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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020.

 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______

Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
EFSC
 
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected 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 May 4, 2020, the Registrant had 26,161,001 shares of outstanding common stock, $0.01 par value per share.

This document is also available through our website at http://www.enterprisebank.com.
 






ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.  Financial Statements
 
 
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.  Legal Proceedings
 
 
 
Item 1A.  Risk Factors
 
 
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3. Defaults Upon Senior Securities
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
Item 5. Other Information
 
 
 
Item 6. Exhibits
 
 
Signatures
 
 
 
 




Glossary of Acronyms, Abbreviations and Entities

The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 2 and the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.

ACL
Allowance for Credit Losses
 
FASB
Financial Accounting Standards Board
ACLL
Allowance for Credit Losses on Loans (excludes allowance for securities and allowance for unfunded commitments)
 
FDIC
Federal Deposit Insurance Corporation
ASC
Accounting Standards Codification
 
FHLB
Federal Home Loan Bank
ASU
Accounting Standards Update
 
GAAP
Generally Accepted Accounting Principles (United States)
Bank
Enterprise Bank & Trust
 
LIBOR
London Interbank Offered Rate
C&I
Commercial and Industrial
 
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CECL
Current Expected Credit Loss
 
PCD
Purchased Credit Deteriorated
Company
Enterprise Financial Services Corp and Subsidiaries
 
PCI
Purchased Credit Impaired
CRE
Commercial Real Estate
 
PPP
Paycheck Protection Program
DCF
Discounted Cash Flow
 
SBA
Small Business Administration
EFSC
Enterprise Financial Services Corp
 
SEC
Securities and Exchange Commission
Enterprise
Enterprise Financial Services Corp and Subsidiaries
 
Trinity
Trinity Capital Corporation





PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Cash and due from banks
$
98,619

 
$
74,769

Federal funds sold
3,068

 
3,060

Interest-earning deposits (including $43,315 and $15,285 pledged as collateral, respectively)
81,996

 
89,427

Total cash and cash equivalents
183,683

 
167,256

Interest-earning deposits greater than 90 days
3,730

 
3,730

Securities available-for-sale
1,161,514

 
1,135,317

Securities held-to-maturity, net
178,932

 
181,166

Loans held-for-sale
8,430

 
5,570

Loans
5,457,517

 
5,314,337

Less: Allowance for credit losses on loans
92,187

 
43,288

Total loans, net
5,365,330

 
5,271,049

Other investments
41,703

 
38,044

Fixed assets, net
59,358

 
60,013

Goodwill
210,344

 
210,344

Intangible assets, net
24,585

 
26,076

Other assets
263,034

 
235,226

Total assets
$
7,500,643

 
$
7,333,791

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Noninterest-bearing deposit accounts
$
1,354,571

 
$
1,327,348

Interest-bearing transaction accounts
1,389,603

 
1,367,444

Money market accounts
1,925,415

 
1,713,615

Savings accounts
554,413

 
536,169

Certificates of deposit:
 
 
 
Brokered
170,667

 
215,758

Other
595,237

 
610,689

Total deposits
5,989,906

 
5,771,023

Subordinated debentures and notes
141,336

 
141,258

FHLB advances
222,000

 
222,406

Other borrowings
173,061

 
230,886

Notes payable
32,857

 
34,286

Other liabilities
95,047

 
66,747

Total liabilities
$
6,654,207

 
$
6,466,606

 
 
 
 
Commitments and contingent liabilities (Note 5)
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 0 shares issued and outstanding

 

Common stock, $0.01 par value; 45,000,000 shares authorized; 28,140,602 and 28,067,087 shares issued, respectively
281

 
281

Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively
(73,528
)
 
(58,181
)
Additional paid in capital
525,838

 
526,599

Retained earnings
370,748

 
380,737

Accumulated other comprehensive income
23,097

 
17,749

Total shareholders' equity
846,436

 
867,185

Total liabilities and shareholders' equity
$
7,500,643

 
$
7,333,791

The accompanying notes are an integral part of these consolidated financial statements.

1



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
Three months ended March 31,
(in thousands, except per share data)
2020
 
2019
Interest income:
 
 
 
Interest and fees on loans
$
67,169

 
$
61,025

Interest on debt securities:
 
 
 
Taxable
7,557

 
5,475

Nontaxable
1,489

 
447

Interest on interest-earning deposits
300

 
447

Dividends on equity securities
173

 
223

Total interest income
76,688

 
67,617

Interest expense:
 
 
 
Deposits
9,888

 
11,820

Subordinated debentures and notes
1,919

 
1,648

FHLB advances
895

 
1,398

Notes payable and other borrowings
618

 
408

Total interest expense
13,320

 
15,274

Net interest income
63,368

 
52,343

Provision for credit losses
22,264

 
1,476

Net interest income after provision for credit losses
41,104

 
50,867

Noninterest income:
 
 
 
Service charges on deposit accounts
3,143

 
2,935

Wealth management revenue
2,501

 
1,992

Card services revenue
2,247

 
1,790

Tax credit income
2,036

 
158

Miscellaneous income
3,481

 
2,355

Total noninterest income
13,408

 
9,230

Noninterest expense:
 
 
 
Employee compensation and benefits
21,685

 
19,352

Occupancy
3,347

 
2,637

Data processing
2,082

 
1,906

Professional fees
862

 
746

Merger-related expenses

 
7,270

Other
10,697

 
7,927

Total noninterest expense
38,673

 
39,838

 
 
 
 
Income before income tax expense
15,839

 
20,259

Income tax expense
2,971

 
4,103

Net income
$
12,868

 
$
16,156

 
 
 
 
Earnings per common share
 
 
 
Basic
$
0.49

 
$
0.68

Diluted
0.48

 
0.67

The accompanying notes are an integral part of these consolidated financial statements.

2




ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 
Three months ended March 31,
(in thousands)
2020
 
2019
Net income
$
12,868

 
$
16,156

Other comprehensive income (loss), after-tax:
 
 
 
Change in unrealized gain on available-for-sale debt securities
10,564

 
11,502

Reclassification adjustment for realized (gain) loss on sale of available-for-sale debt securities
(3
)
 
220

Reclassification of (gain) loss on held-to-maturity securities
(156
)
 
2

Change in unrealized loss on cash flow hedges arising during the period
(5,180
)
 
(952
)
Reclassification of loss on cash flow hedges
123

 

Total other comprehensive income, after-tax
5,348

 
10,772

Comprehensive income
$
18,216

 
$
26,928


The accompanying notes are an integral part of these consolidated financial statements.


3



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(in thousands, except per share data)
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders’ equity
Balance at December 31, 2019
$
281

 
$
(58,181
)
 
$
526,599

 
$
380,737

 
$
17,749

 
$
867,185

Net income

 

 

 
12,868

 

 
12,868

Other comprehensive income

 

 

 

 
5,348

 
5,348

Comprehensive income

 

 

 
12,868

 
5,348

 
18,216

Cash dividends paid on common shares, $0.18 per share

 

 

 
(4,743
)
 

 
(4,743
)
Repurchase of common shares

 
(15,347
)
 

 

 

 
(15,347
)
Issuance under equity compensation plans, 73,515 shares, net

 

 
(1,721
)
 

 

 
(1,721
)
Share-based compensation

 

 
960

 

 

 
960

Reclassification for the adoption of ASU 2016-13 (CECL)

 

 

 
(18,114
)
 

 
(18,114
)
Balance at March 31, 2020
$
281

 
$
(73,528
)
 
$
525,838

 
$
370,748

 
$
23,097

 
$
846,436

 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except per share data)
Common Stock
 
Treasury Stock
 
Additional paid in capital
 
Retained earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
shareholders’ equity
Balance at December 31, 2018
$
239

 
$
(42,655
)
 
$
350,936

 
$
304,566

 
$
(9,282
)
 
$
603,804

Net income

 

 

 
16,156

 

 
16,156

Other comprehensive income

 

 

 

 
10,772

 
10,772

Comprehensive income

 

 

 
16,156

 
10,772

 
26,928

Cash dividends paid on common shares, $0.14 per share

 

 

 
(3,763
)
 

 
(3,763
)
Issuance under equity compensation plans, 75,089 shares, net
1

 

 
(1,941
)
 

 

 
(1,940
)
Share-based compensation

 

 
921

 

 

 
921

Shares issued in connection with acquisition of Trinity Capital Corporation, 3,990,822 shares
40

 

 
171,845

 

 

 
171,885

Balance at March 31, 2019
$
280

 
$
(42,655
)
 
$
521,761

 
$
316,959

 
$
1,490

 
$
797,835

The accompanying notes are an integral part of these consolidated financial statements.

4



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three months ended March 31,
(in thousands, except share data)
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
12,868

 
$
16,156

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
1,524

 
1,162

Provision for credit losses
22,264

 
1,476

Deferred income taxes
(183
)
 
2,727

Net amortization of debt securities
1,054

 
407

Amortization of intangible assets
1,491

 
838

Mortgage loans originated-for-sale
(33,537
)
 
(4,087
)
Proceeds from mortgage loans sold
30,888

 
3,825

Loss (gain) on:
 
 
 
Sale of investment securities
(4
)
 
292

Valuation adjustments and sale of other real estate
52

 
(66
)
Sale of state tax credits
(124
)
 
(158
)
Share-based compensation
960

 
921

Net accretion of loan discount
(2,510
)
 
(596
)
Changes in other assets and liabilities, net
(2,181
)
 
(7,185
)
Net cash provided by operating activities
32,562

 
15,712

Cash flows from investing activities:
 
 
 
Acquisition cash purchase price, net of cash and cash equivalents acquired

 
(23,376
)
Net decrease (increase) in loans
(134,482
)
 
13,855

Proceeds received from:
 
 
 
Sale of debt securities, available-for-sale
207

 
259,420

Paydown or maturity of debt securities, available-for-sale
55,932

 
27,684

Paydown or maturity of debt securities, held-to-maturity
1,595

 
1,269

Redemption of other investments
24,310

 
11,744

Sale of state tax credits held for sale
1,186

 
2,381

Sale of other real estate
443

 
66

Payments for the purchase of:
 
 
 
Available-for-sale debt securities
(69,336
)
 
(221,711
)
Other investments
(28,809
)
 
(14,977
)
State tax credits held for sale
(3,780
)
 
(1,852
)
Fixed assets, net
(918
)
 
(1,268
)
Net cash (used in) provided by investing activities
(153,652
)
 
53,235

Cash flows from financing activities:
 
 
 
Net increase (decrease) in noninterest-bearing deposit accounts
27,223

 
(83,290
)
Net increase (decrease) in interest-bearing deposit accounts
191,659

 
(48,770
)
Repayments of FHLB advances, net
(300
)
 
105,025

Proceeds from notes payable

 
40,000

Repayments of notes payable
(1,429
)
 
(2,000
)
Net decrease in other borrowings
(57,825
)
 
(49,279
)
Cash dividends paid on common stock
(4,743
)
 
(3,763
)
Payments for the repurchase of common stock
(15,347
)
 

Payments for the issuance of equity instruments, net
(1,721
)
 
(1,940
)
Net cash provided by (used in) financing activities
137,517

 
(44,017
)
Net increase in cash and cash equivalents
16,427

 
24,930

Cash and cash equivalents, beginning of period
167,256

 
196,552

Cash and cash equivalents, end of period
$
183,683

 
$
221,482

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
13,026

 
$
14,020

Noncash transactions:
 
 
 
Transfer to other real estate owned in settlement of loans
$

 
$
1,372

Right-of-use assets obtained in exchange for lease obligations
200

 

Common shares issued in connection with acquisition

 
171,885


The accompanying notes are an integral part of these consolidated financial statements.

5



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used by Enterprise Financial Services Corp (the “Company,” “EFSC,” or “Enterprise”) in the preparation of the condensed consolidated financial statements are summarized below:

Business and Consolidation

Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers located in the Arizona, Kansas, Missouri, and New Mexico markets through its banking subsidiary, Enterprise Bank & Trust.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission.

Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the statements of financial position, results of operations, and cash flow for the interim periods.

Recently Adopted Accounting Pronouncements

On January 1, 2020, the Company adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology commonly referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities.
The Company adopted this standard 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 the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded an after-tax decrease to retained earnings of $18.1 million as of January 1, 2020 for the cumulative effect of adopting this standard.
The Company adopted this standard using the prospective transition approach for PCD assets that were previously classified as PCI assets. Management did not reassess whether PCI assets met the criteria of PCD assets as of the date of the adoption.

6



The Company elected not to maintain PCI pools for certain loans which are now accounted for individually. Thus they are now included in nonperforming and classified loans. Management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.

The following table illustrates the impact of adoption:
 
 
 
 
 
 
($ in thousands)
December 31, 2019
 
Impact of Adoption
 
January 1, 2020

Assets:
 
 
 
 
 
Loans
$
5,314,337

 
$
7,091

 
$
5,321,428

Allowance for credit losses on loans
43,288

 
28,387

 
71,675

Allowance for credit losses on held-to-maturity debt securities

 
303

 
303

Deferred tax asset
14,851

 
5,898

 
20,749

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Reserve for unfunded commitments
430

 
2,413

 
2,843

 
 
 
 
 
 
Shareholders’ Equity
 
 
 
 
 
Retained Earnings
380,737

 
(18,114
)
 
362,623


The Company also adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” on January 1, 2020. The Company previously selected the option to adopt the removal or modification of disclosures during the second quarter of 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are applied retrospectively to all periods presented upon their effective date. The adoption of this update did not have a material effect on the Company's consolidated financial statements.

Accounting Standards Issued but not yet Adopted

FASB ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the FASB issued “Reference Rate Reform (Topic 848)” which provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for contract modifications as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the optional expedients and exceptions and has not yet determined the impact this standard may have on its consolidated financial statements.

Loans
The Company has elected to present the accrued interest receivable balance separate from amortized cost basis, exclude accrued interest receivable balances from the tabular disclosures, and not to estimate an ACL on accrued interest receivable as these amounts are timely written off as a credit loss expense.

Accrued interest receivable totaled $16.7 million at March 31, 2020 and was reported in Other Assets on the consolidated balance sheets.


7



PCD Loans
The Company has purchased loans, some of which have experienced more than significant credit deterioration since origination. PCD loans are recorded at the amount paid. An ACL is determined using the same methodology as other loans held for investment. The initial ACL determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through provision expense.

Allowance for Credit Losses on Loans
The ACLL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.

The ACLL is measured on a collective basis when similar risk characteristics exist. The Company has identified the following portfolio segments:

C&I – C&I loans consist of loans to small and medium-sized businesses in a wide variety of industries. These loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. Risk arises primarily due to a difference between expected and actual cash flows of the borrower. However, the recoverability of these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. Included within C&I are revolving loans supported by borrowing bases that fluctuate depending on the amount of underlying collateral. A portion of C&I loans consists of enterprise value lending, which are loans with senior debt exposure to private equity backed companies.

CRE – CRE loans include various types of loans for which the Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship. The primary risks of CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Construction and Land Development – The Company originates loans to finance construction projects including one- to four-family residences, multifamily residences, commercial office, and industrial projects. Construction loans are generally collateralized by first liens on the real estate and have floating interest rates. Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans. Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change.

Residential Real Estate – The Company originates loans to finance one- to four-family residences, secured by both first and second liens. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Residential loans with a second lien are inherently riskier due to the junior lien position.


8



Agricultural – Agricultural loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying real property. Agricultural loans are included as a component of CRE and C&I loans.

Consumer – The Company provides a broad range of consumer loans to customers, including personal lines of credit, credit cards and automobile loans. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral.

The Company utilizes a DCF method to measure the ACL on loans collectively evaluated that are sub-segmented by credit risk levels. The DCF method incorporates assumptions for probability of default, loss given default, prepayments and curtailments over the contractual term of the loans. In determining the probability of default, the Company utilized a regression analysis to determine certain economic factors that are relevant loss drivers in the portfolio segments based on historical or peer evaluations. National unemployment is a loss driver used in nearly all portfolios, except Consumer. The annual percentage change in gross domestic product is also used in C&I, Construction, Agricultural and Consumer portfolios. The annual percentage change in a commercial real estate index, national house price index and the consumer price index are used in the CRE, Residential Real Estate and Consumer portfolios, respectively. 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 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.

The Company uses a one-year reasonable and supportable forecast that considers baseline, upside and downside economic scenarios. For periods beyond the forecast period, the Company reverts to historical loss rates on a straight-line basis over a six-month period.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective 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.


9



NOTE 2 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.

The following table presents a summary of per common share data and amounts for the periods indicated.
 
Three months ended March 31,
(in thousands, except per share data)
2020
 
2019
Net income as reported
$
12,868

 
$
16,156

 
 
 
 
Weighted average common shares outstanding
26,473

 
23,927

Additional dilutive common stock equivalents
66

 
156

Weighted average diluted common shares outstanding
26,539

 
24,083

 
 
 
 
Basic earnings per common share:
$
0.49

 
$
0.68

Diluted earnings per common share:
0.48

 
0.67


For the three months ended March 31, 2020 and 2019 common stock equivalents of approximately 62,000 and 122,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive.

10



NOTE 3 - INVESTMENTS

The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available for sale and held to maturity:
 
 
March 31, 2020
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Allowance for Credit Losses
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Obligations of U.S. Government-sponsored enterprises
$
9,960

 
$
270

 
$

 
$

 
$
10,230

Obligations of states and political subdivisions
243,863

 
10,373

 
(205
)
 

 
254,031

Agency mortgage-backed securities
863,698

 
23,465

 
(496
)
 

 
886,667

U.S. Treasury bills
9,973

 
613

 

 

 
10,586

          Total securities available for sale
$
1,127,494

 
$
34,721

 
$
(701
)
 
$

 
$
1,161,514

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
11,688

 
$
153

 
$

 
$
(1
)
 
$
11,840

Agency mortgage-backed securities
44,720

 
1,924

 

 

 
46,644

Corporate debt securities
122,827

 
162

 
(3,090
)
 
(302
)
 
119,597

          Total securities held-to-maturity
$
179,235

 
$
2,239


$
(3,090
)

$
(303
)
 
$
178,081

Less: Allowance for credit losses
303

 
 
 
 
 
 
 
 
          Total securities held-to-maturity, net
$
178,932

 
 
 
 
 
 
 
 


 
December 31, 2019
(in thousands)
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
    Obligations of U.S. Government-sponsored enterprises
$
9,954

 
$
92

 
$

 
$
10,046

    Obligations of states and political subdivisions
207,269

 
6,118

 
(363
)
 
213,024

    Agency mortgage-backed securities
888,129

 
15,083

 
(1,191
)
 
902,021

U.S. Treasury Bills
$
9,971

 
$
255

 
$

 
$
10,226

          Total securities available for sale
$
1,115,323

 
$
21,548

 
$
(1,554
)
 
$
1,135,317

Held-to-maturity securities:
 
 
 
 
 
 
 
   Obligations of states and political subdivisions
$
11,704

 
$
170

 
$

 
$
11,874

   Agency mortgage-backed securities
46,346

 
675

 

 
47,021

Corporate debt securities
123,116

 
128

 
(200
)
 
123,044

          Total securities held to maturity
$
181,166

 
$
973

 
$
(200
)

$
181,939



At March 31, 2020 and December 31, 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of $431.7 million and $484.8 million at March 31, 2020 and December 31, 2019, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.


11



The amortized cost and estimated fair value of debt securities at March 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 3 years.

 
Available for sale
 
Held to maturity
(in thousands)
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
2,018

 
$
2,054

 
$

 
$

Due after one year through five years
26,301

 
27,369

 
4,444

 
4,503

Due after five years through ten years
10,205

 
10,576

 
130,071

 
126,934

Due after ten years
225,272

 
234,848

 

 

Agency mortgage-backed securities
863,698

 
886,667

 
44,720

 
46,644

 
$
1,127,494

 
$
1,161,514


$
179,235


$
178,081



The following table represents a summary of available-for-sale investment securities that had an unrealized loss:
 
March 31, 2020
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of states and political subdivisions
$
10,475

 
$
205

 
$

 
$

 
$
10,475

 
$
205

Agency mortgage-backed securities
82,614

 
415

 
5,198

 
81

 
87,812

 
496

 
$
93,089

 
$
620


$
5,198


$
81


$
98,287


$
701

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table represents a summary of investment securities that had an unrealized loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of states and political subdivisions
56,327

 
363

 

 

 
56,327

 
363

Agency mortgage-backed securities
131,693

 
756

 
41,491

 
435

 
173,184

 
1,191

Corporate debt securities
67,964

 
200

 

 

 
67,964

 
200

 
$
255,984

 
$
1,319


$
41,491


$
435


$
297,475


$
1,754



The unrealized losses at both March 31, 2020 and December 31, 2019, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At March 31, 2020, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired. Accrued interest receivable on available-for-sale debt securities totaled $4.5 million at March 31, 2020 and is excluded from the estimate of credit losses.

Accrued interest receivable on held-to-maturity debt securities totaled $1.4 million at March 31, 2020 and is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. At March 31, 2020, the ACL on held-to-maturity securities was $0.3 million.

12



NOTE 4 - LOANS

Below is a summary of loans by category at March 31, 2020 and December 31, 2019:
 
(in thousands)
March 31, 2020
 
December 31, 2019
Commercial and industrial
$
2,469,013

 
2,361,157

Real estate:
 
 
 
Commercial - investor owned
1,327,814

 
1,299,884

Commercial - owner occupied
720,543

 
697,437

Construction and land development
469,627

 
457,273

Residential
346,758

 
366,261

Total real estate loans
2,864,742

 
2,820,855

Consumer and other
126,212

 
134,941

Loans, before unearned loan fees
5,459,967

 
5,316,953

Unearned loan fees, net
(2,450
)
 
(2,616
)
Loans, including unearned loan fees
$
5,457,517

 
$
5,314,337



The loan balance at March 31, 2020 includes a discount on acquired loans of $24.5 million. At March 31, 2020 loans of $2.7 billion were pledged to FHLB and the Federal Reserve Bank.

A summary of the activity in the ACLL by category through March 31, 2020 is as follows:
(in thousands)