Forward-looking statements
This Quarterly Report on Form 10-Q contains information and statements that are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the Company, and include, without limitation, statements about the Company's plans, strategies, goals, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries, as well as statements about the Company's expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of the FCBP acquisition and other acquisitions. Forward-looking statements are typically identified with the use of terms such as "may," "might," "will," "would," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "could," "continue," "intend," and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements are inherently subject to risks and uncertainties and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation: our ability to efficiently integrate acquisitions, including the FCBP acquisition, into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic and market conditions, including risk of recession, high unemployment rates, higher inflation and its impacts (includingU.S. federal government measures to address higher inflation),U.S. fiscal debt, budget and tax matters, and any slowdown in global economic growth; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; the ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in legislative or regulatory requirements, as well as current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including rules and regulations relating to bank products and financial services; changes in accounting policies and practices or accounting standards; changes in the method of determining LIBOR and the phase-out of LIBOR; natural disasters; terrorist activities, war and geopolitical matters (including the war inUkraine and the imposition of additional sanctions and export controls in connection therewith), or pandemics, including the COVID-19 pandemic, and their effects on economic and business environments in which we operate, including the ongoing disruption to the financial market and other economic activity caused by the continuing COVID-19 pandemic; and other risks discussed under the caption "Risk Factors" under Part I, Item 1A of our 2021 Annual Report on Form 10-K, and other reports filed with theSEC , all of which could cause the Company's actual results to differ from those set forth in the forward-looking statements. The Company cautions that the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Company's results. Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management's analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with theSEC which are available on our website at www.enterprisebank.com under "Investor Relations." 29 --------------------------------------------------------------------------------
Introduction
The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first nine months of 2022 compared to the financial condition as ofDecember 31, 2021 . In addition, this discussion summarizes the significant factors affecting the results of operations of the Company for the three months endedSeptember 30, 2022 , compared to the linked second quarter ("linked quarter") in 2022 and the results of operations, liquidity and cash flows for the nine months endedSeptember 30, 2022 compared to the same period in 2021. In light of the nature of the Company's business, which is not seasonal, the Company's management believes that the comparison to the linked quarter is the most relevant to understand the financial results from management's perspective. For purposes of the Quarterly Report on Form 10-Q, the Company is presenting a comparison to the corresponding year-to-date period in 2021. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Significant Accounting Policies and Estimates
The Company's critical accounting policies are considered important to the understanding of the Company's financial condition and results of operations. These 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. If 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. A full description of our critical accounting policies and the impact and any associated risks related to those 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 the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . The Company has prepared 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. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. 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 statement in future periods. There can be no assurances that actual results will not differ from those estimates. 30 --------------------------------------------------------------------------------
Provision for credit losses
Utilizing the CECL methodology, 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$140.6 million atSeptember 30, 2022 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$7.7 million . Conversely, the allowance would have increased$39.0 million using only the downside scenario. 31 --------------------------------------------------------------------------------
Summary
The Company finalized its acquisition of FCBP on
Below are highlights of the Company’s financial performance for the periods indicated.
Three months ended At or for the nine months ended
(in thousands, except per share September 30, June 30, September 30, September 30, September 30,
data) 2022 2022 2021 2022 2021
EARNINGS
Total interest income $ 135,695 $ 116,069 $ 103,228 $ 358,345 $ 275,589
Total interest expense 11,405 6,456 5,955 23,277 17,455
Net interest income 124,290 109,613 97,273 335,068 258,134
Provision (benefit) for credit
losses 676 658 19,668 (2,734) 17,045
Net interest income after
provision (benefit) for credit
losses 123,614 108,955 77,605 337,802 241,089
Total noninterest income 9,454 14,194 17,619 42,289 45,113
Total noninterest expense 68,843 65,424 76,885 197,067 182,225
Income before income tax expense 64,225 57,725 18,339 183,024 103,977
Income tax expense 14,025 12,576 4,426 39,982 21,733
Net income $ 50,200 $ 45,149 $ 13,913 $ 143,042 $ 82,244
Preferred stock dividends 937 938 - 3,104 -
Net income available to common
shareholders $ 49,263 $ 44,211 $ 13,913 $ 139,938 $ 82,244
Basic earnings per share $ 1.32 $ 1.19 $ 0.38 $ 3.74 $ 2.48
Diluted earnings per share $ 1.32 $ 1.19 $ 0.38 $ 3.73 $ 2.48
Return on average assets 1.51 % 1.34 % 0.45 % 1.42 % 1.01 %
Return on average common equity 13.74 % 12.65 % 3.96 % 13.09 % 9.14 %
Return on average tangible
common equity1 18.82 % 17.44 % 5.37 % 17.92 % 12.31 %
Net interest margin (tax
equivalent) 4.10 % 3.55 % 3.40 % 3.64 % 3.45 %
Efficiency ratio 51.47 % 52.84 % 66.92 % 52.22 % 60.09 %
Core efficiency ratio1 51.47 % 52.81 % 51.30 % 52.21 % 52.59 %
Book value per common share $ 36.92 $ 36.97 $ 37.52
Tangible book value per common
share1 $ 26.62 $ 26.63
ASSET QUALITY Net charge-offs (recoveries) $ 478$ (175) $ 1,850 $ 1,824$ 8,366 Nonperforming loans 18,184 19,560 41,554 Classified assets 98,078 96,801 104,220 Nonperforming loans to total loans 0.19 % 0.21 % 0.46 % Nonperforming assets to total assets 0.14 % 0.16 % 0.35 % ACL on loans to total loans 1.50 % 1.52 % 1.67 % Net charge-offs (recoveries) to average loans (annualized) 0.02 % (0.01) % 0.08 % 0.03 % 0.14 %
(1) A non-GAAP measure. A reconciliation has been included in this section under the heading “Use of Non-GAAP Financial Measures”.
32 --------------------------------------------------------------------------------
Financial results and other notable items include:
• Details of PPP loans are shown in the following table:
Quarter ended At or for the nine months ended
September 30, September 30, September 30, September 30,
(in thousands) 2022 June 30, 2022 2021 2022 2021
PPP loans outstanding, net of
deferred fees $ 13,165 $ 49,175 $ 438,959 $ 13,165 $ 438,959
Average PPP loans outstanding, net 26,113 89,152 489,104 102,599 614,470
PPP interest and fee income
recognized 471 1,557 6,048 4,886 22,463
PPP deferred fees remaining 119 524 7,428 119 7,428
PPP average yield 7.16 % 7.01 % 4.91 % 6.37 % 4.89 %
PPP has impacted the Company's financial metrics in all periods since the
Company began participating in April 2020 . Loan and deposit growth, earnings per
share, and return on assets all increased due to the PPP. Conversely, the
allowance coverage ratio, the leverage ratio and the ratio of tangible common
equity to tangible assets all decreased. The net interest margin has benefited
in quarters where loan forgiveness has been approved by the SBA and related loan
fees have been accelerated into income. Since the PPP loans are guaranteed by
the SBA, CET1, Tier 1 and total risk-based capital are not impacted by PPP loan
balances.
•Pre-provision net revenue1 ("PPNR") of $64.9 million in the third quarter 2022
increased $6.5 million from the linked quarter PPNR of $58.4 million . PPNR of
$180.3 million for the nine months ended September 30, 2022 increased
$36.1 million from $144.2 million in the prior year period. The increase from
the linked quarter was primarily due to an increase in operating revenue,
partially offset by an increase in noninterest expense. The year-to-date
increase over the prior year period was primarily due to the acquisition of FCBP
in the third quarter 2021, partially offset by a decline in PPP income.
1 PPNR is a non-GAAP measure. See the discussion and reconciliation of these measures in the accompanying financial tables.
•Net interest income of$124.3 million for the third quarter 2022 increased$14.7 million from$109.6 million in the linked quarter. Net interest margin ("NIM") was 4.10% for the third quarter 2022, compared to 3.55% for the linked quarter. Net interest income and NIM benefited from higher average loan and investment balances and expanding yields on earning assets, partially offset by higher deposit costs and a decline in average interest-earning cash. Net interest income of$335.1 million for the nine months endedSeptember 30, 2022 increased$76.9 million from$258.1 million in the prior year period. The year-to-date increase over the prior year was due primarily to the acquisition of FCBP, an increase in market interest rates, and growth in the loan and investment portfolios, partially offset by a decline in PPP income. •Noninterest income of$9.5 million for the third quarter 2022 decreased$4.7 million from$14.2 million in the linked quarter. The decline from the linked quarter was primarily due to a decrease in tax credit income and card service revenue. The increase in market interest rates in the quarter reduced tax credit income due to the impact on tax credit projects carried at fair value. Card services revenue declined due to the Durbin Amendment cap on debit card income that became effective in the current quarter. Noninterest income of$42.3 million for the nine months endedSeptember 30, 2022 decreased$2.8 million from$45.1 million in the prior year period. The year-to-date decrease from the prior period was due primarily to the reduction in tax credit income partially offset by increased noninterest income from the FCBP acquisition.
Balance sheet highlights:
•Loans - Total loans increased$337.3 million to$9.4 billion atSeptember 30, 2022 , compared to$9.0 billion atDecember 31, 2021 . PPP loans declined$258.8 million fromDecember 31, 2021 . Excluding PPP, loans grew$596.1 million , or 7%, on a year-to-date basis fromDecember 31, 2021 . Average loans totaled$9.1 billion for the nine months endedSeptember 30, 2022 compared to$7.7 billion for the nine months endedSeptember 30, 2021 . 33 -------------------------------------------------------------------------------- •Deposits - Total deposits decreased$286.2 million , to$11.1 billion atSeptember 30, 2022 from$11.3 billion atDecember 31, 2021 . The decline in deposits was primarily concentrated in interest-bearing demand and money market accounts that were not relationship-based and reflects a shift in our deposit mix aligned with our disciplined focus on relationship-based, lower-cost deposits. Average deposits totaled$11.4 billion for the nine months endedSeptember 30, 2022 , compared to$9.0 billion for the nine months endedSeptember 30, 2021 . Noninterest deposit accounts represented 42.0% of total deposits and the loan to deposit ratio was 84.6% atSeptember 30, 2022 . •Asset quality - The allowance for credit losses on loans to total loans was 1.50% atSeptember 30, 2022 , compared to 1.61% atDecember 31, 2021 . Nonperforming assets to total assets was 0.14% atSeptember 30, 2022 compared to 0.23% atDecember 31, 2021 . Due to the improvement in credit quality and a shift in the risk composition of the loan portfolio, offset by a decline in macroeconomic forecasts, a provision benefit of$2.7 million was recorded in the first nine months of 2022, compared to a provision expense of$17.0 million in the comparable prior year period. The provision for credit losses of$17.0 million included$23.9 million to establish the initial allowance for credit losses on certain First Choice acquired loans and commitments. Loan growth and the provision benefit in the first nine months of 2022 contributed to the decline in the ratio of allowance for credit losses to total loans. •Shareholders' equity - Total shareholders' equity was$1.45 billion atSeptember 30, 2022 , compared to$1.53 billion atDecember 31, 2021 , and the tangible common equity to tangible assets ratio2 was 7.86% atSeptember 30, 2022 compared to 8.13% atDecember 31, 2021 . The decline in the tangible common equity ratio was primarily due to a$172.0 million decrease in accumulated other comprehensive income, mainly from a decrease in the fair value of the available-for-sale investment portfolio. The Company and the Bank's regulatory capital ratios exceeded the "well-capitalized" level atSeptember 30, 2022 . InJune 2022 , the Company retired 1,980,093 shares of treasury stock and returned them to authorized and unissued shares. The Company repurchased 700,473 shares totaling$32.9 million in the first nine months of 2022 for an average price of$47.00 per share. The shares acquired in 2022 complete the share repurchase plan authorized by the Board of Directors onApril 29, 2021 . OnMay 4, 2022 , the Board of Directors approved a new plan that authorized the repurchase of up to 2,000,000 shares of common stock. No shares have been repurchased under the recently-approved plan. The Company's Board of Directors approved a quarterly dividend of$0.24 per common share, payable onDecember 30, 2022 to shareholders of record as ofDecember 15, 2022 , an increase of$0.01 , or 4.3%, compared to the third quarter 2022. The Board of Directors also declared a cash dividend of$12.50 per share of Series A Preferred Stock (or$0.3125 per depositary share) representing a 5% per annum rate for the period commencing (and including)September 15, 2022 to (but excluding)December 15, 2022 . The dividend will be payable onDecember 15, 2022 to shareholders of record onNovember 30, 2022 . 2 Tangible common equity to tangible assets ratio is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables. 34 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net Interest Income Average Balance Sheet The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis. Three months endedSeptember 30 , Three months endedJune 30 , Three months endedSeptember 30, 2022 2022 2021 Average Average Average Interest Yield/ Interest Yield/ Interest Yield/ (in thousands) Average Balance Income/Expense Rate Average Balance Income/Expense Rate Average Balance Income/Expense Rate Assets Interest-earning assets: Total loans1, 2$ 9,230,738 $ 118,642 5.10 %$ 9,109,131 $ 102,328 4.51 %$ 8,666,353 $ 94,465 4.32 % Taxable securities 1,294,470 8,064 2.27 1,209,498 6,894 2.29 904,338 4,810 2.11 Non-taxable securities2 907,785 6,653 2.84 858,621 6,050 2.83 690,600 4,773 2.74 Total securities 2,202,255 14,717 2.65 2,068,119 12,944 2.51 1,594,938 9,583 2.38 Interest-earning deposits 765,258 4,190 2.17 1,401,961 2,496 0.71 1,251,988 480 0.15 Total interest-earning assets 12,198,251 137,549 4.47 12,579,211 117,768 3.76 11,513,279 104,528 3.60 Noninterest-earning assets 959,870 949,263 821,279 Total assets$ 13,158,121 $ 13,528,474 $ 12,334,558 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand accounts$ 2,200,619 $ 1,707 0.31 %$ 2,329,431 $ 659 0.11 %$ 2,228,466 $ 459 0.08 % Money market accounts 2,791,822 6,067 0.86 2,767,595 2,270 0.33 2,675,405 1,294 0.19 Savings 828,747 69 0.03 854,860 70 0.03 747,927 61 0.03 Certificates of deposit 554,987 844 0.60 591,091 851 0.58 604,594 927 0.61 Total interest-bearing deposits 6,376,175 8,687 0.54 6,542,977 3,850 0.24 6,256,392 2,741 0.17 Subordinated debentures 155,225 2,313 5.91 155,092 2,257 5.84 204,011 2,855 5.55 FHLB advances 25,543 103 1.60 50,000 197 1.58 89,457 211 0.94 Securities sold under agreements to repurchase 198,027 123 0.25 202,537 41 0.08 216,403 58 0.11 Other borrowed funds 19,984 179 3.53 21,413 111 2.08 25,699 90 1.39 Total interest-bearing liabilities 6,774,954 11,405 0.67 6,972,019 6,456 0.37 6,791,962 5,955 0.35 Noninterest bearing liabilities: Demand deposits 4,778,720 4,987,455 4,040,761 Other liabilities 109,943 94,733 107,739 Total liabilities 11,663,617 12,054,207 10,940,462 Shareholders' equity 1,494,504 1,474,267 1,394,096 Total liabilities & shareholders' equity$ 13,158,121 $ 13,528,474 $ 12,334,558 Net interest income$ 126,144 $ 111,312 $ 98,573 Net interest spread 3.80 % 3.39 % 3.25 % Net interest margin 4.10 % 3.55 % 3.40 % 1 Average balances include nonaccrual loans. Interest income includes loan fees of$3.6 million ,$4.2 million , and$6.5 million for the three months endedSeptember 30, 2022 ,June 30, 2022 , andSeptember 30, 2021 , respectively. 2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were$1.9 million ,$1.7 million , and$1.3 million for the three months endedSeptember 30, 2022 ,June 30, 2022 , andSeptember 30, 2021 , respectively. 35 -------------------------------------------------------------------------------- Nine months ended September 30, 2022 2021 Average Average Interest Yield/ Interest Yield/ (in thousands) Average Balance Income/Expense Rate Average Balance Income/Expense Rate Assets Interest-earning assets: Total loans1, 2$ 9,116,072 $ 317,271 4.65 %$ 7,727,264 $ 250,699 4.34 % Taxable securities 1,219,093 20,658 2.27 870,169 14,235 2.19 Non-taxable securities2 846,707 17,973 2.84 635,423 13,392 2.82 Total securities 2,065,800 38,631 2.50 1,505,592 27,627 2.45 Interest-earning deposits 1,312,442 7,502 0.76 914,954 906 0.13 Total interest-earning assets 12,494,314 363,404 3.89 10,147,810 279,232 3.68 Noninterest-earning assets 937,549 712,946 Total assets$ 13,431,863 $ 10,860,756 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand accounts$ 2,344,007 $ 2,902 0.17 %$ 2,035,029 $ 1,123 0.07 % Money market accounts 2,810,278 9,797 0.47 2,458,146 3,257 0.18 Savings 833,721 205 0.03 707,269 161 0.03 Certificates of deposit 584,213 2,492 0.57 555,045 3,329 0.80 Total interest-bearing deposits 6,572,219 15,396 0.31 5,755,489 7,870 0.18 Subordinated debentures 155,093 6,790 5.85 203,853 8,521 5.59 FHLB advances 41,758 495 1.58 63,297 603 1.27 Securities sold under agreements to repurchase 220,703 224 0.14 218,942 176 0.11 Other borrowed funds 21,402 372 2.32 27,154 285 1.40 Total interest-bearing liabilities 7,011,175 23,277 0.44 6,268,735 17,455 0.37 Noninterest bearing liabilities: Demand deposits 4,819,718 3,280,414 Other liabilities 99,458 108,001 Total liabilities 11,930,351 9,657,150 Shareholders' equity 1,501,512 1,203,606 Total liabilities & shareholders' equity$ 13,431,863 $ 10,860,756 Net interest income$ 340,127 $ 261,777 Net interest spread 3.45 % 3.31 % Net interest margin 3.64 % 3.45 % 1 Average balances include nonaccrual loans. Interest income includes loan fees of$13.0 million and$22.1 million for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. 2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were$5.1 million and$3.6 million for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. 36 --------------------------------------------------------------------------------
Rate/Volume
The following table presents, on a tax equivalent basis for the periods indicated, a summary of the changes in interest income and expense resulting from changes in yield/rate and volume.
Nine months ended
Three months ended September 30, 2022 September 30, 2022
compared to compared to
Nine months ended
Three months ended June 30, 2022 September 30, 2021
Increase (decrease) due to Increase (decrease) due to
(in thousands) Volume(1) Rate(2) Net Volume(1) Rate(2) Net
Interest earned on:
Loans(3) $ 1,395 $ 14,919 $ 16,314 $ 47,366 $ 19,206 $ 66,572
Taxable securities 552 618 1,170 5,896 527 6,423
Non-taxable securities(3) 404 199 603 4,484 97 4,581
Interest-earning deposits (1,540) 3,234 1,694 551 6,045 6,596
Total interest-earning assets $ 811 $ 18,970 $ 19,781 $ 58,297 $ 25,875 $ 84,172
Interest paid on:
Interest-bearing demand accounts $ (37) $ 1,085 $ 1,048 $ 194 $ 1,585 $ 1,779
Money market accounts 21 3,776 3,797 528 6,012 6,540
Savings (1) - (1) 30 15 45
Certificates of deposit (42) 35 (7) 167 (1,005) (838)
Subordinated debentures 4 52 56 (2,119) 388 (1,731)
FHLB advances (96) 2 (94) (234) 126 (108)
Securities sold under agreements to
repurchase (1) 83 82 1 47 48
Other borrowings (7) 75 68 (70) 157 87
Total interest-bearing liabilities (159) 5,108 4,949 (1,503) 7,325 5,822
Net interest income $ 970 $ 13,862 $ 14,832 $ 59,800 $ 18,550 $ 78,350
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a tax equivalent basis.
NOTE: The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Net interest income (on a tax equivalent basis) of $126.1 million for the three
months ended September 30, 2022 increased $14.8 million , from $111.3 million in
the linked quarter. Interest income increased during the quarter due to higher
loan and investment balances combined with an increase in market interest rates.
The effective federal funds rate for the third quarter 2022 was 2.20%, an
increase of 144 basis points, compared to the linked quarter. Excess liquidity
was redeployed into the investment portfolio which, combined with higher average
loan balances, benefited the earning-asset mix. The increase in interest income
was partially offset by higher interest expense on the deposit portfolio due to
higher costs.
Net interest income (on a tax equivalent basis) for the nine months ended
September 30, 2022 of $340.1 million increased $78.3 million , over
$261.8 million in the prior year period. The year-to-date increase over the
prior year was primarily due to the FCBP acquisition and an increase in market
interest rates. Organic growth in the loan portfolio and the continued increase
in the investment portfolio has also benefited net interest income.
The current quarter and year-to-date increases in net interest income were
partially offset by a decline in PPP income. PPP income in the third quarter
2022 was $0.5 million , compared to $1.6 million in the linked quarter. PPP
income was $4.9 million for the nine months ended September 30, 2022 , compared
to $22.5 million in the comparable prior year period.
37
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NIM was 4.10% for the third quarter 2022, an increase of 55 basis points from
3.55% in the linked quarter. The increase in NIM from the linked quarter was
primarily due to higher yields on loans, investments and interest-earning
deposits due to an increase in market interest rates. The average loan yield was
5.10% in the third quarter 2022, an increase of 59 basis points from 4.51% in
the linked quarter. The average loan yield increased due to the repricing of
variable-rate loans and the origination of new loans at an average rate of 5.68%
in the third quarter. Approximately 20% of the variable-rate loan portfolio
reprices on the first day of each quarter and thus, interest income in the
period did not benefit from the Federal Reserve's increase in the target federal
funds rate in the current quarter. These loans will reset early in the fourth
quarter. The average investment yield was 2.65%, an increase of 14 basis points
from the linked quarter. The investment yield increased due to the purchase of
new investments at higher yields due to the expansion of the investment
portfolio and the reinvestment of cash flows. Investments purchased in the third
quarter 2022 had a tax equivalent average yield of 3.68%.
NIM was 3.64% for the nine months ended September 30, 2022 , an increase of 19
basis points, from 3.45% in the prior year period. The increase in NIM over the
prior year period was primarily due to the increase in interest rates that have
had a greater impact on assets with variable interest rates than on deposit
costs. In 2022, the target federal funds rate has increased 300 basis points to
a range of 3.0 to 3.25%, the highest level since early 2008.
Non-interest income
The following table presents a comparative summary of the main components of non-interest revenue for the periods indicated.
Linked quarter comparison Prior year comparison
Quarter ended Nine months ended
September 30, September 30, September 30,
(in thousands) 2022 June 30, 2022 Increase (decrease) 2022 2021 Increase (decrease)
Deposit service charges $ 4,951 $ 4,749 $ 202 4 % $ 13,863 $ 11,466 $ 2,397 21 %
Wealth management revenue 2,432 2,533 (101) (4) % 7,587 7,572 15 - %
Card services revenue 2,652 3,514 (862) (25) % 9,206 8,657 549 6 %
Tax credit income (loss) (3,625) 1,186 (4,811) (406) % 169 3,654 (3,485) (95) %
Other income 3,044 2,212 832 38 % 11,464 13,764 (2,300) (17) %
Total noninterest income $ 9,454 $ 14,194 $ (4,740) (33) % $ 42,289 $ 45,113 $ (2,824) (6) %
Total noninterest income for the third quarter 2022 was $9.5 million , a decrease
of $4.7 million from $14.2 million in the linked quarter. The decrease from the
linked quarter was primarily due to decreases in tax credit income and card
services revenue. Rising interest rates reduced tax credit income due to the
impact on tax credit projects carried at fair value. The rise in interest rates
in the third quarter 2022 increased the discount rate used in the fair value of
these projects, resulting in a lower fair value. Future rate increases may
result in additional fair value changes that will lower tax credit income. The
Durbin Amendment limits the amount of interchange income the Company can earn on
debit card transactions. This limitation went into effect for the Company in the
third quarter 2022 and reduced card services revenue by approximately $1.0
million in the third quarter.
Other income in the current and linked quarters included a combined $0.3 million
of income from community development investments and swap income. Income from
community development investments and customer swap fees are not consistent
sources and will vary among periods.
Total noninterest income for the nine months ended September 30, 2022 was
$42.3 million , a decrease of $2.8 million from $45.1 million in the prior year
period. The decrease was primarily due to tax credit and other income. Tax
credit income was lower due to the previously discussed changes in the fair
value of tax credits carried at fair value. Other income in the first nine
months of 2022 decreased primarily due to lower private equity fund
distributions and lower mortgage banking revenue due to a decline in activity,
partially offset by higher income on community development investments. The FCBP
acquisition contributed $4.9 million to noninterest income in 2022 compared to
$1.5 million in the prior year period, primarily in deposit service charges.
38
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Non-interest expenses
The following table presents a comparative summary of the main components of non-interest expenses for the periods indicated.
Linked quarter comparison Prior year comparison
Quarter ended Nine months ended
September 30, September 30, September 30,
(in thousands) 2022 June 30, 2022 Increase (decrease) 2022 2021 Increase (decrease)
Employee compensation
and benefits $ 36,999 $ 36,028 $ 971 3 % $ 108,854 $ 91,416 $ 17,438 19 %
Occupancy 4,497 4,309 188 4 % 13,392 11,776 1,616 14 %
Data processing 3,543 3,111 432 14 % 9,914 9,068 846 9 %
Professional fees 1,597 1,542 55 4 % 4,316 3,189 1,127 35 %
Branch closure expenses - - - - % - 3,441 (3,441) NM
Merger-related expenses - - - - % - 19,762 (19,762) NM
Other expense 22,207 20,434 1,773 9 % 60,591 43,573 17,018 39 %
Total noninterest
expense $ 68,843 $ 65,424 $ 3,419 5 % $ 197,067 $ 182,225 $ 14,842 8 %
Efficiency ratio 51.47 % 52.84 % (1.37) % 52.22 % 60.09 % (7.87) %
Core efficiency ratio1 51.47 % 52.81 % (1.34) % 52.21 % 52.59 %
(1.12)%
1 Core efficiency ratio is a non-GAAP measure. See discussion and reconciliation of this measure in the accompanying financial tables. NM – Not significant
Noninterest expense was$68.8 million for the third quarter 2022, an increase of$3.4 million from$65.4 million in the linked quarter. Employee compensation and benefits increased$1.0 million from the linked quarter due to an increase in full-time equivalent associates and higher performance-based incentive accruals. Other expense increased$2.3 million from the linked quarter primarily due to a$1.8 million increase in variable deposit costs in certain of the Company's specialized deposit businesses that are impacted by higher interest rates. Noninterest expense of$197.1 million for the nine months endedSeptember 30, 2022 , increased$14.8 million , from$182.2 million in the prior year period. The increase was primarily due to the FCBP acquisition that added$20.0 million in noninterest expense for the nine months endedSeptember 30, 2022 compared to$7.4 million in the prior year period, an increase in employee compensation and benefits from merit increases in 2021, and higher deposit servicing costs. Certain deposit specialty accounts receive an earnings credit that pays costs used to service the customer. These costs are recorded as noninterest expense and will fluctuate with the amount of the underlying deposit balances and the related earnings credit rate. The increase was primarily due to continued success in generating new customer activity in the deposit specialties and higher earnings credit rates. Offsetting these increases was a decline of$19.8 million in merger expenses that were recognized in the prior year on the acquisitions ofSeacoast Commerce Banc Holdings and FCBP and$3.4 million in branch closure expenses recognized in the prior year period.
Income taxes
The Company's effective tax rate was 21.8% for both the third quarter 2022 and the linked quarter. The effective tax rate was 21.9% and 20.9% for the nine months endedSeptember 30, 2022 and 2021, respectively. The Company's effective tax rate for the first nine months of 2022 has increased over the prior year period due to growth of pre-tax income and the further expansion and diversification of the Company's geographic footprint which has affected tax apportionment between states with different income tax rates. 39
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