquidity and leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. The loan to value ratio depends on the type of collateral. Generally speaking, accounts receivable are financed at between 50% and 80% of accounts receivable less than 60 days past due. Inventory financing will range between 50% and 80% (with no work in process) depending on the borrower and nature of inventory. We require a first lien position for those loans.
As of December 31, 2022, commercial and industrial loans totaled $2.35 billion, or 16.3% of loans receivable, which compared to $1.39 billion, or 14.1% of loans receivable, as of December 31, 2021. Commercial and industrial loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $494.5 million, $326.3 million, $686.8 million, $49.1 million, $136.4 million and $656.1 million at December 31, 2022, respectively.
Agricultural Loans. Agricultural loans include loans for financing agricultural production, including loans to businesses or individuals engaged in the production of timber, poultry, livestock or crops and are not categorized as part of real estate loans. Our agricultural loans are generally secured by farm machinery, livestock, crops, vehicles or other agricultural-related collateral. A portion of our portfolio of agricultural loans is comprised of loans to individuals which would normally be characterized as consumer loans except for the fact that the individual borrowers are primarily engaged in the production of timber, poultry, livestock or crops.
As of December 31, 2022, agricultural loans totaled $285.2 million, or 2.0% of loans receivable, compared to the $43.9 million, or 0.4% of loans receivable as of December 31, 2021. Agricultural loans originated in our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets were $45.5 million, zero, $239.7 million, zero, zero and zero at December 31, 2022, respectively.
Table 9 presents the distribution of the maturity of our total loans as of December 31, 2022. The table also presents the portion of our loans that have fixed interest rates and interest rates that fluctuate over the life of the loans based on changes in the interest rate environment.
The loans acquired during our acquisitions accrete interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the weighted-average life of the loans).
Table 9: Maturity Distribution of Loan Portfolio and Interest Rate Detail of Loans Due After One Year
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity Distribution of Loan Portfolio |
| One Year or Less | | Over One Year Through Five Years | | Over Five Years Through Fifteen Years | | Over Fifteen Years | | Total Loans Receivable |
| (In thousands) |
Real estate: | | | | | | | | | |
Commercial real estate loans | | | | | | | | | |
Non-farm/non-residential | $ | 964,573 | | | $ | 2,945,758 | | | $ | 1,387,703 | | | $ | 334,029 | | | $ | 5,632,063 | |
Construction/land development | 837,255 | | | 902,881 | | | 272,243 | | | 122,887 | | | 2,135,266 | |
Agricultural | 58,922 | | | 127,918 | | | 103,626 | | | 56,345 | | | 346,811 | |
Residential real estate loans | | | | | | | | | |
Residential 1-4 family | 164,196 | | | 440,152 | | | 323,971 | | | 820,232 | | | 1,748,551 | |
Multifamily residential | 177,787 | | | 282,621 | | | 88,635 | | | 29,009 | | | 578,052 | |
Total real estate | 2,202,733 | | | 4,699,330 | | | 2,176,178 | | | 1,362,502 | | | 10,440,743 | |
Consumer | 22,763 | | | 42,929 | | | 234,271 | | | 849,933 | | | 1,149,896 | |
Commercial and industrial | 786,596 | | | 1,182,899 | | | 350,560 | | | 29,208 | | | 2,349,263 | |
Agricultural | 205,788 | | | 62,829 | | | 15,800 | | | 818 | | | 285,235 | |
Other | 15,888 | | | 100,922 | | | 52,546 | | | 14,987 | | | 184,343 | |
Total loans receivable | $ | 3,233,768 | | | $ | 6,088,909 | | | $ | 2,829,355 | | | $ | 2,257,448 | | | $ | 14,409,480 | |
| | | | | | | | | | | | | | | | | |
| Loans Due After One Year |
| Predetermined Interest Rates | | Floating or Adjustable Interest Rates | | Total |
| (In thousands) |
Real estate: | | | | | |
Commercial real estate loans | | | | | |
Non-farm/non-residential | $ | 2,325,965 | | | $ | 2,341,525 | | | $ | 4,667,490 | |
Construction/land development | 274,741 | | | 1,023,270 | | | 1,298,011 | |
Agricultural | 136,384 | | | 151,505 | | | 287,889 | |
Residential real estate loans | | | | | |
Residential 1-4 family | 592,565 | | | 991,790 | | | 1,584,355 | |
Multifamily residential | 158,816 | | | 241,449 | | | 400,265 | |
Total real estate | 3,488,471 | | | 4,749,539 | | | 8,238,010 | |
Consumer | 1,074,953 | | | 52,180 | | | 1,127,133 | |
Commercial and industrial | 569,685 | | | 992,982 | | | 1,562,667 | |
Agricultural | 34,495 | | | 44,952 | | | 79,447 | |
Other | 133,648 | | | 34,807 | | | 168,455 | |
Total loans receivable | $ | 5,301,252 | | | $ | 5,874,460 | | | $ | 11,175,712 | |
Non-Performing Assets
We classify our problem loans into three categories: past due loans, special mention loans and classified loans (accruing and non-accruing).
When management determines that a loan is no longer performing, and that collection of interest appears doubtful, the loan is placed on non-accrual status. Loans that are 90 days past due are placed on non-accrual status unless they are adequately secured and there is reasonable assurance of full collection of both principal and interest. Our management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on non-accrual status.
Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An allowance for credit losses is determined using the same methodology as other loans. For PCD loans not individually analyzed for impairment, the Company develops separate PCD models for each loan segment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses. The Company held approximately $142.5 million and $448,000 in PCD loans, as of December 31, 2022 and 2021, respectively.
Table 10 sets forth information with respect to our non-performing assets as of December 31, 2022 and 2021. As of these dates, all non-performing restructured loans are included in non-accrual loans.
Table 10: Non-performing Assets
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in thousands) |
Non-accrual loans | $ | 51,011 | | | $ | 47,158 | |
Loans past due 90 days or more (principal or interest payments) | 9,845 | | | 3,035 | |
Total non-performing loans | 60,856 | | | 50,193 | |
Other non-performing assets | | | |
Foreclosed assets held for sale, net | 546 | | | 1,630 | |
Other non-performing assets | 74 | | | — | |
Total other non-performing assets | 620 | | | 1,630 | |
Total non-performing assets | $ | 61,476 | | | $ | 51,823 | |
Allowance for credit losses to non-accrual loans | 567.86 | % | | 501.96 | % |
Allowance for credit losses to non-performing loans | 475.99 | | | 471.61 | |
Non-accrual loans to total loans | 0.35 | | | 0.48 | |
Non-performing loans to total loans | 0.42 | | | 0.51 | |
Non-performing assets to total assets | 0.27 | | | 0.29 | |
Our non-performing loans are comprised of non-accrual loans and accruing loans that are contractually past due 90 days. Our bank subsidiary recognizes income principally on the accrual basis of accounting. When loans are classified as non-accrual, the accrued interest is charged off and no further interest is accrued, unless the credit characteristics of the loan improve. If a loan is determined by management to be uncollectible, the portion of the loan determined to be uncollectible is then charged to the allowance for credit losses.
Total non-performing loans were $60.9 million as of December 31, 2022, compared to $50.2 million as of December 31, 2021, for an increase of $10.7 million. The $10.7 million increase in non-performing loans is primarily the result of the acquisition of Happy during the second quarter of 2022 which resulted in a $22.2 million increase in non-performing loans attributable to our Texas market and a $788,000 increase in non-performing loans attributable to our SPF market, partially offset by decreases in non-performing loans in our Arkansas, Florida, Alabama and Centennial CFG markets of $5.5 million, $6.3 million, $66,000 and $439,000, respectively. Non-performing loans at December 31, 2022, were $8.4 million, $20.5 million, $22.2 million, $404,000, $2.3 million and $7.1 million in the Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets, respectively.
The $7.1 million balance of non-accrual loans for our Centennial CFG market balance of non-accrual loans for our Centennial CFG market consists of two loans that are assessed for credit risk by the Federal Reserve under the Shared National Credit Program. Due to the condition of the two loans, partial charge-offs for a total of $5.4 million were taken on these loans during 2022. The loans are not current on either principal or interest, and we have reversed any interest that had accrued subsequent to the non-accrual date designated by the Federal Reserve. Any interest payments that are received will be applied to the principal balance.
Troubled debt restructurings (“TDRs”) generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term. As a result, we will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about three to twelve months. For our TDRs that accrue interest at the time the loan is restructured, it would be a rare exception to have charged-off any portion of the loan. As of December 31, 2022, we had $4.1 million of restructured loans that are in compliance with the modified terms and are not reported as past due or non-accrual in Table 10. Our Florida market contains $2.4 million, and our Arkansas market contains $1.7 million of these restructured loans.
A loan modification that might not otherwise be considered may be granted resulting in classification as a TDR. These loans can involve loans remaining on non-accrual, moving to non-accrual, or continuing on an accrual status, depending on the individual facts and circumstances of the borrower. Generally, a non-accrual loan that is restructured remains on non-accrual for a period of six months to demonstrate that the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can pay under the new terms and may result in the loan being returned to an accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan will remain in a non-accrual status.
The majority of the Bank’s loan modifications relate to commercial lending and involve reducing the interest rate, changing from a principal and interest payment to interest-only, a lengthening of the amortization period, or a combination of some or all of the three. In addition, it is common for the Bank to seek additional collateral or guarantor support when modifying a loan. At December 31, 2022, the amount of TDRs was $5.7 million, a decrease of 23.7% from $7.5 million at December 31, 2021. As of December 31, 2022 and 2021, 72.3% and 85.7%, respectively, of all restructured loans were performing to the terms of the restructure.
Total foreclosed assets held for sale were $546,000 as of December 31, 2022, compared to $1.6 million as of December 31, 2021 for a decrease of $1.1 million. The foreclosed assets held for sale as of December 31, 2022 are comprised of approximately $120,000 of assets located in Arkansas, $260,000 located in Florida, zero located in Alabama and Centennial CFG and $166,000 located in Texas.
Table 11 shows the summary of foreclosed assets held for sale as of December 31, 2022 and 2021.
Table 11: Total Foreclosed Assets Held for Sale
| | | | | | | | | | | |
| December 31 |
| 2022 | | 2021 |
| (In thousands) |
Commercial real estate loans | | | |
Non-farm/non-residential | $ | 118 | | | $ | 536 | |
Construction/land development | 47 | | | 834 | |
| | | |
Residential real estate loans | | | |
Residential 1-4 family | 260 | | | 260 | |
Multifamily residential | 121 | | | — | |
Total foreclosed assets held for sale | $ | 546 | | | $ | 1,630 | |
A loan is considered impaired when it is probable that we will not receive all amounts due according to the contracted terms of the loans. Impaired loans include non-performing loans (loans past due 90 days or more and non-accrual loans), criticized and/or classified loans with a specific allocation, loans categorized as TDRs and certain other loans identified by management that are still performing (loans included in multiple categories are only included once). As of December 31, 2022, average impaired loans were $297.7 million compared to $289.5 million as of December 31, 2021. As of December 31, 2022 impaired loans were $221.1 million compared to $331.5 million as of December 31, 2021. The amortized cost balance for loans with a specific allocation decreased from $284.0 million to $168.6 million, and the specific allocation for impaired loans decreased by approximately $20.4 million for the period ended December 31, 2022 compared to the period ended December 31, 2021. As of December 31, 2022, our Arkansas, Florida, Texas, Alabama, SPF and Centennial CFG markets accounted for approximately $22.2 million, $125.7 million, $63.4 million, $404,000, $2.3 million and $7.1 million of the impaired loans, respectively.
Past Due and Non-Accrual Loans
Table 12 shows the summary non-accrual loans as of December 31, 2022 and 2021:
Table 12: Total Non-Accrual Loans
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (In thousands) |
Real estate: | | | |
Commercial real estate loans | | | |
Non-farm/non-residential | $ | 12,219 | | | $ | 11,923 | |
Construction/land development | 1,977 | | | 1,445 | |
Agricultural | 278 | | | 897 | |
Residential real estate loans | | | |
Residential 1-4 family | 18,083 | | | 16,198 | |
Multifamily residential | — | | | 156 | |
Total real estate | 32,557 | | | 30,619 | |
Consumer | 2,842 | | | 1,648 | |
Commercial and industrial | 14,920 | | | 13,875 | |
Agricultural & other | 692 | | | 1,016 | |
| | | |
Total non-accrual loans | $ | 51,011 | | | $ | 47,158 | |
If the non-accrual loans had been accruing interest in accordance with the original terms of their respective agreements, interest income of approximately $4.0 million for the year ended December 31, 2022, $2.4 million in 2021, and $3.7 million in 2020 would have been recorded. Interest income recognized on the non-accrual loans for the years ended December 31, 2022, 2021 and 2020 was considered immaterial.
Table 13 shows the summary of accruing past due loans 90 days or more as of December 31, 2022 and 2021:
Table 13: Total Loans Accruing Past Due 90 Days or More
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (In thousands) |
Real estate: | | | |
Commercial real estate loans | | | |
Non-farm/non-residential | $ | 1,844 | | | $ | 2,225 | |
Construction/land development | 31 | | | — | |
| | | |
Residential real estate loans | | | |
Residential 1-4 family | 1,374 | | | 701 | |
| | | |
Total real estate | 3,249 | | | 2,926 | |
Consumer | 35 | | | 2 | |
Commercial and industrial | 6,300 | | | 107 | |
Other | 261 | | | — | |
Total loans accruing past due 90 days or more | $ | 9,845 | | | $ | 3,035 | |
| | | |
Our total loans accruing past due 90 days or more and non-accrual loans to total loans was 0.42% and 0.51% as of December 31, 2022 and 2021, respectively.
Allowance for Credit Losses
Overview. The allowance for credit losses on loans receivable is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed and expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The Company uses the discounted cash flow (“DCF”) method to estimate expected losses for all of Company’s loan pools. These pools are as follows: construction & land development; other commercial real estate; residential real estate; commercial & industrial; and consumer & other. The loan portfolio pools were selected in order to generally align with the loan categories specified in the quarterly call reports required to be filed with the Federal Financial Institutions Examination Council. For each of these loan pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national unemployment rate, gross domestic product, national retail sales index, housing price indices and rental vacancy rate index.
The allowance for credit losses is measured based on call report segment as these types of loan exhibit similar risk characteristics. The identified loan segments are as follows:
•1-4 family construction
•All other construction
•1-4 family revolving home equity lines of credit (“HELOC”) & junior liens
•1-4 family senior liens
•Multifamily
•Owner occupies commercial real estate
•Non-owner occupied commercial real estate
•Commercial & industrial, agricultural, non-depository financial institutions, purchase/carry securities, other
•Consumer auto
•Other consumer
•Other consumer - SPF
The combination of adjustments for credit expectations (default and loss) and time expectations prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis.
The allowance for credit losses for each segment is measured through the use of the discounted cash flow method. Loans evaluated individually that are considered to be impaired are not included in the collective evaluation. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. For loans for which a specific reserve is not recorded, an allowance is recorded based on the loss rate for the respective pool within the collective evaluation if a specific reserve is not recorded.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:
•Management has a reasonable expectation at the reporting date that troubled debt restructuring will be executed with an individual borrower.
•The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factors and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies, procedures and strategies; (ii) changes in nature and volume of the portfolio; (iii) staff experience; (iv) changes in volume and trends in classified loans, delinquencies and nonaccruals; (v) concentration risk; (vi) trends in underlying collateral values; (vii) external factors such as competition, legal and regulatory environment; (viii) changes in the quality of the loan review system and (ix) economic conditions.
Loans considered impaired, according to ASC 326, are loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for credit losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for credit losses when in the process of collection, it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion the collection of interest is doubtful or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for credit losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, although the majority of payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and we reasonably expect to collect all principal and interest.
Acquisition Accounting and Acquired Loans. We account for our acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed are recorded at fair value. In accordance with ASC 326, the Company records both a discount and an allowance for credit losses on acquired loans. All purchased loans are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
Purchased loans that have experienced more than insignificant credit deterioration since origination are PCD loans. An allowance for credit losses is determined using the same methodology as other loans. For PCD loans not individually analyzed for impairment, the Company develops separate PCD models for each loan segment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through the provision for credit losses.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Specific Allocations. As a general rule, if a specific allocation is warranted, it is the result of an analysis of a previously classified credit or relationship. Typically, when it becomes evident through the payment history or a financial statement review that a loan or relationship is no longer supported by the cash flows of the asset and/or borrower and has become collateral dependent, we will use appraisals or other collateral analysis to determine if collateral impairment has occurred. The amount or likelihood of loss on this credit may not yet be evident, so a charge-off would not be prudent. However, if the analysis indicates that an impairment has occurred, then a specific allocation will be determined for this loan. If our existing appraisal is outdated or the collateral has been subject to significant market changes, we will obtain a new appraisal for this impairment analysis. Cash flow available to service debt was used for the other impaired loans. This analysis is performed each quarter in connection with the preparation of the analysis of the adequacy of the allowance for credit losses, and if necessary, adjustments are made to the specific allocation provided for a particular loan.
For collateral dependent loans, we do not consider an appraisal outdated simply due to the passage of time. However, if an appraisal is older than 13 months and if market or other conditions have deteriorated and we believe that the current market value of the property is not within approximately 20% of the appraised value, we will consider the appraisal outdated and order either a new appraisal or an internal validation report for the impairment analysis. The recognition of any provision or related charge-off on a collateral dependent loan is either through annual credit analysis or, many times, when the relationship becomes delinquent. If the borrower is not current, we will update our credit and cash flow analysis to determine the borrower's repayment ability. If we determine this ability does not exist and it appears that the collection of the entire principal and interest is not likely, then the loan could be placed on non-accrual status. In any case, loans are classified as non-accrual no later than 105 days past due. If the loan requires a quarterly impairment analysis, this analysis is completed in conjunction with the completion of the analysis of the adequacy of the allowance for credit losses. Any exposure identified through the impairment analysis is shown as a specific reserve on the individual impairment. If it is determined that a new appraisal or internal validation report is required, it is ordered and will be taken into consideration during completion of the next impairment analysis.
In estimating the net realizable value of the collateral, management may deem it appropriate to discount the appraisal based on the applicable circumstances. In such case, the amount charged off may result in loan principal outstanding being below fair value as presented in the appraisal.
Between the receipt of the original appraisal and the updated appraisal, we monitor the loan's repayment history. If the loan is $3.0 million or greater or the total loan relationship is $5.0 million or greater, our policy requires an annual credit review. Our policy requires financial statements from the borrowers and guarantors at least annually. In addition, we calculate the global repayment ability of the borrower/guarantors at least annually.
As a general rule, when it becomes evident that the full principal and accrued interest of a loan may not be collected, or by law at 105 days past due, we will reflect that loan as non-performing. It will remain non-performing until it performs in a manner that it is reasonable to expect that we will collect the full principal and accrued interest.
When the amount or likelihood of a loss on a loan has been determined, a charge-off should be taken in the period it is determined. If a partial charge-off occurs, the quarterly impairment analysis will determine if the loan is still impaired, and thus continues to require a specific allocation.
The Company had $221.1 million and $331.5 million in collateral-dependent impaired loans for the periods ended December 31, 2022 and 2021, respectively.
Loans Collectively Evaluated for Impairment. Loans receivable collectively evaluated for impairment increased by approximately $4.65 billion from $9.54 billion at December 31, 2021 to $14.19 billion at December 31, 2022. The percentage of the allowance for credit losses allocated to loans receivable collectively evaluated for impairment to the total loans collectively evaluated for impairment decreased from 1.94% at December 31, 2021 to 1.82% at December 31, 2022.
Charge-offs and Recoveries. Total charge-offs increased to $17.3 million for the year ended December 31, 2022, compared to $11.7 million for the year ended December 31, 2021. Total recoveries increased to $3.2 million for the year ended December 31, 2022, compared to $2.9 million for the same period in 2021.
Net loans charged off for the years ended December 31, 2022 and 2021 were $14.0 million and $8.8 million, respectively. For the years ended December 31, 2022 and 2021, approximately $1.4 million and $3.1 million, respectively, of the net charge-offs were from our Arkansas market. For the years ended December 31, 2022 and 2021, approximately $4.5 million and $5.3 million, respectively, of the net charge-offs were from our Florida market. For the years ended December 31, 2022 and 2021, approximately $5.4 million and zero, respectively, of the net charge-offs were from our Texas market. Approximately $55,000 and $17,000 related to net charge-offs for the years ended December 31, 2022 and 2021, respectively, on loans in our Alabama market. For the years ended December 31, 2022 and 2021, approximately $290,000 and $401,000 of the net charge-offs were from our SPF market. For the years ended December 31, 2022 and 2021, approximately $2.3 million and zero, respectively, of the net charge-offs were from our Centennial CFG market.
While the 2022 charge-offs and recoveries consisted of many relationships, there were three individual relationships consisting of charge-offs greater than $1.0 million. The first was a $4.0 million charge-off for a commercial and industrial loan in our Florida market. The second was a $3.6 million charge-off for a commercial and industrial loan in our New York market, and the third was a $1.5 million charge-off for a commercial and industrial loan in our New York market.
For the year ended December 31, 2021, there were two individual relationships consisting of charge-offs greater than $1.0 million. The first was a $3.8 million charge-off for a commercial and industrial loan in our Florida market. The second was a $1.9 million charge-off for a commercial and industrial loan in our Arkansas market.
We have not charged off an amount less than what was determined to be the fair value of the collateral as presented in the appraisal, less estimated costs to sell (for collateral dependent loans), for any period presented. Loans partially charged-off are placed on non-accrual status until it is proven that the borrower's repayment ability with respect to the remaining principal balance can be reasonably assured. This is usually established over a period of 6-12 months of timely payment performance.
Table 14 shows the allowance for credit losses, charge-offs and recoveries for loans as of and for the years ended December 31, 2022 and 2021.
Table 14: Analysis of Allowance for Credit Losses
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in thousands) |
Balance, beginning of year | $ | 236,714 | | | $ | 245,473 | |
Allowance for credit losses on acquired PCD loans | 16,816 | | | — | |
Loans charged off | | | |
Real estate: | | | |
Commercial real estate loans: | | | |
Non-farm/non-residential | — | | | 604 | |
Construction/land development | 1 | | | — | |
Agricultural | — | | | 42 | |
Residential real estate loans: | | | |
Residential 1-4 family | 410 | | | 545 | |
Multifamily residential | 36 | | | — | |
Total real estate | 447 | | | 1,191 | |
Consumer | 2,332 | | | 458 | |
Commercial and industrial | 9,773 | | | 8,242 | |
| | | |
Other | 4,715 | | | 1,770 | |
Total loans charged off | 17,267 | | | 11,661 | |
Recoveries of loans previously charged off | | | |
Real estate: | | | |
Commercial real estate loans: | | | |
Non-farm/non-residential | 967 | | | 785 | |
Construction/land development | 405 | | | 58 | |
| | | |
Residential real estate loans: | | | |
Residential 1-4 family | 118 | | | 680 | |
Multifamily residential | 1 | | | 3 | |
Total real estate | 1,491 | | | 1,526 | |
Consumer | 143 | | | 70 | |
Commercial and industrial | 780 | | | 591 | |
| | | |
Other | 822 | | | 715 | |
Total recoveries | 3,236 | | | 2,902 | |
Net loans charged off (recovered) | 14,031 | | | 8,759 | |
Provision for credit loss - loans | 5,000 | | | — | |
Provision for credit loss - acquired loans | 45,170 | | | — | |
Balance, end of year | $ | 289,669 | | | $ | 236,714 | |
Net charge-offs (recoveries) to average loans receivable | 0.11 | % | | 0.08 | % |
Allowance for credit losses to total loans | 2.01 | | | 2.41 | |
Allowance for credit losses to net charge-offs (recoveries) | 2,064.49 | | | 2,702.52 | |
Net charge-offs to average loans receivable were 0.11% and 0.08% as of December 31, 2022 and 2021, respectively. The low level of charge-offs for the year emphasize the Company's strong asset quality, and additional disclosure of net charge-offs to average loans outstanding by loan category is not considered necessary.
Table 15 presents the allocation of allowance for credit losses as of December 31, 2022 and 2021.
Table 15: Allocation of Allowance for Credit Losses
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| 2022 | | 2021 |
| Allowance Amount | | % of loans(1) | | Allowance Amount | | % of loans(1) |
| (Dollars in thousands) |
Real estate: | | | | | | | |
Commercial real estate loans: | | | | | | | |
Non-farm/non- residential | $ | 92,197 | | | 39.1 | % | | $ | 86,910 | | | 39.5 | % |
Construction/land development | 32,243 | | | 14.8 | | | 28,415 | | | 18.8 | |
Agricultural residential real estate loans: | 1,651 | | | 2.4 | | | 308 | | | 1.3 | |
Residential real estate loans: | | | | | | | |
Residential 1-4 family | 45,312 | | | 12.1 | | | 45,364 | | | 13.0 | |
Multifamily residential | 5,651 | | | 4.0 | | | 3,094 | | | 2.9 | |
Total real estate | 177,054 | | | 72.4 | | | 164,091 | | | 75.5 | |
Consumer | 20,907 | | | 8.0 | | | 16,612 | | | 8.4 | |
Commercial and industrial | 88,131 | | | 16.3 | | | 52,910 | | | 14.1 | |
Agricultural | 1,223 | | | 2.0 | | | 152 | | | 0.4 | |
Other | 2,354 | | | 1.3 | | | 2,949 | | | 1.6 | |
Total | $ | 289,669 | | | 100.0 | % | | $ | 236,714 | | | 100.0 | % |
(1)Percentage of loans in each category to total loans receivable.
Investment Securities
Our securities portfolio is the second largest component of earning assets and provides a significant source of revenue. Securities within the portfolio are classified as held-to-maturity, available-for-sale, or trading based on the intent and objective of the investment and the ability to hold to maturity. Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. The estimated effective duration of our securities portfolio was 5.0 years as of December 31, 2022.
Securities held-to-maturity, which include any security for which we have the positive intent and ability to hold until maturity, are reported at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized/accreted to the call date to interest income using the constant effective yield method over the estimated life of the security. As of December 31, 2022, we had $1.29 billion of held-to-maturity securities. We had no held-to-maturity securities as of December 31, 2021. As of December 31, 2022, $1.11 billion, or 86.2%, were invested in obligations of state and political subdivisions, $43.0 million, or 3.3%, were invested in obligations of U.S. Government-sponsored enterprises and $135.0 million, or 10.5%, were invested in mortgage-backed securities. The U.S. government-sponsored enterprises and mortgage-backed securities are guaranteed by the U.S. government.
Securities available-for-sale are reported at fair value with unrealized holding gains and losses reported as a separate component of stockholders’ equity as other comprehensive income. Securities that are held as available-for-sale are used as a part of our asset/liability management strategy. Securities that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital, and other similar factors are classified as available-for-sale. Available-for-sale securities were $4.04 billion and $3.12 billion as of December 31, 2022 and 2021, respectively.
As of December 31, 2022, $1.86 billion, or 46.1%, of our available-for-sale securities were invested in mortgage-backed securities, compared to $1.54 billion, or 49.3%, of our available-for-sale securities as of December 31, 2021. To reduce our income tax burden, $906.3 million, or 22.4%, of our available-for-sale securities portfolio as of December 31, 2022, was primarily invested in tax-exempt obligations of state and political subdivisions, compared to $997.0 million, or 32.0%, of our available-for-sale securities as of December 31, 2021. We had $661.8 million, or 16.4%, invested in obligations of U.S. Government-sponsored enterprises as of December 31, 2022, compared to $433.0 million, or 13.9%, of our available-for-sale securities as of December 31, 2021. Also, we had approximately $608.9 million, or 15.1%, invested in other securities as of December 31, 2022, compared to $151.9 million, or 4.9%, of our available-for-sale securities as of December 31, 2021.
The Company evaluates all securities quarterly to determine if any securities in a loss position require a provision for credit losses in accordance with ASC 326. The Company first assesses whether it intends to sell or is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectability of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
The Company recorded a $2.0 million provision for credit losses on the held-to-maturity investment securities during the second quarter of 2022 as a result of the investment securities acquired as part of the Happy acquisition. Of the Company's held-to-maturity securities, $1.11 billion, or 86.2% are municipal securities. To estimate the necessary loss provision, the Company utilized historical default and recovery rates of the municipal bond sector and applied these rates using a pooling method. The remainder of investments classified as held-to-maturity are U.S. government-sponsored enterprises and mortgage-backed securities all of which are guaranteed by the U.S. government. Due to the inherent low risk in these U.S. government guaranteed securities, no provision for credit loss was established on this portion of the portfolio.
At December 31, 2022, the Company determined that the allowance for credit losses of $842,000, resulting from economic uncertainty, was adequate for the available-for-sale investment portfolio, and the allowance for credit losses for the held-to-maturity portfolio was also considered adequate. No additional provision for credit losses was considered necessary for the investment portfolio.
Table 16 presents the carrying value and fair value of available-for-sale and held-to-maturity investment securities as of December 31, 2022 and 2021.
Table 16: Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost | | Allowance for Credit Losses | | Net Carrying Amount | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
Available-for-sale | | | | | | | | | | | |
U.S. government-sponsored enterprises | $ | 682,316 | | | $ | — | | | $ | 682,316 | | | $ | 2,713 | | | $ | (23,209) | | | $ | 661,820 | |
Residential mortgage-backed securities | 1,759,025 | | | — | | | 1,759,025 | | | 71 | | | (211,453) | | | 1,547,643 | |
Commercial mortgage-backed securities | 339,206 | | | — | | | 339,206 | | | — | | | (22,254) | | | 316,952 | |
State and political subdivisions | 1,021,188 | | | (842) | | | 1,020,346 | | | 1,649 | | | (115,698) | | | 906,297 | |
Other securities | 643,885 | | | — | | | 643,885 | | | 346 | | | (35,353) | | | 608,878 | |
Total | $ | 4,445,620 | | | $ | (842) | | | $ | 4,444,778 | | | $ | 4,779 | | | $ | (407,967) | | | $ | 4,041,590 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost | | Allowance for Credit Losses | | Net Carrying Amount | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
Held-to-maturity | | | | | | | | | | | |
U.S. government-sponsored enterprises | $ | 43,017 | | | $ | — | | | $ | 43,017 | | | $ | — | | | $ | (3,349) | | | $ | 39,668 | |
Residential mortgage-backed securities | 49,088 | | | — | | | 49,088 | | | 24 | | | (1,205) | | | 47,907 | |
Commercial mortgage-backed securities | 85,912 | | | — | | | 85,912 | | | 107 | | | (2,551) | | | 83,468 | |
State and political subdivisions | 1,111,693 | | | (2,005) | | | 1,109,688 | | | 65 | | | (154,650) | | | 955,103 | |
Other securities | — | | | — | | | — | | | — | | | — | | | — | |
Total | $ | 1,289,710 | | | $ | (2,005) | | | $ | 1,287,705 | | | $ | 196 | | | $ | (161,755) | | | $ | 1,126,146 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost | | Allowance for Credit Losses | | Net Carrying Amount | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
Available-for-sale | | | | | | | | | | | |
U.S. government-sponsored enterprises | $ | 433,829 | | | $ | — | | | $ | 433,829 | | | $ | 2,375 | | | $ | (3,225) | | | $ | 432,979 | |
Residential mortgage-backed securities | 1,175,185 | | | — | | | 1,175,185 | | | 4,085 | | | (18,551) | | | 1,160,719 | |
Commercial mortgage-backed securities | 372,702 | | | — | | | 372,702 | | | 6,521 | | | (1,968) | | | 377,255 | |
State and political subdivisions | 973,318 | | | (842) | | | 972,476 | | | 26,296 | | | (1,794) | | | 996,978 | |
Other securities | 151,449 | | | — | | | 151,449 | | | 1,781 | | | (1,354) | | | 151,876 | |
Total | $ | 3,106,483 | | | $ | (842) | | | $ | 3,105,641 | | | $ | 41,058 | | | $ | (26,892) | | | $ | 3,119,807 | |
Table 17 reflects the amortized cost and estimated fair value of available-for-sale and held-to-maturity securities as of December 31, 2022 and 2021, by contractual maturity as well as the weighted-average yields (for tax-exempt obligations on a fully taxable equivalent basis) of those securities by contractual maturity. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
Table 17: Maturity and Yield Distribution of Investment Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| 1 Year or Less | | 1 Year Through 5 Years | | 5 Years Through 10 Years | | Over 10 Years | | Monthly Amortizing Securities | | Total Amortized Cost | | Total Fair Value |
| (Dollars in thousands) |
Available-for-sale | | | | | | | | | | | | | |
U.S. Government-sponsored enterprises | $ | 254,833 | | | $ | 99,132 | | | $ | 198,888 | | | $ | 129,463 | | | $ | — | | | $ | 682,316 | | | $ | 661,820 | |
State and political subdivisions | 3,808 | | | 25,231 | | | 108,082 | | | 884,067 | | | — | | | 1,021,188 | | | 906,297 | |
Residential mortgage-backed securities | — | | | — | | | — | | | — | | | 1,759,025 | | | 1,759,025 | | | 1,547,643 | |
Commercial mortgage-backed securities | — | | | — | | | — | | | — | | | 339,206 | | | 339,206 | | | 316,952 | |
Other securities | 6,999 | | | 52,014 | | | 169,335 | | | 414,036 | | | 1,501 | | | 643,885 | | | 608,878 | |
Total | $ | 265,640 | | | $ | 176,377 | | | $ | 476,305 | | | $ | 1,427,566 | | | $ | 2,099,732 | | | $ | 4,445,620 | | | $ | 4,041,590 | |
Percentage of total amortized cost | 6.0 | % | | 4.0 | % | | 10.7 | % | | 32.1 | % | | 47.2 | % | | 100.0 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| 1 Year or Less | | 1 Year Through 5 Years | | 5 Years Through 10 Years | | Over 10 Years | | Monthly Amortizing Securities | | Total Amortized Cost | | Total Fair Value |
| (Dollars in thousands) |
Held-to-maturity | | | | | | | | | | | | | |
U.S. Government-sponsored enterprises | $ | — | | | $ | — | | | $ | 43,017 | | | $ | — | | | $ | — | | | $ | 43,017 | | | $ | 39,668 | |
State and political subdivisions | — | | | 4,782 | | | 173,165 | | | 933,746 | | | — | | | 1,111,693 | | | 955,103 | |
Residential mortgage-backed securities | — | | | — | | | — | | | — | | | 49,088 | | | 49,088 | | | 47,907 | |
Commercial mortgage-backed securities | — | | | — | | | — | | | — | | | 85,912 | | | 85,912 | | | 83,468 | |
| | | | | | | | | | | | | |
Total | $ | — | | | $ | 4,782 | | | $ | 216,182 | | | $ | 933,746 | | | $ | 135,000 | | | $ | 1,289,710 | | | $ | 1,126,146 | |
Percentage of total amortized cost | — | % | | 0.4 | % | | 16.8 | % | | 72.4 | % | | 10.4 | % | | 100.0 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| 1 Year or Less | | 1 Year Through 5 Years | | 5 Years Through 10 Years | | Over 10 Years | | Monthly Amortizing Securities | | Tax Equivalent Yield |
| (Dollars in thousands) |
Available-for-sale | | | | | | | | | | | |
U.S. Government-sponsored enterprises | 2.97 | % | | 2.03 | % | | 2.69 | % | | 3.64 | % | | — | % | | 2.88 | % |
State and political subdivisions | 4.35 | | | 3.46 | | | 2.99 | | | 2.84 | | | — | | | 2.88 | |
Residential mortgage-backed securities | — | | | — | | | — | | | — | | | 2.48 | | | 2.48 | |
Commercial mortgage-backed securities | — | | | — | | | — | | | — | | | 3.04 | | | 3.04 | |
Other securities | 5.64 | | | 4.58 | | | 3.81 | | | 5.34 | | | 2.60 | | | 4.13 | |
Held-to-maturity | | | | | | | | | | | |
U.S. Government-sponsored enterprises | — | | | — | | | 3.04 | | | — | | | — | | | 3.04 | |
State and political subdivisions | — | | | 3.17 | | | 3.25 | | | 3.58 | | | — | | | 3.53 | |
Residential mortgage-backed securities | — | | | — | | | — | | | — | | | 4.49 | | | 4.49 | |
Commercial mortgage-backed securities | — | | | — | | | — | | | — | | | 4.10 | | | 4.10 | |
Other securities | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 1 Year or Less | | 1 Year Through 5 Years | | 5 Years Through 10 Years | | Over 10 Years | | Monthly Amortizing Securities | | Total Amortized Cost | | Total Fair Value |
| (Dollars in thousands) |
Available-for-sale | | | | | | | | | | | | | |
U.S. Government-sponsored enterprises | $ | 6,285 | | | $ | 53,108 | | | $ | 219,569 | | | $ | 154,867 | | | $ | — | | | $ | 433,829 | | | $ | 432,979 | |
State and political subdivisions | 1,710 | | | 27,732 | | | 87,127 | | | 856,749 | | | — | | | 973,318 | | | 996,978 | |
Residential mortgage-backed securities | — | | | — | | | — | | | — | | | 1,175,185 | | | 1,175,185 | | | 1,160,719 | |
Commercial mortgage-backed securities | — | | | — | | | — | | | — | | | 372,702 | | | 372,702 | | | 377,255 | |
Other securities | 47 | | | 15,121 | | | 74,837 | | | 59,444 | | | 2,000 | | | 151,449 | | | 151,876 | |
Total | $ | 8,042 | | | $ | 95,961 | | | $ | 381,533 | | | $ | 1,071,060 | | | $ | 1,549,887 | | | $ | 3,106,483 | | | $ | 3,119,807 | |
Percentage of total amortized cost | 0.3 | % | | 3.1 | % | | 12.3 | % | | 34.5 | % | | 49.8 | % | | 100.0 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 1 Year or Less | | 1 Year Through 5 Years | | 5 Years Through 10 Years | | Over 10 Years | | Monthly Amortizing Securities | | Tax Equivalent Yield |
| (Dollars in thousands) |
Available-for-sale | | | | | | | | | | | |
U.S. Government-sponsored enterprises | 1.99 | % | | 1.13 | % | | 1.07 | % | | 0.81 | % | | — | % | | 0.99 | % |
State and political subdivisions | 4.32 | | | 3.75 | | | 2.83 | | | 2.73 | | | — | | | 2.77 | |
Residential mortgage-backed securities | — | | | — | | | — | | | — | | | 1.39 | | | 1.39 | |
Commercial mortgage-backed securities | — | | | — | | | — | | | — | | | 1.97 | | | 1.97 | |
Other securities | 1.54 | | | 4.42 | | | 3.40 | | | 1.92 | | | 1.03 | | | 2.91 | |
The weighted average tax-equivalent yield is calculated by multiplying the carried book value by the tax-equivalent yield for each security and is then grouped by investment type and maturity. Tax-exempt obligations have been computed on a tax-equivalent basis. Taxable-equivalent adjustments are the result of increasing income from tax-free investments by an amount equal to the taxes that would be paid if the income were fully taxable, thus making tax-exempt yields comparable to taxable asset yields. Taxable equivalent adjustments were based upon 24.6735% and 25.74% income tax rates for 2022 and 2021, respectively. In 2022, $28.4 million of interest income on debt securities was excluded from Federal taxation, and $12.3 million was excluded from state taxation. In 2021, $19.6 million of interest income on debt securities was excluded from Federal taxation, and $6.1 million was excluded from state taxation.
Deposits
Our deposits averaged $17.93 billion for the year ended December 31, 2022 and $13.73 billion for 2021. Total deposits increased $3.68 billion, or 25.8%, to $17.94 billion as of December 31, 2022, from $14.26 billion as of December 31, 2021. Uninsured deposits including related interest accrued and unpaid were $9.06 billion as of December 31, 2022 compared to $5.66 billion as of December 31, 2021. Deposits are our primary source of funds. We offer a variety of products designed to attract and retain deposit customers. Those products consist of checking accounts, regular savings deposits, NOW accounts, money market accounts and certificates of deposit. Deposits are gathered from individuals, partnerships and corporations in our market areas. In addition, we obtain deposits from state and local entities and, to a lesser extent, U.S. Government and other depository institutions.
Our policy also permits the acceptance of brokered deposits. From time to time, when appropriate in order to fund strong loan demand, we accept brokered time deposits, generally in denominations of less than $250,000, from a regional brokerage firm, and other national brokerage networks. We also participate in the One-Way Buy Insured Cash Sweep (“ICS”) service and similar services, which provide for one-way buy transactions among banks for the purpose of purchasing cost-effective floating-rate funding without collateralization or stock purchase requirements. Management believes these sources represent a reliable and cost-efficient alternative funding source for the Company. However, to the extent that our condition or reputation deteriorates, or to the extent that there are significant changes in market interest rates which we do not elect to match, we may experience an outflow of brokered deposits. In that event we would be required to obtain alternate sources for funding.
Table 18 reflects the classification of the brokered deposits as of December 31, 2022 and 2021.
Table 18: Brokered Deposits
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (In thousands) |
Time Deposits | $ | — | | | $ | — | |
| | | |
Insured Cash Sweep and Other Transaction Accounts | 476,630 | | | 625,704 | |
Total Brokered Deposits | $ | 476,630 | | | $ | 625,704 | |
The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. We will continue to manage interest expense through deposit pricing. We may allow higher rate deposits to run off during periods of limited loan demand. We believe that additional funds can be attracted, and deposit growth can be realized through deposit pricing if we experience increased loan demand or other liquidity needs.
The Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. In 2020, the Federal Reserve lowered the target rate to 0.00% to 0.25%. This remained in effect throughout all of 2021. The Federal Reserve increased the target rate seven times during 2022. First, on March 16, 2022, the target rate was increased to 0.25% to 0.50%. Second, on May 4, 2022, the target rate was increased to 0.75% to 1.00%. Third, on June 15, 2022, the target rate was increased to 1.50% to 1.75%. Fourth, on July 27, 2022, the target rate was increased to 2.25% to 2.50%. Fifth, on September 21, 2022, the target rate was increased to 3.00% to 3.25%. Sixth, on November 2, 2022, the target rate was increased to 3.75% to 4.00%. Seventh, on December 14, 2022, the target rate was increased to 4.25% to 4.50%. The Federal Reserve increased the target rate to 4.50% to 4.75% on February 1, 2023.
Table 19 reflects the classification of the average deposits and the average rate paid on each deposit category which is in excess of 10 percent of average total deposits, for the years ended December 31, 2022, 2021, and 2020.
Table 19: Average Deposit Balances and Rates
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Average Amount | | Average Rate Paid | | Average Amount | | Average Rate Paid | | Average Amount | | Average Rate Paid |
| (Dollars in thousands) |
Non-interest-bearing transaction accounts | $ | 5,378,906 | | | — | % | | $ | 3,924,341 | | | — | % | | $ | 2,998,560 | | | — | % |
Interest-bearing transaction accounts | 10,146,537 | | | 0.77 | | | 7,846,618 | | | 0.20 | | | 6,978,839 | | | 0.50 | |
Savings deposits | 1,374,244 | | | 0.22 | | | 869,386 | | | 0.06 | | | 707,782 | | | 0.13 | |
Time deposits: | | | | | | | | | | | |
$100,000 or more | 631,276 | | | 0.53 | | | 728,845 | | | 1.00 | | | 1,346,063 | | | 1.70 | |
Other time deposits | 402,155 | | | 0.39 | | | 359,030 | | | 0.47 | | | 410,075 | | | 1.02 | |
Total | $ | 17,933,118 | | | 0.48 | % | | $ | 13,728,220 | | | 0.18 | % | | $ | 12,441,319 | | | 0.51 | % |
Table 20 presents our maturities of time deposits as of December 31, 2022 and December 31, 2021.
Table 20: Maturities of Time Deposits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Insured | | Uninsured | | Total | | Insured | | Uninsured | | Total |
| (Dollars in thousands) |
Maturing | | | | | | | | | | | |
Three months or less | $ | 221,967 | | | $ | 83,734 | | | $ | 305,701 | | | $ | 175,573 | | | $ | 90,140 | | | $ | 265,713 | |
Over three months to six months | 144,936 | | | 48,234 | | | 193,170 | | | 111,178 | | | 55,090 | | | 166,268 | |
Over six months to 12 months | 232,475 | | | 123,856 | | | 356,331 | | | 174,136 | | | 95,801 | | | 269,937 | |
Over 12 months | 129,909 | | | 58,123 | | | 188,032 | | | 108,691 | | | 70,278 | | | 178,969 | |
Total | $ | 729,287 | | | $ | 313,947 | | | $ | 1,043,234 | | | $ | 569,578 | | | $ | 311,309 | | | $ | 880,887 | |
Securities Sold Under Agreements to Repurchase
We enter into short-term purchases of securities under agreements to resell (resale agreements) and sales of securities under agreements to repurchase (repurchase agreements) of substantially identical securities. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements are carried on the balance sheet at the amount advanced. Interest incurred on repurchase agreements is reported as interest expense. Securities sold under agreements to repurchase decreased $9.7 million, or 6.9%, from $140.9 million as of December 31, 2021 to $131.1 million as of December 31, 2022.
FHLB and Other Borrowed Funds
The Company’s FHLB borrowed funds, which are secured by our loan portfolio, were $650.0 million and $400.0 million at December 31, 2022 and 2021, respectively. The Company had no other borrowed funds as of December 31, 2022 or December 31, 2021. At December 31, 2022, $50.0 million and $600.0 million of the outstanding balance were classified as short-term and long-term advances, respectively. At December 31, 2021, the entire $400.0 million balance was classified as long term advances. The FHLB advances mature from 2023 to 2033 with fixed interest rates ranging from 2.26% to 4.84% and are secured by loans and investments securities. Expected maturities could differ from contractual maturities because the FHLB has have the right to call or the Company has the right to prepay certain obligations.
Subordinated Debentures
Subordinated debentures, which consist of subordinated debt securities and guaranteed payments on trust preferred securities, were $440.4 million and $371.1 million as of December 31, 2022 and 2021, respectively.
On April 1, 2022, the Company acquired $23.2 million in trust preferred securities from Happy which were currently callable without penalty based on the terms of the specific agreements. During the second and third quarters of 2022, the Company redeemed, without penalty, the $23.2 million of the trust preferred securities acquired from Happy. In addition, during the second and third quarters, the Company also redeemed, without penalty, the $73.3 million of trust preferred securities held prior to the Happy acquisition. As a result, the Company no longer holds any trust preferred securities as of December 31, 2022.
On April 1, 2022, the Company acquired $140.0 million in aggregate principal amount of 5.500% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”) from Happy, and the Company recorded approximately $144.4 million which included fair value adjustments.. The 2030 Notes are unsecured, subordinated debt obligations of the Company and will mature on July 31, 2030. From and including the date of issuance to, but excluding July 31, 2025 or the date of earlier redemption, the 2030 Notes will bear interest at an initial rate of 5.50% per annum, payable in arrears on January 31 and July 31 of each year. From and including July 31, 2025 to, but excluding, the maturity date or earlier redemption, the 2030 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be 3-month Secured Overnight Funding Rate (SOFR)), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2030 Notes, plus 5.345%, payable quarterly in arrears on January 31, April 30, July 31, and October 31 of each year, commencing on October 31, 2025.
The Company may, beginning with the interest payment date of July 31, 2025, and on any interest payment date thereafter, redeem the 2030 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2030 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2030 Notes at any time, including prior to July 31, 2025, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2030 Notes for U.S. federal income tax purposes or preclude the 2030 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2030 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.
On January 18, 2022, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 3.125% Fixed-to-Floating Rate Subordinated Notes due 2032 (the “2032 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $296.4 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. From and including the date of issuance to, but excluding January 30, 2027 or the date of earlier redemption, the 2032 Notes will bear interest at an initial rate of 3.125% per annum, payable in arrears on January 30 and July 30 of each year. From and including January 30, 2027 to, but excluding the maturity date or earlier redemption, the 2032 Notes will bear interest at a floating rate equal to the Benchmark rate (which is expected to be Three-Month Term SOFR), each as defined in and subject to the provisions of the applicable supplemental indenture for the 2032 Notes, plus 182 basis points, payable quarterly in arrears on January 30, April 30, July 30, and October 30 of each year, commencing on April 30, 2027.
The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.
On April 3, 2017, the Company completed an underwritten public offering of $300.0 million in aggregate principal amount of its 5.625% Fixed-to-Floating Rate Subordinated Notes due 2027 (the “2027 Notes”) for net proceeds, after underwriting discounts and issuance costs, of approximately $297.0 million. The 2027 Notes were unsecured, subordinated debt obligations and would have matured on April 15, 2027. From and including the date of issuance to, but excluding April 15, 2022, the 2027 Notes bore interest at an initial rate of 5.625% per annum. From and including April 15, 2022 to, but excluding the maturity date or earlier redemption, the 2027 Notes were to bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination plus a spread of 3.575%; provided, however, that in the event three-month LIBOR was less than zero, then three-month LIBOR would have been deemed to be zero.
The Company, beginning with the interest payment date of April 15, 2022, and on any interest payment date thereafter, was permitted to redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2027 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
Stockholders’ Equity
Stockholders’ equity increased $760.6 million to $3.53 billion as of December 31, 2022, compared to $2.77 billion as of December 31, 2021. The increase in stockholders’ equity is primarily associated with the $961.3 million in common stock issued to Happy shareholders for the acquisition of Happy on April 1, 2022 and $305.3 million in net income, partially offset by the $315.9 million decrease in accumulated other comprehensive income, $128.4 million of shareholder dividends paid and the repurchase of $70.9 million of our common stock during 2022. The improvement in stockholders’ equity was 27.5% for the year ended December 31, 2022 compared to December 31, 2021. As of December 31, 2022 and 2021, our equity to asset ratio was 15.41% and 15.32%, respectively. Book value per common share was $17.33 at December 31, 2022 compared to $16.90 at December 31, 2021.
Common Stock Cash Dividends. We declared cash dividends on our common stock of $0.66, $0.56 and $0.53 per share for the years ended December 31, 2022, 2021 and 2020, respectively. The common stock dividend payout ratio for the year ended December 31, 2022, 2021 and 2020 was 42.07%, 28.88% and 40.88% respectively.
Stock Repurchase Program. On January 22, 2021, the Board of Directors of the Company authorized the repurchase of up to an additional 20,000,000 shares of the Company’s common stock under the previously approved stock repurchase program. During 2022, the Company utilized a portion of this stock repurchase program in order to repurchase a total of 3,098,531 shares with a weighted-average stock price of $22.84 per share. The 2022 earnings were used to fund the repurchases during the year. Shares repurchased under the program as of December 31, 2022 total 20,759,866 shares. The remaining balance available for repurchase was 18,992,134 shares at December 31, 2022.
Liquidity and Capital Adequacy Requirements
Parent Company Liquidity. The primary sources for payment of our operating expenses, and dividends are current cash on hand ($359.6 million as of December 31, 2022), dividends received from our bank subsidiary and a $20.0 million unfunded line of credit with another financial institution.
Risk-Based Capital. We, as well as our bank subsidiary, are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and other discretionary actions by regulators that, if enforced, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings and other factors.
In July 2013, the Federal Reserve Board and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” and certain provisions of the Dodd-Frank Act (“Basel III”). Basel III applies to all depository institutions, bank holding companies with total consolidated assets of $500 million or more, and savings and loan holding companies. Basel III became effective for the Company and its bank subsidiary on January 1, 2015. Basel III limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” of 2.5% of common equity Tier 1 capital to risk-weighted assets, which is in addition to the amount necessary to meet its minimum risk-based capital requirements.
Basel III amended the prompt corrective action rules to incorporate a common equity Tier 1 ("CET1") capital requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization is required to have at least a 4.5% CET1 risk-based capital ratio, a 4% Tier 1 leverage ratio, a 6% Tier 1 risk-based capital ratio and an 8% total risk-based capital ratio.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that, as of December 31, 2022 and December 31, 2021, we met all regulatory capital adequacy requirements to which we were subject.
On January 18, 2022, the Company completed an underwritten public offering of the 2032 Notes in aggregate principal amount of $300.0 million. The 2032 Notes are unsecured, subordinated debt obligations of the Company and will mature on January 30, 2032. The Company may, beginning with the interest payment date of January 30, 2027, and on any interest payment date thereafter, redeem the 2032 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2032 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2032 Notes at any time, including prior to January 30, 2027, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2032 Notes for U.S. federal income tax purposes or preclude the 2032 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2032 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.
On April 1, 2022, the Company acquired $140.0 million in aggregate principal amount of 5.500% Fixed-to-Floating Rate Subordinated Notes due 2030 from Happy, and the Company recorded approximately $144.4 million which included fair value adjustments. The 2030 Notes are unsecured, subordinated debt obligations of the Company and will mature on July 31, 2030. The Company may, beginning with the interest payment date of July 31, 2025, and on any interest payment date thereafter, redeem the 2030 Notes, in whole or in part, subject to prior approval of the Federal Reserve if then required, at a redemption price equal to 100% of the principal amount of the 2030 Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. The Company may also redeem the 2030 Notes at any time, including prior to July 31, 2025, at the Company’s option, in whole but not in part, subject to prior approval of the Federal Reserve if then required, if certain events occur that could impact the Company’s ability to deduct interest payable on the 2030 Notes for U.S. federal income tax purposes or preclude the 2030 Notes from being recognized as Tier 2 capital for regulatory capital purposes, or if the Company is required to register as an investment company under the Investment Company Act of 1940, as amended. In each case, the redemption would be at a redemption price equal to 100% of the principal amount of the 2030 Notes plus any accrued and unpaid interest to, but excluding, the redemption date.
On April 3, 2017, the Company completed an underwritten public offering of the 2027 Notes in aggregate principal amount of $300.0 million. The 2027 Notes were unsecured, subordinated debt obligations and would have matured on April 15, 2027. On April 15, 2022, the Company completed the payoff of the 2027 Notes in aggregate principal amount of $300.0 million. Each 2027 Note was redeemed pursuant to the terms of the Subordinated Indenture, as supplemented by the First Supplemental Indenture, each dated as of April 3, 2017, between the Company and U.S. Bank Trust Company, National Association, the Trustee for the 2027 Notes, at the redemption price of 100% of its principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 27, 2020, the federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows bank holding companies and banks to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. The Company has elected to adopt the interim final rule, which is reflected in the risk-based capital ratios presented below.
Table 21 presents our risk-based capital ratios as of December 31, 2022 and 2021.
Table 21: Risk-Based Capital
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (Dollars in thousands) |
Tier 1 capital | | | |
Stockholders’ equity | $ | 3,526,362 | | | $ | 2,765,721 | |
ASC 326 transitional period adjustment | 24,369 | | | 55,143 | |
Goodwill and core deposit intangibles, net | (1,456,270) | | | (997,605) | |
Unrealized loss (gain) on available-for-sale securities | 305,458 | | | (10,462) | |
Total common equity Tier 1 capital | 2,399,919 | | | 1,812,797 | |
Qualifying trust preferred securities | — | | | 71,270 | |
Total Tier 1 capital | 2,399,919 | | | 1,884,067 | |
Tier 2 capital | | | |
Allowance for credit losses | 289,669 | | | 236,714 | |
ASC 326 transitional period adjustment | (24,369) | | | (55,143) | |
Disallowed allowance for credit losses (limited to 1.25% of risk weighted assets) | (32,184) | | | (33,514) | |
Qualifying allowance for credit losses | 233,116 | | | 148,057 | |
Qualifying subordinated notes | 440,420 | | | 299,824 | |
Total Tier 2 capital | 673,536 | | | 447,881 | |
Total risk-based capital | $ | 3,073,455 | | | $ | 2,331,948 | |
Average total assets for leverage ratio | $ | 22,091,588 | | | $ | 16,960,683 | |
Risk weighted assets | $ | 18,583,293 | | | $ | 11,793,539 | |
Ratios at end of period | | | |
Common equity Tier 1 capital | 12.91 | % | | 15.37 | % |
Leverage ratio | 10.86 | | | 11.11 | |
Tier 1 risk-based capital | 12.91 | | | 15.98 | |
Total risk-based capital | 16.54 | | | 19.77 | |
Minimum guidelines – Basel III | | | |
Common equity Tier 1 capital | 7.00 | % | | 7.00 | % |
Leverage ratio | 4.00 | | | 4.00 | |
Tier 1 risk-based capital | 8.50 | | | 8.50 | |
Total risk-based capital | 10.50 | | | 10.50 | |
Well-capitalized guidelines | | | |
Common equity Tier 1 capital | 6.50 | % | | 6.50 | % |
Leverage ratio | 5.00 | | | 5.00 | |
Tier 1 risk-based capital | 8.00 | | | 8.00 | |
Total risk-based capital | 10.00 | | | 10.00 | |
As of the most recent notification from regulatory agencies, our bank subsidiary was “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized”, we, as well as our banking subsidiary, must maintain minimum CET1 capital, leverage, Tier 1 risk-based capital, and total risk-based capital ratios as set forth in the table. There are no conditions or events since that notification that we believe have changed the bank subsidiary’s category.
Table 22 presents actual capital amounts and ratios as of December 31, 2022 and 2021, for our bank subsidiary and us.
Table 22: Capital and Ratios
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Capital Requirement – Basel III | | Minimum To Be Well-Capitalized Under Prompt Corrective Action Provision |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
As of December 31, 2022 | | | | | | | | | | | |
Common equity Tier 1 capital ratios: | | | | | | | | | | | |
Home BancShares | $ | 2,399,919 | | | 12.91 | % | | $ | 1,300,831 | | | 7.00 | % | | N/A | | N/A |
Centennial Bank | 2,408,756 | | | 13.00 | | | 1,297,352 | | | 7.00 | | | 1,204,684 | | | 6.50 | |
Leverage ratios: | | | | | | | | | | | |
Home BancShares | $ | 2,399,919 | | | 10.86 | % | | $ | 883,664 | | | 4.00 | % | | N/A | | N/A |
Centennial Bank | 2,408,756 | | | 10.93 | | | 881,464 | | | 4.00 | | | 1,101,831 | | | 5.00 | |
Tier 1 capital ratios: | | | | | | | | | | | |
Home BancShares | $ | 2,399,919 | | | 12.91 | % | | $ | 1,579,580 | | | 8.50 | % | | N/A | | N/A |
Centennial Bank | 2,408,756 | | | 13.00 | | | 1,575,356 | | | 8.50 | | | 1,482,688 | | | 8.00 | |
Total risk-based capital ratios: | | | | | | | | | | | |
Home BancShares | $ | 3,073,455 | | | 16.54 | % | | $ | 1,951,246 | | | 10.50 | % | | N/A | | N/A |
Centennial Bank | 2,640,992 | | | 14.25 | | | 1,946,021 | | | 10.50 | | | 1,853,354 | | | 10.00 | |
As of December 31, 2021 | | | | | | | | | | | |
Common equity Tier 1 capital ratios: | | | | | | | | | | | |
Home BancShares | $ | 1,812,797 | | | 15.37 | % | | $ | 825,548 | | | 7.00 | % | | N/A | | N/A |
Centennial Bank | 1,859,093 | | | 15.82 | | | 822,608 | | | 7.00 | | | 763,850 | | | 6.50 | |
Leverage ratios: | | | | | | | | | | | |
Home BancShares | $ | 1,884,067 | | | 11.11 | % | | $ | 678,427 | | | 4.00 | % | | N/A | | N/A |
Centennial Bank | 1,859,093 | | | 10.97 | | | 677,883 | | | 4.00 | | | 847,353 | | | 5.00 | |
Tier 1 capital ratios: | | | | | | | | | | | |
Home BancShares | $ | 1,884,067 | | | 15.98 | % | | $ | 1,002,451 | | | 8.50 | % | | N/A | | N/A |
Centennial Bank | 1,859,093 | | | 15.82 | | | 998,881 | | | 8.50 | | | 940,123 | | | 8.00 | |
Total risk-based capital ratios: | | | | | | | | | | | |
Home BancShares | $ | 2,331,948 | | | 19.77 | % | | $ | 1,238,322 | | | 10.50 | % | | N/A | | N/A |
Centennial Bank | 2,006,814 | | | 17.08 | | | 1,233,697 | | | 10.50 | | | 1,174,950 | | | 10.00 | |
Cash Commitments and Resources
In the normal course of business, we enter into a number of financial commitments. Examples of these commitments include but are not limited to operating lease obligations, FHLB advances & other borrowings, lines of credit, subordinated debentures, unfunded loan commitments and letters of credit.
Commitments to extend credit and letters of credit are legally binding, conditional agreements generally having certain expiration or termination dates. These commitments generally require customers to maintain certain credit standards and are established based on management’s credit assessment of the customer. The commitments may expire without being drawn upon. Therefore, the total commitment does not necessarily represent future requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $184.6 million and $110.8 million at December 31, 2022 and 2021, respectively, with the majority of maturities ranging from currently due to four years.
Table 23 presents the anticipated funding requirements of our most significant financial commitments, excluding interest, as of December 31, 2022.
Table 23: Funding Requirements of Financial Commitments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Less than One Year | | One-Three Years | | Three-Five Years | | Greater than Five Years | | Total |
| (In thousands) |
Operating lease obligations | $ | 8,332 | | | $ | 14,202 | | | $ | 12,173 | | | $ | 24,591 | | | $ | 59,298 | |
FHLB advances & other borrowings by contractual maturity | 50,000 | | | 100,000 | | | 100,000 | | | 400,000 | | | 650,000 | |
Subordinated debentures | — | | | — | | | — | | | 440,420 | | | 440,420 | |
Loan commitments | 1,785,593 | | | 1,443,492 | | | 1,017,474 | | | 585,049 | | | 4,831,608 | |
Letters of credit | 176,776 | | | 7,748 | | | 100 | | | — | | | 184,624 | |
Non-GAAP Financial Measurements
Our accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, this report contains financial information determined by methods other than in accordance with GAAP, including earnings, as adjusted; diluted earnings per common share, as adjusted; tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted.
We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP.
The tables below present non-GAAP reconciliations of earnings, as adjusted, and diluted earnings per share, as adjusted as well as the non-GAAP computations of tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted; tangible equity to tangible assets; and efficiency ratio, as adjusted. The items used in these calculations are included in financial results presented in accordance with GAAP.
Earnings, as adjusted, and diluted earnings per common share, as adjusted, are meaningful non-GAAP financial measures for management, as they exclude certain items such as merger expenses and/or certain gains and losses. Management believes the exclusion of these items in expressing earnings provides a meaningful foundation for period-to-period and company-to-company comparisons, which management believes will aid both investors and analysts in analyzing our financial measures and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of our business, because management does not consider these items to be relevant to ongoing financial performance.
In Table 24 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Table 24: Earnings, As Adjusted
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (In thousands, except per share data) |
GAAP net income available to common shareholders (A) | $ | 305,262 | | | $ | 319,021 | | | $ | 214,448 | |
Adjustments: | | | | | |
Fair value adjustment for marketable securities | 1,272 | | | (7,178) | | | 1,978 | |
Initial provision for credit losses - acquisition | 58,585 | | | — | | | — | |
Gain on securities | — | | | (219) | | | — | |
Recoveries on historic losses | (6,706) | | | (5,107) | | | — | |
Branch write-off expense | — | | | — | | | 981 | |
Special dividend from equity investment | (1,434) | | | (12,500) | | | (10,185) | |
Merger expenses | 49,594 | | | 1,886 | | | 711 | |
Hurricane expenses | 176 | | | — | | | — | |
TRUPS redemption fees | 2,081 | | | — | | | — | |
Special lawsuit settlement, net of expense | (10,000) | | | — | | | — | |
Outsourced special project expense | — | | | — | | | 1,092 | |
Total adjustments | 93,568 | | | (23,118) | | | (5,423) | |
Tax-effect of adjustments(1) | 22,890 | | | (6,225) | | | (1,417) | |
Total adjustments after tax (B) | 70,678 | | | (16,893) | | | (4,006) | |
Earnings, as adjusted (C) | $ | 375,940 | | | $ | 302,128 | | | $ | 210,442 | |
Average diluted shares outstanding (D) | 195,019 | | | 164,858 | | | 165,373 | |
GAAP diluted earnings per share: A/D | $ | 1.57 | | | $ | 1.94 | | | $ | 1.30 | |
Adjustments after-tax: B/D | 0.36 | | | (0.11) | | | (0.03) | |
Diluted earnings per common share excluding adjustments: C/D | $ | 1.93 | | | $ | 1.83 | | | $ | 1.27 | |
_____________________
(1) Blended statutory tax rate of 24.6735% for 2022, 25.740% for 2021 and 26.135% for 2020.
We had $1.46 billion, $998.1 million and $1.00 billion total goodwill, core deposit intangibles and other intangible assets as of December 31, 2022, 2021 and 2020, respectively. Because of our level of intangible assets and related amortization expenses, management believes tangible book value per share; return on average assets, excluding intangible amortization; return on average assets, as adjusted; return on average common equity, as adjusted; return on average tangible equity excluding intangible amortization; return on average tangible equity, as adjusted and tangible equity to tangible assets are useful in evaluating our Company. These calculations, which are similar to the GAAP calculation of diluted earnings per common share, book value, return on average assets, return on average equity, and equity to assets, are presented in Tables 25 through 28, respectively.
Table 25: Tangible Book Value Per Share
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (In thousands, except per share data) |
Book value per share: A/B | $ | 17.33 | | | $ | 16.90 | |
Tangible book value per share: (A-C-D)/B | 10.17 | | | 10.80 | |
(A) Total equity | $ | 3,526,362 | | | $ | 2,765,721 | |
(B) Shares outstanding | 203,434 | | | 163,699 | |
(C) Goodwill | 1,398,253 | | | 973,025 | |
(D) Core deposit intangible | 58,455 | | | 25,045 | |
Table 26: Return on Average Assets Excluding Intangible Amortization
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in thousands) |
Return on average assets: A/D | 1.35 | % | | 1.83 | % | | 1.33 | % |
Return on average assets excluding intangible amortization: (A+B)/(D-E) | 1.47 | | | 1.96 | | | 1.45 | |
Return on average assets excluding fair value adjustment for marketable securities, initial provision for credit losses-acquisition, gain on securities, recoveries on historic losses, branch write-off expense, special dividend from equity investment, merger expenses, hurricane expenses, TRUPS redemption fees, special lawsuit settlement net of expense and outsourced special project expense: (ROA, as adjusted) (A+C)/D | 1.67 | | | 1.73 | | | 1.30 | |
(A) Net income | $ | 305,262 | | | $ | 319,021 | | | $ | 214,448 | |
(B) Intangible amortization after-tax | 6,624 | | | 4,220 | | | 4,317 | |
(C) Adjustments after-tax | 70,678 | | | (16,893) | | | (4,006) | |
(D) Average assets | 22,553,340 | | | 17,458,985 | | | 16,137,294 | |
(E) Average goodwill, core deposits and other intangible assets | 1,335,216 | | | 1,000,872 | | | 1,004,157 | |
Table 27: Return on Average Tangible Equity Excluding Intangible Amortization
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in thousands) |
Return on average equity: A/D | 9.17 | % | | 11.89 | % | | 8.57 | % |
Return on average common equity excluding fair value adjustment for marketable securities, initial provision for credit losses-acquisition, gain on securities, recoveries on historic losses, branch write-off expense, special dividend from equity investment, merger expenses, hurricane expenses, TRUPS redemption fees, special lawsuit settlement net of expense and outsourced special project expense: (ROE, as adjusted) (A+C)/D | 11.29 | | | 11.26 | | | 8.41 | |
Return on average tangible equity excluding intangible amortization: B/(D-E) | 15.63 | | | 19.20 | | | 14.59 | |
Return on average tangible common equity excluding fair value adjustment for marketable securities, initial provision for credit losses-acquisition, gain on securities, recoveries on historic losses, branch write-off expense, special dividend from equity investment, merger expenses, hurricane expenses, TRUPS redemption fees, special lawsuit settlement net of expense and outsourced special project expense: (ROTCE, as adjusted) (A+C)/(D-E) | 18.84 | | | 17.95 | | | 14.04 | |
(A) Net income | $ | 305,262 | | | $ | 319,021 | | | $ | 214,448 | |
(B) Earnings excluding intangible amortization | 311,886 | | | 323,241 | | | 218,765 | |
(C) Adjustments after-tax | 70,678 | | | (16,893) | | | (4,006) | |
(D) Average equity | 3,330,718 | | | 2,684,139 | | | 2,503,200 | |
(E) Average goodwill, core deposits and other intangible assets | 1,335,216 | | | 1,000,872 | | | 1,004,157 | |
Table 28: Tangible Equity to Tangible Assets
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (Dollars in thousands) |
Equity to assets: B/A | 15.41 | % | | 15.32 | % |
Tangible equity to tangible assets: (B-C-D)/(A-C-D) | 9.66 | | | 10.36 | |
(A) Total assets | $ | 22,883,588 | | | $ | 18,052,138 | |
(B) Total equity | 3,526,362 | | | 2,765,721 | |
(C) Goodwill | 1,398,253 | | | 973,025 | |
(D) Core deposit intangible | 58,455 | | | 25,045 | |
The efficiency ratio is a standard measure used in the banking industry and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income. The efficiency ratio, as adjusted, is a meaningful non-GAAP measure for management, as it excludes certain items and is calculated by dividing non-interest expense less amortization of core deposit intangibles by the sum of net interest income on a tax equivalent basis and non-interest income excluding items such as merger expenses and/or certain other gains and losses. In Table 29 below, we have provided a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Table 29: Efficiency Ratio, As Adjusted
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in thousands) |
Net interest income (A) | $ | 758,676 | | | $ | 572,971 | | | $ | 582,555 | |
Non-interest income (B) | 175,111 | | | 137,569 | | | 111,786 | |
Non-interest expense (C) | 475,627 | | | 298,517 | | | 287,385 | |
FTE Adjustment (D) | 8,663 | | | 7,079 | | | 6,015 | |
Amortization of intangibles (E) | 8,853 | | | 5,683 | | | 5,844 | |
Adjustments: | | | | | |
Non-interest income: | | | | | |
Fair value adjustment for marketable securities | $ | (1,272) | | | $ | 7,178 | | | $ | (1,978) | |
Special dividend from equity investment | 1,434 | | | 12,500 | | | 10,185 | |
Gain on OREO, net | 500 | | | 2,003 | | | 1,132 | |
Gain (loss) on branches, equipment and other assets, net | 15 | | | (105) | | | 326 | |
Gain on securities, net | — | | | 219 | | | — | |
Special lawsuit settlement | 15,000 | | | — | | | — | |
Recoveries on historic losses | 6,706 | | | 5,107 | | | — | |
Total non-interest income adjustments (F) | $ | 22,383 | | | $ | 26,902 | | | $ | 9,665 | |
Non-interest expense: | | | | | |
Branch write-off expense | $ | — | | | $ | — | | | $ | 981 | |
TRUPS redemption fees | 2,081 | | | — | | | — | |
Merger expenses | 49,594 | | | 1,886 | | | 711 | |
Hurricane expense | 176 | | | — | | | — | |
Special lawsuit legal expense | 5,000 | | | — | | | — | |
Outsourced special project expense | — | | | — | | | 1,092 | |
Total non-core non-interest expense (G) | $ | 56,851 | | | $ | 1,886 | | | $ | 2,784 | |
Efficiency ratio (reported): ((C-E)/(A+B+D)) | 49.53 | % | | 40.81 | % | | 40.20 | % |
Efficiency ratio, as adjusted (non-GAAP): ((C-E-G)/(A+B+D-F)) | 44.55 | | | 42.12 | | | 40.36 | |
Table 30 presents selected unaudited quarterly financial information for 2022 and 2021.
Table 30: Quarterly Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Quarters |
| First | | Second | | Third | | Fourth | | Total |
| (In thousands, except per share data) |
Income statement data: | | | | | | | | | |
Total interest income | $ | 144,903 | | | $ | 217,013 | | | $ | 242,955 | | | $ | 272,895 | | | $ | 877,766 | |
Total interest expense | 13,755 | | | 18,255 | | | 29,851 | | | 57,229 | | | $ | 119,090 | |
Net interest income | 131,148 | | | 198,758 | | | 213,104 | | | 215,666 | | | 758,676 | |
Provision for credit losses | — | | | 58,585 | | | — | | | 5,000 | | | 63,585 | |
Net interest income after provision for credit losses | 131,148 | | | 140,173 | | | 213,104 | | | 210,666 | | | 695,091 | |
Total non-interest income | 30,669 | | | 44,581 | | | 43,201 | | | 56,660 | | | 175,111 | |
Total non-interest expense | 76,896 | | | 165,482 | | | 114,346 | | | 118,903 | | | 475,627 | |
Income before income taxes | 84,921 | | | 19,272 | | | 141,959 | | | 148,423 | | | 394,575 | |
Income tax expense | 20,029 | | | 3,294 | | | 33,254 | | | 32,736 | | | 89,313 | |
Net income | $ | 64,892 | | | $ | 15,978 | | | $ | 108,705 | | | $ | 115,687 | | | $ | 305,262 | |
Per share data: | | | | | | | | | |
Basic earnings per common share | $ | 0.40 | | | $ | 0.08 | | | $ | 0.53 | | | $ | 0.57 | | | $ | 1.57 | |
Diluted earnings per common share | 0.40 | | | 0.08 | | | 0.53 | | | 0.57 | | | 1.57 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 Quarters |
| First | | Second | | Third | | Fourth | | Total |
| (In thousands, except per share data) |
Income statement data: | | | | | | | | | |
Total interest income | $ | 162,651 | | | $ | 154,481 | | | $ | 157,060 | | | $ | 150,979 | | | $ | 625,171 | |
Total interest expense | 14,563 | | | 13,229 | | | 12,449 | | | 11,959 | | | 52,200 | |
Net interest income | 148,088 | | | 141,252 | | | 144,611 | | | 139,020 | | | 572,971 | |
Provision for credit losses | — | | | (4,752) | | | — | | | — | | | (4,752) | |
Net interest income after provision for credit losses | 148,088 | | | 146,004 | | | 144,611 | | | 139,020 | | | 577,723 | |
Total non-interest income | 45,276 | | | 31,120 | | | 29,209 | | | 31,964 | | | 137,569 | |
Total non-interest expense | 72,866 | | | 72,982 | | | 75,619 | | | 77,050 | | | 298,517 | |
Income before income taxes | 120,498 | | | 104,142 | | | 98,201 | | | 93,934 | | | 416,775 | |
Income tax expense | 28,896 | | | 25,072 | | | 23,209 | | | 20,577 | | | 97,754 | |
Net income | $ | 91,602 | | | $ | 79,070 | | | $ | 74,992 | | | $ | 73,357 | | | $ | 319,021 | |
Per share data: | | | | | | | | | |
Basic earnings per common share | $ | 0.55 | | | $ | 0.48 | | | $ | 0.46 | | | $ | 0.45 | | | $ | 1.94 | |
Diluted earnings per common share | 0.55 | | | 0.48 | | | 0.46 | | | 0.45 | | | 1.94 | |
Recent Accounting Pronouncements
See Note 24 to the Notes to Consolidated Financial Statements for a discussion of certain recent accounting pronouncements.