UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020 .
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
(Exact Name of Registrant as Specified in its Charter)
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (607 ) 337-2265
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of class |
Trading Symbol(s) |
Name of exchange on which registered |
||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2020, there were 43,611,338 shares outstanding of the Registrant’s Common Stock, $0.01 par value per share.
FORM 10-Q-Quarter Ended June 30, 2020
TABLE OF CONTENTS
| PART I | FINANCIAL INFORMATION |
Item 1 |
Financial Statements |
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3 |
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4 |
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5 |
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6 |
||
7 |
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9 |
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Item 2 |
36 |
|
Item 3 |
52 |
|
Item 4 |
52 |
|
PART II |
OTHER INFORMATION |
|
Item 1 |
53 |
|
Item 1A |
53 |
|
Item 2 |
55 |
|
Item 3 |
55 |
|
Item 4 |
55 |
|
Item 5 |
55 |
|
Item 6 |
56 |
|
57 |
Item 1 – FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
June 30, |
December 31, |
|||||||
2020 |
2019 |
|||||||
(In thousands, except share and per share data) |
||||||||
Assets |
||||||||
Cash and due from banks |
$ |
$ |
||||||
Short-term interest bearing accounts |
||||||||
Equity securities, at fair value |
||||||||
Securities available for sale, at fair value |
||||||||
Securities held to maturity (fair value $ |
||||||||
Federal Reserve and Federal Home Loan Bank stock |
||||||||
Loans held for sale |
||||||||
Loans |
||||||||
Less allowance for loan losses (1) |
||||||||
Net loans |
$ |
$ |
||||||
Premises and equipment, net |
||||||||
Goodwill |
||||||||
Intangible assets, net |
||||||||
Bank owned life insurance |
||||||||
Other assets |
||||||||
Total assets |
$ |
$ |
||||||
Liabilities |
||||||||
Demand (noninterest bearing) |
$ |
$ |
||||||
Savings, NOW and money market |
||||||||
Time |
||||||||
Total deposits |
$ |
$ |
||||||
Short-term borrowings |
||||||||
Long-term debt |
||||||||
Subordinated debt, net |
||||||||
Junior subordinated debt |
||||||||
Other liabilities |
||||||||
Total liabilities |
$ |
$ |
||||||
Stockholders’ equity |
||||||||
Preferred stock, $ |
$ |
$ |
||||||
Common stock, $ |
||||||||
Additional paid-in-capital |
||||||||
Retained earnings |
||||||||
Accumulated other comprehensive income (loss) |
( |
) |
||||||
Common stock in treasury, at cost, |
( |
) |
( |
) |
||||
Total stockholders’ equity |
$ |
$ |
||||||
Total liabilities and stockholders’ equity |
$ |
$ |
||||||
(1) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.
See accompanying notes to unaudited interim consolidated financial statements.
Consolidated Statements of Income (unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
(In thousands, except per share data) |
||||||||||||||||
Interest, fee and dividend income |
||||||||||||||||
Interest and fees on loans |
$ |
$ |
$ |
$ |
||||||||||||
Securities available for sale |
||||||||||||||||
Securities held to maturity |
||||||||||||||||
Other |
||||||||||||||||
Total interest, fee and dividend income |
$ |
$ |
$ |
$ |
||||||||||||
Interest expense |
||||||||||||||||
Deposits |
$ |
$ |
$ |
$ |
||||||||||||
Short-term borrowings |
||||||||||||||||
Long-term debt |
||||||||||||||||
Subordinated debt |
||||||||||||||||
Junior subordinated debt |
||||||||||||||||
Total interest expense |
$ |
$ |
$ |
$ |
||||||||||||
Net interest income |
$ |
$ |
$ |
$ |
||||||||||||
Provision for loan losses (1) |
||||||||||||||||
Net interest income after provision for loan losses |
$ |
$ |
$ |
$ |
||||||||||||
Noninterest income |
||||||||||||||||
Service charges on deposit accounts |
$ |
$ |
$ |
$ |
||||||||||||
ATM and debit card fees |
||||||||||||||||
Retirement plan administration fees |
||||||||||||||||
Wealth management |
||||||||||||||||
Insurance |
||||||||||||||||
Bank owned life insurance income |
||||||||||||||||
Net securities gains (losses) |
( |
) |
( |
) |
( |
) |
||||||||||
Other |
||||||||||||||||
Total noninterest income |
$ |
$ |
$ |
$ |
||||||||||||
Noninterest expense |
||||||||||||||||
Salaries and employee benefits |
$ |
$ |
$ |
$ |
||||||||||||
Occupancy |
||||||||||||||||
Data processing and communications |
||||||||||||||||
Professional fees and outside services |
||||||||||||||||
Equipment |
||||||||||||||||
Office supplies and postage |
||||||||||||||||
FDIC expense |
||||||||||||||||
Advertising |
||||||||||||||||
Amortization of intangible assets |
||||||||||||||||
Loan collection and other real estate owned, net |
||||||||||||||||
Other |
||||||||||||||||
Total noninterest expense |
$ |
$ |
$ |
$ |
||||||||||||
Income before income tax expense |
$ |
$ |
$ |
$ |
||||||||||||
Income tax expense |
||||||||||||||||
Net income |
$ |
$ |
$ |
$ |
||||||||||||
Earnings per share |
||||||||||||||||
Basic |
$ |
$ |
$ |
$ |
||||||||||||
Diluted |
$ |
$ |
$ |
$ |
||||||||||||
(1) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.
See accompanying notes to unaudited interim consolidated financial statements.
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
(In thousands) |
||||||||||||||||
Net income |
$ |
$ |
$ |
$ |
||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Securities available for sale: |
||||||||||||||||
Unrealized net holding gains arising during the period, gross |
$ |
$ |
$ |
$ |
||||||||||||
Tax effect |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Unrealized net holding gains arising during the period, net |
$ |
$ |
$ |
$ |
||||||||||||
Reclassification adjustment for net (gains) losses in net income, gross |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Tax effect |
( |
) |
||||||||||||||
Reclassification adjustment for net (gains) losses in net income, net |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross |
$ |
$ |
$ |
$ |
||||||||||||
Tax effect |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net |
$ |
$ |
$ |
$ |
||||||||||||
Total securities available for sale, net |
$ |
$ |
$ |
$ |
||||||||||||
Cash flow hedges: |
||||||||||||||||
Unrealized (losses) on derivatives (cash flow hedges), gross |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Tax effect |
||||||||||||||||
Unrealized (losses) on derivatives (cash flow hedges), net |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Reclassification of net unrealized losses (gains) on cash flow hedges to interest (income), gross |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||
Tax effect |
( |
) |
( |
) |
||||||||||||
Reclassification of net unrealized losses (gains) on cash flow hedges to interest (income), net |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||
Total cash flow hedges, net |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||||
Pension and other benefits: |
||||||||||||||||
Amortization of prior service cost and actuarial losses, gross |
$ |
$ |
$ |
$ |
||||||||||||
Tax effect |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Amortization of prior service cost and actuarial losses, net |
$ |
$ |
$ |
$ |
||||||||||||
Total pension and other benefits, net |
$ |
$ |
$ |
$ |
||||||||||||
Total other comprehensive income |
$ |
$ |
$ |
$ |
||||||||||||
Comprehensive income |
$ |
$ |
$ |
$ |
||||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
Consolidated Statements of Stockholders’ Equity (unaudited)
Common Stock |
Additional Paid-in- Capital |
Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Common Stock in Treasury |
Total |
|||||||||||||||||||
(In thousands, except share and per share data) |
||||||||||||||||||||||||
Balance at March 31, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||||||||
Net income |
||||||||||||||||||||||||
Cash dividends - $ |
( |
) |
( |
) |
||||||||||||||||||||
Net issuance of |
( |
) |
( |
) |
||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Balance at June 30, 2020 |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
Balance at March 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||||||||
Net income |
||||||||||||||||||||||||
Cash dividends - $ |
( |
) |
( |
) |
||||||||||||||||||||
Net issuance of |
( |
) |
( |
) |
||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Balance at June 30, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||||||||
Common Stock |
Additional Paid-in- Capital |
Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Common Stock in Treasury |
Total |
|||||||||||||||||||
(In thousands, except share and per share data) |
||||||||||||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||||||||
Net income |
||||||||||||||||||||||||
Cumulative effect adjustment for ASU 2016-13 implementation |
( |
) |
( |
) |
||||||||||||||||||||
Cash dividends - $ |
( |
) |
( |
) |
||||||||||||||||||||
Purchase of |
( |
) |
( |
) |
||||||||||||||||||||
Net issuance of |
( |
) |
( |
) |
||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Balance at June 30, 2020 |
$ |
$ |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||
Balance at December 31, 2018 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||||||||
Net income |
||||||||||||||||||||||||
Cash dividends - $ |
( |
) |
( |
) |
||||||||||||||||||||
Net issuance of |
( |
) |
( |
) |
||||||||||||||||||||
Stock-based compensation |
||||||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||
Balance at June 30, 2019 |
$ |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, |
||||||||
2020 |
2019 |
|||||||
(In thousands) |
||||||||
Operating activities |
||||||||
Net income |
$ |
$ |
||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Provision for loan losses |
||||||||
Depreciation and amortization of premises and equipment |
||||||||
Net amortization on securities |
||||||||
Amortization of intangible assets |
||||||||
Amortization of operating lease right-of use assets |
||||||||
Excess tax benefit on stock-based compensation |
( |
) |
( |
) |
||||
Stock-based compensation expense |
||||||||
Bank owned life insurance income |
( |
) |
( |
) |
||||
Amortization of subordinated debt issuance costs |
||||||||
Proceeds from sale of loans held for sale |
||||||||
Originations of loans held for sale |
( |
) |
( |
) |
||||
Net gains on sale of loans held for sale |
( |
) |
( |
) |
||||
Net security losses |
||||||||
Net gains on sale of other real estate owned |
( |
) |
( |
) |
||||
Net change in other assets and other liabilities |
( |
) |
( |
) |
||||
Net cash provided by operating activities |
$ |
$ |
||||||
Investing activities |
||||||||
Net cash used in acquisitions |
$ |
( |
) |
$ |
||||
Securities available for sale: |
||||||||
Proceeds from maturities, calls and principal paydowns |
||||||||
Proceeds from sales |
||||||||
Purchases |
( |
) |
( |
) |
||||
Securities held to maturity: |
||||||||
Proceeds from maturities, calls and principal paydowns |
||||||||
Proceeds from sales |
||||||||
Purchases |
( |
) |
( |
) |
||||
Equity securities: |
||||||||
Purchases |
( |
) |
||||||
Other: |
||||||||
Net increase in loans |
( |
) |
( |
) |
||||
Proceeds from Federal Home Loan Bank stock redemption |
||||||||
Purchases of Federal Home Loan Bank stock |
( |
) |
( |
) |
||||
Proceeds from settlement of bank owned life insurance |
||||||||
Purchases of premises and equipment, net |
( |
) |
( |
) |
||||
Proceeds from sales of other real estate owned |
||||||||
Net cash used in investing activities |
$ |
( |
) |
$ |
( |
) |
||
Financing activities |
||||||||
Net increase in deposits |
$ |
$ |
||||||
Net decrease in short-term borrowings |
( |
) |
( |
) |
||||
Proceeds from issuance subordinated debt |
||||||||
Payment of subordinated debt issuance costs |
( |
) |
||||||
Proceeds from issuance of long-term debt |
||||||||
Repayments of long-term debt |
( |
) |
( |
) |
||||
Proceeds from the issuance of shares to employee and other stock plans |
||||||||
Cash paid by employer for tax-withholdings on stock issuance |
( |
) |
( |
) |
||||
Purchase of treasury stock |
( |
) |
||||||
Cash dividends |
( |
) |
( |
) |
||||
Net cash provided by (used in) financing activities |
$ |
$ |
( |
) |
||||
Net increase in cash and cash equivalents |
$ |
$ |
||||||
Cash and cash equivalents at beginning of period |
||||||||
Cash and cash equivalents at end of period |
$ |
$ |
||||||
Six Months Ended June 30, |
||||||||
2020 |
2019 |
|||||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest expense |
$ |
$ |
||||||
Income taxes paid, net of refund |
||||||||
Noncash investing activities: |
||||||||
Loans transferred to other real estate owned |
$ |
$ |
||||||
Acquisitions: |
||||||||
Fair value of assets acquired |
$ |
$ |
||||||
See accompanying notes to unaudited interim consolidated financial statements.
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2020
| 1. | Description of Business |
NBT Bancorp Inc. (the “Company”) is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The principal assets of the Company consist of all of the outstanding shares of common stock of its subsidiaries, including: NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II (collectively, the “Trusts”). The Company’s principal sources of revenue are the management fees and dividends it receives from the Bank, NBT Financial and NBT Holdings.
The Company’s business, primarily conducted through the Bank, consists of providing commercial banking, retail banking and wealth management services primarily to customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, the southern coastal Maine area. and now entering Connecticut. The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. The Company’s business philosophy is to operate as a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited interim consolidated financial statements include the accounts of NBT Bancorp and its wholly-owned subsidiaries, the Bank, NBT Financial and NBT Holdings. Collectively, NBT Bancorp and its subsidiaries are referred to herein as (“the Company”). The interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to current period presentation. The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.
Allowance for Credit Losses – Loans
Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required the recognition of a credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. 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, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. 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 changes in environmental conditions, such as changes in unemployment rates, production metrics, property values, or other relevant factors. Significant management judgment is required at each point in the measurement process.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or sub-segmented as needed to ensure loans of similar risk profiles are appropriately pooled.
The following table illustrates the portfolio and class segments for the Company’s loan portfolio in 2020:
Portfolio Segment |
Class |
Commercial Loans |
Commercial & Industrial Paycheck Protection Plan Commercial Real Estate |
Consumer Loans |
Auto Other Consumer |
Residential Loans |
|
Commercial Loans
The Company offers a variety of commercial loan products. The Company’s underwriting analysis for commercial loans typically includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows.
Commercial and Industrial (“C&I”) – The Company offers a variety of loan options to meet the specific needs of our C&I customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs and are typically collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. To reduce these risks, management also attempts to obtain personal guarantees of the owners or to obtain government loan guarantees to provide further support.
Paycheck Protection Program (“PPP”) – Section 1102 of the CARES Act created the Paycheck Protection Program, a program administered by the Small Business Administration (the “SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. The Company has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for six months of the loan. The PPP commenced on April 3, 2020 and is available to qualified borrowers through August 8, 2020, or as long as the appropriated funding is available. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees. The Company began accepting applications from qualified borrowers on April 3, 2020 and as of June 30, 2020 processed approximately 3,000 loans totaling over $547 million in relief.
Commercial Real Estate (“CRE”) – The Company offers CRE loans to finance real estate purchases, refinancing’s, expansions and improvements to commercial and agricultural properties. CRE loans are loans that are secured by liens on the real estate, which may include both owner-occupied and nonowner- occupied properties, such as apartments, commercial structures, health care facilities and other facilities. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80 % of the appraised value of the property. Government loan guarantees may be obtained to provide further support for agricultural property.
Consumer Loans
The Company offers a variety of Consumer loan products including Auto and Other Consumer loans.
Auto – The Company provides both direct and indirect financing of automobiles (“Auto”). The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the Company primarily finances the purchases of automobiles indirectly through dealer relationships. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from to six years , based upon the nature of the collateral and the size of the loan.
Other Consumer – The Other Consumer loan segment consists primarily of specialty lending loans and direct consumer loans. The Company offers unsecured specialty lending consumer loans across a national footprint originated through our relationships with national technology-driven consumer lending companies to finance such things as dental and medical procedures, K-12 tuition, solar energy installations and other consumer purpose loans. Advances of credit through this specialty lending business line are subject to the Company’s underwriting standards including criteria such as FICO score and debt to income thresholds. The Company offers a variety of direct consumer installment loans to finance various personal expenditures. In addition to installment loans, the Company also offers personal lines of credit, overdraft protection, debt consolidation, education and other uses. Consumer installment loans carry a fixed rate of interest with principal repayment terms typically ranging from to fifteen years , based upon the nature of the collateral and the size of the loan. Consumer installment loans are often secured with collateral consisting of a perfected lien on the asset being purchased or a perfected lien on a consumer’s deposit account. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower’s financial condition and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.
Residential
Residential loans consist primarily of loans secured by a first or second mortgage on primary residences, home equity loans and lines of credit in first and second lien positions and residential construction loans. We originate adjustable-rate and fixed rate, one-to-four-family residential loans for the construction or purchase of a residential property or the refinancing of a mortgage. These loans are collateralized by properties located in the Company’s market area. Loans on one-to-four-family residential are generally originated in amounts of no more than 85 % of the purchase price or appraised value (whichever is lower) or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. For home equity loans, consumers are able to borrow up to 85 % of the equity in their homes and are generally tied to Prime with a ten-year draw followed by a fifteen-year amortization. These loans carry a higher risk than first mortgage residential loans as they are often in a second position with respect to collateral.
For the 2019 disclosures for the allowance for credit losses, the loan portfolio was segmented into the Commercial, Consumer and Residential Real Estate portfolio segments. The Commercial segment was further pooled into three classes: Commercial and Industrial, Commercial Real Estate and Business Banking. The Consumer segment was further pooled into three classes: Indirect Auto, Specialty Lending and Direct. For a description of these portfolio segments’ and classes’ risk characteristics, see Note 5 Allowance for Loan Losses and Credit Quality of Loans to the consolidated financial statements presented in our 2019 Annual Report on Form 10-K.
Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PD”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each asset class, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviate from that of the wider industry. The historical PDR curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle.
Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using externally developed economic forecasts which are probabilistically weighted to reflect potential forecast inaccuracy and model limitations. These forecasts are applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level stated interest rate. 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 a troubled debt restructuring (“TDR”) will be executed with an individual borrower or 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.
After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components of the portfolio; the experience, ability and depth of lending management and staff; the Company’s credit review system; and the effect of external factors; such as competition, legal and regulatory requirements.
Loans that do not share risk characteristics and meet materiality criteria are evaluated on an individual basis and are excluded from the pooled evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate. Generally, individually assessed loans are collateral dependent.
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company has exposure 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 an expense in other noninterest 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 their estimated lives. Estimating credit losses on unfunded commitments requires the Bank to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate a reserve on unfunded commitments.
Allowance for Credit Losses – Held-to-Maturity (“HTM”) Debt Securities
The Company’s HTM debt securities are also required to utilize the CECL approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as (as applicable): internal or external (third-party) credit score or credit ratings, risk ratings or classification, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or expected credit loss patterns, and reasonable and supportable forecast periods. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.
The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of no credit losses. Therefore, the Company did not record a credit loss for these securities.
State and municipal bonds carry a Moody’s rating of A to AAA. In addition, the Company has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and considers historical credit loss information, current conditions and reasonable and supportable forecasts. Given the rarity of municipal defaults and losses, the Company utilized Moody’s Municipal Loss Forecast Model as the sole source of municipal default and loss rates which provides decades of data across all municipal sectors and geographies. As with the loan portfolio, cash flows are forecast over a 6-quarter period under various, weighted economic conditions, with a reversion to long-term average economic conditions over a 4-quarter period on a straight-line basis. Management may exercise discretion to make adjustments based on environmental factors. As of March 31, 2020 and June 30, 2020, the Company determined that the expected credit loss on its municipal bond portfolio was de minimis, and therefore, an allowance for credit losses was not recorded.
Allowance for Credit Losses – Available-for Sales (“AFS”) Debt Securities
The impairment model for AFS debt securities differs from the CECL approach utilized by HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it 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 debt securities AFS that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, 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. The cash flows should be estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. 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.
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 AFS security is uncollectible or when either of the criteria regarding intent or requirement to sell is met. As of March 31, 2020 and June 30, 2020, the Company determined that the unrealized loss positions in the AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded.
Accrued Interest Receivable
Upon adoption of CECL on January 1, 2020, the Company made the following elections regarding accrued interest receivable: (1) presented accrued interest receivable balances separately within other assets balance sheet line item; (2) excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and (3) continued our policy to write off accrued interest receivable by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. For loans given short-term loan modifications to assist borrowers during the COVID-19 national emergency, this accounting policy would not apply as the length of time between interest recognition and the write-off of uncollectible interest could exceed 120 days. Therefore, the Company estimated an allowance for credit losses for accrued interest receivable related to loans with short-term modifications due to the pandemic. Historically, the Company has not experienced uncollectible accrued interest receivable on investment securities.
| 3. | Recent Accounting Pronouncements |
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all related subsequent amendments thereto. ASU 2016-13 introduces new guidance that make substantive changes to the accounting for credit losses. ASU 2016-13 introduces the CECL model, which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts and is generally expected to result in earlier recognition of credit losses. ASU 2016-13 also modifies certain provisions of the current other-than-temporary impairment model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security’s amortized cost basis and its fair value and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. ASU 2016-13 also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. ASU 2016-13 requires expanded disclosures including, but not limited to, (1) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management’s estimate and the reasons for those changes, (2) financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (3) a rollforward of the allowance for credit losses for HTM and AFS securities. The standard also changes the accounting for purchased credit-impaired debt securities and loans. ASU 2016-13 was effective for the Company on January 1, 2020. Management expects that the CECL model may create more volatility in the level of our allowance for loan losses from quarter to quarter as changes in the level of allowance for loan losses will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality.
The Company adopted CECL on January 1, 2020 (“Day 1”) using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative effect of adopting ASC 326. The transition adjustment includes a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for credit losses on off-balance sheet credit exposure, and $1.5 million impact to the deferred tax asset. The Company did not record an allowance for HTM debt securities on January 1, 2020 as the amount of credit risk was deemed immaterial. The Company did not record an allowance for credit losses on its AFS debt securities under the newly codified AFS debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is minimal. Refer to Note 4 Securities and Note 5 Allowance for Credit Losses and Credit Quality of Loans to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q for more information.
In December 2018, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company is adopting the capital transition relief over the permissible five-year period.
On March 22, 2020, a statement was issued by the Company’s banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the recent coronavirus (“COVID-19”) pandemic. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructuring as defined by GAAP from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, the Company is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are not material. As of June 30, 2020, there were $1.0 billion in loans in modification programs related to COVID-19.
In August 2018, the FASB issued ASU 2018-13, Fair value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair value Measurement. The provisions of ASU 2018-13 modify the disclosure requirements on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective January 1, 2020. The adoption did not have a material impact on the consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-15 amends existing guidance and requires a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize and which costs to expense. ASU 2018-15 is effective for the Company on January 1, 2020. The adoption did not have a material impact on the consolidated financial statements and related disclosures.
Accounting Standards Issued Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from LIBOR or other interbank offered rate on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this ASU are effective for the Company on January 1, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20), provides changes to the disclosure requirements for defined benefit plans. The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments are a result of the disclosure framework project that focuses on improvements to the effectiveness of disclosures in the notes to financial statements. The amendments remove and add certain disclosure requirements. The disclosure requirements being removed relating to public companies are: (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, (2) the amount and timing of plan assets expected to be returned to the employer, (3) the 2001 disclosure requirement relating to Japanese Welfare Pension Insurance Law, (4) related party disclosures about the amount of future annual benefits covered by insurance, and (5) the effects of a one-percentage-point change in assumed health care cost trends on the benefit cost and obligation. The disclosure requirements being added relating to public companies are (1) the weighted-average interest crediting rates for cash balance plans, and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for the Company on January 1, 2021 and early adoption is permitted. The amendments should be applied retrospectively and the Company does not expect the guidance to have a material impact on its disclosures to the consolidated financial statements.
| 4. | Securities |
The amortized cost, estimated fair value and unrealized gains (losses) of AFS securities are as follows:
(In thousands) |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Estimated Fair Value |
||||||||||||
As of June 30, 2020 |
||||||||||||||||
Federal agency |
$ |
$ |
$ |
$ |
||||||||||||
State & municipal |
||||||||||||||||
Mortgage-backed: |
||||||||||||||||
Government-sponsored enterprises |
||||||||||||||||
U.S. government agency securities |
||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government-sponsored enterprises |
||||||||||||||||
U.S. government agency securities |
||||||||||||||||
Corporate |
||||||||||||||||
Total AFS securities |
$ |
$ |
$ |
$ |
||||||||||||
As of December 31, 2019 |
||||||||||||||||
Federal agency |
$ |
$ |
$ |
$ |
||||||||||||
State & municipal |
||||||||||||||||
Mortgage-backed: |
||||||||||||||||
Government-sponsored enterprises |
||||||||||||||||
U.S. government agency securities |
||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government-sponsored enterprises |
||||||||||||||||
U.S. government agency securities |
||||||||||||||||
Total AFS securities |
$ |
$ |
$ |
$ |
||||||||||||
There was no allowance for credit losses on AFS securities as of the quarter ending June 30, 2020.
The components of net realized gains (losses) on the sale of AFS securities are as follows. These amounts were reclassified out of accumulated other comprehensive income (loss) (“AOCI”) and into earnings. There were no
Six Months Ended June 30, |
||||||||
(In thousands) |
2020 |
2019 |
||||||
Gross realized gains |
$ |
$ |
||||||
Gross realized (losses) |
( |
) |
||||||
Net AFS realized gains (losses) |
$ |
$ |
( |
) |
||||
Included in net gains (losses) on AFS securities, the Company recorded gains from calls of approximately $3 thousand and $4 thousand for the six months ended June 30, 2020 and 2019, respectively. There were no
The amortized cost, estimated fair value and unrealized gains (losses) of securities HTM are as follows:
(In thousands) |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Estimated Fair Value |
||||||||||||
As of June 30, 2020 |
||||||||||||||||
Mortgage-backed: |
||||||||||||||||
Government-sponsored enterprises |
$ |
$ |
$ |
$ |
||||||||||||
U.S. government agency securities |
||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government-sponsored enterprises |
||||||||||||||||
U.S. government agency securities |
||||||||||||||||
State & municipal |
||||||||||||||||
Total HTM securities |
$ |
$ |
$ |
$ |
||||||||||||
As of December 31, 2019 |
||||||||||||||||
Mortgage-backed: |
||||||||||||||||
Government-sponsored enterprises |
$ |
$ |
$ |
$ |
||||||||||||
U.S. government agency securities |
||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government-sponsored enterprises |
||||||||||||||||
U.S. government agency securities |
||||||||||||||||
State & municipal |
||||||||||||||||
Total HTM securities |
$ |
$ |
$ |
$ |
||||||||||||
At June 30, 2020 and December 31, 2019, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and Government-sponsored enterprises securities. There was no allowance for credit losses on HTM securities as of June 30, 2020.
Included in net realized gains (losses), the Company recorded gains from calls on HTM securities of approximately $4 no
During the three and six months ended June 30, 2020, the Company sold HTM securities with an amortized cost of $1.0 1 no
AFS and HTM securities with amortized costs totaling $1.3 249.8 million and $189.8 million, respectively, were pledged as collateral for securities sold under repurchase agreements.
The following tables set forth information with regard to gains and losses on equity securities:
Three Months Ended June 30, |
||||||||
(In thousands) |
2020 |
2019 |
||||||
Net gains and (losses) recognized on equity securities |
$ |
$ |
( |
) |
||||
Less: Net gains and (losses) recognized during the period on equity securities sold during the period |
||||||||
Unrealized gains and (losses) recognized on equity securities still held |
$ |
$ |
( |
) |
||||
Six Months Ended June 30, |
||||||||
(In thousands) |
2020 |
2019 |
||||||
Net gains and (losses) recognized on equity securities |
$ |
( |
) |
$ |
||||
Less: Net gains and (losses) recognized during the period on equity securities sold during the period |
||||||||
Unrealized gains and (losses) recognized on equity securities still held |
$ |
( |
) |
$ |
||||
As of June 30, 2020 and December 31, 2019, the carrying value of equity securities without readily determinable fair values was $4.0 no
The following tables set forth information with regard to contractual maturities of debt securities at June 30, 2020:
(In thousands) |
Amortized Cost |
Estimated Fair Value |
||||||
AFS debt securities: |
||||||||
Within one year |
$ |
$ |
||||||
From one to five years |
||||||||
From five to ten years |
||||||||
After ten years |
||||||||
Total AFS debt securities |
$ |
$ |
||||||
HTM debt securities: |
||||||||
Within one year |
$ |
$ |
||||||
From one to five years |
||||||||
From five to ten years |
||||||||
After ten years |
||||||||
Total HTM debt securities |
$ |
$ |
||||||
Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Except for U.S. Government securities and Government-sponsored enterprises securities, there were no
The following table sets forth information with regard to investment securities with unrealized losses, for which an allowance for credit losses has not been recorded at June 30, 2020, segregated according to the length of time the securities had been in a continuous unrealized loss position:
Less Than 12 Months |
12 Months or Longer |
Total |
||||||||||||||||||||||||||||||||||
(In thousands) |
Fair Value |
Unrealized Losses |
Number of Positions |
Fair Value |
Unrealized Losses |
Number of Positions |
Fair Value |
Unrealized Losses |
Number of Positions |
|||||||||||||||||||||||||||
As of June 30, 2020 |
||||||||||||||||||||||||||||||||||||
AFS securities: |
||||||||||||||||||||||||||||||||||||
Federal agency |
$ |
$ |
( |
) |
$ |
$ |
$ |
$ |
( |
) |
||||||||||||||||||||||||||
Mortgage-backed |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||
Collateralized mortgage obligations |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||||||||
Total securities with unrealized losses |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||||||||||||||||||
HTM securities: |
||||||||||||||||||||||||||||||||||||
State & municipal |
$ |
$ |
( |
) |
$ |
$ |
$ |
$ |
( |
) |
||||||||||||||||||||||||||
Total securities with unrealized losses |
$ |
$ |
( |
) |
$ |
$ |
$ |
$ |
( |
) |
||||||||||||||||||||||||||
As of December 31, 2019 |
||||||||||||||||||||||||||||||||||||
AFS securities: |
||||||||||||||||||||||||||||||||||||
Federal agency |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||||||||||||||||||
State & municipal |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||
Mortgage-backed |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||||||||
Collateralized mortgage obligations |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||||||||
Total securities with unrealized losses |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||||||||||||||||||
HTM securities: |
||||||||||||||||||||||||||||||||||||
Mortgage-backed |
$ |
$ |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||||||||||||||||||||
Collateralized mortgage obligations |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||||||||||
State & municipal |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||
Total securities with unrealized losses |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
||||||||||||||||||||||||
The Company does not believe the AFS securities that were in an unrealized loss position as of June 30, 2020, which consisted of 8 individual securities, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of June 30, 2020, all of the AFS securities in an unrealized loss position consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises that carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk-free” and have a long history of zero credit losses. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. AIR on AFS debt securities totaled $2.6 million at June 30, 2020 and is excluded from the estimate of credit losses and reported in the financial statement line for other assets.
| 5. | Allowance for Credit Losses and Credit Quality of Loans |
As previously mentioned in Note 2 Summary of Significant Accounting Policies, the Company’s January 1, 2020 adoption of CECL resulted in a significant change to our methodology for estimating the allowance for credit losses since December 31, 2019. Portfolio segmentation has been redefined under CECL and therefore prior year tables are presented separately.
The Day 1 increase in the allowance for credit loss on loans relating to adoption of ASU 2016-13 was $3.0 million, which decreased retained earnings by $2.3 million and increased the deferred tax asset by $0.7 million.
There were no new loans purchased with credit deterioration during the six months ended June 30, 2020. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $26.8 million at June 30, 2020 and was included in the allowance for loan credit losses to estimate the impact of accrued interest receivable related to loans with short-term modifications due to the pandemic as the length of time between interest recognition and the write-off of uncollectible interest could exceed 120 days which exempts these loans from our policy election for accrued interest receivable. The estimated allowance for credit losses related to AIR at June 30, 2020 was $1.1 million.
The Day 1, March 31, 2020 and June 30, 2020 allowance for credit losses calculations incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverted to long-term economic conditions over a 4-quarter reversion period on a straight-line basis.
The quantitative model as of Day 1 incorporated a baseline economic outlook sourced from a reputable third-party that reflected economic conditions over the forecast period that were fairly consistent with current conditions at December 31, 2019. Additionally, downside and upside scenarios were incorporated and weighted, along with the baseline outlook, to accommodate other potential economic conditions in the quantitative model. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of Day 1.
The quantitative model as of March 31, 2020 incorporated a baseline economic outlook sourced from a reputable third-party that reflected continued economic deterioration, with unemployment peaking in the second quarter of 2020 and remaining elevated well above the pre-COVID-19 pandemic levels into 2021 and a near-term negative GDP environment with a rebound beginning in the second half of 2020 and stabilizing in 2021. A short-term reduction in prepayment and curtailment speeds was also applied to more reasonably model payment behavior during the COVID-19 national emergency. Additionally, downside and upside scenarios were incorporated and weighted, along with the baseline outlook, to accommodate other potential economic conditions in the quantitative model. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2020. Additional adjustments for COVID-19 related factors were not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus, including direct payments to individuals, increased unemployment benefits, deferral/modification initiatives and various government-sponsored loan programs. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at March 31, 2020.
The quantitative model as of June 30, 2020 incorporated a baseline economic outlook sourced from a reputable third-party that reflected continued economic deterioration from the March 31, 2020 forecasts, with unemployment peaking in the quarter of the measurement but sharply improving in the third quarter 2020, while remaining elevated well above the pre-COVID-19 pandemic levels for the entire forecast period and into 2023; GDP is forecast to rebound strongly in the third quarter 2020 followed by moderately negative growth in the fourth quarter 2020 with increasing growth through 2022 and stabilization in 2023. A short-term reduction in prepayment and curtailment speeds was also applied to more reasonably model payment behavior during the COVID-19 national emergency. Additionally, downside and upside scenarios were incorporated and weighted, along with the baseline outlook, to accommodate other potential economic conditions in the quantitative model. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 2020. Additional adjustments for COVID-19 related factors were not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus, including direct payments to individuals, increased unemployment benefits, deferral/modification initiatives and various government-sponsored loan programs. The commercial & industrial and consumer segment models were based upon percent change in unemployment, with forecast values as of June 30, 2020, well outside the observed historical experience. Therefore, adjustment was required to produce outputs more aligned with default expectations given the forecast economic environment. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at June 30, 2020.
The following tables present the activity in the allowance for credit losses by portfolio segment:
(In thousands) |
Commercial Loans |
Consumer Loans |
Residential |
Total |
||||||||||||
Balance as of March 31, 2020 |
$ |
$ |
$ |
$ |
||||||||||||
Charge-offs |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Recoveries |
||||||||||||||||
Provision |
||||||||||||||||
Ending Balance as of June 30, 2020 |
$ |
$ |
$ |
$ |
||||||||||||
(In thousands) |
Commercial Loans |
Consumer Loans |
Residential |
Total |
||||||||||||
Balance as of January 1, 2020 (after adoption of ASC 326) |
$ |
$ |
$ |
$ |
||||||||||||
Charge-offs |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Recoveries |
||||||||||||||||
Provision |
||||||||||||||||
Ending Balance as of June 30, 2020 |
$ |
$ |
$ |
$ |
||||||||||||
The increase in the allowance for credit losses from Day 1 to March 31, 2020 and June 30, 2020 was primarily due to macroeconomic factors surrounding the COVID-19 pandemic.
Individually Evaluated Loans
As of June 30, 2020, there were no relationships identified to be evaluated for loss on an individual basis. As of March 31, 2020, only one relationship was identified to be evaluated for loss on an individual basis which had an amortized cost basis of $4.2 million. This loan’s allowance for credit loss was $2.1 million and was determined by an estimate of the fair value of the collateral which consisted of business assets (accounts receivable, inventory and machinery and equipment). As of Day 1, there were no relationships identified to be evaluated for loss on an individual basis.
The following table sets forth information with regard to past due and nonperforming loans by loan segment:
(In thousands) |
31-60 Days Past Due Accruing |
61-90 Days Past Due Accruing |
Greater Than 90 Days Past Due Accruing |
Total Past Due Accruing |
Nonaccrual |
Current |
Recorded Total Loans |
|||||||||||||||||||||
As of June 30, 2020 |
||||||||||||||||||||||||||||
Commercial Loans: |
||||||||||||||||||||||||||||
Commercial & Industrial |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||||||
Paycheck Protection Plan |
||||||||||||||||||||||||||||
Total Commercial Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||||||
Auto |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Other Consumer |
||||||||||||||||||||||||||||
Total Consumer Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Residential |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Total Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
As of June 30, 2020, there were no loans in non-accrual without an allowance for credit losses.
Credit Quality Indicators
The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans.
Commercial Grading System
For C&I, PPP and CRE loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass. The increase in non-pass credits from December 31, 2019 was primarily due to the Company’s proactive approach to downgrade loans that were both in payment deferral due to the COVID-19 pandemic and in higher risk industries such as entertainment, restaurants, retail, healthcare and accommodations.
Doubtful
A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss.
Substandard
Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.
Special Mention
Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent.
Pass
Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Pass loans also include any portion of a government guaranteed loan, including PPP loans.
Consumer and Residential Grading System
Consumer and Residential loans are graded as either Nonperforming or Performing.
Nonperforming
Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status.
Performing
All loans not meeting any of the above criteria are considered Performing.
The following tables illustrate the Company’s credit quality by loan class by vintage:
(In thousands) |
2020 |
2019 |
2018 |
2017 |
2016 |
Prior |
Revolving Loans Amortized Cost Basis |
Revolving Loans Converted to Term |
Total |
|||||||||||||||||||||||||||
Commercial & Industrial |
||||||||||||||||||||||||||||||||||||
By Internally Assigned Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total Commercial & Industrial |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||||||||||||||
By Internally Assigned Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Total Commercial Real Estate |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Paycheck Protection Plan |
||||||||||||||||||||||||||||||||||||
By Internally Assigned Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Total Paycheck Protection Plan |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Auto |
||||||||||||||||||||||||||||||||||||
By Payment Activity: |
||||||||||||||||||||||||||||||||||||
Performing |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Nonperforming |
||||||||||||||||||||||||||||||||||||
Total Auto |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Other Consumer |
||||||||||||||||||||||||||||||||||||
By Payment Activity: |
||||||||||||||||||||||||||||||||||||
Performing |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Nonperforming |
||||||||||||||||||||||||||||||||||||
Total Other Consumer |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Residential |
||||||||||||||||||||||||||||||||||||
By Payment Activity: |
||||||||||||||||||||||||||||||||||||
Performing |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Nonperforming |
||||||||||||||||||||||||||||||||||||
Total Residential |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Total Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||||||
Troubled Debt Restructuring
When the Company modifies a loan in a troubled debt restructuring, such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount. Residential and Consumer TDRs occurring during 2020 were due to the reduction in the interest rate or extension of the term.
An allowance for impaired commercial and consumer loans that have been modified in a TDR is measured based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan an impairment charge would be recorded.
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act, along with a joint agency statement issued by banking regulatory agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the short-term modification programs provided to its borrowers and has concluded the modifications were generally made to borrowers who were in good standing prior to the COVID-19 pandemic and the modifications were temporary and minor in nature and therefore do not qualify for designation as TDRs.
The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:
Three Months Ended June 30, 2020 |
Six Months Ended June 30, 2020 |
|||||||||||||||||||||||
(Dollars in thousands) |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||
Auto |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Total Consumer Loans |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Residential |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Total Troubled Debt Restructurings |
$ |
$ |
$ |
$ |
||||||||||||||||||||
The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period:
Three Months Ended June 30, 2020 |
Six Months Ended June 30, 2020 |
|||||||||||||||
(Dollars in thousands) |
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
||||||||||||
Commercial Loans: |
||||||||||||||||
Commercial & Industrial |
$ |
$ |
||||||||||||||
Commercial Real Estate |
||||||||||||||||
Total Commercial Loans |
$ |
$ |
||||||||||||||
Residential |
$ |
$ |
||||||||||||||
Total Troubled Debt Restructurings |
$ |
$ |
||||||||||||||
Allowance for Loan Losses
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.
The following table illustrates the changes in the allowance for loan losses by our portfolio segments:
(In thousands) |
Commercial Loans |
Consumer Loans |
Residential Real Estate |
Total |
||||||||||||
Balance as of March 31, 2019 |
$ |
$ |
$ |
$ |
||||||||||||
Charge-offs |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Recoveries |
||||||||||||||||
Provision |
||||||||||||||||
Ending Balance as of June 30, 2019 |
$ |
$ |
$ |
$ |
||||||||||||
(In thousands) |
Commercial Loans |
Consumer Loans |
Residential Real Estate |
Total |
||||||||||||
Balance as of December 31, 2018 |
$ |
$ |
$ |
$ |
||||||||||||
Charge-offs |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Recoveries |
||||||||||||||||
Provision |
||||||||||||||||
Ending Balance as of June 30, 2019 |
$ |
$ |
$ |
$ |
||||||||||||
The following table illustrates the allowance for loan losses and the recorded investment by portfolio segments:
(In thousands) |
Commercial Loans |
Consumer Loans |
Residential Real Estate |
Total |
||||||||||||
As of December 31, 2019 |
||||||||||||||||
Allowance for loan losses |
$ |
$ |
$ |
$ |
||||||||||||
Allowance for loans individually evaluated for impairment |
||||||||||||||||
Allowance for loans collectively evaluated for impairment |
$ |
$ |
$ |
$ |
||||||||||||
Ending balance of loans |
$ |
$ |
$ |
$ |
||||||||||||
Ending balance of originated loans individually evaluated for impairment |
||||||||||||||||
Ending balance of acquired loans collectively evaluated for impairment |
||||||||||||||||
Ending balance of originated loans collectively evaluated for impairment |
$ |
$ |
$ |
$ |
||||||||||||
The following tables set forth information with regard to past due and nonperforming loans by loan class:
(In thousands) |
31-60 Days Past Due Accruing |
61-90 Days Past Due Accruing |
Greater Than 90 Days Past Due Accruing |
Total Past Due Accruing |
Nonaccrual |
Current |
Recorded Total Loans |
|||||||||||||||||||||
As of December 31, 2019 |
||||||||||||||||||||||||||||
Originated |
||||||||||||||||||||||||||||
Commercial Loans: |
||||||||||||||||||||||||||||
C&I |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
CRE |
||||||||||||||||||||||||||||
Business Banking |
||||||||||||||||||||||||||||
Total Commercial Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||||||
Indirect Auto |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Specialty Lending |
||||||||||||||||||||||||||||
Direct |
||||||||||||||||||||||||||||
Total Consumer Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Residential Real Estate |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Total Originated Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Acquired |
||||||||||||||||||||||||||||
Commercial Loans: |
||||||||||||||||||||||||||||
C&I |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
CRE |
||||||||||||||||||||||||||||
Business Banking |
||||||||||||||||||||||||||||
Total Commercial Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||||||
Direct |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Total Consumer Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Residential Real Estate |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Total Acquired Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
Total Loans |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
The following table provides information on impaired loans specifically evaluated for impairment:
December 31, 2019 |
||||||||||||
(In thousands) |
Recorded Investment Balance (Book) |
Unpaid Principal Balance (Legal) |
Related Allowance |
|||||||||
Originated |
||||||||||||
With no related allowance recorded: |
||||||||||||
Commercial Loans: |
||||||||||||
C&I |
$ |
$ |
$ |
|||||||||
CRE |
||||||||||||
Business Banking |
||||||||||||
Total Commercial Loans |
$ |
$ |
||||||||||
Consumer Loans: |
||||||||||||
Indirect Auto |
$ |
$ |
||||||||||
Direct |
||||||||||||
Specialty Lending |
||||||||||||
Total Consumer Loans |
$ |
$ |
||||||||||
Residential Real Estate |
$ |
$ |
||||||||||
Total |
$ |
$ |
||||||||||
Total Loans |
$ |
$ |
$ |
|||||||||
The following table summarizes the average recorded investments on loans specifically evaluated for impairment and the interest income recognized:
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30, 2019 |
June 30, 2019 |
|||||||||||||||
(In thousands) |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||
Originated |
||||||||||||||||
Commercial Loans: |
||||||||||||||||
C&I |
$ |
$ |
$ |
$ |
||||||||||||
CRE |
||||||||||||||||
Business Banking |
||||||||||||||||
Total Commercial Loans |
$ |
$ |
$ |
$ |
||||||||||||
Consumer Loans: |
||||||||||||||||
Indirect Auto |
$ |
$ |
$ |
$ |
||||||||||||
Direct |
||||||||||||||||
Total Consumer Loans |
$ |
$ |
$ |
$ |
||||||||||||
Residential Real Estate |
$ |
$ |
$ |
$ |
||||||||||||
Total Originated |
$ |
$ |
$ |
$ |
||||||||||||
Total Loans |
$ |
$ |
$ |
$ |
||||||||||||
The following tables illustrate the Company’s credit quality by loan class:
(In thousands) |
As of December 31, 2019 |
|||||||||||
Originated |
||||||||||||
Commercial Credit Exposure By Internally Assigned Grade: |
C&I |
CRE |
Total |
|||||||||
Pass |
$ |
$ |
$ |
|||||||||
Special Mention |
||||||||||||
Substandard |
||||||||||||
Doubtful |
||||||||||||
Total |
$ |
$ |
$ |
|||||||||
Business Banking Credit Exposure By Internally Assigned Grade: |
Business Banking |
Total |
||||||
Non-classified |
$ |
$ |
||||||
Classified |
||||||||
Total |
$ |
$ |
||||||
Consumer Credit Exposure By Payment Activity: |
Indirect Auto |
Specialty Lending |
Direct |
Total |
||||||||||||
Performing |
$ |
$ |
$ |
$ |
||||||||||||
Nonperforming |
||||||||||||||||
Total |
$ |
$ |
$ |
$ |
||||||||||||
Residential Real Estate Credit Exposure By Payment Activity: |
Residential Real Estate |
Total |
||||||
Performing |
$ |
$ |
||||||
Nonperforming |
||||||||
Total |
$ |
$ |
||||||
Acquired |
||||||||||||
Commercial Credit Exposure |
||||||||||||
By Internally Assigned Grade: |
C&I |
CRE |
Total |
|||||||||
Pass |
$ |
$ |
$ |
|||||||||
Special Mention |
||||||||||||
Substandard |
||||||||||||
Total |
$ |
$ |
$ |
|||||||||
Business Banking Credit Exposure By Internally Assigned Grade: |
Business Banking |
Total |
||||||
Non-classified |
$ |
$ |
||||||
Classified |
||||||||
Total |
$ |
$ |
||||||
Consumer Credit Exposure |
||||||||
By Payment Activity: |
Direct |
Total |
||||||
Performing |
$ |
$ |
||||||
Nonperforming |
||||||||
Total |
$ |
$ |
||||||
Residential Real Estate Credit Exposure By Payment Activity: |
Residential Real Estate |
Total |
||||||
Performing |
$ |
$ |
||||||
Nonperforming |
||||||||
Total |
$ |
|||||||
The following table illustrates the recorded investment and number of modifications for modified loans, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:
Three Months Ended June 30, 2019 |
Six Months Ended June 30, 2019 |
|||||||||||||||||||||||
(Dollars in thousands) |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
Number of Contracts |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||||||||||
Commercial Loans: |
||||||||||||||||||||||||
C&I |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Business Banking |
||||||||||||||||||||||||
Total Commercial Loans |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||
Indirect Auto |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Direct |
||||||||||||||||||||||||
Total Consumer Loans |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Residential Real Estate |
$ |
$ |
$ |
$ |
||||||||||||||||||||
Total Troubled Debt Restructurings |
$ |
$ |
$ |
$ |
||||||||||||||||||||
The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period:
Three Months Ended June 30, 2019 |
Six Months Ended June 30, 2019 |
|||||||||||||||
(Dollars in thousands) |
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
||||||||||||
Consumer Loans: |
||||||||||||||||
Indirect Auto |
$ |
$ |
||||||||||||||
Direct |
||||||||||||||||
Total Consumer Loans |
$ |
$ |
||||||||||||||
Residential Real Estate |
$ |
$ |
||||||||||||||
Total Troubled Debt Restructurings |
$ |
$ |
||||||||||||||
| 6. | Subordinated Debt |
On June 23, 2020, the Company issued $100.0 million aggregate principal amount of 5.00 % fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualifies as Tier 2 capital, bear interest at an annual rate of 5.00 %, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85 %, payable quarterly in arrears commencing on October 1, 2025. The subordinated notes issuance costs of $2.0 million are being amortized on a straight line basis into interest expense over five years .
The Company may redeem the subordinated notes (i) in whole or in part beginning with the interest payment date of July 1, 2025, and on any interest payment date thereafter or (ii) in whole but not in part upon the occurrence of a “Tax Event”, a “Tier 2 Capital Event” or in the event the Company is required to register as an investment company pursuant to the Investment Company Act of 1940, as amended. The redemption price for any redemption is 100 % of the principal amount of the subordinated notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any redemption of the subordinated notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations.
The following table summarizes the Company’s subordinated debt:
(Dollars in thousands) |
June 30, 2020 |
|||
Subordinated notes issued June 2020 – fixed interest rate of |
$ |
|||
Unamortized debt issuance costs |
( |
) |
||
Total subordinated debt, net |
$ |
|||
| 7. | Defined Benefit Post-Retirement Plans |
The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at June 30, 2020. Benefits paid from the plan are based on age, years of service, compensation, social security benefits and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks and mutual funds.
In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for former executives of Alliance Financial Corporation (“Alliance”) when the Company acquired Alliance.
These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits”.
In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. In addition, the Company assumed post-retirement medical life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These post-retirement benefits are referred to herein as “Other Benefits”.
The Company made no
The components of expense for Pension Benefits and Other Benefits are set forth below:
Pension Benefits |
Other Benefits |
|||||||||||||||
Three Months Ended June 30, |
Three Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Components of net periodic (benefit) cost: |
||||||||||||||||
Service cost |
$ |
$ |
$ |
$ |
||||||||||||
Interest cost |
||||||||||||||||
Expected return on plan assets |
( |
) |
( |
) |
||||||||||||
Net amortization |
||||||||||||||||
Total net periodic (benefit) cost |
$ |
( |
) |
$ |
$ |
$ |
||||||||||
Pension Benefits |
Other Benefits |
|||||||||||||||
Six Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Components of net periodic (benefit) cost: |
||||||||||||||||
Service cost |
$ |
$ |
$ |
$ |
||||||||||||
Interest cost |
||||||||||||||||
Expected return on plan assets |
( |
) |
( |
) |
||||||||||||
Net amortization |
||||||||||||||||
Total net periodic (benefit) cost |
$ |
( |
) |
$ |
$ |
$ |
||||||||||
The service cost component of the net periodic (benefit) cost is included in Salaries and Employee Benefits and the interest cost, expected return on plan assets and net amortization components are included in Other Noninterest Expense on the unaudited interim consolidated statements of income.
| 8. | Earnings Per Share |
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units).
The following is a reconciliation of basic and diluted EPS for the periods presented in the unaudited interim consolidated statements of income:
Three Months Ended June 30, |
||||||||
(In thousands, except per share data) |
2020 |
2019 |
||||||
Basic EPS: |
||||||||
Weighted average common shares outstanding |
||||||||
Net income available to common stockholders |
$ |
$ |
||||||
Basic EPS |
$ |
$ |
||||||
Diluted EPS: |
||||||||
Weighted average common shares outstanding |
||||||||
Dilutive effect of common stock options and restricted stock |
||||||||
Weighted average common shares and common share equivalents |
||||||||
Net income available to common stockholders |
$ |
$ |
||||||
Diluted EPS |
$ |
$ |
||||||
Six Months Ended June 30, |
||||||||
(In thousands, except per share data) |
2020 |
2019 |
||||||
Basic EPS: |
||||||||
Weighted average common shares outstanding |
||||||||
Net income available to common stockholders |
$ |
$ |
||||||
Basic EPS |
$ |
$ |
||||||
Diluted EPS: |
||||||||
Weighted average common shares outstanding |
||||||||
Dilutive effect of common stock options and restricted stock |
||||||||
Weighted average common shares and common share equivalents |
||||||||
Net income available to common stockholders |
$ |
$ |
||||||
Diluted EPS |
$ |
$ |
||||||
There were 3,250
There were 1,500
| 9. | Reclassification Adjustments Out of Other Comprehensive Income (Loss) |
The following table summarizes the reclassification adjustments out of AOCI:
Detail About AOCI Components |
Amount Reclassified From AOCI |
Affected Line Item in the Consolidated Statement of Comprehensive Income (Loss) |
|||||||
Three Months Ended |
|||||||||
(In thousands) |
June 30, 2020 |
June 30, 2019 |
|||||||
AFS securities: |
|||||||||
Amortization of unrealized gains related to securities transfer |
$ |
$ |
Interest income |
||||||
Tax effect |
$ |
( |
) |
$ |
( |
) |
Income tax (benefit) |
||
Net of tax |
$ |
$ |
|||||||
Cash flow hedges: |
|||||||||
Net unrealized losses (gains) on cash flow hedges reclassified to interest expense |
$ |
$ |
( |
) |
Interest expense |
||||
Tax effect |
$ |
( |
) |
$ |
Income tax (benefit) expense |
||||
Net of tax |
$ |
$ |
( |
) |
|||||
Pension and other benefits: |
|||||||||
Amortization of net losses |
$ |
$ |
Other noninterest expense |
||||||
Amortization of prior service costs |
Other noninterest expense |
||||||||
Tax effect |
$ |
( |
) |
$ |
( |
) |
Income tax (benefit) |
||
Net of tax |
$ |
$ |
|||||||
Total reclassifications, net of tax |
$ |
$ |
|||||||
Detail About AOCI Components |
Amount Reclassified From AOCI |
Affected Line item in the Consolidated Statement of Comprehensive Income (Loss) |
|||||||
Six Months Ended |
|||||||||
(In thousands) |
June 30, 2020 |
June 30, 2019 |
|||||||
AFS securities: |
|||||||||
(Gains) losses on AFS securities |
$ |
( |
) |
$ |
Net securities (gains) losses |
||||
Amortization of unrealized gains related to securities transfer |
Interest income |
||||||||
Tax effect |
$ |
( |
) |
$ |
( |
) |
Income tax (benefit) |
||
Net of tax |
$ |
$ |
|||||||
Cash flow hedges: |
|||||||||
Net unrealized losses (gains) on cash flow hedges reclassified to interest expense |
$ |
$ |
( |
) |
Interest expense |
||||
Tax effect |
$ |
( |
) |
$ |
Income tax (benefit) expense |
||||
Net of tax |
$ |
$ |
( |
) |
|||||
Pension and other benefits: |
|||||||||
Amortization of net losses |
$ |
$ |
Other noninterest expense |
||||||
Amortization of prior service costs |
Other noninterest expense |
||||||||
Tax effect |
$ |
( |
) |
$ |
( |
) |
Income tax (benefit) |
||
Net of tax |
$ |
$ |
|||||||
Total reclassifications, net of tax |
$ |
$ |
|||||||
| 10. | Derivative Instruments and Hedging Activities |
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
Derivatives Not Designated as Hedging Instruments
The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheet at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.
As of June 30, 2020, the Company had sixteen risk participation agreements with financial institution counterparties for interest rate swaps related to participated loans. The fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $387 thousand and $169 thousand, respectively as of June 30, 2020. As of December 31, 2019, the Company had fifteen risk participation agreements with financial institution counterparties for interest rate swaps related to participated loans. The fair values included in other assets and other liabilities on the unaudited interim consolidated balance sheet applicable to these agreements amounted to $112 thousand and $82 thousand, respectively. Risk participation agreements provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions.
Derivatives Designated as Hedging Instruments
The Company has entered into interest rate swaps to modify the interest rate characteristics of certain short-term Federal Home Loan Bank (“FHLB”) advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges.
The following table depicts the fair value adjustment recorded related to the notional amount of derivatives outstanding as well as the notional amount of risk participation agreements:
June 30, |
December 31, |
|||||||
(In thousands) |
2020 |
2019 |
||||||
Derivatives Not Designated as Hedging Instruments: |
||||||||
Fair value adjustment included in other assets and other liabilities |
||||||||
Interest rate derivatives |
$ |
$ |
||||||
Notional amount: |
||||||||
Interest rate derivatives |
||||||||
Risk participation agreements |
||||||||
Derivatives Designated as Hedging Instruments: |
||||||||
Fair value adjustment included in other assets |
||||||||
Interest rate derivatives |
||||||||
Fair value adjustment included in other liabilities |
||||||||
Interest rate derivatives |
||||||||
Notional amount: |
||||||||
Interest rate derivatives |
||||||||
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s short-term rate borrowings. During the next twelve months, the Company estimates that an additional $226 thousand will be reclassified from AOCI as a reduction to interest expense.
The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Derivatives Designated as Hedging Instruments: |
||||||||||||||||
Interest rate derivatives - included component |
||||||||||||||||
Amount of (loss) recognized in other comprehensive income |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Amount of loss (gain) reclassified from AOCI into interest expense |
( |
) |
( |
) |
||||||||||||
The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Derivatives Not Designated as Hedging Instruments: |
||||||||||||||||
(Decrease) increase in other income |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
| 11. | Fair Value Measurements and Fair Value of Financial Instruments |
GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments.
The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used in pricing the securities by its third party providers.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows.
The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
(In thousands) |
Level 1 |
Level 2 |
Level 3 |
June 30, 2020 |
||||||||||||
Assets: |
||||||||||||||||
AFS securities |
||||||||||||||||
Federal agency |
$ |
$ |
$ |
$ |
||||||||||||
State & municipal |
||||||||||||||||
Mortgage-backed |
||||||||||||||||
Collateralized mortgage obligations |
||||||||||||||||
Corporate |
||||||||||||||||
Total AFS securities |
$ |
$ |
$ |
$ |
||||||||||||
Equity securities |
||||||||||||||||
Derivatives |
||||||||||||||||
Total |
$ |
$ |
$ |
$ |
||||||||||||
Liabilities: |
||||||||||||||||
Derivatives |
$ |
$ |
$ |
$ |
||||||||||||
Total |
$ |
$ |
$ |
$ |
||||||||||||
(In thousands) |
Level 1 |
Level 2 |
Level 3 |
December 31, 2019 |
||||||||||||
Assets: |
||||||||||||||||
AFS securities |
||||||||||||||||
Federal agency |
$ |
$ |
$ |
$ |
||||||||||||
State & municipal |
||||||||||||||||
Mortgage-backed |
||||||||||||||||
Collateralized mortgage obligations |
||||||||||||||||
Total AFS securities |
$ |
$ |
$ |
$ |
||||||||||||
Equity securities |
||||||||||||||||
Derivatives |
||||||||||||||||
Total |
$ |
$ |
$ |
$ |
||||||||||||
Liabilities: |
||||||||||||||||
Derivatives |
$ |
$ |
$ |
$ |
||||||||||||
Total |
$ |
$ |
$ |
$ |
||||||||||||
GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as goodwill, loans held for sale, other real estate owned, collateral-dependent impaired loans, mortgage servicing rights and HTM securities. The only non-recurring fair value measurements recorded during the three and six month periods ended June 30, 2020 and the year ended December 31, 2019 were related to impaired loans and write-downs of other real estate owned. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10 % to 50 %. Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3.
As of June 30, 2020 and December 31, 2019, the Company had no
The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives.
June 30, 2020 |
December 31, 2019 |
||||||||||||
(In thousands) |
Fair Value Hierarchy |
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
||||||||
Financial assets: |
|||||||||||||
HTM securities |
2 |
$ |
$ |
$ |
$ |
||||||||
Net loans |
3 |
||||||||||||
Financial liabilities: |
|||||||||||||
Time deposits |
2 |
$ |
$ |
$ |
$ |
||||||||
Long-term debt |
2 |
||||||||||||
Subordinated debt |
1 |
||||||||||||
Junior subordinated debt |
2 |
||||||||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial wealth operation that contributes net fee income annually. The wealth management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.
HTM Securities
The fair value of the Company’s HTM securities is primarily measured using information from a third party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
Net Loans
Net loans include portfolio loans and loans held for sale. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments which also includes credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820.
Time Deposits
The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
Long-Term Debt
The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.
Subordinated Debt
The fair value of subordinated debt has been measured using the observable market price as of the period reported.
Junior Subordinated Debt
The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis.
| 12. | Commitments and Contingencies |
The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letters of credit and certain agricultural real estate loans sold to investors with recourse, with the sold portion having a government guarantee that is assignable back to the Company upon repurchase of the loan in the event of default. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those investments. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s credit worthiness. Commitments to extend credit and unused lines of credit totaled $1.9
Since many loan commitments, standby letters of credit and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.
The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are frequently issued in support of third party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters of credit totaled $38.0 million at June 30, 2020 and $34.5 million at December 31, 2019. As of June 30, 2020 and December 31, 2019, the fair value of the Company’s standby letters of credit was not significant.
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc. (“NBT”) and its wholly owned subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019 for an understanding of the following discussion and analysis. Operating results for the three and six month periods ending June 30, 2020 are not necessarily indicative of the results of the full year ending December 31, 2020 or any future period.
Forward-looking Statements
Certain statements in this filing and future filings by the Company with the SEC, in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board (“FRB”); (5) inflation, interest rate, securities market and monetary fluctuations; (6) political instability; (7) acts of war or terrorism; (8) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (9) changes in consumer spending, borrowings and savings habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisitions and integration of acquired businesses; (13) the ability to increase market share and control expenses; (14) changes in the competitive environment among financial holding companies; (15) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including those under the Dodd-Frank Act, Economic Growth, Regulatory Relief, Consumer Protection Act of 2018, Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and regulatory pronouncements around CARES Act; (16) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters; (17) changes in the Company’s organization, compensation and benefit plans; (18) the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; (19) greater than expected costs or difficulties related to the integration of new products and lines of business; (20) the adverse impact on the U.S. economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (“COVID-19”), global pandemic; (21) the impact of a slowing U.S. economy and increased unemployment on the performance of our loan portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products; and (22) the Company’s success at managing the risks involved in the foregoing items.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the potential adverse effect of the current COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company, its customers and the global economy and financial markets. The extent to which the COVID-19 pandemic impacts the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its impact on the Company’s customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors including, but not limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the Securities and Exchange Commission, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.
Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Non-GAAP Measures
This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Where non-GAAP disclosures are used in this Form 10-Q, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables. Management believes that these non-GAAP measures provide useful information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry. Non-GAAP measures should not be considered a substitute for financial measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.
Critical Accounting Policies
The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses, pension accounting and provision for income taxes.
The allowance for credit losses consists of the allowance for credit losses and the reserve for unfunded commitments. As a result of the Company’s January 1, 2020, adoption of Accounting Standards Updates (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. The reserve for unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The reserve for unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.
Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. Going forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.
Management is required to make various assumptions in valuing the Company’s pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations and expert opinions in determining the various rates used to estimate pension expense. The Company also considers the Citigroup Pension Liability Index, market interest rates and discounted cash flows in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.
The Company is subject to examinations from various taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate. Should tax laws change or the taxing authorities determine that management’s assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company’s results of operations.
The Company’s policies on the incurred method for the allowance for loan losses, pension accounting and provision for income taxes are disclosed in Note 1 to the consolidated financial statements presented in our 2019 Annual Report on Form 10-K. All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2019 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported. The Company’s policies on the CECL method for allowance for credit losses is presented in Note 2 to the unaudited interim consolidated finance statements in this Quarterly Report on Form 10- Q. Refer to Note 3 to the unaudited interim consolidated finance statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.
Overview
Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to: net income and earnings per share, return on assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons. The Company’s results in the first half of 2020 have been impacted by the COVID-19 pandemic and the CECL accounting methodology, including the estimated impact of the COVID-19 pandemic on expected credit losses. The following information should be considered in connection with the Company’s results for the three and six months ended June 30, 2020:
• |
Net income up $14.3 million from the first quarter of 2020 and down $5.8 million from the second quarter of 2019. |
• |
Diluted earnings per share up $0.33 from the first quarter of 2020 and down $0.13 from the second quarter of 2019. |
• |
Provision expense for the three months ended June 30, 2020 was $18.8 million, as the economic deterioration due to COVID-19 and the related impact to expected losses continued in the second quarter while net charge-offs of $5.3 million were relatively consistent with the prior quarter. Provision expense decreased $10.8 million from the first quarter of 2020 and increased $11.6 million from the second quarter of 2019. |
• |
The net interest margin on a fully table equivalent (“FTE”) basis for the second quarter of 2020 was 3.38%, down 14 basis points (“bps”) from the first quarter of 2020 and down 23 bps from the second quarter of 2019. |
• |
Pre-provision net revenue (“PPNR”)(1) for the second quarter of 2020 was $50.7 million compared to $44.9 million in the previous quarter and $47.2 million in the second quarter of 2019 reflecting higher net interest income and lower noninterest expense than the previous quarter. |
• |
Book value per share of $26.20 at June 30, 2020; tangible book value per share grew 3% for the quarter and 8% from prior year to $19.46(2) at June 30, 2020. |
• |
Completed public offering of $100 million of 5.00% fixed-to-floating rate subordinated notes due 2030. |
• |
Originated $547 million in Paycheck Protection Plan loans. |
(1) PPNR is a Non-GAAP financial measure that management believes is useful in evaluating the underlying operating results of the Company excluding the volatility in loan loss provision due to CECL adoption and the impact of the COVID-19 pandemic, net securities gains (losses) and non-recurring income and/or expense.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Net income before income tax expense |
$ |
31,277 |
$ |
39,360 |
$ |
43,360 |
$ |
76,605 |
||||||||
FTE adjustment |
329 |
445 |
658 |
944 |
||||||||||||
Provision for loan losses |
18,840 |
7,277 |
48,480 |
13,084 |
||||||||||||
Net securities (gains) losses |
(180 |
) |
69 |
632 |
12 |
|||||||||||
Nonrecurring expense |
650 |
- |
650 |
- |
||||||||||||
Unfunded loan commitments reserve |
(200 |
) |
- |
1,800 |
- |
|||||||||||
PPNR |
$ |
50,716 |
$ |
47,151 |
$ |
95,580 |
$ |
90,645 |
||||||||
(2) Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding.
COVID-19 Pandemic and Company Response
The year 2020 began with overall stable U.S. economic conditions that were significantly impacted by the COVID-19 pandemic and subsequent shut-down of non-essential business throughout the Company’s footprint. A prolonged global pandemic like COVID-19 could adversely affect our operations. The results of operations and the ultimate effect of pandemic will depend on numerous factors that are highly uncertain including how long restrictions for business and individuals will last, further information around the severity of the virus itself, additional actions taken by federal, state and local governments to contain and treat COVID-19 and what, if any, additional government relief will be provided.
In response, the Company immediately formed an Executive Task Force and engaged its established Incident Response Team under its Business Continuity Plan to execute a comprehensive pandemic response plan. The Company has taken significant steps to address the needs of its customers impacted by COVID-19. The Company is providing payment relief for all its customers for 180 days or less, waiving associated late fees while not reporting these payment deferrals as late payments to the credit bureaus for all its consumer customers who were current prior to this event. The Company continues to responsibly lend to qualified consumer and commercial customers and designed special lending programs as well as participating in government sponsored relief programs to respond to customers’ needs during the pandemic.
The Company has been a participant in the Small Business Administration’s Paycheck Protection Program (“PPP”), a new loan guarantee program created under the CARES Act targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the Small Business Administration (“SBA”), whose guarantee is backed by the full faith and credit of the United States. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. In addition, PPP loans are risk-weighted at zero percent under the generally-applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes. The Company processed approximately 3,000 loans totaling over $547 million in relief. The Company also is participating in the Main Street Lending Program as defined in the CARES Act.
The Company has taken further steps to address the safety of its employees and its customers. Monitoring of state and local responses has been incorporated into any transition plans for re-opening across its footprint:
● Employees
- 90% of non-branch employees were working remotely and a measured transition back onsite began on July 13.
- Adopted health and safety precautions in our branches.
- Additional paid time off provided to address health and childcare needs.
- Cross-training and redeployment programs directing staff resources to areas of greatest need.
● Customers
- 82% of branches remained open for drive-up service and remaining branch staff redeployed to assist in other areas until the branch lobbies reopened on July 6.
- Leveraged technology tools such as robotic process automation for payment extension requests and onboarding loans; increased use of electronic signatures.
- Digital communication channels significantly enhanced with dedicated webpages, emails and social media content.
- Offered payment deferrals and forbearance.
Results of Operations
Net income for the three months ended June 30, 2020 was $24.7 million, up $14.3 million from $10.4 million for the first quarter of 2020 and down $5.8 million from $30.6 million for the second quarter of 2019. Diluted earnings per share for the three months ended June 30, 2020 was $0.56, as compared with $0.23 for the prior quarter, and $0.69 for the second quarter of 2019. Return on average assets (annualized) was 0.94% for the three months ended June 30, 2020 as compared to 0.43% for the prior quarter and 1.28% for the same period last year. Return on average equity (annualized) was 8.76% for the three months ended June 30, 2020 as compared to 3.69% for the prior quarter and 11.63% for the three months ended June 30, 2019. Return on average tangible common equity (annualized) was 12.14% for the three months ended June 30, 2020 as compared to 5.24% for the prior quarter and 16.38% for the three months ended June 30, 2019.
Net income for the six months ended June 30, 2020 was $35.1 million, down $24.6 from $59.7 million for the same period last year. Diluted earnings per share for the six months ended June 30, 2020 was $0.80, as compared with $1.35 for the same period in 2019. Return on average assets (annualized) was 0.69% for the six months ended June 30, 2020 as compared to 1.26% for the same period last year. Return on average equity (annualized) was 6.23% for the six months ended June 30, 2020 as compared to 11.57% for the six months ended June 30, 2019. Return on average tangible common equity (annualized) was 8.69% for the six months ended June 30, 2020 as compared to 16.41% for the six months ended June 30, 2019.
Return on average tangible common equity is a non-GAAP measure and excludes amortization of intangible assets (net of tax) from net income and average tangible equity calculated as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Net income |
$ |
24,713 |
$ |
30,555 |
$ |
35,081 |
$ |
59,682 |
||||||||
Amortization of intangible assets (net of tax) |
662 |
670 |
1,288 |
1,396 |
||||||||||||
Net income, excluding intangible amortization |
$ |
25,375 |
$ |
31,225 |
$ |
36,369 |
$ |
61,078 |
||||||||
Average stockholders’ equity |
$ |
1,134,794 |
$ |
1,053,750 |
$ |
1,132,194 |
$ |
1,039,829 |
||||||||
Less: average goodwill and other intangibles |
294,423 |
288,930 |
290,411 |
289,419 |
||||||||||||
Average tangible common equity |
$ |
840,371 |
$ |
764,820 |
$ |
841,783 |
$ |
750,410 |
||||||||
Net Interest Income
Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.
Net interest income was $80.4 million for the second quarter of 2020, up $3.3 million, or 4.2%, from the previous quarter. The FTE net interest margin was 3.38% for the three months ended June 30, 2020, down 14 bps from the previous quarter. Interest income decreased $2.0 million, or 2.2%, as the yield on average interest-earning assets decreased 39 bps from the prior quarter to 3.68%, while average interest-earning assets of $9.6 billion increased $742.8 million from the prior quarter, primarily due to an increase in short-term interest bearing accounts due to excess liquidity and an increase in average loans due to PPP loan originations. Interest expense was down $5.2 million, or 42.7%, as the cost of interest-bearing liabilities decreased 37 bps to 0.45% for the quarter ended June 30, 2020, driven by interest-bearing deposit costs decreasing 35 bps along with 43 bps decrease in short-term borrowings costs.
Net interest income was $80.4 million for the second quarter of 2020, up $1.8 million, or 2.3%, from the second quarter of 2019. The FTE net interest margin was 3.38% for the three months ended June 30, 2020, down 23 bps from the second quarter of 2019. Interest income decreased $5.8 million, or 6.2%, as the yield on average interest-earning assets decreased 60 bps from the same period in 2019 to 3.68%, while average interest-earning assets increased $823.4 million, primarily due to excess liquidity and an increase in average loans due to PPP loan originations. Interest expense decreased $7.6 million, or 52.1%, as the cost of interest-bearing liabilities decreased 51 bps, driven by interest-bearing deposit costs decreasing 44 bps along with the 86 bps decrease in short-term borrowings cost. The Federal Reserve lowered its target fed funds rate by 150 basis points in the first quarter of 2020.
Net interest income for the first six months of 2020 was $157.6 million, up $1.3 million, or 0.8%, from the same period in 2019. FTE net interest margin of 3.45% for the six months ended June 30, 2020, was down from 3.63% for the same period in 2019. Interest income decreased $7.7 million, or 4.2%, as the yield on average interest-earning assets decreased 41 bps from the same period in 2019 to 3.87%, while average interest-earning assets increased $486.7 million primarily due to excess liquidity and an increase in average loans due to PPP loan originations. Interest expense was down $9.0 million, or 32.0%, for the six months ended June 30, 2020 as compared to the same period in 2019 as the cost of interest-bearing liabilities decreased 31 bps to 0.63%, driven by interest-bearing deposit costs decreasing 23 bps along with the 65 bps decrease in short-term borrowings cost. The Federal Reserve lowered its target fed funds rate by 150 basis points in the first quarter of 2020.
Average Balances and Net Interest Income
The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis.
Three Months Ended |
June 30, 2020 |
June 30, 2019 |
||||||||||||||||||||||
(Dollars in thousands) |
Average Balance |
Interest |
Yield/ Rates |
Average Balance |
Interest |
Yield/ Rates |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Short-term interest bearing accounts |
$ |
380,260 |
$ |
96 |
0.10 |
% |
$ |
25,783 |
$ |
82 |
1.28 |
% |
||||||||||||
Securities available for sale (1) (3) |
985,561 |
5,600 |
2.29 |
% |
981,079 |
6,031 |
2.47 |
% |
||||||||||||||||
Securities held to maturity (1) (3) |
613,899 |
4,201 |
2.75 |
% |
770,651 |
5,447 |
2.83 |
% |
||||||||||||||||
Federal Reserve Bank and FHLB stock |
36,604 |
554 |
6.09 |
% |
46,179 |
760 |
6.60 |
% |
||||||||||||||||
Loans (2) (3) |
7,589,032 |
77,324 |
4.10 |
% |
6,958,299 |
81,358 |
4.69 |
% |
||||||||||||||||
Total interest-earning assets |
$ |
9,605,356 |
$ |
87,775 |
3.68 |
% |
$ |
8,781,991 |
$ |
93,678 |
4.28 |
% |
||||||||||||
Other assets |
961,807 |
816,748 |
||||||||||||||||||||||
Total assets |
$ |
10,567,163 |
$ |
9,598,739 |
||||||||||||||||||||
Liabilities and stockholders’ equity: |
||||||||||||||||||||||||
Money market deposit accounts |
$ |
2,360,407 |
$ |
1,716 |
0.29 |
% |
$ |
1,916,045 |
$ |
5,564 |
1.16 |
% |
||||||||||||
NOW deposit accounts |
1,167,486 |
121 |
0.04 |
% |
1,127,413 |
379 |
0.13 |
% |
||||||||||||||||
Savings deposits |
1,383,495 |
180 |
0.05 |
% |
1,282,084 |
185 |
0.06 |
% |
||||||||||||||||
Time deposits |
760,803 |
2,795 |
1.48 |
% |
953,698 |
4,106 |
1.73 |
% |
||||||||||||||||
Total interest-bearing deposits |
$ |
5,672,191 |
$ |
4,812 |
0.34 |
% |
$ |
5,279,240 |
$ |
10,234 |
0.78 |
% |
||||||||||||
Short-term borrowings |
427,004 |
972 |
0.92 |
% |
620,898 |
2,760 |
1.78 |
% |
||||||||||||||||
Long-term debt |
64,165 |
393 |
2.46 |
% |
82,414 |
471 |
2.29 |
% |
||||||||||||||||
Subordinated debt |
8,633 |
128 |
5.96 |
% |
- |
- |
- |
|||||||||||||||||
Junior subordinated debt |
101,196 |
695 |
2.76 |
% |
101,196 |
1,141 |
4.52 |
% |
||||||||||||||||
Total interest-bearing liabilities |
$ |
6,273,189 |
$ |
7,000 |
0.45 |
% |
$ |
6,083,748 |
$ |
14,606 |
0.96 |
% |
||||||||||||
Demand deposits |
$ |
2,887,545 |
$ |
2,298,867 |
||||||||||||||||||||
Other liabilities |
271,635 |
162,374 |
||||||||||||||||||||||
Stockholders’ equity |
1,134,794 |
1,053,750 |
||||||||||||||||||||||
Total liabilities and stockholders’ equity |
$ |
10,567,163 |
$ |
9,598,739 |
||||||||||||||||||||
Net interest income (FTE) |
$ |
80,775 |
$ |
79,072 |
||||||||||||||||||||
Interest rate spread |
||||||||||||||||||||||||
Net interest margin (FTE) |
3.23 |
% |
3.32 |
% |
||||||||||||||||||||
Taxable equivalent adjustment |
$ |
329 |
3.38 |
% |
$ |
445 |
3.61 |
% |
||||||||||||||||
Net interest income |
$ |
80,446 |
$ |
78,627 |
||||||||||||||||||||
| (1) | Securities are shown at average amortized cost. |
| (2) | For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding. |
| (3) | Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%. |
Six Months Ended |
June 30, 2020 |
June 30, 2019 |
||||||||||||||||||||||
(Dollars in thousands) |
Average Balance |
Interest |
Yield/ Rates |
Average Balance |
Interest |
Yield/ Rates |
||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Short-term interest bearing accounts |
$ |
227,478 |
$ |
335 |
0.30 |
% |
$ |
17,471 |
$ |
174 |
2.01 |
% |
||||||||||||
Securities available for sale (1) (3) |
974,044 |
11,353 |
2.34 |
% |
982,881 |
11,984 |
2.46 |
% |
||||||||||||||||
Securities held to maturity (1) (3) |
618,149 |
8,554 |
2.78 |
% |
776,577 |
11,043 |
2.87 |
% |
||||||||||||||||
Federal Reserve Bank and FHLB stock |
38,194 |
1,144 |
6.02 |
% |
47,657 |
1,552 |
6.57 |
% |
||||||||||||||||
Loans (2) (3) |
7,376,072 |
156,119 |
4.26 |
% |
6,922,684 |
160,768 |
4.68 |
% |
||||||||||||||||
Total interest-earning assets |
$ |
9,233,937 |
$ |
177,505 |
3.87 |
% |
$ |
8,747,270 |
$ |
185,521 |
4.28 |
% |
||||||||||||
Other assets |
923,689 |
806,225 |
||||||||||||||||||||||
Total assets |
$ |
10,157,626 |
$ |
9,553,495 |
||||||||||||||||||||
Liabilities and stockholders’ equity: |
||||||||||||||||||||||||
Money market deposit accounts |
$ |
2,230,857 |
$ |
6,965 |
0.63 |
% |
$ |
1,860,358 |
$ |
9,974 |
1.08 |
% |
||||||||||||
NOW deposit accounts |
1,126,845 |
404 |
0.07 |
% |
1,131,291 |
817 |
0.15 |
% |
||||||||||||||||
Savings deposits |
1,329,890 |
360 |
0.05 |
% |
1,267,146 |
362 |
0.06 |
% |
||||||||||||||||
Time deposits |
801,896 |
6,187 |
1.55 |
% |
948,109 |
7,907 |
1.68 |
% |
||||||||||||||||
Total interest-bearing deposits |
$ |
5,489,488 |
$ |
13,916 |
0.51 |
% |
$ |
5,206,904 |
$ |
19,060 |
0.74 |
% |
||||||||||||
Short-term borrowings |
480,261 |
2,769 |
1.16 |
% |
666,349 |
5,997 |
1.81 |
% |
||||||||||||||||
Long-term debt |
64,179 |
786 |
2.46 |
% |
78,085 |
893 |
2.31 |
% |
||||||||||||||||
Subordinated debt |
4,316 |
128 |
5.96 |
% |
- |
- |
- |
|||||||||||||||||
Junior subordinated debt |
101,196 |
1,621 |
3.22 |
% |
101,196 |
2,309 |
4.60 |
% |
||||||||||||||||
Total interest-bearing liabilities |
$ |
6,139,440 |
$ |
19,220 |
0.63 |
% |
$ |
6,052,534 |
$ |
28,259 |
0.94 |
% |
||||||||||||
Demand deposits |
$ |
2,642,926 |
$ |
2,304,169 |
||||||||||||||||||||
Other liabilities |
243,066 |
156,963 |
||||||||||||||||||||||
Stockholders’ equity |
1,132,194 |
1,039,829 |
||||||||||||||||||||||
Total liabilities and stockholders’ equity |
$ |
10,157,626 |
$ |
9,553,495 |
||||||||||||||||||||
Net interest income (FTE) |
$ |
158,285 |
$ |
157,262 |
||||||||||||||||||||
Interest rate spread |
3.24 |
% |
3.34 |
% |
||||||||||||||||||||
Net interest margin (FTE) |
3.45 |
% |
3.63 |
% |
||||||||||||||||||||
Taxable equivalent adjustment |
$ |
658 |
$ |
944 |
||||||||||||||||||||
Net interest income |
$ |
157,627 |
$ |
156,318 |
||||||||||||||||||||
| (1) | Securities are shown at average amortized cost. |
| (2) | For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding. |
| (3) | Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%. |
The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume) and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.
Three Months Ended June 30, |
Increase (Decrease) 2020 over 2019 |
|||||||||||
(In thousands) |
Volume |
Rate |
Total |
|||||||||
Short-term interest bearing accounts |
$ |
154 |
$ |
(140 |
) |
$ |
14 |
|||||
Securities available for sale |
26 |
(457 |
) |
(431 |
) |
|||||||
Securities held to maturity |
(1,090 |
) |
(156 |
) |
(1,246 |
) |
||||||
Federal Reserve Bank and FHLB stock |
(150 |
) |
(56 |
) |
(206 |
) |
||||||
Loans |
6,874 |
(10,908 |
) |
(4,034 |
) |
|||||||
Total FTE interest income |
$ |
5,814 |
$ |
(11,717 |
) |
$ |
(5,903 |
) |
||||
Money market deposit accounts |
$ |
1,055 |
$ |
(4,903 |
) |
$ |
(3,848 |
) |
||||
NOW deposit accounts |
13 |
(271 |
) |
(258 |
) |
|||||||
Savings deposits |
14 |
(19 |
) |
(5 |
) |
|||||||
Time deposits |
(765 |
) |
(546 |
) |
(1,311 |
) |
||||||
Short-term borrowings |
(699 |
) |
(1,089 |
) |
(1,788 |
) |
||||||
Long-term debt |
(111 |
) |
33 |
(78 |
) |
|||||||
Subordinated debt |
128 |
- |
128 |
|||||||||
Junior subordinated debt |
- |
(446 |
) |
(446 |
) |
|||||||
Total FTE interest expense |
$ |
(365 |
) |
$ |
(7,241 |
) |
$ |
(7,606 |
) |
|||
Change in FTE net interest income |
$ |
6,179 |
$ |
(4,476 |
) |
$ |
1,703 |
|||||
Six Months Ended June 30, |
Increase (Decrease) 2020 over 2019 |
|||||||||||
(In thousands) |
Volume |
Rate |
Total |
|||||||||
Short-term interest bearing accounts |
$ |
428 |
$ |
(267 |
) |
$ |
161 |
|||||
Securities available for sale |
(102 |
) |
(529 |
) |
(631 |
) |
||||||
Securities held to maturity |
(2,174 |
) |
(315 |
) |
(2,489 |
) |
||||||
Federal Reserve Bank and FHLB stock |
(288 |
) |
(120 |
) |
(408 |
) |
||||||
Loans |
10,343 |
(14,992 |
) |
(4,649 |
) |
|||||||
Total FTE interest income |
$ |
8,207 |
$ |
(16,223 |
) |
$ |
(8,016 |
) |
||||
Money market deposit accounts |
$ |
1,732 |
$ |
(4,741 |
) |
$ |
(3,009 |
) |
||||
NOW deposit accounts |
(3 |
) |
(410 |
) |
(413 |
) |
||||||
Savings deposits |
18 |
(20 |
) |
(2 |
) |
|||||||
Time deposits |
(1,145 |
) |
(575 |
) |
(1,720 |
) |
||||||
Short-term borrowings |
(1,408 |
) |
(1,820 |
) |
(3,228 |
) |
||||||
Long-term debt |
(166 |
) |
59 |
(107 |
) |
|||||||
Subordinated debt |
128 |
- |
128 |
|||||||||
Junior subordinated debt |
- |
(688 |
) |
(688 |
) |
|||||||
Total FTE interest expense |
$ |
(844 |
) |
$ |
(8,195 |
) |
$ |
(9,039 |
) |
|||
Change in net FTE interest income |
$ |
9,051 |
$ |
(8,028 |
) |
$ |
1,023 |
|||||
Noninterest Income
Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the periods indicated:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Service charges on deposit accounts |
$ |
2,529 |
$ |
4,224 |
$ |
6,526 |
$ |
8,460 |
||||||||
ATM and debit card fees |
6,136 |
6,156 |
11,990 |
11,681 |
||||||||||||
Retirement plan administration fees |
9,214 |
7,836 |
17,155 |
15,570 |
||||||||||||
Wealth management |
6,823 |
7,122 |
14,096 |
13,685 |
||||||||||||
Insurance |
3,292 |
3,547 |
7,561 |
8,291 |
||||||||||||
Bank owned life insurance |
1,381 |
1,186 |
2,755 |
2,563 |
||||||||||||
Net securities gains (losses) |
180 |
(69 |
) |
(632 |
) |
(12 |
) |
|||||||||
Other |
5,456 |
4,239 |
10,983 |
7,824 |
||||||||||||
Total noninterest income |
$ |
35,011 |
$ |
34,241 |
$ |
70,434 |
$ |
68,062 |
||||||||
Noninterest income for the three months ended June 30, 2020 was $35.0 million, down $0.4 million, or 1.2%, from the prior quarter and up $0.8 million, or 2.2%, from the second quarter of 2019. Excluding net securities gains (losses), noninterest income for the three months ended June 30, 2020 would have been $34.8 million, down $1.4 million, or 3.9%, from the prior quarter and up $0.5 million, or 1.5%, from the second quarter of 2019. The decrease from the prior quarter was primarily driven by lower service charges on deposit accounts due to lower overdraft charges during the COVID-19 pandemic and lower insurance income due to seasonally higher insurance revenues in the first quarter of 2020, partly offset by higher retirement plan administration fees due to the April 1, 2020 acquisition of Alliance Benefit Group of Illinois, Inc. (“ABG”), which contributed $1.8 million in revenues during the second quarter of 2020. The increase from the second quarter of 2019 was primarily due to the increase in retirement plan administration fees due to the ABG acquisition and an increase in other noninterest income due primarily to higher swap fee income, partly offset by lower service charges on deposit accounts due to lower overdraft charges during the COVID-19 pandemic.
Noninterest income for the six months ended June 30, 2020 was $70.4 million, up $2.4 million, or 3.5%, from the same period in 2019. Excluding net securities gains (losses), noninterest income for the six months ended June 30, 2020 would have been $71.1 million, up $3.0 million, or 4.4%, from the same period in 2019. The increase from the prior year was driven by an increase in retirement plan administration fees due to the ABG acquisition and an increase in other noninterest income due primarily to higher swap fee income, partly offset by lower service charges on deposit accounts due to lower overdraft charges during the COVID-19 pandemic and lower insurance revenue.
Noninterest Expense
Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the periods indicated:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(In thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
Salaries and employee benefits |
$ |
39,717 |
$ |
38,567 |
$ |
80,467 |
$ |
77,923 |
||||||||
Occupancy |
5,065 |
5,443 |
11,060 |
11,718 |
||||||||||||
Data processing and communications |
4,079 |
4,693 |
8,312 |
9,107 |
||||||||||||
Professional fees and outside services |
3,403 |
3,359 |
7,300 |
7,027 |
||||||||||||
Equipment |
4,779 |
4,518 |
9,421 |
9,275 |
||||||||||||
Office supplies and postage |
1,455 |
1,577 |
3,091 |
3,168 |
||||||||||||
FDIC expense |
993 |
949 |
1,304 |
1,966 |
||||||||||||
Advertising |
322 |
641 |
931 |
1,144 |
||||||||||||
Amortization of intangible assets |
883 |
893 |
1,717 |
1,861 |
||||||||||||
Loan collection and other real estate owned, net |
728 |
961 |
1,745 |
1,746 |
||||||||||||
Other |
3,916 |
4,630 |
10,873 |
9,756 |
||||||||||||
Total noninterest expense |
$ |
65,340 |
$ |
66,231 |
$ |
136,221 |
$ |
134,691 |
||||||||
Noninterest expense for the three months ended June 30, 2020 was $65.3 million, down $5.5 million, or 7.8%, from the prior quarter and down $0.9 million, or 1.3%, from the second quarter of 2019. The decrease from the prior quarter was due to lower salaries and employee benefits, occupancy expenses, professional fees and outside services and other noninterest expense. The decrease in salaries and benefits was due to decreased medical expenses during the COVID-19 pandemic and lower stock-based compensation expenses, partly offset by increased salaries due to the ABG acquisition. Occupancy expense along with professional fees and outside services expense decreased driven by the COVID-19 pandemic due to lower utilization of bank premises and general reduced activities. Other noninterest expense due primarily to a $2.0 million expense in the first quarter for the allowance for unfunded loan commitments, along with lower travel and training expenses during the pandemic, partly offset by higher FDIC expense due to the remaining portion of the FDIC small bank credit being utilized in the prior quarter. The decrease in noninterest expense from the second quarter of 2019 was due to lower data processing and communication expense driven by lower transaction volumes as a result of the COVID-19 pandemic, lower other noninterest expense due to lower travel and training expenses during the COVID-19 pandemic and lower pension costs, partly offset by an increase in salaries and employee benefits due to the ABG acquisition.
Noninterest expense for the six months ended June 30, 2020 was $136.2 million, up $1.5 million, or 1.1%, from the same period in 2019. The increase from the prior year was driven by higher salaries and employee benefits due to the ABG acquisition and higher other noninterest expense driven by a $1.8 million expense for the allowance for unfunded loan commitments, partly offset by lower data processing and communication expense and lower occupancy expense driven by the COVID-19 pandemic. FDIC expense was lower due to application of the Small Bank Assessment Credit in the six months ended June 30th, 2020.
Income Taxes
Income tax expense for the three months ended June 30, 2020 was $6.6 million, up $4.8 million from the prior quarter and down $2.2 million from the second quarter of 2019. The effective tax rate of 21.0% for the second quarter of 2020 was higher comparable to 14.2% in the prior quarter and comparable at 22.4% for the second quarter of 2019. The higher effective tax rate compared to the first quarter of 2020 was due to higher level of taxable income relative to total income and included a true-up of tax expense to bring the full year estimated effective tax rate to 19.5%. The lower effective tax rate compared to the second quarter of 2019 was due to a lower level of taxable income relative to total income.
Income tax expense for the six months ended June 30, 2020 was $8.3 million, down $8.6 million from the same period of 2019. The effective tax rate of 19.1% for the first six months of 2020 was down from 22.1% for the same period in the prior year. The decrease in income tax expense from the prior year was due to a lower level of taxable income as a result of the COVID-19 pandemic and and increased provision for loan losses.
ANALYSIS OF FINANCIAL CONDITION
Securities
Total securities increased $103.6 million, or 6.3%, from December 31, 2019 to June 30, 2020. The securities portfolio represents 16.0% of total assets as of June 30, 2020 as compared to 16.8% as of December 31, 2019.
The following table details the composition of securities available for sale, securities held to maturity and equity securities for the periods indicated:
June 30, 2020 |
December 31, 2019 |
|||||||
Mortgage-backed securities: |
||||||||
With maturities 15 years or less |
22 |
% |
25 |
% |
||||
With maturities greater than 15 years |
12 |
% |
12 |
% |
||||
Collateral mortgage obligations |
46 |
% |
45 |
% |
||||
Municipal securities |
11 |
% |
10 |
% |
||||
U.S. agency notes |
6 |
% |
6 |
% |
||||
Corporate |
1 |
% |
- |
|||||
Equity securities |
2 |
% |
2 |
% |
||||
Total |
100 |
% |
100 |
% |
||||
The Company’s mortgage-backed securities, U.S. agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio. Refer to Note 3 to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q for information related to other-than-temporary impairment considerations.
Loans
A summary of loans, net of deferred fees and origination costs, by type(1) for the periods indicated follows:
(In thousands) |
June 30, 2020 |
December 31, 2019 |
||||||
Commercial |
$ |
1,318,806 |
$ |
1,302,209 |
||||
Commercial real estate |
2,256,580 |
2,142,057 |
||||||
Paycheck protection plan |
510,097 |
- |
||||||
Residential real estate mortgages |
1,460,058 |
1,445,156 |
||||||
Indirect auto |
1,091,889 |
1,193,635 |
||||||
Specialty lending |
515,618 |
542,063 |
||||||
Home equity |
415,528 |
444,082 |
||||||
Other consumer |
59,415 |
66,896 |
||||||
Total loans |
$ |
7,627,991 |
$ |
7,136,098 |
||||
(1) Loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL.
Total loans increased by $491.9 million, at June 30, 2020 from December 31, 2019. Excluding PPP loans, period end loans decreased $18.2 million from December 31, 2019. Commercial and industrial loans increased $16.6 million to $1.3 billion; commercial real estate loans increased $114.5 million to $2.3 billion; and total consumer loans decreased $149.3 million to $3.5 billion, driven by managed run-off of indirect auto loans. Total loans represent approximately 70.3% of assets as of June 30, 2020, as compared to 73.4% as of December 31, 2019.
Allowance for Loan Losses, Provision for Loan Losses and Nonperforming Assets
Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
As a result of our January 1, 2020, adoption of CECL and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment includes a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the deferred tax asset. After a thorough consideration and validation of the factors discussed in Note 2 to the Company’s unaudited interim consolidated financial statements included in this Form 10-Q, required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
The allowance for credit losses totaled $113.5 million at June 30, 2020, compared to $100.0 million at March 31, 2020 and $72.2 million at June 30, 2019. The allowance for credit losses as a percentage of loans was 1.49% (1.59% excluding PPP loans) at June 30, 2020, compared to 1.38% at March 31, 2020 and 1.04% at June 30, 2019. The provision for loan losses was $48.5 million for the six months ended June 30, 2020, compared to $13.1 million for the six months ended June 30, 2019. Net charge-offs totaled $11.0 million during the six months ended June 30, 2020, compared to net charge-offs of $13.4 million during the six months ended June 30, 2019. The higher provision for loan losses in the six months ended June 30, 2020 when compared to the six months ended June 30, 2019 was driven by implementation of CECL, which uses an economic forecast that now includes the impact of the COVID-19 pandemic. As of June 30, 2020, the unfunded commitment reserve totaled $5.5 million, compared to $5.7 million as of March 31, 2020 and $0.9 million as of June 30, 2019. The increase in the unfunded commitment reserve in 2020 compared to 2019 is related to an increase in expected losses due to the adoption of CECL and the deterioration of the economic forecast due to COVID-19. Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. In the third quarter of 2019 the threshold for evaluating classified and nonperforming loans specifically evaluated for impairment was increased from $750 thousand to $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.
June 30, 2020 |
December 31, 2019 |
|||||||||||||||
(Dollars in thousands) |
Amount |
% |
Amount |
% |
||||||||||||
Nonaccrual loans: |
||||||||||||||||
Commercial |
$ |
10,801 |
42 |
% |
$ |
12,379 |
49 |
% |
||||||||
Residential real estate |
8,533 |
33 |
% |
5,233 |
21 |
% |
||||||||||
Consumer |
2,693 |
11 |
% |
4,046 |
16 |
% |
||||||||||
Troubled debt restructured loans |
3,540 |
14 |
% |
3,516 |
14 |
% |
||||||||||
Total nonaccrual loans |
$ |
25,567 |
100 |
% |
$ |
25,174 |
100 |
% |
||||||||
Loans 90 days or more past due and still accruing: |
||||||||||||||||
Commercial |
$ |
90 |
4 |
% |
$ |
- |
- |
|||||||||
Residential real estate |
252 |
12 |
% |
927 |
25 |
% |
||||||||||
Consumer |
1,715 |
83 |
% |
2,790 |
75 |
% |
||||||||||
Total loans 90 days or more past due and still accruing |
$ |
2,057 |
100 |
% |
$ |
3,717 |
100 |
% |
||||||||
Total nonperforming loans |
$ |
27,624 |
$ |
28,891 |
||||||||||||
OREO |
1,783 |
1,458 |
||||||||||||||
Total nonperforming assets |
$ |
29,407 |
$ |
30,349 |
||||||||||||
Total nonperforming loans to total loans |
0.36 |
% |
0.40 |
% |
||||||||||||
Total nonperforming assets to total assets |
0.27 |
% |
0.31 |
% |
||||||||||||
Allowance for loan losses to total nonperforming loans |
410.87 |
% |
252.55 |
% |
||||||||||||
Excluding PPP loan originations, nonperforming loans to total loans was 0.39% at June 30, 2020, down 6 bps from 0.45% at March 31, 2020 and consistent with 0.39% at June 30, 2019. The decline in nonperforming loans resulted primarily from the resolution of one commercial credit of $4.2 million. Past due loans as a percentage of total loans was 0.30% at June 30, 2020 (0.32% excluding PPP loan originations), down from 0.51% at March 31, 2020 and down from 0.52% at June 30, 2019.
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act, along with a joint agency statement issued by banking regulatory agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the short-term modification programs provided to its borrowers and has concluded the modifications were generally made to borrowers who were in good standing prior to the COVID-19 pandemic and the modifications were temporary and minor in nature and therefore do not qualify for designation as TDRs. As of June 30, 2020, 13% of total loans outstanding were in payment deferral programs, of which 80% are commercial borrowers and 20% are consumer borrowers. As of August 5, 2020, 6.3% of total loans (excluding PPP loan balances) were in payment deferral programs.
In addition to nonperforming loans discussed above, the Company has also identified approximately $115.3 million in potential problem loans at June 30, 2020 as compared to $84.1 million at December 31, 2019. The increase in potential problem loans is primarily due to the Company’s proactive approach to risk ratings throughout the deferral process and relates to higher risk industries impacted by the COVID-19 pandemic. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of June 30, 2020, 9.6% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.
Deposits
Total deposits were $8.8 billion at June 30, 2020, up $1.2 billion, or 16.2%, from December 31, 2019. Total average deposits increased $621.3 million, or 8.3%, from the same period last year. The growth was driven primarily by an increase of $338.8 million, or a 14.7% increase in demand deposits, combined with an increase in interest bearing deposits of $282.6 million, or 5.4%, due to growth in money market deposit account (“MMDA”) partly offset by a decrease in time accounts. The high rate of deposit growth was primarily due to funding of PPP loans and various government support programs.
Borrowed Funds
The Company’s borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $339.7 million at June 30, 2020 compared to $655.3 million at December 31, 2019. The notional value of interest rate swaps hedging cash flows related to short-term borrowings totaled $25.0 million at June 30, 2020 and $50.0 million at December 31, 2019. Long-term debt was $64.2 million at June 30, 2020 and December 31, 2019.
For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below.
Subordinated Debt
On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualifies as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.0 million. As of June 30, 2020 the subordinated debt net of unamortized issuance costs was $98.0 million.
Capital Resources
Stockholders’ equity of $1.1 billion represented 10.53% of total assets at June 30, 2020 compared with $1.1 billion, or 11.53% as of December 31, 2019. Stockholders’ equity was consistent with December 31, 2019 as net income of $35.1 million for the six months ending June 30, 2020 and an increase in accumulated other comprehensive income of $21.5 million was offset by dividends declared of $23.6 million during the period, repurchase of common stock of $8.0 million and a $4.3 million negative adjustment due to the adoption of CECL.
The Company repurchased 263,507 shares of common stock during the first quarter of 2020 at a weighted average price of $30.25 excluding commissions under a previous announced plan. As of June 30, 2020, there were 736,493 shares available for repurchase under this plan authorized on October 28, 2019 and set to expire on December 31, 2021. The Company suspended repurchases during the first quarter and does not expect to repurchase additional shares at this time.
The Board of Directors considers the Company’s earnings position and earnings potential when making dividend decisions. The Board of Directors approved a third-quarter 2020 cash dividend of $0.27 per share at a meeting held on July 27, 2020. The dividend will be paid on September 15, 2020 to stockholders of record as of September 1, 2020.
As the capital ratios in the following table indicate, the Company remained “well capitalized” at June 30, 2020 under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios must be 5%, 6.5%, 8% and 10%, respectively.
Capital Measurements |
June 30, 2020 |
December 31, 2019 |
||||||
Tier 1 leverage ratio |
9.44 |
% |
10.33 |
% |
||||
Common equity tier 1 capital ratio |
11.34 |
% |
11.29 |
% |
||||
Tier 1 capital ratio |
12.60 |
% |
12.56 |
% |
||||
Total risk-based capital ratio |
15.15 |
% |
13.52 |
% |
||||
Cash dividends as a percentage of net income |
67.37 |
% |
38.02 |
% |
||||
Per common share: |
||||||||
Book value |
$ |
26.20 |
$ |
25.58 |
||||
Tangible book value(1) |
$ |
19.46 |
$ |
19.03 |
||||
Tangible equity ratio(2) |
8.04 |
% |
8.84 |
% |
||||
| (1) | Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding. |
| (2) | Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. |
In March 2020, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company is allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020, and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020, and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022. The Company adopted the capital transition relief over the permissible five-year period.
Liquidity and Interest Rate Sensitivity Management
Market Risk
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.
Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”), meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 50 bps takes place over a 12 month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded into them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risks.
In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets (particularly LIBOR-based loans) repricing downward faster than the interest-bearing liabilities that remain at or near their floors. In the rising rate scenarios, net interest income is projected to experience a slight decline from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, MMDA and time accounts. Net interest income for the next twelve months in the + 200/+100/-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the June 30, 2020 balance sheet position:
Interest Rate Sensitivity Analysis |
|
Change in interest rates |
Percent change in |
(in bps points) |
net interest income |
+200 |
1.55% |
+100 |
1.27% |
-50 |
1.32% |
The Company anticipates that the trajectory of net interest income will depend significantly on the depth and duration of the current economic downturn. In response to the economic impact of the pandemic, the federal funds rate was reduced by 150 bps in March 2020, and term interest rates fell sharply across the yield curve. The Company has reduced deposit rates and expects to make further reductions in the second quarter. With deposit rates approaching their lower bound, the Company will focus on managing asset yields in order to maintain the net interest margin. Competitive pressure may limit the Company’s ability to maintain asset yields in the current environment, however.
Liquidity Risk
Liquidity involves the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. ALCO is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies, regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.
The primary liquidity measurement the Company utilizes is called the “Basic Surplus”, which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At June 30, 2020, the Company’s Basic Surplus measurement was 24.1% of total assets or approximately $2.6 billion as compared to the December 31, 2019 Basic Surplus of 15.8% or $1.5 billion and was above the Company’s minimum of 5% (calculated at $542.4 million and $485.8 million, of period end total assets as June 30, 2020 and December 31, 2019, respectively) set forth in its liquidity policies.
At June 30, 2020 and December 31, 2019, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $328.3 million and $585.8 million, respectively. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.4 billion at June 30, 2020 and $1.2 billion at December 31, 2019. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $687.6 million and $627.6 million at June 30, 2020 and December 31, 2019, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to purchase brokered time deposits and borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $1.8 billion at June 30, 2020 and $1.4 billion at December 31, 2019. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the ability to pledge automobile loans as collateral. At June 30, 2020 and December 31, 2019, the Bank had the capacity to borrow $773.1 million and $837.3 million, respectively, from this program. The Company’s internal policies authorize borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $2.4 billion at June 30, 2020 and $1.8 billion at December 31, 2019.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2020. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.
At June 30, 2020, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.
The Company’s primary source of funds is the Bank. Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At June 30, 2020, approximately $154.1 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.
Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, the Company’s disclosure controls and procedures were effective.
Effective January 1, 2020, the Company adopted the CECL accounting standard. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
There are no material legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject, except as described in the Company’s 2019 Annual Report on Form 10-K.
There are no material changes to the risk factors as previously discussed in Part I, Item 1A of our 2019 Annual Report on Form 10-K, except as described below.
The ongoing coronavirus (“COVID-19”) pandemic is adversely impacting the Company and our customers, counterparties, employees and third-party service providers. Further, the COVID-19 pandemic has led to an economic recession and disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and the adverse impacts on our business, financial position, results of operations and prospects could be significant.
The Company’s business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The COVID-19 global public health crisis and the corresponding governmental response have resulted in widespread volatility, severe disruptions in the U.S. economy at large, operational difficulty for many small businesses, and deterioration in household, business, economic and market conditions. The extent of the impact of the COVID-19 pandemic and related responses on our capital, liquidity and other financial positions and on our business, results of operations and prospects will depend on a number of evolving factors, including:
• |
The duration, extent, and severity of the pandemic. The COVID-19 pandemic does not yet appear to be contained and could affect significantly more households and businesses. The duration and level of severity of the pandemic continue to be unpredictable. |
• |
The impact on our employees. While we have not experienced a significant impact on the availability of our employees to date, our colleagues remain at risk of being exposed to COVID-19. We have taken meaningful steps and precautions to ensure their health and well-being; however, COVID-19 could still impact our colleagues’ availability to work due to illness, quarantines, government actions, financial center closures or other reasons. If our employees are not able to work as effectively or a substantial number of employees are unable to work due to COVID-19, our business would be adversely affected. |
• |
The effects on our customers, counterparties, employees and third-party service providers. COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational and other risks are generally expected to increase. |
• |
The effects on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional and local economies and markets could suffer disruptions that are lasting. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect our results of operations and financial condition. |
Additionally, if the COVID-19 pandemic has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.
The Company is unable to fully estimate the impact of the COVID-19 pandemic on our business and operations at this time. The global pandemic may cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, further reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects. Sustained adverse effects may also prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements or result in downgrades in our credit ratings.
Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our results of operations, financial condition and cash flows. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. The full extent to which the COVID-19 pandemic will negatively affect our results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
The Company’s active participation in the PPP, or in other relief programs, may expose us to credit losses as well as litigation and compliance risk.
To support our customers, businesses, and communities, the Company’s participation in the PPP, and participation in any other relief programs now or in the future, including those under the CARES Act, exposes us to certain credit, compliance, and other risks.
Pursuant to regulatory requirements, PPP loans are subject to forbearance of loan repayment, and if PPP borrowers fail to qualify for loan forgiveness from the SBA, the Company bears the risk of holding these loans at unfavorable interest rates. In addition, because of the short time period between the passing of the CARES Act and the implementation of the PPP, there is ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. There is risk that the SBA or another governmental entity could conclude there is a deficiency in the manner in which the Company originated, funded, or serviced PPP loans, which may or may not be related to the ambiguity in the CARES Act or the rules and guidance promulgated by the SBA and the U.S. Department of the Treasury regarding the operation of the PPP. In the event of such deficiency, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us.
Since the commencement of the PPP, several other banks have been subject to litigation regarding the processes and procedures that such banks followed in accepting and processing applications for the PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers, with respect to the processes and procedures we used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability to us or adversely affect our reputation business, financial condition, and results of operations.
In addition, we may be subject to regulatory scrutiny regarding the Company’s processing of PPP applications or its origination or servicing of PPP loans. While the SBA has stated that banks may rely on the certifications of borrowers regarding their eligibility for PPP loans, the Company also has obligations under the PPP. If the SBA found that the Company did not meet those obligations, the remedies the SBA may seek against the Company are unknown but may include not guarantying the PPP loans, resulting in credit exposure to borrowers who may be unable to repay their loans.
(a) |
Not applicable |
(b) |
Not applicable |
(c) |
None |
None
None
None
3.1 |
Restated Certificate of Incorporation of NBT Bancorp Inc. as amended through July 1, 2015 (filed as Exhibit 3.1 to Registrant’s Form 10-Q, filed on August 10, 2015 and incorporated herein by reference). |
3.2 |
Amended and Restated Bylaws of NBT Bancorp Inc. effective May 22, 2018 (filed as Exhibit 3.1 to Registrant’s Form 8-K, filed on May 23, 2018 and incorporated herein by reference). |
3.3 |
Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the Registrant’s Form 8-K, filed on November 18, 2004 and incorporated herein by reference). |
4.1 |
Subordinated Indenture, dated as of June 23, 2020, between NBT Bancorp Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to Registrant’s Form 8-K, filed on June 23, 2020 and incorporated herein by reference). |
4.2 |
First Supplemental Indenture, dated as of June 23, 2020, between NBT Bancorp Inc. and U.S. Bank National Association (filed as Exhibit 4.2 to Registrant’s Form 8-K, filed on June 23, 2020 and incorporated herein by reference). |
4.3 |
Form of 5.000% Fixed-to-Floating Rate Subordinated Notes due 2030 (included in Exhibit 4.2). |
Certification by the Chief Executive Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934. |
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Certification by the Chief Financial Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934. |
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Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS |
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 10th day of August 2020.
NBT BANCORP INC. |
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By: |
/s/ John V. Moran |
John V. Moran |
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Executive Vice President |
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Chief Financial Officer |
57
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John H. Watt, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: August 10, 2020
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By:
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/s/ John H. Watt, Jr.
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John H. Watt Jr.
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Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John V. Moran, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: August 10, 2020
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By:
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/s/ John V. Moran
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John V. Moran
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Executive Vice President and
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Chief Financial Officer
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EXHIBIT 32.1
Written Statement of the Chief Executive Officer Pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002
The undersigned, the Chief Executive Officer of NBT Bancorp Inc. (the “Company”), hereby certifies that to his knowledge on the date hereof:
(a) the Form 10-Q of the Company for the Quarterly Period Ended June 30, 2020, filed on the date hereof with the Securities and Exchange
Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
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/s/ John H. Watt, Jr.
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John H. Watt, Jr.
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Chief Executive Officer
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August 10, 2020
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NBT Bancorp Inc. and will be retained by NBT Bancorp Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
EXHIBIT 32.2
Written Statement of the Chief Financial Officer Pursuant to Section 906 of the SARBANES-OXLEY ACT OF 2002
The undersigned, the Chief Financial Officer of NBT Bancorp Inc. (the “Company”), hereby certifies that to his knowledge on the date
hereof:
(a) the Form 10-Q of the Company for the Quarterly Period Ended June 30, 2020, filed on the date hereof with the Securities and
Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
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/s/ John V. Moran
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John V. Moran
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Executive Vice President and
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Chief Financial Officer
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August 10, 2020
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NBT Bancorp Inc. and will be retained by NBT Bancorp Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.