ENTERPRISE FINANCIAL SERVICES CORP: DISCUSSION AND ANALYSIS OF MANAGEMENT’S FINANCIAL POSITION AND PERFORMANCE (Form 10-K)
introduction
The objective of this section is to provide an overview of the results of operations and financial condition of the Company by focusing on changes in certain key measures from year to year. It should be read in conjunction with the Consolidated Financial Statements and related Notes contained in "Item 8. Financial Statements and Supplementary Data," and other financial data presented elsewhere in this report, particularly the information regarding the Company's business operations described in Item 1. A detailed discussion comparing 2020 and 2019 results is incorporated herein by reference to Item 7 of the Company's 2020 Annual Report on Form 10-K filed onFebruary 19, 2021 . Executive Summary Our Company offers a broad range of business and personal banking services including wealth management services. Lending services include commercial and industrial, commercial real estate, real estate construction and development, residential real estate, specialty, and other loans. A wide variety of deposit products and a complete suite of treasury management and international trade services complement our lending capabilities. Tax-credit brokerage activities consist of the acquisition of Federal and State tax credits and the sale of these tax credits. The Company's results of operations are also affected by prevailing economic conditions, competition, government policies and other actions of regulatory agencies. The Company's financial condition, operating results and liquidity in 2020 and 2021 were impacted by COVID-19 and the monetary and fiscal policy changes enacted to address the pandemic. Starting in 2020, theFederal Reserve reduced interest rates and reserve requirements, while also increasing quantitative easing through purchases of Treasuries and agency mortgage-backed securities. The federal government's fiscal support of the economy through the Cares Act, the ARA and other acts have been highly expansionary. Low interest rates, supply chain disruptions and monetary and fiscal policies contributed to higher inflation in 2021, leading theFederal Reserve to begin tapering its quantitative easing inNovember 2021 .
The following table summarizes the significant components of First Choice’s and Seacoast’s transactions at the time of acquisition. See “Item 8. Note 2 – Acquisitions” for more information.
First Choice Seacoast ($ in thousands) July 21, 2021 November 12, 2020 Loans, net$ 1,936,137 $ 1,190,441 Securities 34,489 - Total assets acquired 2,248,062 1,312,037 Deposits 1,840,429 1,081,006 Total liabilities assumed 2,006,857 1,193,595 Consideration paid: Cash$ 2,152 $ 1,630 Common stock1 343,650 167,035 Total consideration paid$ 345,802 $ 168,665
1 The consideration for common stock for First Choice was
30
--------------------------------------------------------------------------------
Financial Performance Highlights Below are highlights of our financial performance over the past few years
Year ended December 31,
($ in thousands, except per share data) 2021 2020 2019
MERITS
Total interest income$ 383,230 $ 304,779 $ 305,134 Total interest expense 23,036 34,778 66,417 Net interest income 360,194 270,001 238,717 Provision for credit losses 13,385 65,398 6,372 Net interest income after provision for loan losses 346,809 204,603 232,345 Total noninterest income 67,743 54,503 49,176 Total noninterest expense 245,919 167,159 165,485 Income before income tax expense 168,633 91,947 116,036 Income tax expense 35,578 17,563 23,297 Net income$ 133,055
Basic earnings per share$ 3.86 $ 2.76 $ 3.56 Diluted earnings per share$ 3.86
Return on average assets 1.16 % 0.90 % 1.35 % Return on average common equity 10.49 % 8.24 % 11.66 % Return on average tangible common equity1 14.18 % 11.23 % 16.08 % Net interest margin (fully tax equivalent) 3.41 % 3.56 % 3.80 % Efficiency ratio 57.47 % 51.51 % 57.48 % Core efficiency ratio1 51.61 % 50.96 % 52.36 % Dividend payout ratio 19.66 % 26.61 % 17.87 % Book value per common share$ 38.53 $ 34.57 $ 32.67 Tangible book value per common share1$ 28.28 $ 25.48 $ 23.76 Average common equity to average assets 11.14 % 10.94 % 11.54 % Tangible common equity to tangible assets1 8.13 % 8.40 % 8.89 % At or for the year ended December 31, 2021 2020 2019 ASSET QUALITY Net charge-offs$ 11,629 $ 1,907 $ 6,410 Nonperforming loans 28,024 38,507 26,425 Classified assets 100,797 123,808 85,897 Nonperforming loans to total loans 0.31 % 0.53 % 0.50 % Nonperforming assets to total assets 0.23 % 0.45 % 0.45 % Allowance for loan losses to total loans 1.61 % 1.89 % 0.81 % Net charge-offs to average loans 0.14 % 0.03 % 0.13 %
1Non-GAAP measures. A reconciliation has been included in this MD&A section under the heading “Use of Non-GAAP Financial Measures.”
The company has identified the following trends in 2021:
•The Company reported net income of$133.1 million , or$3.86 per diluted share for 2021, compared to$74.4 million , or$2.76 per diluted share for 2020. In addition to organic growth, contributing to the 31 -------------------------------------------------------------------------------- increase in net income was a full year of Seacoast operations and a partial year of First Choice operations. Net income also benefited from a reduction in the provision for credit losses of$52.0 million in 2021 compared to 2020, which was partially offset by a$17.9 million increase in merger-related expenses. Acquisition related provision for credit losses of$25.4 million and$8.6 million in 2021 and 2020, respectively, were included in the provision for credit losses. This expense, commonly referred to as the "CECL double-count", is recognized when a loan portfolio is acquired. Excluding the CECL double-count, the provision for credit losses decreased in 2021 primarily due to strong credit quality, the forward-looking CECL methodology and the improved outlook for forecasted economic factors compared to 2020. •Net interest income for 2021 totaled$360.2 million , an increase of$90.2 million , or 33%, compared to$270.0 million for 2020. PPP interest and fee income totaled$27.3 million and$19.6 million in 2021 and 2020, respectively. The First Choice acquisition added$37.9 million and the Company benefited from a full year of Seacoast operations in 2021 compared to a partial year in 2020. Organic growth in the loan portfolio also contributed to the current year increase in net interest income. •Net interest margin decreased 15 basis points to 3.41% during 2021, compared to 3.56% in 2020. The decrease was primarily due to an increase in liquidity from deposit growth. Average interest-bearing cash accounts of$1.1 billion had a yield of 0.14% in 2021, compared to$228.8 million at a yield of 0.27% in 2020. •Noninterest income increased$13.2 million , or 24%, to$67.7 million in 2021 compared to$54.5 million in 2020. This improvement was primarily due to organic growth and the acquisitions of Seacoast and First Choice. •Noninterest expenses totaled$245.9 million for 2021, an increase of$78.8 million , or 47%, compared to 2020. Seacoast and First Choice increased noninterest expense$51.2 million in 2021 compared to 2020, in addition to a$17.9 million increase in merger-related expenses year-over-year. The Company's efficiency ratio was 57.5% in 2021, compared to 51.5% for the prior year. The increase in 2021 was primarily due to merger-related expenses. The Company's core efficiency ratio1 was relatively stable at 51.6% in 2021, compared to 51.0% for the prior year. •The Company's effective tax rate was 21.1% in 2021 compared to 19.1% in 2020. The higher rate in 2021 primarily resulted from higher pre-tax income and the Company's expanded geographic footprint and the related state apportionment.
1Non-GAAP measures. A reconciliation has been included in this MD&A section under the heading “Use of Non-GAAP Financial Measures.”
2021 Significant Transactions During 2021, we announced the following significant transactions: •OnJuly 21, 2021 , the Company announced the completion of its acquisition of First Choice, a commercial bank based inLos Angeles, CA , with$2.3 billion in assets. The overall transaction had a value of$346 million .
•Continued to support customers through PPP, additional lending
of PPP loans.
•The Company announced the closing of five branch locations inCalifornia andSt. Louis . A lease and fixed asset impairment charge of$3.8 million was recognized, including$0.4 million reported in merger-related expenses. The Company expects to realize annual cost savings of approximately$2.3 million related to these closures.
•The company redeemed
32 --------------------------------------------------------------------------------
•The Company has issued and sold 3,000,000 common shares, each representing 1/40th interest in one common stock of 5% non-cumulative perpetual preferred stock
•The Company repurchased 1,299,527 of its common shares at a weighted-average share price of$46.62 . AtDecember 31, 2021 , there were 700,473 shares remaining to be purchased under the existing share repurchase plan.
•Dividends paid in 2021 by
2020 Significant Transactions During 2020, we announced the following significant transactions: •OnNovember 12, 2020 , the Company announced the completion of its acquisition of Seacoast which operated five full-service retail and commercial banking offices inCalifornia andNevada as well as SBA loan production offices and deposit production offices in various states. Aggregate consideration at closing was 5.0 million shares of Company common stock to Seacoast shareholders. The overall transaction had a value of$169 million .
• Helped new and existing clients navigate and access PPP loans by approving approximately 3,900 loans in total
•InMay 2020 , the Company issued$63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030. The notes are callable beginning in 2025 and are included in tier 2 capital.
•The Company repurchased 456,251 of its common shares at a weighted average share price of
•Dividends paid in 2020 by
33
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net Interest Income
Average Balance Sheet
The following table presents, for the periods indicated, certain information
related to our average interest-earning assets and interest-bearing liabilities,
as well as, the corresponding interest rates earned and paid, all on a tax
equivalent basis. Average balances are presented on a daily average basis.
Year ended December 31,
2021 2020 2019
Average Average Average
Interest Yield/ Interest Yield/ Interest Yield/
($ in thousands) Average Balance Income/Expense Rate Average Balance Income/Expense Rate Average Balance Income/Expense Rate
Assets
Interest-earning assets:
Loans1, 2 $ 8,055,873 $ 349,112 4.33 % $ 6,071,496 $ 270,673 4.46 % $ 5,018,568 $ 269,864 5.38 %
Taxable securities 908,189 19,305 2.13 1,016,100 25,524 2.51 1,064,913 30,085 2.83
Non-taxable securities2 659,804 18,468 2.80 350,501 11,151 3.18 131,161 4,668 3.56
Total securities 1,567,993 37,773 2.41 1,366,601 36,675 2.68 1,196,074 34,753 2.91
Interest-earning deposits 1,084,853 1,496 0.14 228,760 620 0.27 107,433 2,128 1.98
Total interest-earning assets 10,708,719 388,381 3.63 7,666,857 307,968 4.02 6,322,075 306,745 4.85
Noninterest-earning assets 758,591 587,057 572,216
Total assets $ 11,467,310 $ 8,253,914 $ 6,894,291
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts $ 2,122,752 $ 1,614 0.08 % $ 1,494,364 $ 2,101 0.14 % $ 1,286,641 $ 7,592 0.59 %
Money market accounts 2,557,836 4,669 0.18 1,977,826 7,754 0.39 1,608,349 26,267 1.63
Savings accounts 724,768 225 0.03 589,832 279 0.05 489,310 841 0.17
Certificates of deposit 570,496 4,160 0.73 676,889 10,915 1.61 799,079 15,156 1.90
Total interest-bearing deposits 5,975,852 10,668 0.18 4,738,911 21,049 0.44 4,183,379 49,856 1.19
Subordinated debentures and notes 195,686 10,960 5.60 179,534 9,885 5.51 136,950 7,507 5.48
FHLB advances 59,945 803 1.34 241,635 2,673 1.11 287,474 6,668 2.32
Securities sold under agreements to repurchase 225,894 235 0.10 206,338 542 0.26 169,179 1,246 0.74
Other borrowings 26,428 370 1.40 32,147 629 1.96 32,392 1,140 3.52
Total interest-bearing liabilities 6,483,805 23,036 0.36 5,398,565 34,778 0.64 4,809,374 66,417 1.38
Noninterest bearing liabilities:
Demand deposits 3,597,204 1,854,982 1,228,832
Other liabilities 109,148 97,492 60,608
Total liabilities 10,190,157 7,351,039 6,098,814
Shareholders' equity 1,277,153 902,875 795,477
Total liabilities & shareholders' equity $ 11,467,310 $ 8,253,914 $ 6,894,291
Net interest income $ 365,345 $ 273,190 $ 240,328
Net interest spread 3.27 % 3.38 % 3.47 %
Net interest margin (tax equivalent) 3.41 3.56 3.80
1Average balances include interest-free loans. Interest income includes net loan fees of
2Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate in 2021 and a 24.7% tax rate in each of 2020 and 2019. The tax-equivalent adjustments were$5.1 million for the year endedDecember 31, 2021 ,$3.2 million for the year endedDecember 31, 2020 , and$1.6 million for the year endedDecember 31, 2019 . 34 --------------------------------------------------------------------------------
Rate/Volume
The table below summarizes, on a tax equivalent basis, the changes in interest income and expense resulting from changes in yield/rates and volume for the periods shown.
2021 compared to 2020 2020 compared to 2019
Increase (decrease) due to Increase (decrease) due to
($ in thousands) Volume1 Rate2 Net Volume1 Rate2 Net
Interest earned on:
Loans $ 86,183 $ (7,744) $ 78,439 $ 51,290 $ (50,481) $ 809
Taxable securities (2,541) (3,678) (6,219) (1,334) (3,227) (4,561)
Non-taxable securities3 8,799 (1,482) 7,317 7,027 (544) 6,483
Interest-earning deposits 1,313 (437) 876 1,228 (2,736) (1,508)
Total interest-earning assets 93,754 (13,341) 80,413 58,211 (56,988) 1,223
Interest paid on:
Interest-bearing demand accounts $ 689 $ (1,176) $ (487) $ 1,063 $ (6,554) $ (5,491)
Money market accounts 1,844 (4,929) (3,085) 4,970 (23,483) (18,513)
Savings 55 (109) (54) 145 (707) (562)
Certificates of deposit (1,506) (5,249) (6,755) (2,142) (2,099) (4,241)
Subordinated debentures and notes 902 173 1,075 2,345 33 2,378
FHLB advances (2,341) 471 (1,870) (933) (3,062) (3,995)
Securities sold under agreements to
repurchase 47 (354) (307) 229 (933) (704)
Other borrowed funds (100) (159) (259) (9) (502) (511)
Total interest-bearing liabilities (410) (11,332) (11,742) 5,668 (37,307) (31,639)
Net interest income $ 94,164 $ (2,009)
1 Change in volume multiplied by the yield/price of the previous period. 2Yield/price change multiplied by the volume of the previous period. 3Non-taxable income is presented on a full tax equivalent basis using a tax rate of 25.2% and 24.7% for 2021 and 2020, respectively. NOTE: Interest rate change due to price and volume has been mapped to price and volume changes in proportion to the ratio of the absolute dollar amounts of each change.
Net interest income (on a tax equivalent basis) was$365.3 million for 2021, compared to$273.2 million for 2020, an increase of$92.2 million , or 34%. Total interest income increased$80.4 million and total interest expense decreased$11.7 million . The increase in net interest income in 2021 was primarily due to higher loan volumes, which benefited from the Seacoast and First Choice acquisitions, PPP loans, and a decline in the interest rate on interest-bearing liabilities. Loans issued through the PPP bear interest at 1% and have either a two or five year maturity. As a PPP lender, the Company also receives fees for the issuance of PPP loans that vary based on the size of the loan. Interest income and loan fees included in net interest income from the PPP program totaled$27.3 million and$19.6 million in 2021 and 2020, respectively. During 2021, the Company received$14.6 million in PPP loan fees for loans originated in the year. These fees are recognized over the life of the loan, or when the loan is repaid or forgiven. AtDecember 31, 2021 , the Company has$272.0 million in PPP loans and$4.2 million in deferred fees, compared to$698.6 million in loans and$11.3 million in fees at the end of 2020. The tax-equivalent net interest margin was 3.41% for 2021, compared to 3.56% for 2020. The primary driver of the decline in net interest margin from 2020 to 2021 was an increase in liquidity from deposit growth. Average interest-bearing cash balances grew to$1.1 billion , an increase of$856.1 million from 2020. In addition, 2021 was impacted by a full year of low interest rates following theFederal Reserve's reduction of interest rates in 2020. The federal funds target rate declined 150 basis points in 2020 and one-month LIBOR declined over 160 basis points. The 35 -------------------------------------------------------------------------------- decline in short-term rates reduced the yield on the Company's variable-rate loan portfolio, as well as the yield earned on new loan production. As ofDecember 31, 2021 , variable-rate loans comprised approximately 63% of total loans. In response to the decline in interest rates, the Company proactively reduced the cost of certain managed money market and interest-bearing accounts, while also reducing certificates of deposit balances and wholesale borrowings. Average interest-earning assets increased$3.0 billion , or 40%, to$10.7 billion for the year endedDecember 31, 2021 . The increase was due to growth in average earning assets due to the inclusion of a full year of Seacoast operations, a partial year of First Choice operations and the previously mentioned increase in liquidity from deposit generation. Average securities represented 15% of earnings assets in 2021 and 18% in 2020. The acquisitions of Seacoast and First Choice did not include any significant investment security balances. The Company has taken a measured approach to investing excess liquidity into the investment portfolio, increasing the average balance from$1.4 billion in 2020 to$1.6 billion in 2021. Average interest-earning deposits increased from 3% to 10% of earning assets, primarily due to higher liquidity from deposit growth. Volume growth of the balance sheet drove an increase in interest income on earning assets of$93.8 million . Interest income on interest-earnings assets decreased$13.3 million primarily due the decline in interest rates in 2021 compared to 2020. Average interest-bearing liabilities increased$1.1 billion , or 20% for the year endedDecember 31, 2021 . The increase resulted from$1.2 billion of growth in interest-bearing deposits. While average interest-bearing liabilities increased, interest expense declined$11.7 million due to a 26 basis point decline in the cost of deposits, primarily due to the run-off of higher yielding certificates of deposit. The Company issued$63.3 million of subordinated debentures inMay 2020 with an interest rate of 5.75% that was included for a full year in 2021. Partially offsetting this additional expense was the redemption of the$50.0 million subordinated debentures at 4.75% in the fourth quarter 2021. The total cost of interest-bearing liabilities declined 28 basis points, from 0.64% in 2021 to 0.36% in 2021. The shift in the mix of interest-bearing liabilities from certificates of deposit and wholesale borrowings to interest-bearing and noninterest-bearing deposits reduced interest expense in 2021 by$0.4 million . Interest expense on interest-bearing liabilities decreased$11.3 million for the year endedDecember 31, 2021 due to lower rates. Noninterest Income The following table presents a comparative summary of the major components of noninterest income for each of the years in the three-year period endedDecember 31, 2021 : Year ended December 31, Change from ($ in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Service charges on deposit accounts$ 15,428 $ 11,717 $
12,801
Income from wealth management
10,259 9,732 9,932 527 (200) Card services revenue 11,880 9,481 9,154 2,399 327 Tax credit income 8,028 6,611 5,393 1,417 1,218 Miscellaneous income 22,148 16,962 11,896 5,186 5,066
Total interest-free income
Noninterest income increased$13.2 million , or 24%, in 2021 compared to 2020. This improvement was primarily due to a$5.4 million increase from Seacoast and First Choice, a$3.6 million increase in other income, primarily private equity and community development investments, a$2.4 million increase in card services income, and a$1.4 million increase in tax credit activity. 36 -------------------------------------------------------------------------------- Noninterest Expense The following table presents a comparative summary of the components of noninterest expense: Year ended December 31, Change from ($ in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Employee compensation and benefits$ 124,904 $ 92,288 $ 81,295 $ 32,616 $ 10,993 Occupancy 16,286 13,457 12,465 2,829 992 Data processing 12,242 9,050 8,242 3,192 808 Professional fees 4,289 3,940 3,683 349 257 Branch-closure expenses 3,441 - - 3,441 - Merger-related expenses 22,082 4,174 17,969 17,908 (13,795) Other expenses 62,675 44,250 41,831 18,425 2,419 Total noninterest expense$ 245,919 $ 167,159 $ 165,485 $ 78,760 $ 1,674 Efficiency ratio 57.47 % 51.51 % 57.48 % 5.96 % (5.97) % Core efficiency ratio1 51.61 % 50.96 % 52.36 % 0.65 % (1.40) %
1 A non-GAAP measure. A reconciliation has been included in this MD&A section under the heading “Use of Non-GAAP Financial Measures.”
Noninterest expense increased$78.8 million , or 47%, in 2021 compared to 2020. The acquisitions of Seacoast and First Choice added$57.2 million of operating expenses in 2021, compared to$6.0 million from Seacoast in 2020. Excluding First Choice and Seacoast, employee compensation and benefits increased$7.0 million in 2021 compared to 2020, or 8%. The primary components of the increase in compensation and benefits were$2.7 million in salaries from merit increases and net new positions,$1.3 million in employee benefits, and$1.2 million in equity-based compensation. The Company announced in the third quarter of 2021 the closure of two branch locations inSt. Louis and recognized a lease and fixed asset impairment charge of$3.4 million . The branch closures became effective inJanuary 2022 . Merger related expenses of$22.1 million on the First Choice and Seacoast acquisitions, including the cost of closing threeCalifornia locations, were$17.9 million higher than the$4.2 million recorded in 2020 on the Seacoast acquisition. The Company expects to realize annual cost savings of approximately$2.3 million related to these closures. The Company did not earn a full year of operating income, or incur a full year of expense, from First Choice in 2021, but will do so in 2022. The Company does not expect to incur any additional merger expenses on First Choice or Seacoast. The Company expects to continue to invest in its associates and other infrastructure that supports growth. In addition, low unemployment, inflationary pressures and a shift in employee work arrangements to a virtual/hybrid model are expected to impact future operating expenses. Income Taxes The Company's blended federal and state tax rate is approximately 25.2% at the end of 2021, compared to 24.9% at the end of 2020. Permanent differences between pre-tax income and taxable income along with tax planning initiatives reduced the effective income tax rate in 2021 to 21.1% compared to 19.1% in 2020. The increase in the effective tax rate in 2021 was primarily due to higher pretax income in 2021 and an increase in state taxable income due to the Company's expanded geographic footprint. Additionally, in 2020, the Company was able to carryback a net operating loss to a prior period with a higher tax rate, reducing the effective tax for that year. 37 --------------------------------------------------------------------------------
FINANCIAL CONDITION
Summary Balance Sheet
December 31, % Increase (Decrease)
($ in thousands) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Total cash and cash equivalents $ 2,021,689 $ 537,703 $ 167,256 275.99 % 221.49 %
Securities 1,795,687 1,400,039 1,316,483 28.26 % 6.35 %
Total loans 9,017,642 7,224,935 5,314,337 24.81 % 35.95 %
Total assets 13,537,358 9,751,571 7,333,791 38.82 % 32.97 %
Deposits 11,343,799 7,985,389 5,771,023 42.06 % 38.37 %
Total liabilities 12,008,242 8,672,596 6,466,606 38.46 % 34.11 %
Total shareholders' equity 1,529,116 1,078,975 867,185 41.72 % 24.42 %
Assets
Loans by Type
The Company has a diversified loan portfolio, with no particular concentration
of credit in any one economic sector; however, a substantial portion of the
portfolio, including the C&I category, is secured by real estate. The ability of
the Company's borrowers to honor their contractual obligations is partially
dependent upon the local economy and its effect on the real estate market.
The following table sets forth the composition of the Company's loan portfolio
by type of loans:
December 31,
($ in thousands) 2021 2020
Commercial and industrial $ 3,392,375 $ 3,088,995
Commercial real estate – owned by investors 2,141,143 1,589,419 Commercial real estate – owner occupied 2,035,785 1,498,408 Construction and land development
734,073 546,686 Residential real estate 454,052 319,179 Other 260,214 182,248 Total loans$ 9,017,642 $ 7,224,935 December 31, 2021 2020 Commercial and industrial 37.6 % 42.8 % Commercial real estate - investor owned 23.8 % 22.0 % Commercial real estate - owner occupied 22.6 % 20.7 % Construction and land development 8.1 % 7.6 % Residential real estate 5.0 % 4.4 % Other 2.9 % 2.5 % Total loans 100.0 % 100.0 % C&I loans are made based on the borrower's ability to generate cash flows for repayment from income sources, general credit strength, experience, and character, even though such loans may also be secured by real estate or other assets. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations. PPP loans of$272.0 million and$698.6 million were included in C&I loans in the tables above at the end of 2021 and 2020, respectively.
The company remains focused on building high quality C&I relationships as these typically feature variable interest rates and allow for cross-selling opportunities with other banking products. C&I loan growth as well
38 -------------------------------------------------------------------------------- supports our efforts to maintain the Company's asset-sensitive interest rate risk position. Additionally, our specialized products, especially sponsor finance, life insurance premium financing, and tax credit financing/lending, consist of primarily C&I loans, and have contributed significantly to the Company's C&I loan growth. These loans are sourced through relationships developed with wealth and estate planning firms and private equity funds and are not bound geographically by our markets. As a result, these specialized loan products offer opportunities to expand and diversify our overall geographic concentration by entering into new markets.
Real estate loans focus on the estimated cash flows from operating the property and/or the underlying value of the collateral.
•Our commercial real estate loans, including investor-owned and owner-occupied categories, primarily represent multifamily and other commercial property loans on which the primary source of repayment is income from the property. These loans are principally underwritten based on the cash flow coverage of the property, the Company's loan to value guidelines, and generally require either the limited or full guaranty of principal sponsors of the credit. Commercial real estate loans also represent owner-occupied C&I loans for which the primary source of repayment is dependent on sources other than the underlying collateral. •Construction and land development loans relating primarily to residential and commercial properties, represent financing secured by real estate under development for eventual sale or undeveloped ground. AtDecember 31, 2021 ,$289.8 million of these loans include the use of interest reserves and follow standard underwriting guidelines. Construction projects are monitored by the loan officer and a centralized independent loan disbursement function is employed. •Residential real estate loans include residential mortgages, which are loans that, due to size or other attributes, do not qualify for conventional home mortgages available-for-sale in the secondary market, second mortgages and home equity lines. Residential mortgage loans are usually limited to a maximum of 80% of collateral value at origination.
Other loans are loans to individuals, loans to government and political departments, loans to non-custodian financial institutions and purchase loans or are fully collateralised by investment securities. Credit risk is managed by thoroughly checking borrowers’ creditworthiness before and after lending.
39 -------------------------------------------------------------------------------- The following table presents a breakdown of loans by NAICS code atDecember 31, 2021 and 2020: December 31, 2021 December 31, 2020 Outstanding Outstanding ($ in thousands) Balance % Balance % Accomodation and Food Services$ 785,485 9 %$ 577,026 8 % Administrative and Support and Waste Management and Remediation Services 176,601 2 % 167,023 2 % Agriculture, Forestry, Fishing and Hunting1 195,342 2 % 207,335 3 % Arts, Entertainment, and Recreation 120,805 1 % 110,422 2 % Construction 580,731 6 % 451,050 6 % Educational Services 52,034 1 % 53,708 1 % Finance and Insurance 1,344,389 15 % 1,057,888 15 % Health Care and Social Assistance 372,109 4 % 320,556 4 % Information 64,686 1 % 53,696 1 % Management of Companies and Enterprises 84,110 1 % 54,563 1 % Manufacturing 613,725 7 % 590,652 8 % Mining, Quarrying, and Oil and Gas Extraction 9,771 - % 3,375 - % Other Services (except Public Administration) 593,149 7 % 509,006 7 % Professional, Scientific, and Technical Services 329,009 4 % 304,701 4 % Public Administration 11,358 - % 13,811 - % Real Estate and Rental and Leasing 2,462,088 27 % 1,722,630 24 % Retail Trade 460,763 5 % 398,251 6 % Transportation and Warehousing 214,132 2 % 151,273 2 % Utilities 25,393 - % 19,321 - % Wholesale Trade 445,771 5 % 360,630 5 % Other 76,191 1 % 98,018 1 % Total Loans$ 9,017,642 100 %$ 7,224,935 100 %
1Includes
The table below shows a breakdown of commercial and industrial loans by size
($ in thousands) Number of Loans Outstanding Balance Average Balance <$2 million 3,326 $ 921,537 $ 277$2-5 million 289 915,656 3,168$5-10 million 92 627,728 6,823 >$10 million 60 927,454 15,458 Total 3,767 $ 3,392,375 $ 901
The table below shows a breakdown of commercial real estate loans by size
($ in thousands) Number of Loans Outstanding Balance Average Balance <$2 million 3,300 $ 1,840,760 $ 558$2-5 million 383 1,184,292 3,092$5-10 million 90 626,733 6,964 >$10 million 34 525,143 15,445 Total 3,807 $ 4,176,928 $ 1,097 40
-------------------------------------------------------------------------------- The following table presents a breakdown of construction loans by size atDecember 31, 2021 . ($ in thousands) Number of Loans Outstanding Balance Average Balance <$2 million 539 $ 212,129 $ 394$2-5 million 63 200,775 3,187$5-10 million 30 206,262 6,875 >$10 million 8 114,907 14,363 Total 640 $ 734,073 $ 1,147 The following table presents a breakdown of residential loans by size atDecember 31, 2021 . ($ in thousands) Number of Loans Outstanding Balance Average Balance <$2 million 2,457 $ 304,224 $ 124$2-5 million 27 83,666 3,099$5-10 million 8 54,019 6,752 >$10 million 1 12,143 12,143 Total 2,493 $ 454,052 $ 182 The following table presents a breakdown of other loans by size atDecember 31, 2021 . ($ in thousands) Number of Loans Outstanding Balance Average Balance <$2 million 1,415 $ 154,663 $ 109$2-5 million 16 43,306 2,707$5-10 million 7 41,262 5,895 >$10 million 2 20,983 10,491 Total 1,440 $ 260,214 $ 181
The table below shows a breakdown of total loans by geographic region
($ in thousands) December 31, 2021
St. Louis $ 2,153,749
Kansas City 785,342
Arizona 545,362
New Mexico 538,981
California 1,715,978
Specialty, PPP and Other loans 3,278,230
Total $ 9,017,642
41
-------------------------------------------------------------------------------- The following table illustrates selected specialty lending detail, atDecember 31, 2021 and 2020: First Choice December 31, Acquired Loans ($ in thousands) 2021 2020 Change % Change at 12/31/21 C&I$ 1,538,155 $ 1,103,060 $ 435,095 39.4 %$ 298,545 CRE investor owned 1,955,087 1,420,905 534,182 37.6 % 553,986 CRE owner occupied 1,112,463 825,846 286,617 34.7 % 290,876 SBA loans 1,241,449 895,930 345,519 38.6 % 164,094 Sponsor finance 508,469 396,487 111,982 28.2 % - Life insurance premium financing 593,562 534,092 59,470 11.1 % - Tax credits 486,881 382,602 104,279 27.3 % - SBA PPP loans 271,958 698,645 (426,687) (61.1) % 149,334 Residential real estate 430,985 318,091 112,894 35.5 % 151,970 Construction and land development 625,526 474,399 151,127 31.9 % 173,969 Other 253,107 174,878 78,229 44.7 % 32,351 Total Loans$ 9,017,642 $ 7,224,935 $ 1,792,707 24.8 %$ 1,815,125
The Sponsor Finance portfolio consists primarily of manufacturing and wholesale loans. It includes mid-market mergers and acquisitions, targeted private equity firms, primarily SBICs, and senior debt financings for portfolio companies.
The life insurance premium financing category specializes in financing whole life insurance premiums used in estate planning for high net worth individuals through end-to-end relationships with boutique estate planners
The tax credit portfolio includes tax credit-related lending on affordable housing projects funded through the use of federal and state low income housing tax credits. In addition, we provide leveraged and other loans on projects funded through the CDFI New Markets Tax Credit Program. This portfolio also includes tax credit brokerage through 10-year streams ofMissouri state tax credits from affordable housing development funds. The tax credits are sold to clients and other individuals for tax planning purposes.
SBA 7(a) loans are primarily owner-occupied commercial real estate loans secured by a 1st lien. Most of these loans are 75% guaranteed by the SBA.
SBA PPP loans were granted in 2020 in response to the COVID-19 pandemic and are guaranteed by the SBA. The loans can be granted by the SBA if certain conditions are met.
Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. AtDecember 31, 2021 , no significant concentrations exceeding 10% of total loans existed in the Company's loan portfolio, except as described above. 42 -------------------------------------------------------------------------------- The following table presents the maturity distribution of loans atDecember 31, 2021 categorized by fixed or variable interest rates, net of unearned loan fees: Due in One After One After Five Year or Less Through Five Through Fifteen After Percent of ($ in thousands) (1) Years Years Fifteen Years Total Total Loans Fixed Rate Loans Commercial and industrial$ 135,942 $ 549,283 $ 278,445 $ 15,871 $ 979,541 11 % Real estate: Commercial 159,983 1,240,531 374,708 24,532 1,799,754 20 % Construction and land development 57,205 143,742 9,336 89 210,372 2 % Residential 24,272 75,214 13,377 31,750 144,613 2 % Other 4,018 9,019 70,578 114,154 197,769 2 % Total$ 381,420 $ 2,017,789 $ 746,444 $ 186,396 $ 3,332,049 37 % Variable Rate Loans Commercial and industrial$ 976,252 $ 1,217,215 $ 206,655 $ 12,712 $ 2,412,834 27 % Real estate: Commercial 191,202 414,017 450,615 1,321,340 2,377,174 26 % Construction and land development 164,306 171,528 95,703 92,164 523,701 6 % Residential 32,458 36,302 76,791 163,888 309,439 3 % Other 9,913 12,726 39,676 130 62,445 1 % Total$ 1,374,131 $ 1,851,788 $ 869,440 $ 1,590,234 $ 5,685,593 63 % Total Loans Commercial and industrial$ 1,112,194 $ 1,766,498 $ 485,100 $ 28,583 $ 3,392,375 38 % Real estate: Commercial 351,185 1,654,548 825,323 1,345,872 4,176,928 46 % Construction and land development 221,511 315,270 105,039 92,253 734,073 8 % Residential 56,730 111,516 90,168 195,638 454,052 5 % Other 13,931 21,745 110,254 114,284 260,214 3 % Total$ 1,755,551 $ 3,869,577 $ 1,615,884 $ 1,776,630 $ 9,017,642 100 %
(1) Includes loans with no stated maturity and overdraft facilities.
The majority of variable loans are based on the prime rate or LIBOR. AtDecember 31, 2021 ,$3.2 billion or 57% of variable rate loans were subject to an interest rate floor. Most loan originations have one-to three-year maturities. Management monitors this mix as part of its interest rate risk management. See "Interest Rate Risk" of this MD&A section. 43 -------------------------------------------------------------------------------- Provision and Allowance for Credit Losses The adoption of CECL onJanuary 1, 2020 increased the ACL on loans by$28.4 million , or 65%, and the allowance for unfunded commitments by$2.4 million as compared to 2019. These increases were offset in retained earnings and did not impact the consolidated statement of operations. The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly through the provision of credit losses. CECL requires economic forecasts to be factored into determining estimated losses. As a result, CECL will typically require a higher level of provision at the start of an economic downturn. The decrease in the provision for credit losses in 2021 was primarily due to a change in economic forecasts, which has significantly improved since the start of the COVID-19 pandemic inMarch 2020 . Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and unemployment. AtDecember 31, 2021 , the Company's forecast of the percentage change in GDP included a range of (2.2)% to 6.7% and the percentage change in unemployment included a range of 3.0% to 8.7%. At the beginning of the pandemic atMarch 2020 , the forecast of the percentage change in GDP included a range of (9.6)% to 2.1% and the percentage change in unemployment included a range of 6.0% to 13.0%. The Company utilizes a one-year reasonable and supportable forecast and a one-year reversion period. In the acquisition of First Choice, we recognized an allowance of$7.6 million on PCD loans and an allowance of$23.9 million on non-PCD loans. Similarly, in the acquisition of Seacoast we recognized an allowance of$3.5 million on PCD loans and$8.6 million on non-PCD loans. Pursuant to the CECL accounting methodology, the allowance on PCD loans is recorded as part of the acquired loan portfolio. The allowance on non-PCD loans is established through a charge to the provision for credit losses in the post-combination financial statements. To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize a reversal of provision for credit losses. Conversely, if economic conditions and the Company's forecast worsens, the Company could recognize elevated levels of provision for credit losses. The provision is also reflective of charge-offs in the period. The following table presents the components of the provision for credit losses for the periods indicated: December 31, (in thousands) 2021 2020 Provision (benefit) for loan losses$ (10,911) $ 54,822 Provision on acquired loans 23,904
8,557
Provision for off-balance sheet commitments1 1,911
2,877
Provision for held-to-maturity securities 165
147
Recovery of accrued interest (1,684)
(1,005)
Provision for credit losses$ 13,385
1 2021 includes
44 --------------------------------------------------------------------------------
The following table is a summary of the allocation of allowance for credit losses for the periods shown:
December 31,
($ in thousands) 2021 2020
Percent of loans in Percent of loans in
each category to each category to
Balance at the end of the period Applicable to: Total loan amount
Amount total loans Commercial and industrial$ 63,825 37.6 %$ 58,812 42.8 % Real estate: Commercial 53,437 46.3 % 49,074 42.7 % Construction and land development 14,536 8.1 % 21,413 7.6 % Residential 7,927 5.1 % 4,585 4.4 % Other 5,316 2.9 % 2,787 2.5 % Total allowance$ 145,041 100.0 %$ 136,671 100.0 % The allowance for credit losses was 1.61% of total loans atDecember 31, 2021 , compared to 1.89%, and 0.81%, atDecember 31, 2020 and 2019, respectively. The decline in the allowance to total loans ratio in 2021 was primarily due to the comparatively lower ACL on the First Choice loan portfolio, net loan charge-offs of$11.6 million , improved credit metrics, and continued improvement in economic forecasts. The increase in the ratio in 2020 compared to 2019 was due to the adoption of CECL and higher provision expense due to the pandemic, partially offset by the acquisition of Seacoast and PPP loans which included$1.3 billion in government-guaranteed loans with no allowance.
The following table is a summary of the net charge-offs (recoveries) on average loans for the periods shown:
December 31,
2021 2020
Net Charge-offs Net Charge-offs Net Charge-offs Net Charge-offs
($ in thousands) (Recoveries) Average Loans(1) (Recoveries)/Average Loans (Recoveries) Average Loans(1) (Recoveries)/Average Loans
Commercial and industrial $ 10,425 $ 3,195,017 0.33 % $ 3,533 $ 2,917,784 0.12 %
Real estate:
Commercial 810 3,586,773 0.02 % (2,607) 2,179,246 (0.12) %
Construction and land development (451) 673,646 (0.07) % (136) 483,835 (0.03) %
Residential 558 396,777 0.14 % 842 337,759 0.25 %
Other 287 197,172 0.15 % 275 142,312 0.19 %
Total $ 11,629 $ 8,049,385 0.14 % $ 1,907 $ 6,060,936 0.03 %
(1) Excluding loans held for sale.
For more information on the credit loss allowance method, see “Critical Accounting Policies and Estimates” in this MD&A section.
Non-Performing Loans and Assets See “Item 8. Note 1 – Summary of Significant Accounting Policies” for more information on non-performing loans and other properties.
45 --------------------------------------------------------------------------------
The following table shows the categories of non-performing assets excluding government-guaranteed interests:
December 31, ($ in thousands) 2021 2020 Non-accrual loans$ 23,449 $ 34,818 Loans past due 90 days or more and still accruing interest 1,716 130 Restructured loans 2,859 3,559 Total nonperforming loans 28,024 38,507 Other real estate 3,493 5,330 Total nonperforming assets$ 31,517 $ 43,837 Total assets$ 13,537,358 $ 9,751,571 Total loans 9,017,642 7,224,935 Total allowance for credit losses 145,041 136,671 Allowance for credit losses to nonaccrual loans 619 % 393 % Allowance for credit losses to nonperforming loans 518 % 355 % Allowance for credit losses to total loans 1.61 % 1.89 % Nonaccrual loans to total loans 0.26 % 0.48 % Nonperforming loans to total loans 0.31 % 0.53 % Nonperforming assets to total assets 0.23 % 0.45 %
Bad loans by loan type were as follows:
($ in thousands) December 31, 2021 Number of loans December 31, 2020 Number of
loan
Commercial and industrial$ 21,538 77 % 34$ 21,770 57 % 21 Commercial real estate 4,414 16 % 14 12,519 32 % 27 Residential real estate 2,048 7 % 12 4,189 11 % 3 Other 24 - % 4 29 - % 33 Total$ 28,024 100 % 64$ 38,507 100 % 84
The following table summarizes the changes in non-performing loans:
Year ended December
31,
($ in thousands) 2021
2020
Nonperforming loans, beginning of period$ 38,507
Additions to nonaccrual loans 43,350
30,424
Charge-offs (17,185) (6,739)
Principal payments (36,648) (18,385)
Nonperforming loans, end of period$ 28,024
Nonperforming loans atDecember 31, 2021 decreased$10.5 million , or 27%, when compared toDecember 31, 2020 . The decrease in nonperforming loans during 2021 was primarily from principal payments of$36.6 million and charge-offs of$17.2 million . The Company implemented several loan programs to assist its customers impacted by the COVID-19 pandemic, including providing short-term payment deferrals, primarily for 90 days or less. As ofDecember 31, 2021 , substantially all of these loans have returned to a paying status. 46 -------------------------------------------------------------------------------- Other real estate Other real estate atDecember 31, 2021 andDecember 31, 2020 was$3.5 million and$5.3 million , respectively.
The following table summarizes the development of other real estate:
Year ended December 31,
($ in thousands) 2021 2020
Other real estate, beginning of period $ 5,330
$ 6,344 Additions 3,175 756 Writedowns in value (29) (1,104) Sales (4,983) (666)
Other real estate, end of period$ 3,493
Fair value write-downs were recorded in loan, legal and other real estate expenses.
investments
AtDecember 31, 2021 , our portfolio of investment securities was$1.8 billion , or 13%, of total assets, compared to$1.4 million , or 14%, of total assets as ofDecember 31, 2020 . The portfolio is comprised of both available-for-sale and held-to-maturity securities. The table below sets forth the carrying value of investment securities held by the Company: December 31, 2021 2020 ($ in thousands) Amount % Amount % Obligations ofU.S. Government sponsored enterprises$ 173,511 9.6 %$ 15,161 1.1 % Obligations of states and political subdivisions 811,463 45.2 % 592,556 42.3 % Agency mortgage-backed securities 581,964 32.4 % 639,314 45.7 % U.S. Treasury Bills 91,170 5.1 % 11,466 0.8 % Corporate debt securities 138,193 7.7 % 141,991 10.1 % Total$ 1,796,301 100.0 %$ 1,400,488 100.0 % The allowance for credit losses on held-to-maturity debt securities was$0.6 million and$0.4 million atDecember 31, 2021 and 2020, respectively. The Company had no debt securities classified as trading atDecember 31, 2021 , or 2020.
The table below summarizes information on the expected life and tax-equivalent income of the investment portfolio
Within 1 year 1 to 5 years 5 to 10 years Over 10 years Total
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Obligations of U.S. Government -sponsored
enterprises $ - -
%
$ 11,927 2.36 %$ 173,511 1.18 % Obligations of states and political subdivisions 1,048 4.39 % 22,870 2.35 % 39,607 2.88 % 747,938 2.71 % 811,463 2.71 % Agency mortgage-backed securities 22,541 2.97 % 335,215 2.83 % 205,739 1.68 % 18,469 1.91 % 581,964 2.40 %U.S. Treasury Bills 80,961 0.07 % 10,209 2.47 % - - % - - % 91,170 0.34 % Corporate debt securities - - % 5,181 3.28 % 133,012 3.37 % - - % 138,193 3.37 % Total$ 104,550 0.74 %$ 515,767 2.31 %$ 397,650 2.36 %$ 778,334 2.69 %$ 1,796,301 2.39 % Yields on tax-exempt securities are computed on a taxable equivalent basis using a tax rate of 25.2%. Expected maturities will differ from contractual maturities, as borrowers may have the right to call or repay obligations with or without prepayment penalties. 47 --------------------------------------------------------------------------------
Other investments consist primarily of FHLB capital stock, common stock investments related to our Trust Preferred Securities, Community Development Funds and other investments in private equity funds, primarily SBICs.
December 31,
2021 2020
($ in thousands) Amount % Amount %
FHLB capital stock $ 12,075 20.2 % $ 10,774 22.1 %
Other investments 47,821 79.8 % 37,991 77.9 %
Total $ 59,896 100.0 % $ 48,765 100.0 %
The table below summarizes information on the expected life and tax-equivalent income of other investments
No Stated Maturity
($ in thousands) Amount Yield
FHLB capital stock $ 12,075 4.13 %
Other investments 47,821 1.78 %
Total $ 59,896 2.25 %
48
--------------------------------------------------------------------------------
insoles
The table below shows the breakdown of the Company’s deposits by type:
Years ended December 31, % Increase (decrease) ($ in thousands) 2021 2020 2021 vs. 2020 Noninterest-bearing demand accounts$ 4,578,436 $ 2,711,828 68.8 % Interest-bearing demand accounts 2,465,884 1,768,497 39.4 % Money market accounts 2,890,976 2,327,066 24.2 % Savings accounts 800,210 627,903 27.4 % Certificates of deposit: Brokered 128,970 50,209 156.9 % Other 479,323 499,886 (4.1) % Total deposits$ 11,343,799 $ 7,985,389 42.1 % Noninterest-bearing deposits / Total deposits 40 %
34%
The following table shows the average balance and average rate of the Company's
deposits by type:
Years ended December 31,
2021 2020 2019
Average Rate Average Rate Average Rate
($ in thousands) Average Balance Paid Average Balance Paid Average Balance Paid
Noninterest-bearing deposit accounts $ 3,597,204 - % $ 1,854,982 - % $ 1,228,832 - %
Interest-bearing demand accounts 2,122,752 0.08 % 1,494,364 0.14 % 1,286,641 0.59 %
Money market accounts 2,557,836 0.18 1,977,826 0.39 1,608,349 1.63
Savings accounts 724,768 0.03 589,832 0.05 489,310 0.17
Certificates of deposit 570,496 0.73 676,889 1.61 799,079 1.90
Total interest-bearing deposits $ 5,975,852 0.18 $ 4,738,911 0.44 $ 4,183,379 1.19
Total average deposits $ 9,573,056 0.11 $ 6,593,893 0.32 $ 5,412,211 0.92
Average total deposits were $9.6 billion for the year ended December 31, 2021 ,
an increase of $3.0 billion , or 45%, from December 31, 2020 . The increase in
2021 was primarily due to the First Choice and Seacoast acquisitions and the
high level of liquidity in the economy. The increase in 2020 was primarily due
to the Seacoast acquisition and PPP loan fundings.
The table below shows the estimated uninsured certificates of deposit maturities as of
($ in thousands) Total
Three months or less $ 15,074
Over three through six months 9,098
Over six through twelve months 47,855
Over twelve months 21,645
Total $ 93,672
away
49 -------------------------------------------------------------------------------- Shareholders' equity Shareholders' equity totaled$1.5 billion atDecember 31, 2021 , an increase of$450.1 million , or 42%, fromDecember 31, 2020 .
Significant activities in the past year
•increase from the issuance of approximately 7.8 million shares of common stock for the First Choice acquisition reflecting$342.3 million of consideration; •increase from net income of$133.1 million ; •increase from issuance of preferred stock of$72.0 million , net; •decrease from share repurchases of$60.6 million , pursuant to the Company's publicly-announced stock repurchase program; •decrease from dividends paid on common stock of$26.2 million ; and •net decrease in fair value of available-for-sale securities and cash flow hedges of$18.3 million .
liquidity and capital resources
liquidity
The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are changes in deposit levels, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as the core deposit base and loan and security repayments and maturities. Additionally, liquidity is provided from lines of credit with the FHLB, theFederal Reserve , and correspondent banks; the ability to acquire large and brokered deposits; sales of the securities portfolio; and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy. The Company's Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank's Board of Directors. Our liquidity position is monitored daily. Our liquidity management framework includes measurement of several key elements, such as a loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company's liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments. Liquidity from assets is available primarily from cash balances and the investment portfolio. Cash and interest-bearing deposits with other banks totaled$2.0 billion atDecember 31, 2021 , compared to$537.7 million atDecember 31, 2020 . The low interest rate environment, coupled with an uncertain outlook and government stimulus, such as the PPP, has increased liquidity within the banking industry, including the Company. Investment securities are another important tool to the Company's liquidity objectives. Securities totaled$1.8 billion atDecember 31, 2021 , and included$753 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining$1.0 billion could be pledged or sold to enhance liquidity, if necessary.
Liability liquidity financing sources are available to increase financial flexibility. In addition to borrowed amounts at
available at the
50 -------------------------------------------------------------------------------- In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company's various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company's liquidity. The Company has$2.6 billion in unused commitments as ofDecember 31, 2021 . While this commitment level would exhaust the majority the Company's current liquidity resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low. At the holding company level, our primary funding sources are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings) and debt instruments. The main use of this liquidity is to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. In 2021, the holding company maintained a revolving line of credit for an aggregate amount up to$25 million , all of which was available atDecember 31, 2021 . The line of credit has a one-year term that was renewed inFebruary 2022 . The proceeds can be used for general corporate purposes. The Company has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and debt securities. The Company's ability to offer securities pursuant to the registration statement depends on market conditions and the Company's continuing eligibility to use the Form S-3 under rules of theSEC . Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have a negative impact on the Company's ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process. The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the Company's shareholders or for other cash needs. Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such obligations relate to funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Company. The Company also enters into derivative contracts under which the Company either receives cash from or pays cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of these contracts changes daily as market interest rates change. For additional information on the Company's contractual obligations and commitments see the following footnotes in Item 8: "Note 6 - Leases," "Note 7 - Derivative Financial Instruments," "Note 11 - Subordinated Debentures," "Note 12 - Federal Home Loan Bank Advances," "Note 13 - Other Borrowings," and "Note 18 - Commitments." Capital Resources The Company and the Bank are subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements and results of operations of the Company. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 51 -------------------------------------------------------------------------------- Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and tier 1 capital to risk-weighted assets, and of tier 1 capital to average assets. To be categorized as "well-capitalized", banks must maintain minimum total risk-based (10%), tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and tier 1 leverage ratios (5%). As ofDecember 31, 2021 , andDecember 31, 2020 , the Company and the Bank met all capital adequacy requirements to which they are subject. The Bank met the definition of "well-capitalized" at each ofDecember 31, 2021 and 2020. Refer to "Item 8. Note 15 -Regulatory Capital " for a summary of our risk-based capital and leverage ratios.
The following table summarizes the Company’s capital ratios:
December 31, 2021 December 31, 2020
Minimum Ratio
($ in thousands) EFSC Bank EFSC Bank To Be Well-Capitalized with CCB
Common Equity Tier 1 Capital to
Risk Weighted Assets 11.3 % 12.5 % 10.9 % 12.5 % 6.5 % 7.0 %
Tier 1 Capital to Risk Weighted
Assets 13.0 % 12.5 % 12.1 % 12.5 % 8.0 % 8.5 %
Total Capital to Risk Weighted
Assets 14.7 % 13.5 % 14.9 % 13.7 % 10.0 % 10.5 %
Leverage Ratio (Tier 1 Capital to
Average Assets) 9.7 % 9.3 % 10.0 % 10.3 % 5.0 % 4.0 %
Tangible common equity to tangible
assets1 8.1 % 8.4 %
Common equity tier 1 capital $ 1,091,823 $ 1,201,340 $ 795,873 $ 913,116
Tier 1 capital 1,257,462 1,201,391 889,527 913,169
Total risk-based capital 1,423,036 1,303,715 1,094,601 1,004,839
1 Not a required regulatory
capital ratio
The Company believes the tangible common equity and regulatory capital ratios
are important measures of capital strength even though they are considered to be
non-GAAP measures. The tables included in this MD&A section under the caption
"Use of Non-GAAP Financial Measures" reconcile these ratios to U.S. GAAP.
Risk Management
Market risk arises from exposure to changes in interest rates and other relevant
market rate or price risk. The Company faces market risk in the form of interest
rate risk through transactions other than trading activities. Market risk from
these activities, in the form of interest rate risk, is measured and managed
through a number of methods. The Company uses financial modeling techniques to
measure interest rate risk. These techniques measure the sensitivity of future
earnings due to changing interest rate environments. Guidelines established by
the Bank's Asset/Liability Management Committee and approved by the Bank's Board
of Directors are used to monitor exposure of earnings at risk. General interest
rate movements are used to develop sensitivity as management believes it has no
primary exposure to a specific point on the yield curve. These limits are based
on the Company's exposure to immediate and sustained parallel rate movements,
either upward or downward. The Company does not have any direct market risk from
commodity exposures.
Interest Rate Risk
Our interest rate risk management practices are aimed at optimizing net interest
income, while guarding against deterioration that could be caused by certain
interest rate scenarios. Interest rate sensitivity varies with different types
of interest-earning assets and interest-bearing liabilities. We attempt to
maintain interest-earning assets, comprised primarily of both loans and
investments, and interest-bearing liabilities, comprised primarily of deposits,
maturing or repricing in similar time horizons in order to manage any impact
from market interest rate changes according to our risk tolerance. The Company
uses an earnings simulation model to measure earnings sensitivity to changing
rates.
52
--------------------------------------------------------------------------------
The Company determines the sensitivity of its short-term future earnings to a
hypothetical plus or minus 100 to 300 basis point parallel rate shock through
the use of simulation modeling. The simulation of earnings includes the modeling
of the balance sheet as an ongoing entity. Future business assumptions involving
administered rate products, prepayments for future rate-sensitive balances, and
the reinvestment of maturing assets and liabilities are included. These items
are then modeled to project net interest income based on a hypothetical change
in interest rates. The resulting net interest income for the next 12-month
period is compared to the net interest income amount calculated using flat
rates. This difference represents the Company's earnings sensitivity to a
positive or negative parallel rate shock.
The table below summarizes the projected impact of interest rate shocks on net interest income
Annual % change Rate Shock1 in net interest income + 300 bp 22.9% + 200 bp 14.1% + 100 bp 5.6%
1 Due to the current level of interest rates, the downward shock scenarios are not shown.
In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic interest rate scenarios. In general, changes in interest rates are positively correlated with changes in net interest income. The Company occasionally uses interest rate derivative instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company's exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources. AtDecember 31, 2021 , the Company had$62.0 million in derivative contracts used to manage interest rate risk. Derivative financial instruments are also discussed in "Item 8. Note 7 - Derivative Financial Instruments." TheFCA has announced that the most common USD LIBOR settings (overnight, 1-month. 3-month, 6-month and 12-month) will cease publication afterJune 30, 2023 . LIBOR is the most liquid and common interest rate index in the world and is commonly referenced in financial instruments. TheFederal Reserve's Alternative Reference Rates Committee has proposed that SOFR replace LIBOR. The Company expects to select a replacement index and provide customer notification in early 2023, prior to the cessation of the USD LIBOR settings. While a replacement index has not yet been selected, the Company ceased using LIBOR and ICE swap rates in new contracts and began issuing SOFR based loans inDecember 2021 . We have exposure to LIBOR in various financial contracts. Instruments that may be impacted include loans, securities, debt instruments and derivatives, among other financial contracts indexed to LIBOR and that mature afterDecember 31, 2021 . We also have loans that are indirectly linked to LIBOR through reference to the ICE swap rate. We have an internal working group composed of members from legal, credit, finance, operations, risk and audit to monitor developments, develop policies and procedures, assess the impact to the Company, consider relevant options and to determine an appropriate replacement index for affected contracts that expire after the expected discontinuation of LIBOR onJune 30, 2023 . We are actively working to amend and address impacted contracts to allow for a replacement index. However, amending certain contracts indexed to LIBOR may require consent from the counterparties which could be difficult and costly to obtain in certain circumstances. As ofDecember 31, 2021 , the Company's financial contracts indexed to LIBOR included$2.8 billion in loans (including$618.4 million indirectly linked to LIBOR through reference to an ICE swap rate),$125.3 million in borrowings, and$889.0 million (notional) in derivatives. In addition, LIBOR is used in the Company's analysis of the fair value of tax credits and may be referenced in other financial contracts not included in the discussion above. 53 -------------------------------------------------------------------------------- The Company had$5.7 billion in variable rate loans as ofDecember 31, 2021 . Of these loans,$3.2 billion have an interest rate floor and 95% of those loans were at the floor.$2.8 billion in variable rate loans are indexed to LIBOR,$2.4 billion are indexed to the prime rate, and$382.8 million are indexed to other rates. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The following accounting policies are considered most critical to the understanding of the Company's financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations," where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see "Item 8. Note 1 - Summary of Significant Accounting Policies." The Company has prepared all of the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. There can be no assurances that actual results will not differ from those estimates. Allowance for Credit Losses OnJanuary 1, 2020 , the Company adopted Accounting Standard Update 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard, referred to as CECL, requires an estimate of lifetime expected credit losses on certain financial assets measured at amortized cost. The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management's estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company's forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company's credit costs. The Company's allowance for credit losses on loans was$145.0 million atDecember 31, 2021 based on the weighting of the different economic scenarios. As a hypothetical example, if the Company had only used the upside scenario, the allowance would have decreased$20.5 million . Conversely, the allowance would have increased$43.9 million using only the downside scenario. 54 --------------------------------------------------------------------------------
acquisitions
Acquisitions and Business Combinations are accounted for using the acquisition method of accounting. The assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition.Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The results of operations of the acquired business are included in the Company's consolidated financial statements from the respective date of acquisition. Merger-related costs are costs the Company incurs to effect a business combination. Merger-related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related costs as expenses in the periods in which the costs are incurred and the services are received. Income Taxes Management uses certain assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax assets and liabilities and income tax expense. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required in the future if the amounts of taxes recoverable through loss carry backs decline, if we project lower levels of future taxable income, or we project lower levels of tax planning strategies. Such valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results. Effects of New Accounting Pronouncements See "Item 8. Note 1 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements" for information on recent accounting pronouncements and their impact, if any, on our consolidated financial statements. Use of Non-GAAP Financial Measures The Company's accounting and reporting policies conform toU.S. GAAP and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as core efficiency ratio, tangible common equity ratio, return on average tangible common equity, and tangible book value per common share, in this report that are considered "non-GAAP financial measures." Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The Company considers its core efficiency ratio, tangible common equity ratio, return on average tangible common equity, and tangible book value per common share, collectively "core performance measures" presented in this report, as relevant measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of certain non-comparable items, and the Company's operating performance on an ongoing basis. Core performance measures exclude certain other income and expense items such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, which 55 -------------------------------------------------------------------------------- the Company believes to be not indicative of or useful to measure the Company's operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity ratio provides useful information to investors about the Company's capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject. The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company's performance and capital strength. The Company's management uses, and believes investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company's operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. The Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated. 56 --------------------------------------------------------------------------------
Reconciliations of non-GAAP financial measures
Core Efficiency Ratio
For the Years ended December 31,
($ in thousands) 2021 2020 2019
Net interest income $ 360,194 $ 270,001 $ 238,717
Less incremental accretion income - 4,083 4,783
Core net interest income 360,194 265,918 233,934
Total noninterest income 67,743 54,503 49,176
Less gain on sale of other real estate 884 - -
Less other income from non-core acquired assets - - 1,372
Less gain on sale of investment securities - 421 243
Less other non-core income - 265 266
Core noninterest income 66,859 53,817 47,295
Total core revenue $ 427,053 $ 319,735 $ 281,229
Total noninterest expense $ 245,919 $ 167,159 $ 165,485
Less merger-related expenses 22,082 4,174 17,969
Less branch-closure expenses 3,441 - -
Less other non-core expenses - 57 257
Core noninterest expense $ 220,396 $ 162,928 $ 147,259
Core efficiency ratio 51.61 % 50.96 % 52.36 %
Tangible Common Equity and Tangible Common Equity Ratio
For the Years ended December 31, ($ in thousands) 2021 2020 2019 Total shareholders' equity$ 1,529,116 $ 1,078,975 $ 867,185 Less preferred stock 71,988 - - Less goodwill 365,164 260,567 210,344 Less intangible assets 22,286 23,084 26,076 Tangible common equity$ 1,069,678 $ 795,324 $ 630,765 Total assets$ 13,537,358 $ 9,751,571 $ 7,333,791 Less goodwill 365,164 260,567 210,344 Less intangible assets 22,286 23,084 26,076 Tangible assets$ 13,149,908 $ 9,467,920 $ 7,097,371 Tangible common equity to tangible assets 8.13 % 8.40 % 8.89 % 57
--------------------------------------------------------------------------------
Return on the average tangible share capital
For the Years ended December 31, ($ in thousands) 2021 2020 2019 Average shareholder's equity$ 1,277,153 $ 902,875 $ 795,477 Less average preferred stock 8,903 - - Less average goodwill 307,614 217,205 193,804 Less average intangible assets 22,460 23,551
24,957
Average tangible common equity$ 938,176 $ 662,119
Net Income$ 133,055 $ 74,384 $ 92,739 Return on average tangible common equity 14.18 % 11.23 % 16.08 %
Tangible book value per common share
For the Years ended December 31,
($ and shares in thousands) 2021 2020
2019
Tangible Common Equity (calculated above)
Period end shares outstanding 37,820 31,210
26,543
Tangible book value per common share
© Edgar Online, source