Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition
Critical Accounting Policies
The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for loan losses, intangible assets, and the fair value and discount accretion of acquired loans are three policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements.
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.
As previously noted, and as permitted by the CARES Act, we elected to defer the implementation of CECL until the earlier of the cessation of the national emergency or December 31, 2020 because of the challenges associated with developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Accordingly, the Company's provision for loan losses for the first quarter of 2020 is based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses and the remaining discussion below is based on that methodology. Upon the adoption of CECL, the Company expects its allowance for credit losses related to all financial assets will increase to approximately $40-$44 million as of January 1, 2020 compared to its allowance for loan losses at December 31, 2019 of approximately $21 million. As previously discussed, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.
Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on individually evaluated “impaired loans.” A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the original loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled debt restructured status, purchased credit impaired status, and type of collateral) and the loan is determined to be impaired. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.
The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk grade and estimated loss percentages are assigned to each loan pool based on historical losses. The historical loss percentages are then adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not captured by historical data.
The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for general reserve loans. This becomes our “allocated allowance.” The allocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to absorb losses inherent in the portfolio is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded. Any remaining difference between the allocated allowance and the actual allowance for loan losses recorded on our books is our “unallocated allowance.”
Purchased loans are recorded at fair value at the acquisition date. Therefore, amounts deemed uncollectible at the acquisition date represent a discount to the loan value and become a part of the fair value calculation. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase
in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan and this accretion is referred to as “loan discount accretion.”
Within the purchased loan portfolio, loans are deemed purchased credit impaired at acquisition if the bank believes it will not be able to collect all contractual cash flows. Performing loans with an unamortized discount or premium that are not deemed purchased credit impaired are considered to be purchased performing loans. Purchased credit impaired loans are individually evaluated as impaired loans, as described above, while purchased performing loans are evaluated as general reserve loans. For purchased performing loan pools, any computed allowance that is in excess of remaining net discounts is a component of the allocated allowance.
Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.
For further discussion, see “Nonperforming Assets” and “Summary of Loan Loss Experience” below.
See "Allowance for Loan Losses and Loan Loss Experience" for additional discussion.
Intangible Assets
Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements.
When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.
The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency or a consulting firm, as we did in 2016 and 2017, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis. For SBA Complete, the consulting firm we acquired in 2016, the identifiable intangible asset related to the customer list was determined to have a life of approximately seven years, with amortization occurring on a straight-line basis.
Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, with the annual evaluation occurring on October 31 of each year, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill. We have three reporting units – 1) First Bank with $222.7 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.
In our 2019 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units was not impaired. Additionally, during the period ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis. In this analysis, the Company determined that none of it's goodwill was impaired as of March 31, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.
We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.
Fair Value and Discount Accretion of Acquired Loans
We consider the determination of the initial fair value of acquired loans and the subsequent discount accretion of the purchased loans to involve a high degree of judgment and complexity.
We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant accounting guidance. However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods. Because of inherent credit losses and interest rate marks associated with acquired loans, the amount that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. For non-impaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for accounting for loan origination fees and costs.
For purchased credit-impaired (“PCI”) loans, the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans using the effective yield method, provided that the timing and the amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
Subsequent to an acquisition, estimates of cash flows expected to be collected are updated periodically based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If there is a decrease in cash flows expected to be collected, the provision for loan losses is charged, resulting in an increase to the allowance for loan losses. If the Company has a probable increase in cash flows expected to be collected, we will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the loan. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income.
Current Accounting Matters
See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted and accounting standards that are pending adoption.
Recent Developments: COVID-19
In March 2020, the outbreak of the Coronavirus Disease 2019 (COVID-19) was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has caused economic and social disruption resulting in unprecedented uncertainty, volatility and disruption in financial markets, and has placed significant health, economic and other major pressures throughout the communities we serve, the United States and globally. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, material decreases in oil and gas prices and in business valuations, changes in consumer behavior related to pandemic fears, and aggressive measures by the federal government.
On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board, and other federal banking agencies may or are required to implement. Further, in response to the COVID-19 outbreak, the Federal Reserve Board has implemented or announced a number of facilities to provide emergency liquidity to various segments of the U.S. economy and financial market.
Under the CARES Act, financial institutions are permitted to delay the implementation of ASU 2016-13, Financial Instruments - Credit Losses (CECL) until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company has elected such provision and will defer the adoption of CECL until such time that has occurred with an effective retrospective implementation date of January 1, 2020. Refer to Note 1, Accounting Policies, to the Company's consolidated financial statements included elsewhere in this report. Additionally, in a related action to the CARES Act, the joint federal bank regulatory agencies issued an interim final rule effective March 31, 2020, that allows banking organizations that implement CECL this year to elect to mitigate the effects of the CECL accounting standard on their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. Upon such point of adoption of CECL during 2020, the Company will likely elect to defer the regulatory capital effects of CECL in accordance with the interim final rule.
The CARES Act also includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Under these terms, as of March 31, 2020, the Company had processed payment deferrals for 315 loans with an aggregate loan balance of $120 million. Through April 30, 2020, the number of deferrals increased to 1,269 with an aggregate loan balance of $647 million. These deferrals were generally no more than 90 days in duration.
In response to the pandemic, the Company has implemented a number of procedures to support the safety and well-being of its employees, customers and shareholders. In addition, the Company has taken deliberate actions to ensure the continued health and strength of its balance sheet in order to serve its clients and communities.
Employees, Customers and Communities
The Company is supporting the health and safety of its employees and customers, and complying with government directives, through responsible operations administered under its Board approved business continuity plan and protocols:
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All branches currently operate on a "drive-thru only" basis, except by appointment.
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•
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The Company has implemented an employee work-from-home plan where possible.
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•
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Extra precautions are being taken to safeguard health and safety in branch facilities.
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•
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The Company is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. In April and
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early May 2020, the Company approved 2,799 PPP loans totaling approximately $249.5 million under the allocation approved by Congress.
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The Company has implemented a short-term deferral modification program that complies with federal banking regulator's interagency guidance and is working with borrowers effected by COVID-19 on a case by case basis. Under these terms, as of March 31, 2020, the Company had processed payment deferrals for 315 loans with an aggregate loan balance of $120 million. Through April 30, 2020, the number of deferrals increased to 1,269 with an aggregate loan balance of $647 million. These deferrals were generally no more than 90 days in duration.
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Capital, Liquidity & Credit
Capital remains strong, with ratios of the Company, and its subsidiary bank, well above the standards to be considered well-capitalized under regulatory requirements.
Liquidity has increased since the onset of the pandemic, with the Company experiencing increases in deposits and in its cash levels. Management considers the Company's current liquidity position to be adequate to meet short-term and long-term liquidity needs.
Asset quality remains solid, with nonperforming assets to total assets amounting to 0.60% at March 31, 2020 compared to 0.62% at December 31, 2019.
The Company identified several loan portfolio categories totaling approximately $553 million that it considered to be most “at-risk” from the COVID-19 pandemic, including hotels, restaurants, retail stores, travel accommodations, child care facilities, arts and entertainment, barber shops and beauty salons, car and boat dealers, and mini-storage facilities, as well as all credit cards. As a result the analysis, the Company recorded an approximately $4.3 million COVID-19 related provision for loan losses, which brought the total provision for loan losses to $5.6 million for the three months ended March 31, 2020. The amount was determined as if the risk grades for the loans in these portfolios had been adjusted downwards and then applying historical loss rates associated with those risk grades.
FINANCIAL OVERVIEW
Net income amounted to $18.2 million, or $0.62 per diluted common share, for the three months ended March 31, 2020, a decrease of 17.3% in earnings per share from the $22.3 million, or $0.75 per diluted common share, recorded in the first quarter of 2019.
The decrease in earnings was primarily due to an increase in the provision for loan losses, which amounted to $5.6 million in the first quarter of 2020 compared to $0.5 million in the first quarter of 2019. The 2020 amount reflects approximately $4.3 million in provision related to COVID-19. As permitted by the CARES Act, the Company elected to defer the implementation of the Current Expected Credit Loss (CECL) methodology. Accordingly, our provision for loan losses for the first quarter of 2020 is based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, and calculated under the pre-CECL incurred loss methodology for determining loan losses. See further discussion below.
Net Interest Income and Net Interest Margin
Net interest income for the first quarter of 2020 was $54.8 million, a 2.6% increase from the $53.4 million recorded in the first quarter of 2019. The increase in net interest income was primarily due to growth in interest-earning assets, which have increased by approximately 4% over the past year, but was partially offset by a lower net interest margin.
Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) for the first quarter of 2020 was 3.96%, which was 10 basis points lower than the 4.06% realized in the first quarter of 2019. The lower margin was primarily due to the impact of lower interest rates. Since August 2019, the Federal Reserve Board has decreased interest rates by 225 basis points, which resulted in asset yields declining by 20 basis points from the first quarter of 2019, while our cost of funds declined by 10 basis points.
Provision for Loan Losses and Asset Quality
As previously noted, we deferred implementation of CECL and recorded a provision for loan losses of $5.6 million in the first quarter of 2020 compared to a provision for loan losses of $0.5 million in the first quarter of 2019. The 2020 amount reflects approximately $4.3 million in provision related to COVID-19 and was based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses. See "Summary of Loan Loss Experience" for more discussion.
Total net charge-offs for the first quarter of 2020 amounted to $2.5 million, or 0.22% of average loans, compared to net charge-offs of $0.4 million, or 0.04% of average loans, in the first quarter of 2019. Approximately $1.7 million of the first quarter charge-offs had been previously specifically reserved for at December 31, 2019. Total nonperforming assets amounted to $38.3 million at March 31, 2020 compared to $37.8 million at December 31, 2019.
Noninterest Income
Total noninterest income was $13.7 million and $14.1 million for the three months ended March 31, 2020 and 2019, respectively.
The line item "Other service charges, commissions, and fees" includes $0.5 million of impairment of our SBA servicing asset due to the lower fair value of that asset resulting from market conditions at March 31, 2020. Fees from presold mortgages amounted to $1.8 million for the first quarter of 2020 compared to $0.5 million in the first quarter of 2019, with the increase being primarily due to lower interest rates that resulted in increases in mortgage loan volume.
SBA loan sale gains amounted to $0.6 million for the first quarter of 2020 compared to $2.1 million in the first quarter of 2019. We had intended to sell an additional $18.4 million of SBA loans in the first quarter of 2020, however sales scheduled to occur in late March did not occur due to market conditions. Accordingly, we have reflected those loans as "held for sale" in the accompanying Balance Sheet.
Noninterest Expenses
Noninterest expenses amounted to $40.1 million in the first quarter of 2020 compared to $38.8 million recorded in the first quarter of 2019, an increase of 3.4%.
Income Taxes
Our effective tax rate was 20.3% for the first quarter of 2020, compared to 20.9% in the first quarter of 2019.
Balance Sheet and Capital
Total assets at March 31, 2020 amounted to $6.4 billion. Loan growth for the three months ended March 31, 2020 amounted to $99.2 million, or 9.0% annualized, and deposit growth amounted to $113.6 million, or 9.3% annualized.
We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at March 31, 2020 of 14.51%.
Components of Earnings
Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended March 31, 2020 amounted to $54.8 million, an increase of $1.4 million, or 2.6%, from the $53.4 million recorded in the first quarter of 2019. Net interest income on a tax-equivalent basis for the three month period ended March 31, 2020 amounted to $55.1 million, an increase of $1.3 million, or 2.4%, from the $53.8 million recorded in the first quarter of 2019. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.
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Three Months Ended March 31,
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($ in thousands)
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2020
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2019
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Net interest income, as reported
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$
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54,759
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53,361
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Tax-equivalent adjustment
|
334
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|
|
424
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Net interest income, tax-equivalent
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$
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55,093
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53,785
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There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).
For the three months ended March 31, 2020, the higher net interest income compared to the same period of 2019 was primarily due to growth in interest-earning assets.
The following table presents an analysis of net interest income.
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For the Three Months Ended March 31,
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2020
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2019
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($ in thousands)
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Average
Volume
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Average
Rate
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Interest
Earned
or Paid
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Average
Volume
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Average
Rate
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Interest
Earned
or Paid
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Assets
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Loans (1)
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$
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4,512,893
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4.93
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%
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$
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55,297
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$
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4,280,272
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5.11
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%
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$
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53,960
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Taxable securities
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834,528
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2.64
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%
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5,474
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651,878
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2.95
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%
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4,737
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Non-taxable securities
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21,719
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3.04
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%
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164
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45,752
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2.99
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%
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337
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Short-term investments, primarily overnight funds
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226,797
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1.95
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%
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1,098
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394,864
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2.77
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%
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2,701
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Total interest-earning assets
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5,595,937
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4.46
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%
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62,033
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5,372,766
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4.66
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%
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61,735
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Cash and due from banks
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63,218
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55,899
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Premises and equipment
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114,323
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118,911
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Other assets
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409,620
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397,473
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Total assets
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$
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6,183,098
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$
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5,945,049
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Liabilities
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Interest bearing checking
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$
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899,004
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0.18
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%
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|
$
|
408
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|
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908,039
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0.15
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%
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$
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327
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Money market deposits
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1,203,129
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0.56
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%
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1,683
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1,056,931
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0.54
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%
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|
1,395
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Savings deposits
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426,225
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0.25
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%
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|
269
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426,843
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0.27
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%
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|
287
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Time deposits >$100,000
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644,113
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1.83
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%
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2,924
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712,540
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1.81
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%
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3,178
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Other time deposits
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250,860
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|
0.78
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%
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|
489
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263,171
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0.60
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%
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|
390
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Total interest-bearing deposits
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3,423,331
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0.68
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%
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5,773
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3,367,524
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0.67
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%
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|
5,577
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Borrowings
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316,136
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1.91
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%
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|
1,501
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406,190
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2.79
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%
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|
2,797
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Total interest-bearing liabilities
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3,739,467
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0.78
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%
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|
7,274
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|
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3,773,714
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|
0.90
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%
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|
8,374
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Noninterest bearing checking
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1,526,868
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|
|
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1,336,707
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Other liabilities
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58,171
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|
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|
|
|
59,569
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Shareholders’ equity
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858,592
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775,059
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Total liabilities and
shareholders’ equity
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$
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6,183,098
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$
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5,945,049
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Net yield on interest-earning assets and net interest income
|
|
|
3.94
|
%
|
|
$
|
54,759
|
|
|
|
|
4.03
|
%
|
|
$
|
53,361
|
|
Net yield on interest-earning assets and net interest income – tax-equivalent (2)
|
|
|
3.96
|
%
|
|
$
|
55,093
|
|
|
|
|
4.06
|
%
|
|
$
|
53,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
3.68
|
%
|
|
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average prime rate
|
|
|
4.42
|
%
|
|
|
|
|
|
5.50
|
%
|
|
|
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2) Includes tax-equivalent adjustments of $334,000 and $424,000 in 2020 and 2019, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.
Average loans outstanding for the first quarter of 2020 were $4.513 billion, which was $233 million, or 5.4%, higher than the average loans outstanding for the first quarter of 2019 ($4.280 billion). The higher amount of average loans outstanding in 2020 was primarily due to our loan growth initiatives, including our continued focus and expansion into higher growth markets, our hiring of experienced bankers and our emphasis on SBA lending.
In late 2018 and early 2019, in order to reduce exposure to the possibility of lower interest rates, we invested a portion of our interest-bearing cash balances into fixed rate investment securities. As a result, as shown in the
tables above, our average balance of taxable securities grew by $183 million, or 28.0% when comparing the first quarter of 2020 to the first quarter of 2019.
The increases in loans and securities were partially funded from the banks overnight funds, which declined for the periods in 2020 compared to 2019, as shown in the tables above. However the larger source of funding arose from growth in our deposit balances, as discussed in the following paragraph.
Average total deposits outstanding for the first quarter of 2020 were $4.950 billion, which was $246 million, or 5.2%, higher than the average deposits outstanding for the first quarter of 2019 ($4.704 billion). We continue to implement strategies to grow deposits, which we believe to be the principal reason for the increases in our deposit balances. Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $3.729 billion during the first three months of 2019 to $4.055 billion during the first three months of 2020, representing growth of $327 million, or 8.8%.
See additional information regarding changes in our loans and deposits in the section below entitled “Financial Condition.”
Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the first quarter of 2020 was 3.96%, which was 10 basis points lower than the 4.06% realized in the first quarter of 2019. The lower margin was primarily due to the impact of lower interest rates, which were partially offset by higher loan discount accretion.
We recorded loan discount accretion of $1.8 million in the first quarter of 2020, compared to $1.4 million in the first quarter of 2019. The higher loan discount accretion was attributable loan payoffs and higher accretion on SBA loans.
As derived from the table above, in comparing 2020 to 2019, interest-earning asset yields decreased 20 basis points in the first quarter of 2020 compared to the first quarter of 2019, while interest-bearing liability costs decreased by 12 basis points over that same period. Since August 2019, the Federal Reserve Board has decreased interest rates by 225 basis points, which resulted in significant declines in our asset yields. We have been able to reduce our deposit costs, but not to the same level as the reduction experienced in our asset yields.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
We recorded a provision for loan losses of $5.6 million in the first quarter of 2020 compared to a provision for loan losses of $0.5 million in the first quarter of 2019. As previously discussed, our provision for loan losses in 2020 reflects approximately $4.3 million in provision related to COVID-19 and was based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses.
Nonperforming assets amounted to $38.3 million at March 31, 2020 compared to $37.8 million at December 31, 2019. Our nonperforming assets to total assets ratio was 0.60% at March 31, 2020 compared to 0.62% at December 31, 2019. The ratio of annualized net charge-offs to average loans for the three months ended March 31, 2020 was 0.22%, compared to 0.04% for the same period of 2019.
Total noninterest income was $13.7 million and $14.1 million for the three months ended March 31, 2020 and 2019, respectively.
Service charges on deposit accounts increased from $2.9 million in the first quarter of 2019 to $3.3 million in the first quarter of 2020, an increase that we believe is due to promotion of new deposit products.
Other service charges, commissions, and fees decreased in 2020 compared to 2019, primarily due to a $0.5 million impairment recorded on our SBA servicing asset due to the lower fair value of that asset resulting from market conditions at March 31, 2020.
Fees from presold mortgages increased significantly from $0.5 million in the first quarter of 2019 to $1.8 million in the first quarter of 2020. The higher fees in 2020 are due to hiring additional originators, as well a increased volumes in the mortgage industry due to declining interest rates.
Commissions from sales of insurance and financial products did not vary significantly for the periods presented, amounting to approximately $2.1 million and $2.0 million for the first quarters of 2020 and 2019, respectively.
Both SBA consulting fees and SBA loans sale gains were lower in 2020 compared to 2019. For the three months ended March 31, 2020, SBA consulting fees amounted to $1.0 million compared to $1.3 million in the first quarter of 2019. As it relates to SBA loan sale gains, we recorded $0.6 million for the first quarter of 2020 compared to $2.1 million for the first quarter of 2019. The declines in both of these SBA items was due to lower origination activity. Additionally, we had $18.4 million in SBA loans that we intended to sell in March 2020, but the sales scheduled to occur in late March did not occur due to market conditions. Accordingly, we reflect those loans as "held for sale" in our Consolidated Balance Sheets.
Noninterest expenses amounted to $40.1 million in the first quarter of 2020, a 3.4% increase from the $38.8 million recorded in the first quarter of 2019.
Personnel expense increased 4.7% to $24.7 million in the first quarter of 2020 from $23.6 million in the first quarter of 2019. The increase in 2020 was primarily due to the Company's growth initiatives.
The combined amount of occupancy and equipment expense did not vary significantly among the periods presented, amounting $4.1 million for both three month periods.
Intangibles amortization expense decreased from $1.3 million in the first quarter of 2019 to $1.1 million in the first quarter of 2020. The decline was primarily a result of the amortization of intangible assets associated with acquisitions that typically have amortization schedules that decline over time.
Other operating expenses amounted to $10.1 million for the first quarter of 2020 compared to $9.4 million in the first quarter of 2019, an increase of 7.3%. The increase was primarily due to increased software and supplies costs in 2020.
For the three months ended March 31, 2020 and 2019, the provision for income taxes was $4.6 million, an effective tax rate of 20.3%, and $5.9 million, an effective tax rate of 20.9%, respectively.
The consolidated statements of comprehensive income reflect other comprehensive income of $16.1 million during the first quarter of 2020 compared to other comprehensive income of $4.7 million during the first quarter of 2019. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains of our available for sale securities resulting from declines in interest rates. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.
FINANCIAL CONDITION
Total assets at March 31, 2020 amounted to $6.4 billion, a 3.8% increase from December 31, 2019. Total loans at March 31, 2020 amounted to $4.6 billion, a 2.2% increase from December 31, 2019, and total deposits amounted to $5.0 billion, a 2.3% increase from December 31, 2019.
The following table presents information regarding the nature of changes in our levels of loans and deposits for the first three months of 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in thousands
|
|
|
|
|
|
|
|
|
January 1, 2020 to
March 31, 2020
|
|
Balance at
beginning
of period
|
|
Internal
Growth,
net
|
|
Balance at
end of
period
|
|
Total
percentage
growth
|
Total loans
|
|
$
|
4,453,466
|
|
|
99,242
|
|
|
4,552,708
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
Deposits – Noninterest bearing checking
|
|
1,515,977
|
|
|
64,872
|
|
|
1,580,849
|
|
|
4.3
|
%
|
Deposits – Interest bearing checking
|
|
912,784
|
|
|
10,201
|
|
|
922,985
|
|
|
1.1
|
%
|
Deposits – Money market
|
|
1,173,107
|
|
|
51,307
|
|
|
1,224,414
|
|
|
4.4
|
%
|
Deposits – Savings
|
|
424,415
|
|
|
6,962
|
|
|
431,377
|
|
|
1.6
|
%
|
Deposits – Brokered
|
|
86,141
|
|
|
(499
|
)
|
|
85,642
|
|
|
(0.6
|
)%
|
Deposits – Internet time
|
|
698
|
|
|
—
|
|
|
698
|
|
|
—
|
%
|
Deposits – Time>$100,000
|
|
563,108
|
|
|
(9,686
|
)
|
|
553,422
|
|
|
(1.7
|
)%
|
Deposits – Time<$100,000
|
|
255,125
|
|
|
(9,524
|
)
|
|
245,601
|
|
|
(3.7
|
)%
|
Total deposits
|
|
$
|
4,931,355
|
|
|
113,633
|
|
|
5,044,988
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
As derived from the table above, for the first three months of 2020, loan growth was $99.2 million, or 2.2% (9.0% on an annualized basis). Loan growth for the period was organic and driven by our continued expansion into high-growth markets, our hiring of experienced bankers and our emphasis on SBA lending. We expect continued growth in our loan portfolio for the remainder of 2020. In April and early May 2020, the Company approved approximately $249.5 million in PPP loans under the allocation approved by Congress.
The mix of our loan portfolio remains substantially the same at March 31, 2020 compared to December 31, 2019. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Note 7 to the consolidated financial statements presents additional detailed information regarding our mix of loans.
For the three month period ended March 31, 2020, we experienced internal growth in our core deposit accounts (checking, money market and savings). We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.
Our liquidity levels have increased over the past year. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 21.4% at December 31, 2019 to 22.8% at March 31, 2020.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, restructured loans, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows:
|
|
|
|
|
|
|
|
|
ASSET QUALITY DATA ($ in thousands)
|
|
As of/for the quarter ended March 31, 2020
|
|
As of/for the quarter ended December 31, 2019
|
Nonperforming assets
|
|
|
|
|
Nonaccrual loans
|
|
$
|
25,066
|
|
|
24,866
|
|
Restructured loans – accruing
|
|
9,747
|
|
|
9,053
|
|
Accruing loans >90 days past due
|
|
—
|
|
|
—
|
|
Total nonperforming loans
|
|
34,813
|
|
|
33,919
|
|
Foreclosed real estate
|
|
3,487
|
|
|
3,873
|
|
Total nonperforming assets
|
|
$
|
38,300
|
|
|
37,792
|
|
|
|
|
|
|
Purchased credit impaired loans not included above (1)
|
|
$
|
9,839
|
|
|
12,664
|
|
|
|
|
|
|
Asset Quality Ratios – All Assets
|
|
|
|
|
Net charge-offs to average loans - annualized
|
|
0.22
|
%
|
|
0.09
|
%
|
Nonperforming loans to total loans
|
|
0.76
|
%
|
|
0.76
|
%
|
Nonperforming assets to total assets
|
|
0.60
|
%
|
|
0.62
|
%
|
Allowance for loan losses to total loans
|
|
0.54
|
%
|
|
0.48
|
%
|
Allowance for loan losses to nonperforming loans
|
|
70.37
|
%
|
|
63.09
|
%
|
|
|
(1) In the March 3, 2017 acquisition of Carolina Bank and the October 1, 2017 acquisition of Asheville Savings Bank, we acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts, including $0.7 million and $0.8 million in PCI loans at March 31, 2020 and December 31, 2019, respectively, that were contractually past due 90 days or more.
|
Due to the onset of the COVID-19 pandemic not occurring until late in the first quarter of 2020, the nonperforming asset amounts in the table above were not impacted by the pandemic, and loans for which the the Company has granted payment deferrals under the COVID-19 relief provisions previously discussed are not included in the table above or in the Company's past due amounts disclosed elsewhere in this document. While there are still many uncertainties associated with the pandemic and the stimulus measures taken by the United States government to address it, higher unemployment levels and business closures would generally be expected to result in higher levels of nonperformining assets in the future.
We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for loan losses discussed below.
As noted in the table above, at March 31, 2020, total nonaccrual loans amounted to $25.1 million, compared to $24.9 million at December 31, 2019. The increase was primarily driven by SBA loans that were placed on nonaccrual status in 2020.
Restructured loans (TDRs) are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At March 31, 2020, total accruing TDRs amounted to $9.7 million, compared to $9.1 million at December 31, 2019. As previously discussed, COVID-19 related deferrals, which amounted to $120 million at March 31, 2020 are excluded from TDR consideration at March 31, 2020.
Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $3.5 million at March 31, 2020 and $3.9 million at December 31, 2019. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and the improvement in our overall asset quality.
The following is the composition, by loan type, of all of our nonaccrual loans at each period end.
|
|
|
|
|
|
|
|
|
($ in thousands)
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Commercial, financial, and agricultural
|
$
|
3,703
|
|
|
5,518
|
|
|
Real estate – construction, land development, and other land loans
|
958
|
|
|
1,067
|
|
|
Real estate – mortgage – residential (1-4 family) first mortgages
|
8,581
|
|
|
7,552
|
|
|
Real estate – mortgage – home equity loans/lines of credit
|
1,874
|
|
|
1,797
|
|
|
Real estate – mortgage – commercial and other
|
9,837
|
|
|
8,820
|
|
|
Consumer loans
|
113
|
|
|
112
|
|
|
Total nonaccrual loans
|
$
|
25,066
|
|
|
24,866
|
|
|
We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. The following table presents the detail of all of our foreclosed real estate at each period end:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
At March 31, 2020
|
|
At December 31, 2019
|
|
Vacant land and farmland
|
$
|
1,707
|
|
|
1,752
|
|
|
1-4 family residential properties
|
876
|
|
|
974
|
|
|
Commercial real estate
|
904
|
|
|
1,147
|
|
|
Total foreclosed real estate
|
$
|
3,487
|
|
|
3,873
|
|
|
The following table presents geographical information regarding our nonperforming assets at March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
($ in thousands)
|
Total
Nonperforming
Loans
|
|
Total Loans
|
|
Nonperforming
Loans to Total
Loans
|
|
Total
Foreclosed
Real Estate
|
Region (1)
|
|
|
|
|
|
|
|
|
|
Eastern Region (NC)
|
$
|
5,457
|
|
|
1,013,000
|
|
|
0.54
|
%
|
|
$
|
517
|
|
Triangle Region (NC)
|
7,004
|
|
|
978,000
|
|
|
0.72
|
%
|
|
1,049
|
|
Triad Region (NC)
|
6,058
|
|
|
891,000
|
|
|
0.68
|
%
|
|
229
|
|
Charlotte Region (NC)
|
1,750
|
|
|
359,000
|
|
|
0.49
|
%
|
|
—
|
|
Southern Piedmont Region (NC)
|
3,272
|
|
|
275,000
|
|
|
1.19
|
%
|
|
201
|
|
Western Region (NC)
|
1,039
|
|
|
660,000
|
|
|
0.16
|
%
|
|
411
|
|
South Carolina Region
|
964
|
|
|
189,000
|
|
|
0.51
|
%
|
|
459
|
|
Former Virginia Region
|
83
|
|
|
1,000
|
|
|
8.30
|
%
|
|
351
|
|
Other
|
9,186
|
|
|
187,000
|
|
|
4.91
|
%
|
|
270
|
|
Total
|
$
|
34,813
|
|
|
4,553,000
|
|
|
0.76
|
%
|
|
$
|
3,487
|
|
|
|
(1)
|
The counties comprising each region are as follows:
|
Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret
Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake
Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth, Alamance
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg
Southern Piedmont North Carolina Region - Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland
Western North Carolina Region – Buncombe, Henderson, McDowell, Madison, Transylvania
South Carolina Region - Chesterfield, Dillon, Florence
Former Virginia Region - Wythe, Washington, Montgomery, Roanoke
Other includes loans originated on a national basis through the Company’s SBA Lending Division and through the Company's Credit Card Division
Summary of Loan Loss Experience
As previously noted, and as permitted by the CARES Act, we elected to defer the implementation of CECL until the earlier of the cessation of the national emergency or December 31, 2020 because of the challenges associated with developing a reliable forecast of losses that may result from the unprecedented COVID-19 pandemic. Accordingly, the Company's provision for loan losses for the first quarter of 2020 is based on the limited information available and the conditions that existed at March 31, 2020 related to COVID-19, according to the pre-CECL incurred loss methodology for determining loan losses. See further discussion below.
The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses” for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. Recoveries realized during the period are credited to this allowance.
We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area.
The factors that influence management’s judgment in determining the amount charged to operating expense include recent loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and current economic conditions.
For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense.
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Three Months
Ended
March 31, 2020
|
|
Twelve Months
Ended December 31,
2019
|
|
Three Months
Ended
March 31, 2019
|
Loans outstanding at end of period
|
$
|
4,552,708
|
|
|
4,453,466
|
|
|
4,303,787
|
|
Average amount of loans outstanding
|
$
|
4,512,893
|
|
|
4,346,331
|
|
|
4,280,272
|
|
|
|
|
|
|
|
Allowance for loan losses, at beginning of year
|
$
|
21,398
|
|
|
21,039
|
|
|
21,039
|
|
Provision for loan losses
|
5,590
|
|
|
2,263
|
|
|
500
|
|
|
26,988
|
|
|
23,302
|
|
|
21,539
|
|
|
|
|
|
|
|
Loans charged off:
|
|
|
|
|
|
Commercial, financial, and agricultural
|
(2,460
|
)
|
|
(2,473
|
)
|
|
(246
|
)
|
Real estate – construction, land development & other land loans
|
(40
|
)
|
|
(553
|
)
|
|
(264
|
)
|
Real estate – mortgage – residential (1-4 family) first mortgages
|
(195
|
)
|
|
(657
|
)
|
|
(30
|
)
|
Real estate – mortgage – home equity loans / lines of credit
|
(68
|
)
|
|
(307
|
)
|
|
(80
|
)
|
Real estate – mortgage – commercial and other
|
(263
|
)
|
|
(1,556
|
)
|
|
(836
|
)
|
Consumer loans
|
(287
|
)
|
|
(757
|
)
|
|
(281
|
)
|
Total charge-offs
|
(3,313
|
)
|
|
(6,303
|
)
|
|
(1,737
|
)
|
Recoveries of loans previously charged-off:
|
|
|
|
|
|
Commercial, financial, and agricultural
|
217
|
|
|
980
|
|
|
414
|
|
Real estate – construction, land development & other land loans
|
290
|
|
|
1,275
|
|
|
287
|
|
Real estate – mortgage – residential (1-4 family) first mortgages
|
91
|
|
|
705
|
|
|
160
|
|
Real estate – mortgage – home equity loans / lines of credit
|
83
|
|
|
629
|
|
|
128
|
|
Real estate – mortgage – commercial and other
|
47
|
|
|
575
|
|
|
271
|
|
Consumer loans
|
95
|
|
|
235
|
|
|
33
|
|
Total recoveries
|
823
|
|
|
4,399
|
|
|
1,293
|
|
Net (charge-offs) recoveries
|
(2,490
|
)
|
|
(1,904
|
)
|
|
(444
|
)
|
Allowance for loan losses, at end of period
|
$
|
24,498
|
|
|
21,398
|
|
|
21,095
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
Net charge-offs (recoveries) as a percent of average loans (annualized)
|
0.22
|
%
|
|
0.09
|
%
|
|
0.04
|
%
|
Allowance for loan losses as a percent of loans at end of period
|
0.54
|
%
|
|
0.48
|
%
|
|
0.49
|
%
|
We recorded a provision for loan losses of $5.6 million in the first three months of 2020, compared to a provision for loan losses of $0.5 million in the first three months of 2019. The increase was primarily due to a provision recorded related to the economic impacts of the COVID-19 pandemic, as discussed below. Our allowance for loan loss is a mathematical model with the primary factors impacting this model being loan growth, net charge-off history, and asset quality trends, as well as specific reserves we set aside on certain individual loans exhibiting signs of deterioration. Our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary. Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on. In recent years, the new periods have had generally lower net charge-offs (and net recoveries in some periods) than the older periods rolling out of the model, and thus mostly offset upward adjustments to the allowance that would normally be required to reflect new loan growth and the net charge-offs experienced, resulting in generally lower provisions for loan losses.
In March 2020, the COVID-19 pandemic began to impact our nation. The subsequent closures of many businesses and job losses are leading to widespread negative economic impacts. The U.S. Government has taken steps to lessen the negative impacts. In determining a COVID-19 related provision, we reviewed current data related to the
negative economic impacts. We also reviewed deferrals that had been requested from borrowers and also reviewed the industries most at risk from the immediate impact of the shutdown. In this analysis, we identified approximately $553 million of loans to the following industries: hotels, restaurants, retail stores, travel accommodations, child care facilities, arts and entertainment, barber shops and beauty salons, car and boat dealers, and mini-storage facilities, as well as all credit cards. Existing risk grades were adjusted downwards for each of the loans in these industries for the purposes of this special provision and historical loss rates were applied.
The ratio of our allowance to total loans was 0.54% and 0.48% at March 31, 2020 and December 31, 2019, respectively. The increase in this ratio was a result of the factors discussed above that impacted our increased level of provision for loan losses in 2020.
Our ratio of allowance to total loans is significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank in 2017, which had over $1 billion in total loans. Applicable accounting guidance did not allow us to record an allowance for loan losses upon the acquisition of loans – instead the acquired loans were recorded at their discounted fair value, which included the consideration of any expected losses. No allowance for loan losses is recorded for the acquired loans unless the expected credit losses exceed the remaining unamortized discounts – based on an individual basis for purchased credit impaired loans and on a pooled basis for performing acquired loans. See Critical Accounting Policies above for further discussion. Unaccreted discount on acquired loans, which is available to absorb loan losses on those acquired loans, amounted to $11.5 million and $12.7 million at March 31, 2020 and December 31, 2019, respectively.
We believe our reserve levels are adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the reserve using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. See “Critical Accounting Policies – Allowance for Loan Losses” above.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations.
Based on the results of our loan analysis and grading program and our evaluation of the allowance for loan losses at March 31, 2020, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2019.
Liquidity, Commitments, and Contingencies
Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash. Thus far in the COVID-19 pandemic, we have seen our liquidity levels increase, with increases in deposits accounts leading to higher cash levels.
In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $1.023 billion line of credit with the FHLB (of which $348 million and $247 million were outstanding at March 31, 2020 and December 31, 2019, respectively), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at March 31, 2020 or December 31, 2019), and 3) an approximately $123 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at March 31, 2020 or December 31, 2019). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $190 million at both March 31, 2020 and December 31, 2019, as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to $814 million at March 31, 2020 compared to $744 million at December 31, 2019.
Our overall liquidity has increased since December 31, 2019 due primarily to deposit growth which has exceeded loan growth. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 21.4% at December 31, 2019 to 22.8% at March 31, 2020.
We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.
The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2019, detail of which is presented in Table 18 on page 66 of our 2019 Annual Report on Form 10-K.
We are not involved in any other legal proceedings that, in our opinion, could have a material effect on our consolidated financial position.
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.
Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivative activities through March 31, 2020, and have no current plans to do so.
Capital Resources
The Company is regulated by the Board of Governors of the Federal Reserve Board (“FRB”) and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. Our banking subsidiary, First Bank, is also regulated by the FRB and the North Carolina Office of the Commissioner of Banks. We must comply with regulatory capital requirements established by the FRB. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), was enacted and which amended certain aspects of the regulatory framework for small depository institutions with assets less than $10 billion and for large banks with assets of more than $50 billion. The Economic Growth Act, among other matters, provided for an alternative capital rule for financial institutions and their holding companies with total consolidated assets of less than $10 billion. The Economic Growth Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10%, which was proposed to be 9% by the federal regulators. The Community Bank Leverage Ratio provides for a simpler calculation of a bank’s capital ratio than the Basel III provisions that have been in place. Any qualifying depository institution or its holding company that elects to adopt the Community Bank Leverage Ratio and exceeds the ratio set by the banking regulators is considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. March 31, 2020 was the earliest date that the Company could have elected to adopt the Community Bank Leverage Ratio. However, the Company did not opt-in to that alternative framework and instead continues to use the Basel III standards.
Under Basel III standards and 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 classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The capital standards require us to maintain minimum ratios of “Common Equity Tier 1” capital to total risk-weighted assets, “Tier 1” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and
8.00%, respectively. Common Equity Tier 1 capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FRB and FDIC regulations.
The capital conservation buffer requirement began to be phased in on January 1, 2016, at 0.625% of risk weighted assets, and increased each year until fully implemented at 2.5% on January 1, 2019.
In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators. The FRB has not advised us of any requirement specifically applicable to us.
At March 31, 2020, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31,
2019
|
|
Risk-based capital ratios:
|
|
|
|
|
|
|
Common equity Tier 1 to Tier 1 risk weighted assets
|
12.86
|
%
|
|
13.28
|
%
|
|
Minimum required Common equity Tier 1 capital
|
7.00
|
%
|
|
7.00
|
%
|
|
|
|
|
|
|
Tier I capital to Tier 1 risk weighted assets
|
13.98
|
%
|
|
14.41
|
%
|
|
Minimum required Tier 1 capital
|
8.50
|
%
|
|
8.50
|
%
|
|
|
|
|
|
|
Total risk-based capital to Tier II risk weighted assets
|
14.51
|
%
|
|
14.89
|
%
|
|
Minimum required total risk-based capital
|
10.50
|
%
|
|
10.50
|
%
|
|
|
|
|
|
|
Leverage capital ratios:
|
|
|
|
|
|
|
Tier 1 capital to quarterly average total assets
|
11.05
|
%
|
|
11.19
|
%
|
|
Minimum required Tier 1 leverage capital
|
4.00
|
%
|
|
4.00
|
%
|
|
First Bank is also subject to capital requirements that do not vary materially from the Company’s capital ratios presented above. At March 31, 2020, First Bank significantly exceeded the minimum ratios established by the regulatory authorities. The decrease in capital ratios from December 31, 2019 to March 31, 2020 was primarily due to the Company's stock repurchases of approximately $20 million during 2020 and strong balance sheet growth.
BUSINESS DEVELOPMENT AND OTHER SHAREHOLDER MATTERS
The following is a list of business development and other miscellaneous matters affecting First Bancorp and First Bank, our bank subsidiary.
|
|
•
|
On March 13, 2020, the Company announced a quarterly cash dividend of $0.18 per share payable on April 24, 2020 to shareholders of record on March 31, 2020. This dividend rate represents a 50% increase over the dividend rate declared in the first quarter of 2019.
|
SHARE REPURCHASES
We repurchased 576,406 shares of our common stock during the first three months of 2020 at an average price of $34.70 per share, which totaled $20.0 million. At March 31, 2020, we had authority from our Board of Directors to repurchase up to an additional $20 million in shares of the Company’s common stock. We suspended share repurchases in March 2020 for the foreseeable future in response to the potential impact of COVID-19. We may repurchase shares of our stock in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”