Berkshire Hills Bancorp Earnings 2019-03-31
BHLB 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2019
o | 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: 001-15781
BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 04-3510455 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
60 State Street, Boston, Massachusetts | 02109 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (800) 773-5601, ext. 133773
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 ý No o
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 and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filers,” “accelerated filers,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer o
Non-accelerated filer o Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No ý
As of May 7, 2019, the Registrant had 45,468,952 shares of common stock, $0.01 par value per share, outstanding
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 | BHLB | New York Stock Exchange | ||
BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
INDEX
Page | ||||
Notes to Consolidated Financial Statements | ||||
2
3
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2019 | December 31, 2018 | |||||||
(In thousands, except share data) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 98,689 | $ | 100,972 | ||||
Short-term investments | 68,930 | 82,217 | ||||||
Total cash and cash equivalents | 167,619 | 183,189 | ||||||
Trading security, at fair value | 11,164 | 11,212 | ||||||
Marketable equity securities, at fair value | 59,121 | 56,638 | ||||||
Securities available for sale, at fair value | 1,386,768 | 1,399,647 | ||||||
Securities held to maturity (fair values of $375,980 and $371,224) | 369,331 | 373,763 | ||||||
Federal Home Loan Bank stock and other restricted securities | 54,624 | 77,344 | ||||||
Total securities | 1,881,008 | 1,918,604 | ||||||
Loans held for sale, at fair value | 4,773 | 2,183 | ||||||
Commercial real estate loans | 3,388,139 | 3,400,221 | ||||||
Commercial and industrial loans | 1,957,339 | 1,980,046 | ||||||
Residential mortgages | 2,544,824 | 2,566,424 | ||||||
Consumer loans | 1,057,193 | 1,096,562 | ||||||
Total loans | 8,947,495 | 9,043,253 | ||||||
Less: Allowance for loan losses | (62,038 | ) | (61,469 | ) | ||||
Net loans | 8,885,457 | 8,981,784 | ||||||
Premises and equipment, net | 105,651 | 106,500 | ||||||
Goodwill | 518,325 | 518,325 | ||||||
Other intangible assets | 32,219 | 33,418 | ||||||
Cash surrender value of bank-owned life insurance policies | 191,768 | 190,609 | ||||||
Deferred tax assets, net | 38,783 | 42,434 | ||||||
Other assets | 182,720 | 120,926 | ||||||
Assets from discontinued operations | 165,078 | 114,259 | ||||||
Total assets | $ | 12,173,401 | $ | 12,212,231 | ||||
Liabilities | ||||||||
Demand deposits | $ | 1,526,584 | $ | 1,603,019 | ||||
NOW and other deposits | 820,177 | 1,122,321 | ||||||
Money market deposits | 2,743,448 | 2,245,195 | ||||||
Savings deposits | 731,711 | 724,129 | ||||||
Time deposits | 3,344,495 | 3,287,717 | ||||||
Total deposits | 9,166,415 | 8,982,381 | ||||||
Short-term debt | 861,349 | 1,118,832 | ||||||
Long-term Federal Home Loan Bank advances | 258,840 | 309,466 | ||||||
Subordinated borrowings | 89,562 | 89,518 | ||||||
Total borrowings | 1,209,751 | 1,517,816 | ||||||
Other liabilities | 204,725 | 149,519 | ||||||
Liabilities from discontinued operations | 15,505 | 9,597 | ||||||
Total liabilities | $ | 10,596,396 | $ | 10,659,313 | ||||
(continued) | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
Shareholders’ equity | ||||||||
Preferred Stock (Series B non-voting convertible preferred stock - $0.01 par value; 2,000,000 shares authorized, 521,607 shares issued and outstanding in 2019; 2,000,000 shares authorized, 521,607 shares issued and outstanding in 2018 | 40,633 | 40,633 | ||||||
Common stock ($.01 par value; 100,000,000 shares authorized and 46,211,894 shares issued and 45,521,962 shares outstanding in 2019; 100,000,000 shares authorized, 46,211,894 shares issued and 45,416,855 shares outstanding in 2018) | 460 | 460 | ||||||
Additional paid-in capital - common stock | 1,244,975 | 1,245,013 | ||||||
Unearned compensation | (8,825 | ) | (6,594 | ) | ||||
Retained earnings | 321,759 | 308,839 | ||||||
Accumulated other comprehensive (loss) | (2,906 | ) | (13,470 | ) | ||||
Treasury stock, at cost (689,932 shares in 2019 and 795,039 shares in 2018) | (19,091 | ) | (21,963 | ) | ||||
Total shareholders’ equity | 1,577,005 | 1,552,918 | ||||||
Total liabilities and shareholders’ equity | $ | 12,173,401 | $ | 12,212,231 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, | ||||||||
(In thousands, except per share data) | 2019 | 2018 | ||||||
Interest and dividend income from continuing operations | ||||||||
Loans | $ | 105,651 | $ | 91,741 | ||||
Securities and other | 15,458 | 14,405 | ||||||
Total interest and dividend income | 121,109 | 106,146 | ||||||
Interest expense from continuing operations | ||||||||
Deposits | 26,622 | 15,325 | ||||||
Borrowings | 9,028 | 6,064 | ||||||
Total interest expense | 35,650 | 21,389 | ||||||
Net interest income from continuing operations | 85,459 | 84,757 | ||||||
Non-interest income from continuing operations | ||||||||
Mortgage banking originations | 46 | 138 | ||||||
Loan related income | 6,003 | 4,819 | ||||||
Deposit related fees | 6,858 | 8,066 | ||||||
Insurance commissions and fees | 2,853 | 3,025 | ||||||
Wealth management fees | 2,441 | 2,597 | ||||||
Total fee income | 18,201 | 18,645 | ||||||
Other, net | 970 | 1,268 | ||||||
Gain/(loss) on securities, net | 2,551 | (1,502 | ) | |||||
Gain on sale of business operations and other assets, net | — | 481 | ||||||
Total non-interest income | 21,722 | 18,892 | ||||||
Total net revenue from continuing operations | 107,181 | 103,649 | ||||||
Provision for loan losses | 4,001 | 5,575 | ||||||
Non-interest expense from continuing operations | ||||||||
Compensation and benefits | 33,500 | 33,847 | ||||||
Occupancy and equipment | 9,446 | 9,192 | ||||||
Technology and communications | 6,257 | 6,484 | ||||||
Marketing and promotion | 1,267 | 1,222 | ||||||
Professional services | 2,275 | 1,696 | ||||||
FDIC premiums and assessments | 1,639 | 1,195 | ||||||
Other real estate owned and foreclosures | 2 | 67 | ||||||
Amortization of intangible assets | 1,200 | 1,268 | ||||||
Acquisition, restructuring, and other expenses | 7,015 | 5,093 | ||||||
Other | 9,390 | 5,302 | ||||||
Total non-interest expense | 71,991 | 65,366 | ||||||
Income from continuing operations before income taxes | $ | 31,189 | $ | 32,708 | ||||
Income tax expense | 6,917 | 7,337 | ||||||
Net income from continuing operations | $ | 24,272 | $ | 25,371 | ||||
(Loss) from discontinued operations before income taxes | $ | (854 | ) | $ | (162 | ) | ||
Income tax (benefit) | (217 | ) | (39 | ) | ||||
Net (loss) from discontinued operations | $ | (637 | ) | $ | (123 | ) | ||
Net income | $ | 23,635 | $ | 25,248 | ||||
Preferred stock dividend | 240 | 230 | ||||||
Income available to common shareholders | $ | 23,395 | $ | 25,018 | ||||
5
Basic earnings per common share: | ||||||||
Continuing operations | $ | 0.52 | $ | 0.55 | ||||
Discontinued operations | (0.01 | ) | — | |||||
Total | $ | 0.51 | $ | 0.55 | ||||
Diluted earnings per common share: | ||||||||
Continuing operations | $ | 0.52 | $ | 0.55 | ||||
Discontinued operations | (0.01 | ) | — | |||||
Total | $ | 0.51 | $ | 0.55 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 46,113 | 45,966 | ||||||
Diluted | 46,261 | 46,200 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Net income | $ | 23,635 | $ | 25,248 | ||||
Other comprehensive income, before tax: | ||||||||
Changes in unrealized loss on debt securities available-for-sale | 14,215 | (19,162 | ) | |||||
Income taxes related to other comprehensive income: | ||||||||
Changes in unrealized loss on debt securities available-for-sale | (3,651 | ) | 4,931 | |||||
Total other comprehensive income/(loss) | 10,564 | (14,231 | ) | |||||
Total comprehensive income | $ | 34,199 | $ | 11,017 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
7
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||||||||||||
Preferred stock | Common stock | Additional paid-in | Unearned | Retained | other comprehensive | Treasury | ||||||||||||||||||||||||||||||||
(In thousands) | Shares | Amount | Shares | Amount | capital | compensation | earnings | income/(loss) | stock | Total | ||||||||||||||||||||||||||||
Balance at December 31, 2017 | 522 | 40,633 | 45,290 | $ | 460 | $ | 1,242,487 | $ | (6,531 | ) | $ | 239,179 | $ | 4,161 | $ | (24,125 | ) | $ | 1,496,264 | |||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 25,248 | — | — | 25,248 | ||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | (14,231 | ) | — | (14,231 | ) | ||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | 25,248 | (14,231 | ) | — | 11,017 | |||||||||||||||||||||||||||
Adoption of ASU No 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Liabilities | — | — | — | — | — | — | 6,253 | (6,253 | ) | — | — | |||||||||||||||||||||||||||
Adoption of ASU No 2018-01, Income Statement - Reporting Comprehensive Income ( Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | — | — | — | — | — | — | (896 | ) | 896 | — | — | |||||||||||||||||||||||||||
Cash dividends declared on common shares ($0.22 per share) | — | — | — | — | — | — | (9,982 | ) | — | — | (9,982 | ) | ||||||||||||||||||||||||||
Cash dividends declared ($0.44 per share) | — | — | — | — | — | — | (230 | ) | — | — | (230 | ) | ||||||||||||||||||||||||||
Forfeited shares | — | — | (4 | ) | — | 31 | 125 | — | — | (156 | ) | — | ||||||||||||||||||||||||||
Exercise of stock options | — | — | 5 | — | — | — | (73 | ) | — | 149 | 76 | |||||||||||||||||||||||||||
Restricted stock grants | — | — | 92 | — | 1,056 | (3,452 | ) | — | — | 2,396 | — | |||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | 1,382 | — | — | — | 1,382 | ||||||||||||||||||||||||||||
Other, net | — | — | (23 | ) | — | 16 | — | — | — | (886 | ) | (870 | ) | |||||||||||||||||||||||||
Balance at March 31, 2018 | 522 | 40,633 | 45,360 | $ | 460 | $ | 1,243,590 | $ | (8,476 | ) | $ | 259,499 | $ | (15,427 | ) | $ | (22,622 | ) | $ | 1,497,657 | ||||||||||||||||||
Balance at December 31, 2018 | 522 | $ | 40,633 | 45,417 | $ | 460 | $ | 1,245,013 | $ | (6,594 | ) | $ | 308,839 | $ | (13,470 | ) | $ | (21,963 | ) | $ | 1,552,918 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 23,635 | — | — | 23,635 | ||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | 10,564 | — | 10,564 | ||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | 23,635 | 10,564 | — | 34,199 | ||||||||||||||||||||||||||||
Cash dividends declared on common shares ($0.23 per share) | — | — | — | — | — | — | (10,475 | ) | — | — | (10,475 | ) | ||||||||||||||||||||||||||
Cash dividends declared on preferred shares ($0.46 per share) | — | — | — | — | — | — | (240 | ) | — | — | (240 | ) | ||||||||||||||||||||||||||
Forfeited shares | — | — | (13 | ) | — | (41 | ) | 444 | — | — | (403 | ) | — | |||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Restricted stock grants | — | — | 131 | — | 3 | (3,664 | ) | — | — | 3,661 | — | |||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | 989 | — | — | — | 989 | ||||||||||||||||||||||||||||
Other, net | — | — | (13 | ) | — | — | — | — | — | (386 | ) | (386 | ) | |||||||||||||||||||||||||
Balance at March 31, 2019 | 522 | $ | 40,633 | 45,522 | $ | 460 | $ | 1,244,975 | $ | (8,825 | ) | $ | 321,759 | $ | (2,906 | ) | $ | (19,091 | ) | $ | 1,577,005 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 23,635 | $ | 25,248 | ||||
Net (loss) from discontinued operations | (637 | ) | (123 | ) | ||||
Net income from continuing operations | 24,272 | 25,371 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 4,001 | 5,575 | ||||||
Net amortization of securities | 624 | 743 | ||||||
Change in unamortized net loan costs and premiums | 2,161 | (577 | ) | |||||
Premises and equipment depreciation and amortization expense | 2,184 | 2,520 | ||||||
Stock-based compensation expense | 989 | 1,382 | ||||||
Accretion of purchase accounting entries, net | (1,338 | ) | (3,838 | ) | ||||
Amortization of other intangibles | 1,200 | 1,268 | ||||||
Income from cash surrender value of bank-owned life insurance policies | (1,160 | ) | (1,158 | ) | ||||
Securities (gains) losses, net | (2,551 | ) | 1,502 | |||||
Net (decrease) in loans held-for-sale | (2,590 | ) | (1,158 | ) | ||||
Change in right-of-use lease assets | 3,815 | — | ||||||
Change in lease liabilities | (3,981 | ) | — | |||||
Loss on disposition of assets | 1,615 | — | ||||||
Amortization of interest in tax-advantaged projects | 579 | 506 | ||||||
Net change in other | (5,158 | ) | (1,193 | ) | ||||
Net cash provided by operating activities of continuing operations | 24,662 | 30,943 | ||||||
Net cash (used) provided by operating activities of discontinued operations | (44,911 | ) | 53,535 | |||||
Net cash (used) provided by operating activities | (20,249 | ) | 84,478 | |||||
Cash flows from investing activities: | ||||||||
Net decrease in trading security | 174 | 165 | ||||||
Purchases of marketable equity securities | (11,900 | ) | (12,688 | ) | ||||
Proceeds from sales of marketable equity securities | 11,896 | 26,096 | ||||||
Purchases of securities available for sale | (15,180 | ) | (116,423 | ) | ||||
Proceeds from sales of securities available for sale | 2,587 | — | ||||||
Proceeds from maturities, calls, and prepayments of securities available for sale | 39,542 | 44,069 | ||||||
Purchases of securities held to maturity | (159 | ) | (1,618 | ) | ||||
Proceeds from maturities, calls, and prepayments of securities held to maturity | 4,111 | 2,885 | ||||||
Net change in loans | 87,553 | (148,619 | ) | |||||
Purchase of Federal Home Loan Bank stock | (15,930 | ) | (17,614 | ) | ||||
Proceeds from sale of Federal Home Loan Bank stock | 38,650 | 16,661 | ||||||
Net investment in limited partnership tax credits | 505 | — | ||||||
Purchase of premises and equipment, net | (2,382 | ) | (4,376 | ) | ||||
Net cash provided (used) by investing activities | 139,467 | (211,462 | ) | |||||
(continued) | ||||||||
9
Three Months Ended March 31, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 184,034 | (65,870 | ) | |||||
Proceeds from Federal Home Loan Bank advances and other borrowings | 1,292,517 | 1,235,892 | ||||||
Repayments of Federal Home Loan Bank advances and other borrowings | (1,600,624 | ) | (1,157,778 | ) | ||||
Exercise of stock options | — | 76 | ||||||
Common and preferred stock cash dividends paid | (10,715 | ) | (10,212 | ) | ||||
Net cash (provided) used by financing activities | (134,788 | ) | 2,108 | |||||
Net change in cash and cash equivalents | (15,570 | ) | (124,876 | ) | ||||
Cash and cash equivalents at beginning of period | 183,189 | 248,763 | ||||||
Cash and cash equivalents at end of period | $ | 167,619 | $ | 123,887 | ||||
Supplemental cash flow information: | ||||||||
Interest paid on deposits | $ | 26,118 | $ | 15,345 | ||||
Interest paid on borrowed funds | 10,656 | 6,725 | ||||||
Income taxes paid, net | 794 | 1,065 | ||||||
Other non-cash changes: | ||||||||
Other net comprehensive income | 10,564 | (14,231 | ) | |||||
Real estate owned acquired in settlement of loans | — | — | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The Consolidated Financial Statements (the “financial statements”) of Berkshire Hills Bancorp, Inc. and its subsidiaries (the “Company” or “Berkshire”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company is a Delaware corporation, headquartered in Boston, Massachusetts, and the holding company for Berkshire Bank (the “Bank”), a Massachusetts-chartered trust company headquartered in Pittsfield, Massachusetts, and Berkshire Insurance Group, Inc. These financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Bank’s consolidated subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-owned and majority-owned subsidiaries are consolidated unless GAAP requires otherwise.
The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.
These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to GAAP have been omitted.
The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures Berkshire Hills Bancorp, Inc. previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In management’s opinion, all adjustment’s necessary for a fair statement are reflected in the interim periods presented.
Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current presentation.
Recently Adopted Accounting Principles
Effective January 1, 2019, the following new accounting guidance was adopted by the Company:
• | ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities; |
• | ASU No. 2016-02, Leases (Topic 842)(additional information is disclosed in Note 10 - Leases of the Consolidated Financial Statements) |
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU No. 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the Consolidated Balance Sheets as of the date of adoption. ASU No. 2017-12 became effective for the Company on January 1, 2019. The adoption was not material to the financial statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The pronouncement affects all entities that are participants to leasing agreements. From a lessee accounting perspective, the ASU requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. The ASU includes a short-term lease exception for leases with a term of twelve months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. From a lessor accounting perspective, the guidance is largely unchanged, except for targeted improvements to align with new terminology under lessee accounting and with the updated revenue recognition guidance in Topic 606. For sale-leaseback transactions, for a sale to occur the transfer must meet the sale criteria under the new revenue standard, Topic 606. Entities will not be required to reassess transactions previously accounted under then existing guidance.
The ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU No. 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain practical expedients provided under ASU No. 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In December 2018, the FASB issued ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides targeted improvements and clarification to guidance with FASB ASC Topic 842 specific to lessors. The amendments of ASU No. 2018-20 have the same effective date as ASU 2016-02 and may be applied either retrospectively or prospectively to all new and existing leases. The Company obtained a third-party software application which provides lease accounting under the guidelines of FASB ASC Topic 842. The amendments of ASU No. 2016-02 and subsequently issued ASUs, which provided additional guidance and clarifications to various aspects of FASB ASC Topic 842, became effective for the Company on January 1, 2019. The Company recognized right-of-use lease assets and related lease liabilities totaling $79.6 million and $82.8 million respectively as of January 1, 2019. The right-of-use lease assets and related lease liabilities recognized at January 1, 2019 include right-of-use lease assets and lease liabilities classified as discontinued operations. See Note 10 - Leases for more information.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future Application of Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. The ASU requires companies to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Forward-looking information will now be used in credit loss estimates. The ASU requires enhanced disclosures to provide better understanding surrounding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Most debt instruments will require a cumulative-effect adjustment to retained earnings on the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted (modified retrospective approach). However, there is instrument-specific transition guidance. ASU No. 2016-13 is effective for interim and annual periods beginning after December 15, 2019. Early application will be permitted for interim and annual periods beginning after December 15, 2018.
The Company is evaluating the provisions of ASU No. 2016-13, and will closely monitor developments and additional guidance to determine the potential impact on the Company's Consolidated Financial Statements. A cross-functional working group has been formed and is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. Management is working through its implementation plan which includes assessment and documentation of processes and internal controls; model development and documentation; and system configuration. Management is also in the process of implementing a third-party vendor solution to assist us in the application of ASU No. 2016-13. The Company expects the primary changes to be the application of the new expected credit loss model from the incurred model. In addition, the Company expects the guidance to change the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines. The Company is in the process of identifying and implementing required changes to loan loss estimation models and processes and evaluating the impact of this new accounting guidance, which at the date of adoption is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles: Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies the test for goodwill impairment by eliminating the second step of the current two-step method. Under the new accounting guidance, entities will compare the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, the entity is required to recognize an impairment charge for this amount. Current guidance requires an entity to proceed to a second step, whereby the entity would determine the fair value of its assets and liabilities. The new method applies to all reporting units. The performance of a qualitative assessment is still allowable. This accounting guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect adoption to have a material effect on its Consolidated Financial Statements.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds, and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. Entities are also allowed to elect early adoption for the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. As ASU No. 2018-14 only revises disclosure requirements, it will not have a material impact on the Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU No. 2018-15 clarifies certain aspects of ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU No. 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU No. 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently do not expect adoption to have a material impact on its Consolidated Financial Statements.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. DISCONTINUED OPERATIONS
During the period ended March 31, 2019, the Company reached the decision to pursue the sale of the national mortgage banking operations of First Choice Loan Services, Inc. (“FCLS”) – a subsidiary of the Bank. The decision was based on a number of strategic priorities and other factors, including the competitiveness of the mortgage industry. FCLS continues to operate and serve its customers as the Company initiates the process of identifying a buyer. The potential transaction is expected to close within 12 months. As a result of these actions, the Company classified the operations of FCLS as discontinued under ASC 205-20. The Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows present discontinued operations retrospectively for current and prior periods.
The following is a summary of the assets and liabilities of the discontinued operations of FCLS at March 31, 2019 and December 31, 2018:
(in thousands) | March 31, 2019 | December 31, 2018 | ||||
Assets | ||||||
Loans held for sale, at fair value | 136,821 | 94,050 | ||||
Premises and equipment, net | 1,858 | 1,867 | ||||
Other assets | 26,399 | 18,342 | ||||
Total assets | 165,078 | 114,259 | ||||
Liabilities | ||||||
Other liabilities | 15,505 | 9,597 | ||||
Total liabilities | 15,505 | 9,597 | ||||
FCLS funds its lending operations and maintains working capital through an intercompany line-of-credit with the Bank. Although the sale of FCLS will contemplate settlement of these borrowings, debt was not allocated to discontinued operations due to the intercompany nature of the borrowings. When the transaction closes, the Company will reallocate these funds to various purposes, including but not limited to, pay-down of short-term debt with the Federal Home Loan Bank.
The following presents operating results of the discontinued operations of FCLS for the three months ended March 31, 2019 and March 31, 2018:
Three Months Ended March 31, | ||||||
(in thousands) | 2019 | 2018 | ||||
Interest income | 1,044 | 1,094 | ||||
Interest expense | 584 | 381 | ||||
Net interest income | 460 | 713 | ||||
Non-interest income | 8,813 | 10,628 | ||||
Total net revenue | 9,273 | 11,341 | ||||
Non-interest expense | 10,127 | 11,503 | ||||
Loss from discontinued operations before income taxes | (854 | ) | (162 | ) | ||
Income tax (benefit) | (217 | ) | (39 | ) | ||
Net loss from discontinued operations | (637 | ) | (123 | ) | ||
FCLS also originates mortgages designated as held-for-investment. This component of FCLS’s operations was not considered discontinued, since the Company expects to continue to originate mortgages designated as held-for-investment in its footprint on a small scale through processes considered as continuing operations.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. TRADING SECURITY
The Company holds a tax-advantaged economic development bond accounted for at fair value. The security had an amortized cost of $9.9 million and $10.1 million, and a fair value of $11.2 million and $11.2 million, at March 31, 2019 and December 31, 2018, respectively. As discussed further in Note 9 - Derivative Financial Instruments and Hedging Activities, the Company entered into a swap contract to swap-out the fixed rate of the security in exchange for a variable rate. The Company does not purchase securities with the intent of selling them in the near term, and there were no other securities in the trading portfolio at March 31, 2019.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SECURITIES AVAILABLE FOR SALE, HELD TO MATURITY, AND MARKETABLE
EQUITY SECURITIES
The Company adopted ASU-2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" in the first quarter of 2018. All changes in the fair value of marketable equity securities, including other-than-temporary impairment, are immediately recognized in earnings.
The following is a summary of securities available for sale, held to maturity, and marketable equity securities:
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
March 31, 2019 | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Municipal bonds and obligations | $ | 113,521 | $ | 4,088 | $ | (142 | ) | $ | 117,467 | |||||||
Agency collateralized mortgage obligations | 913,263 | 1,964 | (7,313 | ) | 907,914 | |||||||||||
Agency mortgage-backed securities | 168,914 | 78 | (2,876 | ) | 166,116 | |||||||||||
Agency commercial mortgage-backed securities | 61,914 | — | (2,536 | ) | 59,378 | |||||||||||
Corporate bonds | 119,893 | 434 | (1,060 | ) | 119,267 | |||||||||||
Trust preferred securities | 8,319 | 283 | — | 8,602 | ||||||||||||
Other bonds and obligations | 8,016 | 30 | (22 | ) | 8,024 | |||||||||||
Total securities available for sale | 1,393,840 | 6,877 | (13,949 | ) | 1,386,768 | |||||||||||
Securities held to maturity | ||||||||||||||||
Municipal bonds and obligations | 260,968 | 7,149 | (136 | ) | 267,981 | |||||||||||
Agency collateralized mortgage obligations | 71,226 | 1,445 | (346 | ) | 72,325 | |||||||||||
Agency mortgage-backed securities | 7,074 | — | (174 | ) | 6,900 | |||||||||||
Agency commercial mortgage-backed securities | 10,401 | — | (199 | ) | 10,202 | |||||||||||
Tax advantaged economic development bonds | 19,363 | 95 | (1,185 | ) | 18,273 | |||||||||||
Other bonds and obligations | 299 | — | — | 299 | ||||||||||||
Total securities held to maturity | 369,331 | 8,689 | (2,040 | ) | 375,980 | |||||||||||
Marketable equity securities | 55,409 | 5,217 | (1,505 | ) | 59,121 | |||||||||||
Total | $ | 1,818,580 | $ | 20,783 | $ | (17,494 | ) | $ | 1,821,869 | |||||||
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
December 31, 2018 | ||||||||||||||||
Securities available for sale | ||||||||||||||||
Municipal bonds and obligations | $ | 109,648 | $ | 2,272 | $ | (713 | ) | $ | 111,207 | |||||||
Agency collateralized mortgage obligations | 944,946 | 1,130 | (15,192 | ) | 930,884 | |||||||||||
Agency mortgage-backed securities | 175,406 | 36 | (5,121 | ) | 170,321 | |||||||||||
Agency commercial mortgage-backed securities | 62,200 | — | (3,275 | ) | 58,925 | |||||||||||
Corporate bonds | 112,404 | 342 | (1,256 | ) | 111,490 | |||||||||||
Trust preferred securities | 8,314 | 251 | (99 | ) | 8,466 | |||||||||||
Other bonds and obligations | 8,355 | 34 | (35 | ) | 8,354 | |||||||||||
Total securities available for sale | 1,421,273 | 4,065 | (25,691 | ) | 1,399,647 | |||||||||||
Securities held to maturity | ||||||||||||||||
Municipal bonds and obligations | 264,524 | 3,569 | (3,601 | ) | 264,492 | |||||||||||
Agency collateralized mortgage obligations | 71,637 | 533 | (778 | ) | 71,392 | |||||||||||
Agency mortgage-backed securities | 7,219 | — | (297 | ) | 6,922 | |||||||||||
Agency commercial mortgage-backed securities | 10,417 | — | (289 | ) | 10,128 | |||||||||||
Tax advantaged economic development bonds | 19,718 | 22 | (1,698 | ) | 18,042 | |||||||||||
Other bonds and obligations | 248 | — | — | 248 | ||||||||||||
Total securities held to maturity | 373,763 | 4,124 | (6,663 | ) | 371,224 | |||||||||||
Marketable equity securities | 55,471 | 4,370 | (3,203 | ) | 56,638 | |||||||||||
Total | $ | 1,850,507 | $ | 12,559 | $ | (35,557 | ) | $ | 1,827,509 | |||||||
The amortized cost and estimated fair value of available for sale (“AFS”) and held to maturity (“HTM”) securities segregated by contractual maturity at March 31, 2019 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.
Available for sale | Held to maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(In thousands) | Cost | Value | Cost | Value | ||||||||||||
Within 1 year | $ | 7,747 | $ | 7,759 | $ | 2,614 | $ | 2,614 | ||||||||
Over 1 year to 5 years | 26,687 | 26,837 | 14,799 | 14,865 | ||||||||||||
Over 5 years to 10 years | 82,660 | 83,351 | 13,494 | 13,577 | ||||||||||||
Over 10 years | 132,655 | 135,413 | 249,723 | 255,497 | ||||||||||||
Total bonds and obligations | 249,749 | 253,360 | 280,630 | 286,553 | ||||||||||||
Mortgage-backed securities | 1,144,091 | 1,133,408 | 88,701 | 89,427 | ||||||||||||
Total | $ | 1,393,840 | $ | 1,386,768 | $ | 369,331 | $ | 375,980 | ||||||||
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the three months ended March 31, 2019, purchases of AFS securities totaled $15.2 million and the proceeds from the sale of AFS securities totaled $2.6 million. During the three months ended March 31, 2019, gross gains on sale of AFS securities totaled $6 thousand and there were no gross losses. These gains are included in Gain/(loss) on securities, net on the consolidated statements of income. During the three months ended March 31, 2018, purchases of AFS securities totaled $116.4 million. There were no sales of AFS securities during the three months ended March 31, 2018.
Securities available for sale and held to maturity with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
Less Than Twelve Months | Over Twelve Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||
(In thousands) | Losses | Value | Losses | Value | Losses | Value | ||||||||||||||||||
March 31, 2019 | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Municipal bonds and obligations | $ | 7 | $ | 323 | $ | 135 | $ | 8,971 | $ | 142 | $ | 9,294 | ||||||||||||
Agency collateralized mortgage obligations | 121 | 67,340 | 7,192 | 612,951 | 7,313 | 680,291 | ||||||||||||||||||
Agency mortgage-backed securities | 27 | 10,306 | 2,849 | 146,416 | 2,876 | 156,722 | ||||||||||||||||||
Agency commercial mortgage-backed securities | 30 | 4,002 | 2,506 | 55,375 | 2,536 | 59,377 | ||||||||||||||||||
Corporate bonds | 1,040 | 76,670 | 20 | 980 | 1,060 | 77,650 | ||||||||||||||||||
Other bonds and obligations | — | — | 22 | 3,039 | 22 | 3,039 | ||||||||||||||||||
Total securities available for sale | 1,225 | 158,641 | 12,724 | 827,732 | 13,949 | 986,373 | ||||||||||||||||||
Securities held to maturity | ||||||||||||||||||||||||
Municipal bonds and obligations | — | — | 136 | 13,308 | 136 | 13,308 | ||||||||||||||||||
Agency collateralized mortgage obligations | — | — | 346 | 10,858 | 346 | 10,858 | ||||||||||||||||||
Agency mortgage-backed securities | — | — | 174 | 6,900 | 174 | 6,900 | ||||||||||||||||||
Agency commercial mortgage-backed securities | — | — | 199 | 10,202 | 199 | 10,202 | ||||||||||||||||||
Tax advantaged economic development bonds | — | — | 1,185 | 6,884 | 1,185 | 6,884 | ||||||||||||||||||
Total securities held to maturity | — | — | 2,040 | 48,152 | 2,040 | 48,152 | ||||||||||||||||||
Total | $ | 1,225 | $ | 158,641 | $ | 14,764 | $ | 875,884 | $ | 15,989 | $ | 1,034,525 | ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||
Municipal bonds and obligations | $ | 55 | $ | 3,186 | $ | 658 | $ | 11,787 | $ | 713 | $ | 14,973 | ||||||||||||
Agency collateralized mortgage obligations | 76 | 39,114 | 15,116 | 755,528 | 15,192 | 794,642 | ||||||||||||||||||
Agency mortgage-backed securities | 53 | 5,500 | 5,068 | 162,439 | 5,121 | 167,939 | ||||||||||||||||||
Agency commercial mortgage-backed securities | 44 | 1,503 | 3,231 | 57,422 | 3,275 | 58,925 | ||||||||||||||||||
Corporate bonds | 1,249 | 74,434 | 7 | 2,561 | 1,256 | 76,995 | ||||||||||||||||||
Trust preferred securities | 99 | 7,068 | — | — | 99 | 7,068 | ||||||||||||||||||
Other bonds and obligations | — | — | 35 | 3,030 | 35 | 3,030 | ||||||||||||||||||
Total securities available for sale | 1,576 | 130,805 | 24,115 | 992,767 | 25,691 | 1,123,572 | ||||||||||||||||||
Securities held to maturity | ||||||||||||||||||||||||
Municipal bonds and obligations | 127 | 17,596 | 3,474 | 103,759 | 3,601 | |||||||||||||||||||