UMB FINANCIAL CORPORATION This Management's Discussion and Analysis of Financial Condition and Results of Operations highlights the material changes in the results of operations and changes in financial condition of the Company for the three and nine-month periods endedSeptember 30, 2020 . It should be read in conjunction with the accompanying Consolidated Financial Statements, Notes to Consolidated Financial Statements and other financial information appearing elsewhere in this Form 10-Q and the Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
From time to time the Company has made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "believe," "expect," "anticipate," "intend," "estimate," "project," "outlook," "forecast," "target," "trend," "plan," "goal," or other words of comparable meaning or future-tense or conditional verbs such as "may," "will," "should," "would," or "could." Forward-looking statements convey the Company's expectations, intentions, or forecasts about future events, circumstances, results, or aspirations, in each case as of the date such forward-looking statements are made. This Form 10-Q, including any information incorporated by reference in this Form 10-Q, contains forward-looking statements. The Company also may make forward-looking statements in other documents that are filed or furnished with theSecurities and Exchange Commission . In addition, the Company may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others. All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond the Company's control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements include: • local, regional, national, or international business, economic, or political conditions or events;
• changes in laws or the regulatory environment, including as a result of
financial-services legislation or regulation;
• changes in monetary, fiscal, or trade laws or policies, including as a
result of actions by central banks or supranational authorities;
• changes in accounting standards or policies;
• shifts in investor sentiment or behavior in the securities, capital, or
other financial markets, including changes in market liquidity or
volatility or changes in interest or currency rates;
• changes in spending, borrowing, or saving by businesses or households;
• the Company's ability to effectively manage capital or liquidity or to
effectively attract or deploy deposits;
• changes in any credit rating assigned to the Company or its affiliates;
• adverse publicity or other reputational harm to the Company;
• changes in the Company's corporate strategies, the composition of its
assets, or the way in which it funds those assets;
• the Company's ability to develop, maintain, or market products orservices or to absorb unanticipated costs or liabilities associated with
those products or services;
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• the Company's ability to innovate to anticipate the needs of current or
future customers, to successfully compete in its chosen business lines,
to increase or hold market share in changing competitive environments,
or to deal with pricing or other competitive pressures;
• changes in the credit, liquidity, or other condition of the Company's
customers, counterparties, or competitors;
• the Company's ability to effectively deal with economic, business, or
market slowdowns or disruptions;
• judicial, regulatory, or administrative investigations, proceedings,
disputes, or rulings that create uncertainty for, or are adverse to, the
Company or the financial-services industry;
• the Company's ability to address changing or stricter regulatory or
other governmental supervision or requirements;
• the Company's ability to maintain secure and functional financial,
accounting, technology, data processing, or other operating systems or
facilities, including its capacity to withstand cyber-attacks;
• the adequacy of the Company's corporate governance, risk-management
framework, compliance programs, or internal controls, including its
ability to control lapses or deficiencies in financial reporting or to
effectively mitigate or manage operational risk;
• the efficacy of the Company's methods or models in assessing business
strategies or opportunities or in valuing, measuring, monitoring, or
managing positions or risk;
• the Company's ability to keep pace with changes in technology thataffect the Company or its customers, counterparties, or competitors;
• mergers, acquisitions, or dispositions, including the Company's ability
to integrate acquisitions and divest assets;
• the adequacy of the Company's succession planning for key executives or
other personnel;
• the Company's ability to grow revenue, control expenses, or attract and
retain qualified employees;
• natural disasters, war, terrorist activities, pandemics, or the outbreak
of COVID-19 or similar outbreaks, and their effects on economic and
business environments in which the Company operates;
• adverse effects due to COVID-19 on the Company and its customers,
counterparties, employees, and third-party service providers, and the
adverse impacts to our business, financial position, results of
operations, and prospects; or
• other assumptions, risks, or uncertainties described in the Notes toConsolidated Financial Statements (Item 1) and Management's Discussion
and Analysis of Financial Condition and Results of Operations (Item 2)
in this Form 10-Q, in the Risk Factors (Item 1A) in the Form 10-K, or in
any of the Company's quarterly or current reports.
Any forward-looking statement made by the Company or on its behalf speaks only as of the date that it was made. The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except as required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that the Company may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.
Overview
During the first quarter of 2020, the global economy began experiencing a
downturn related to the impacts of the COVID-19 global pandemic (the COVID-19
pandemic, or the pandemic). Such impacts have included significant volatility in
the global stock and fixed income markets, a 150-basis-point reduction in the
target federal funds rate, the enactment of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act, including the
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Paycheck Protection Program (PPP) administered by the
The Company continues to actively monitor developments related to COVID-19 and its impact to its business, customers, employees, counterparties, vendors, and service providers. During the third quarter of 2020, the Company's results of operations included continued building of the allowance for credit losses and monitoring key macroeconomic variables utilized in the econometric models under the CECL accounting standard adopted onJanuary 1, 2020 and$1.4 million of nonrecurring COVID-19 specific expenses. Additionally, the Company continued to see impacts of the volatile equity and debt markets and low interest rate environment in its fee-based businesses. In response to the COVID-19 pandemic, the Company formed aPandemic Taskforce and a steering group comprised of associates across multiple lines of business and support functions and has taken several actions to offer various forms of support to our customers, employees, and communities that have experienced impacts resulting from the COVID-19 pandemic. Approximately 65% of the Company's associates are working remotely. The Company has also increased purchases of computer hardware to support a remote workforce, as well as incurred additional cleaning and janitorial expense to disinfect branch and office locations. The Company is also actively working with customers impacted by the economic downturn by offering payment deferrals and other loan modifications. See further details under "Credit Risk Management" within "Item 3. Quantitative and Qualitative Disclosures about Market Risk." Additionally, the Company has recorded over 5,000 loans totaling$1.5 billion under the PPP. In light of volatility in the capital markets and economic disruptions, the Company continues to carefully monitor its capital and liquidity position. InMarch 2020 , theU.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period. The Company elected this alternative in the first quarter of 2020. The Company continues to anticipate that it will have sufficient capital levels to meet all applicable regulatory capital requirements. The COVID-19 pandemic and stay-at-home and similar mandates have also necessitated certain actions related to the way the Company operates its business. As noted above, the Company transitioned most of its workforce off-site or to work-from-home to help mitigate health risks. The Company is also carefully monitoring the activities of its vendors and other third-party service providers to mitigate the risks associated with any potential service disruptions. The length of time it may be required to operate under such circumstances and future degrees of disruption remain uncertain. While the Company has not experienced material adverse disruptions to its internal operations due to the pandemic, it continues to review evolving risks and developments.
The Company has detailed the impact of the COVID-19 pandemic in each applicable section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included below.
The Company focuses on the following strategic objectives to guide its efforts to achieve its vision, to deliver the unparalleled customer experience, all while seeking to improve net income and strengthen the balance sheet while undertaking prudent risk management.
The first strategic objective is to continuously improve operating efficiencies. The Company has focused on identifying efficiencies that simplify our organizational and reporting structures, streamline back office functions and take advantage of synergies and newer technologies among various platforms and distribution networks. The Company has identified and expects to continue identifying ongoing efficiencies through the normal course of business that, when combined with increased revenue, will contribute to improved operating leverage. During the third quarter of 2020, total revenue increased$25.5 million , or 9.4%, as compared to the third quarter of 2019, while noninterest expense increased$6.6 million , or 3.4%, for the same period. Included in the noninterest expense increase is$2.9 million of severance and$1.4 million of nonrecurring COVID-19 related expenses. The remaining increase in noninterest expense is primarily driven by an increase in bonus and commission expense, deferred compensation expense, and salary and wage expense, partially offset by a decrease in marketing and business development expense, consulting expense, and operational losses. As part of the initiative to improve operating efficiencies, the Company continues to invest in technological advances that it believes will help management drive 55 --------------------------------------------------------------------------------
operating leverage in the future through improved data analysis and automation. The Company also continues to evaluate core systems and will invest in enhancements that it believes will yield operating efficiencies.
The second strategic objective is to increase net interest income through profitable loan and deposit growth and the optimization of the balance sheet. During the third quarter of 2020, the Company had an increase in net interest income of$16.1 million , or 9.6%, from the same period in 2019. The Company has shown increased net interest income through the effects of increased volume and mix of average earning assets. Loans recorded under the PPP increased loan interest income by$8.7 million in the third quarter of 2020. The additional increase in interest income was driven by an increase of$1.3 billion in non-PPP loans. These increases were offset by the recent interest rate reductions. Average loan balances increased$2.8 billion , or 22.0%, for the third quarter of 2020, compared to the same period in 2019. Average PPP loans account for$1.5 billion of this variance. The funding for these assets was driven primarily by a 19.8% increase in average interest-bearing liabilities. Net interest margin, on a tax-equivalent basis, decreased 36 basis points compared to the same period in 2019, in large part due to a decrease in one-month LIBOR rates, excess liquidity buildup, and repricing of earning assets in the low interest rate environment, offset by a 100-basis point decrease in cost of interest-bearing deposits. However, net interest spread contracted by only one basis point during the same period. The Company expects to see continued volatility in the economic markets and government responses to the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company for the remainder of the year. The third strategic objective is to grow the Company's revenue from noninterest sources. The Company seeks to grow noninterest revenues throughout all economic and interest rate cycles, while positioning itself to benefit in periods of economic growth. Noninterest income increased$9.4 million , or 9.0%, to$113.0 million for the three months endedSeptember 30, 2020 , compared to the same period in 2019. This change is primarily due to an increase in trust and securities processing, the market value of company-owned life insurance, derivative income, and trading and investment banking income. See greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. AtSeptember 30, 2020 , noninterest income represented 38.0% of total revenues, compared to 38.1% atSeptember 30, 2019 . The recent economic changes have impacted fee income, especially those with assets tied to market values and interest rates. The fourth strategic objective is effective capital management. The Company places a significant emphasis on maintaining a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company's ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, evaluating acquisition opportunities that complement the Company's strategies, increasing dividends over time, and appropriately utilizing a share repurchase program. AtSeptember 30, 2020 , the Company had$2.9 billion in total shareholders' equity. This is an increase of$290.3 million , or 11.3%, compared to total shareholders' equity atSeptember 30, 2019 . AtSeptember 30, 2020 , the Company had a total risk-based capital ratio of 14.17%. The Company repurchased 2,262 shares of common stock at an average price of$46.91 per share during the third quarter of 2020. Total risk-based capital was favorably impacted by the$200 million subordinated note issuance during the third quarter. For additional information regarding the subordinated note issuance, please see the summary discussion in the "Deposits and Borrowed Funds" section included below.
Earnings Summary
The following is a summary regarding the Company's earnings for the third quarter of 2020. The changes identified in the summary are explained in greater detail below. The Company recorded net income of$73.1 million for the three-month period endedSeptember 30, 2020 , compared to net income of$62.4 million for the same period a year earlier. This represents a 17.2% increase over the three-month period endedSeptember 30, 2019 . Basic earnings per share for the third quarter of 2020 was$1.52 per share ($1.52 per share fully-diluted) compared to$1.28 per share ($1.27 per share fully-diluted) for the third quarter of 2019. Return on average assets and return on average common shareholders' equity for the three-month period endedSeptember 30, 2020 were 0.99% and 10.23%, respectively, compared to 1.03% and 9.69%, respectively, for the three-month period endedSeptember 30, 2019 . 56 -------------------------------------------------------------------------------- Net interest income for the three and nine-month periods endedSeptember 30, 2020 increased$16.1 million , or 9.6%, and$38.0 million , or 7.6%, respectively, compared to the same periods in 2019. For the three-month period endedSeptember 30, 2020 , average earning assets increased by$5.5 billion , or 24.4%, and for the nine-month period endedSeptember 30, 2020 , they increased by$4.5 billion , or 20.5%, compared to the same periods in 2019. Net interest margin, on a tax-equivalent basis, decreased to 2.73% and 2.82% for the three and nine-month periods endedSeptember 30, 2020 , respectively, compared to 3.09% and 3.16%, for the same periods in 2019, respectively. The provision for credit losses increased by$8.5 million to$16.0 million for the three-month period endedSeptember 30, 2020 and increased by$94.7 million to$125.5 million for the nine-month period endedSeptember 30, 2020 , as compared to the same periods in 2019. This increase is the result of the adoption of the CECL standard in the first quarter of 2020 and applying this methodology for computing the allowance for credit losses, coupled with the impacts of the current and forecasted economic downturn related to the COVID-19 pandemic. The Company's nonperforming loans increased$21.9 million to$93.7 million atSeptember 30, 2020 , compared toSeptember 30, 2019 . The allowance for credit losses on loans as a percentage of total loans increased to 1.33% as ofSeptember 30, 2020 , compared to 0.82% atSeptember 30, 2019 . For a description of the Company's methodology for computing the allowance for credit losses, please see the summary discussion in the "Provision and Allowance for Credit Losses" section included below. Noninterest income increased by$9.4 million , or 9.0%, for the three-month period endedSeptember 30, 2020 , and increased by$15.5 million , or 4.9%, for the nine-month period endedSeptember 30, 2020 , compared to the same periods in 2019. These changes are discussed in greater detail below under Noninterest Income. Noninterest expense increased by$6.6 million , or 3.4%, for the three-month period endedSeptember 30, 2020 , and increased by$19.7 million , or 3.4%, for the nine-month period endedSeptember 30, 2020 , compared to the same periods in 2019. These changes are discussed in greater detail below under Noninterest Expense.
Net Interest Income
Net interest income is a significant source of the Company's earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. Net interest income for the three and nine-month periods endedSeptember 30, 2020 increased$16.1 million , or 9.6%, and$38.0 million , or 7.6%, respectively, compared to the same periods in 2019. Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. As illustrated in this table, net interest spread for the three months endedSeptember 30, 2020 decreased one basis point as compared to the same period in 2019. Net interest margin for the three months endedSeptember 30, 2020 decreased 36 basis points compared to the same period in 2019. Net interest spread for the nine-month period endedSeptember 30, 2020 decreased six basis points as compared to the same period in 2019. Net interest margin for the nine-month period endedSeptember 30, 2020 decreased 34 basis points compared to the same period in 2019. The changes are primarily due to favorable volume variance on loans and securities and favorable rate variances on interest-bearing deposits, offset by unfavorable rate variances on earning assets. PPP loans account for$1.5 billion and$902.3 million for the three and nine-month periods endedSeptember 30, 2020 , respectively. These variances have led to an increase in the Company's net interest income during 2020, as compared to results for the same period in 2019. The changes compared to last year have been impacted by the recent short-term interest rate cuts and increased liquidity on the balance sheet. The Company expects to see continued volatility in the economic markets and government responses to these changes as a result of the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company the remainder of the year. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and interest rates have resulted in an increase in net interest income. 57
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Table 1
AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)
The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax-equivalent basis adjustment would have been 2.81% for the three-month period endedSeptember 30, 2020 , and 3.88% for the same period in 2019. The average yield on earning assets without the tax-equivalent basis adjustment would have been 3.05% for the nine-month period endedSeptember 30, 2020 and 3.96% for the same period in 2019. Three Months Ended September 30, 2020 2019 Average Average Average Average Balance Yield/Rate Balance Yield/Rate ASSETS Loans, net of unearned interest$ 15,731,716 3.60 %$ 12,890,878 4.99 % Securities: Taxable 5,478,397 1.92 4,636,243 2.31 Tax-exempt 4,336,539 2.95 3,841,483 3.03 Total securities 9,814,936 2.37 8,477,726 2.63 Federal funds and resell agreements 1,177,590 0.76 394,587 2.83 Interest-bearing due from banks 1,087,838 0.11 582,116 2.35 Other earning assets 32,894 3.54 44,571 4.32 Total earning assets 27,844,974 2.91 22,389,878 3.99 Allowance for credit losses (211,221 ) (104,795 ) Other assets 1,846,919 1,652,033 Total assets$ 29,480,672 $ 23,937,116 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits$ 15,867,017 0.23 %$ 13,226,432 1.23 % Federal funds and repurchase agreements 1,964,161 0.35 1,683,072 1.96 Borrowed funds 115,943 5.56 69,927 7.86 Total interest-bearing liabilities 17,947,121 0.28 14,979,431 1.35 Noninterest-bearing demand deposits 8,260,170 6,082,498 Other liabilities 431,528 321,909 Shareholders' equity 2,841,853 2,553,278 Total liabilities and shareholders' equity$ 29,480,672 $ 23,937,116 Net interest spread 2.63 % 2.64 % Net interest margin 2.73 3.09 58
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Nine Months Ended September 30,
2020 2019
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
ASSETS
Loans, net of unearned interest $ 14,818,893 3.91 % $ 12,607,157 5.10 %
Securities:
Taxable 5,082,153 2.09 4,481,242 2.36
Tax-exempt 4,169,829 3.02 3,730,744 2.98
Total securities 9,251,982 2.51 8,211,986 2.64
Federal funds and resell agreements 1,070,071 1.16 414,560 2.89
Interest-bearing due from banks 1,140,965 0.39 563,810 2.40
Other earning assets 39,580 4.55 50,841 5.05
Total earning assets 26,321,491 3.15 21,848,354 4.07
Allowance for credit losses (173,254 ) (106,565 )
Other assets 1,742,652 1,607,087
Total assets $ 27,890,889 $ 23,348,876
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 15,107,688 0.44 % $ 12,897,172 1.23 %
Federal funds and repurchase agreements 2,043,942 0.66 1,655,934 2.09
Borrowed funds 90,849 6.36 69,669 7.89
Total interest-bearing liabilities 17,242,479 0.50 14,622,775 1.36
Noninterest-bearing demand deposits 7,475,746 6,040,019
Other liabilities 411,547 283,863
Shareholders' equity 2,761,117 2,402,219
Total liabilities and shareholders' equity $ 27,890,889 $ 23,348,876
Net interest spread 2.65 % 2.71 %
Net interest margin 2.82 3.16
Table 2 presents the dollar amount of change in net interest income and margin
due to volume and rate. Table 2 also reflects the effect that interest-free
funds have on net interest margin. The average balance of interest-free funds
(total earning assets less interest-bearing liabilities) increased $2.5 billion
for the three-month period ended September 30, 2020 , and increased $1.9 billion
for the nine-month period ended June 30, 2020 , compared to the same periods in
2019. The benefit from interest-free funds decreased 35 and 28 basis points in
the three and nine-month periods, respectively, due to decreased yields on
earning assets, offset by a decrease in interest rates of interest-bearing
liabilities.
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ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in
thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended Nine Months Ended
September 30, 2020 and 2019 September 30, 2020 and 2019
Volume Rate Total Volume Rate Total
Change in interest earned on:
Loans $ 31,074 $ (50,876 ) $ (19,802 ) $ 76,229 $ (124,100 ) $ (47,871 )
Securities:
Taxable 4,419 (4,992 ) (573 ) 9,995 (9,577 ) 418
Tax-exempt 3,061 (886 ) 2,175 7,738 768 8,506
Federal funds sold and resell
agreements 2,588 (3,157 ) (569 ) 8,028 (7,723 ) 305
Interest-bearing due from banks 1,626 (4,777 ) (3,151 ) 5,601 (12,358 ) (6,757 )
Trading (99 ) (67 ) (166 ) (328 ) (148 ) (476 )
Interest income 42,669 (64,755 ) (22,086 ) 107,263 (153,138 ) (45,875 ) Change in interest incurred on: Interest-bearing deposits
6,857 (38,717 ) (31,860 ) 17,605 (85,840 ) (68,235 ) Federal funds purchased and repurchase agreements
1,189 (7,772 ) (6,583 ) 5,024 (20,887 ) (15,863 ) Other borrowed funds
723 (490 ) 233 1,105 (894 ) 211
Interest expense 8,769 (46,979 ) (38,210 ) 23,734 (107,621 ) (83,887 ) Net interest income
$ 33,900 $ (17,776 ) $ 16,124 $ 83,529 $ (45,517 ) $ 38,012 ANALYSIS OF NET INTEREST MARGIN Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Change 2020 2019 Change Average earning assets$ 27,844,974 $ 22,389,878
17,947,121 14,979,431 2,967,690 17,242,479 14,622,775 2,619,704 Interest-free funds
$ 9,897,853 $ 7,410,447
35.55 % 33.10 % 2.45 % 34.49 % 33.07 % 1.42 %
Tax-equivalent yield on earning assets 2.91 3.99 (1.08 ) 3.15 4.07 (0.92 )
Cost of interest-bearing liabilities 0.28 1.35 (1.07 ) 0.50 1.36 (0.86 )
Net interest spread 2.63 2.64 (0.01 ) 2.65 2.71 (0.06 )
Benefit of interest-free funds 0.10 0.45 (0.35 ) 0.17 0.45 (0.28 )
Net interest margin 2.73 % 3.09 % (0.36 )% 2.82 % 3.16 % (0.34 )%
Provision and Allowance for Credit Losses
The ACL represents management's judgment of the total expected losses included
in the Company's loan portfolio as of the balance sheet date. The Company's
process for recording the ACL is based on the evaluation of the Company's
lifetime historical loss experience, management's understanding of the credit
quality inherent in the loan portfolio, and the impact of the current economic
environment, coupled with reasonable and supportable economic forecasts.
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A mathematical calculation of an estimate is made to assist in determining the
adequacy and reasonableness of management's recorded ACL. To develop the
estimate, the Company follows the guidelines in ASC Topic 326, Financial
Instruments - Credit Losses. The estimate reserves for assets held at amortized
cost and any related credit deterioration in the Company's available-for-sale
debt security portfolio. Assets held at amortized cost include the Company's
loan book and held-to-maturity security portfolio.
The process involves the consideration of quantitative and qualitative factors
relevant to the specific segmentation of loans. These factors have been
established over decades of financial institution experience and include
economic observation and loan loss characteristics. This process is designed to
produce a lifetime estimate of the losses, at a reporting date, that includes
evaluation of historical loss experience, current economic conditions,
reasonable and supportable forecasts, and the qualitative framework outlined by
the Office of the Comptroller of the Currency in the published 2020 Interagency
Policy Statement. This process allows management to take a holistic view of the
recorded ACL reserve and ensure that all significant and pertinent information
is considered.
The Company considers a variety of factors to ensure the safety and soundness of
its estimate including a strong internal control framework, extensive
methodology documentation, credit underwriting standards which encompass the
Company's desired risk profile, model validation, and ratio analysis. If the
Company's total ACL estimate, as determined in accordance with the approved ACL
methodology, is either outside a reasonable range based on review of economic
indicators or by comparison of historical ratio analysis, the ACL estimate is an
outlier and management will investigate the underlying reason(s). Based on that
investigation, issues or factors that previously had not been considered may be
identified in the estimation process, which may warrant adjustments to estimated
credit losses.
The ending result of this process is a recorded consolidated ACL that represents
management's best estimate of the total expected losses included in the loan
portfolio, held-to-maturity securities, and credit deterioration in
available-for-sale securities.
Based on the factors above, management of the Company recorded $16.0 million and
$125.5 million as provision for credit losses for the three and nine-month
periods ended September 30, 2020 , respectively, compared to $7.5 million and
$30.9 million for the same periods in 2019, respectively. As illustrated in
Table 3 below, the ACL on loans increased to 1.33% of total loans as of
September 30, 2020 , compared to 0.82% of total loans as of September 30, 2019 .
Table 3 presents a summary of the Company's ACL for the nine-month periods ended
September 30, 2020 and 2019, and for the year ended December 31, 2019 . Net
charge-offs were $18.3 million for the nine-month period ended September 30,
2020 , compared to $27.1 million for the same period in 2019. See "Credit Risk
Management" under "Item 3. Quantitative and Qualitative Disclosures About Market
Risk" in this report for information relating to nonaccrual loans, past due
loans, restructured loans and other credit risk matters.
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ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES (unaudited, dollars in thousands)
Nine Months Ended Year Ended
September 30, December 31,
2020 2019 2019
Allowance - January 1 $ 101,788 $ 103,635 $ 103,635
Cumulative effect adjustment(1) 9,030 - -
Provision for credit losses 122,000 30,850 32,850
Charge-offs:
Commercial and industrial (6,990 ) (10,123 ) (19,267 ) Specialty lending - (15,919 ) (16,813 ) Commercial real estate (11,920 ) (392 ) (392 ) Consumer real estate (219 ) (50 ) (52 ) Consumer (513 ) (677 ) (909 ) Credit cards (5,953 ) (6,421 ) (8,647 ) Leases and other (11 ) - - Total charge-offs (25,606 ) (33,582 ) (46,080 ) Recoveries: Commercial and industrial 5,640 3,361 3,579 Specialty lending - 56 3,992 Commercial real estate 82 713 738 Consumer real estate 57 241 384 Consumer 271 369 509 Credit cards 1,232 1,763 2,181 Leases and other - - - Total recoveries 7,282 6,503 11,383 Net charge-offs (18,324 ) (27,079 ) (34,697 ) Allowance for credit losses - end of period$ 214,494 $ 107,406 $ 101,788 Allowance for credit losses on loans$ 211,688 $ 107,406 $ 101,788 Allowance for credit losses on held to maturity securities 2,806 N/A(1) N/A(1) Loans at end of period, net of unearned interest 15,950,177 13,043,840 13,431,722 Held to maturity securities at end of period 1,070,307 1,102,005 1,116,102 Total assets at amortized cost 17,020,484 14,145,845 14,547,824 Average loans, net of unearned interest 14,803,943 12,603,268 12,759,387 Allowance for credit losses on loans to loans at end of period 1.33 % 0.82 % 0.76 % Allowance for credit losses - end of period to total assets at amortized cost 1.26 % N/A(1) N/A(1) Allowance as a multiple of net charge-offs 8.76x 2.97x 2.93x Net charge-offs to average loans 0.17 % 0.29 % 0.27 %
(1) Related to the adoption of ASU No. 2016-13. See Note 3, "New Accounting
Pronouncements," for further detail.
Noninterest Income
A key objective of the Company is the growth of noninterest income to provide a diverse source of revenue not directly tied to interest rates. Fee-based services are typically non-credit related and are not generally affected by fluctuations in interest rates.
The Company offers multiple fee-based products and services, which management
believes will more closely align with customer demands. The Company is currently
emphasizing fee-based products and services including trust and securities
processing, bankcard, securities trading and brokerage, and cash and treasury
management.
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Management believes that it can offer these products and services both efficiently and profitably, as most have common platforms and support structures.
Table 4
SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Trust and securities processing $ 50,552 $ 45,218 $ 5,334 11.8 %
Trading and investment banking 8,678 5,712 2,966 51.9
Service charges on deposits 19,650 20,620 (970 ) (4.7 )
Insurance fees and commissions 259 320 (61 ) (19.1 )
Brokerage fees 4,819 8,102 (3,283 ) (40.5 )
Bankcard fees 15,295 16,895 (1,600 ) (9.5 )
Gains on sales of securities available
for sale, net 311 3,057 (2,746 ) (89.8 )
Other 13,432 3,711 9,721 >100.0
Total noninterest income $ 112,996 $ 103,635 $ 9,361 9.0 %
Nine Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Trust and securities processing $ 143,873 $ 130,078 $ 13,795 10.6 %
Trading and investment banking 23,252 16,746 6,506 38.9
Service charges on deposits 63,805 62,648 1,157 1.8
Insurance fees and commissions 1,051 1,123 (72 ) (6.4 )
Brokerage fees 20,432 22,422 (1,990 ) (8.9 )
Bankcard fees 44,756 50,401 (5,645 ) (11.2 )
Gains on sales of securities available
for sale, net 5,544 2,463 3,081 >100.0
Other 29,163 30,534 (1,371 ) (4.5 )
Total noninterest income $ 331,876 $ 316,415 $ 15,461 4.9 %
Noninterest income increased by $9.4 million , or 9.0%, during the three-month
period ended September 30, 2020 , and increased $15.5 million , or 4.9%, during
the nine-month period ended September 30, 2020 , compared to the same periods in
2019. Table 4 above summarizes the components of noninterest income and the
respective year-over-year comparison for each category.
Trust and securities processing income consists of fees earned on personal and
corporate trust accounts, custody of securities services, trust investments and
wealth management services, mutual fund assets, and alternative asset
servicing. The increase in these fees for the three and nine-month periods ended
September 30, 2020 , compared to the same periods in 2019, was primarily due to
an increase in corporate trust and fund services revenues. For the three-month
period ended June 30, 2020 , fund services revenue increased $3.7 million , or
17.6% and corporate trust revenue increased $1.6 million , or 21.3%. For the
nine-month period ended September 30, 2020 , fund services revenue increased $8.2
million , or 13.4%, and corporate trust revenue increased $5.8 million , or
28.3%. The recent volatile markets have impacted the income in this
category. Since trust and securities processing fees are primarily asset-based,
which are highly correlated to the change in market value of the assets, the
related income for the remainder of the year will be affected by changes in the
securities markets. Management continues to emphasize sales of services to both
new and existing clients as well as increasing and improving the distribution
channels.
Trading and investment banking fees for the three and nine-month periods ended
September 30, 2020 increased $3.0 million , or 51.9%, and $6.5 million , or 38.9%,
respectively, compared to the same periods in 2019. These increases were
primarily driven by increased trading volume and increased market valuations of
investments
63
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in the Company's trading portfolio. The income in this category is market driven and impacted by general increases or decreases in trading volume.
Service charges on deposit accounts for the three-month period endedSeptember 30, 2020 decreased by$1.0 million , or 4.7%, compared to the same period last year, driven by lower corporate service charges and return item fees. For the nine-month period, service charges on deposit accounts increased$1.2 million , or 1.8%, compared to the same period last year, primarily driven by income related to healthcare customer transfer and conversion fees recorded in the first quarter of 2020, offset by lower corporate service charges and return item fees. Brokerage fees for the three and nine-month periods endedSeptember 30, 2020 , decreased$3.3 million , or 40.5%, and$2.0 million , or 8.9%, respectively as compared to the same periods in 2019. These decreases were driven by lower 12b-1 fees. The recent reduction in short-term interest rates will impact the income in this category the remainder of the year. During the three and nine-month periods endedSeptember 30, 2020 ,$0.3 million and$5.5 million in gains, respectively, were recognized on the sales of securities available for sale, compared to gains on the sales of securities available for sale of$3.1 million and$2.5 million for the same periods in 2019. The investment portfolio is continually evaluated for opportunities to improve its performance and risk profile relative to market conditions and the Company's interest rate expectations. This can result in differences from quarter to quarter in the amount of realized gains or losses. Other noninterest income for the three-month period endedSeptember 30, 2020 , increased$9.7 million , or 262.0%, driven by increased company-owned life insurance and increased derivative income. For the nine-month period, other noninterest income decreased$1.4 million , or 4.5%, compared to the same period in 2019. This decrease was primarily driven by decreases in company-owned life insurance, offset by an increase in equity earnings on alternative investments and derivative income. Table 5
SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Salaries and employee benefits $ 124,194 $ 110,153 $ 14,041 12.7 %
Occupancy, net 12,027 12,240 (213 ) (1.7 )
Equipment 20,968 19,775 1,193 6.0
Supplies and services 3,442 4,261 (819 ) (19.2 )
Marketing and business development 3,038 5,655 (2,617 ) (46.3 )
Processing fees 12,812 13,619 (807 ) (5.9 )
Legal and consulting 7,244 8,374 (1,130 ) (13.5 )
Bankcard 4,834 4,643 191 4.1
Amortization of other intangible assets 1,524 1,335 189 14.2
Regulatory fees 2,309 2,749 (440 ) (16.0 )
Other 5,603 8,593 (2,990 ) (34.8 )
Total noninterest expense $ 197,995 $ 191,397 $ 6,598 3.4 %
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Nine Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Salaries and employee benefits $ 366,192 $ 340,639 $ 25,553 7.5 %
Occupancy, net 35,618 35,522 96 0.3
Equipment 63,711 58,283 5,428 9.3
Supplies and services 11,412 12,419 (1,007 ) (8.1 )
Marketing and business development 10,962 17,872 (6,910 ) (38.7 )
Processing fees 39,805 38,847 958 2.5
Legal and consulting 19,574 21,503 (1,929 ) (9.0 )
Bankcard 14,243 13,689 554 4.0
Amortization of other intangible assets 4,916 3,913 1,003 25.6
Regulatory fees 7,886 8,549 (663 ) (7.8 )
Other 20,828 24,174 (3,346 ) (13.8 )
Total noninterest expense $ 595,147 $ 575,410 $ 19,737 3.4 %
Noninterest expense increased by $6.6 million , or 3.4%, and $19.7 million , or
3.4%, for the three and nine-month periods ended September 30, 2020 ,
respectively, compared to the same periods in 2019. Included in these variances
were $1.4 million and $5.6 million , respectively, of non-recurring COVID-19
expenses in 2020 and increases of $2.7 million and $3.7 million , respectively,
in severance expenses for the three and nine-month periods ended September 30,
2020 , as compared to the same periods in 2019. Table 5 above summarizes the
components of noninterest expense and the respective year-over-year comparison
for each category.
Salaries and employee benefits increased by $14.0 million , or 12.7%, and $25.6
million , or 7.5%, for the three and nine-month periods ended September 30, 2020 ,
respectively, compared to the same periods in 2019. Salaries and wages
increased $2.5 million , or 3.5%, and increased $11.8 million , or 5.6%, for the
three and nine-month periods ended September 30, 2020 , respectively, compared to
the same periods in 2019. Employee benefits expense increased $4.2 million , or
24.9%, and decreased $1.5 million , or 2.3%, for the three and nine-month periods
ended September 30, 2020 , respectively, compared to the same periods in 2019
driven by changes in deferred compensation expense. Bonus and commission expense
increased $7.3 million , or 35.0%, and $15.2 million , or 23.1%, for the three and
nine-month periods ended September 30, 2020 , respectively, compared to the same
periods in 2019.
Equipment expense increased $1.2 million , or 6.0%, and $5.4 million , or 9.3%,
for the three and nine-month periods ended September 30, 2020 , respectively,
compared to the same periods in 2019, primarily due to higher software,
equipment maintenance, and COVID-19 specific costs.
Marketing and business development expense decreased $2.6 million , or 46.3%, and
$6.9 million , or 38.7%, for the three and nine-month periods ended September 30,
2020 , respectively, compared to the same periods in 2019, primarily due to lower
travel and entertainment expense.
Legal and consulting expense decreased $1.1 million , or 13.5%, and $1.9 million ,
or 9.0%, for the three and nine-month periods ended September 30, 2020 ,
respectively, compared to the same periods in 2019, primarily due to the timing
of multiple projects.
Other expense decreased
65
--------------------------------------------------------------------------------Income Tax Expense The Company's effective tax rate was 11.9% for the nine months endedSeptember 30, 2020 , compared to 15.1% for the same period in 2019. The decrease in the effective tax rate for 2020 is primarily attributable to a larger portion of pre-tax income being earned from tax-exempt municipal securities.
Strategic Lines of Business
The Company has strategically aligned its operations into the following three reportable Business Segments: Commercial Banking, Institutional Banking, and Personal Banking. The Company's senior executive officers regularly evaluate Business Segment financial results produced by the Company's internal reporting system in deciding how to allocate resources and assess performance for individual Business Segments. Prior to 2020, the Company had the following four Business Segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services. In the first quarter of 2020, the Company merged the Healthcare Services segment into the Institutional Banking segment to better reflect how the Company's core businesses, products and services are currently being evaluated by management. For comparability purposes, amounts in all periods are based on methodologies in effect atSeptember 30, 2020 . Previously reported results have been reclassified in this Form 10-Q to conform to the Company's current organizational structure.
Table 6
Commercial Banking Operating Results (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Net interest income $ 122,362 $ 104,360 $ 18,002 17.2 %
Provision for credit losses 14,032 5,966 8,066 >100.0
Noninterest income 22,464 18,874 3,590 19.0
Noninterest expense 65,175 66,447 (1,272 ) (1.9 )
Income before taxes 65,619 50,821 14,798 29.1
Income tax expense 8,100 7,390 710 9.6
Net income $ 57,519 $ 43,431 $ 14,088 32.4 %
Nine Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Net interest income $ 342,406 $ 306,752 $ 35,654 11.6 %
Provision for credit losses 115,533 25,602 89,931 >100.0
Noninterest income 57,782 62,442 (4,660 ) (7.5 )
Noninterest expense 186,341 201,777 (15,436 ) (7.7 )
Income before taxes 98,314 141,815 (43,501 ) (30.7 )
Income tax expense 11,709 21,482 (9,773 ) (45.5 )
Net income $ 86,605 $ 120,333 $ (33,728 ) (28.0 )%
For the nine-month period ended September 30, 2020 , Commercial Banking net
income decreased by $33.7 million , or 28.0%, to $86.6 million , as compared to
the same period in 2019. Net interest income increased $35.7 million , or 11.6%,
for the nine-month period ended September 30, 2020 , compared to the same period
in 2019, primarily driven by strong loan growth and earning asset mix changes.
Commercial Banking added loans of $1.5 billion and loan interest income of $15.6
million related to the PPP during the second and third quarters of
2020. Provision for credit losses increased by $89.9 million for the period due
to adoption of CECL, coupled with the current economic environment and
reasonable and supportable economic forecasts. The impacts of the COVID-19
pandemic are key elements of these forecasts. Noninterest income decreased $4.7
million , or 7.5%, over the same
66
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period in 2019 primarily due to a decrease of $2.2 million in bankcard fees
driven by decreased interchange income, a decrease of $2.1 million in other
noninterest income due to decreased company-owned life insurance income, and a
decrease of $1.2 million in deposit service charges. Noninterest expense
decreased $15.4 million , or 7.7%, to $186.3 million for the nine-month period
ended September 30, 2020 , compared to the same period in 2019. This decrease
was driven by an $11.2 million decrease in technology, service, and overhead
expenses, a decrease of $2.8 million in marketing and business development
expense due to decreased travel and entertainment expense as a result of the
COVID-19 pandemic, and a decrease of $1.1 million in processing fees.
Table 7
Institutional Banking Operating Results (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Net interest income $ 23,375 $ 30,604 $ (7,229 ) (23.6 )%
Provision for credit losses 193 256 (63 ) (24.6 )
Noninterest income 62,688 58,643 4,045 6.9
Noninterest expense 69,667 66,622 3,045 4.6
Income before taxes 16,203 22,369 (6,166 ) (27.6 )
Income tax expense 2,000 3,254 (1,254 ) (38.5 )
Net income $ 14,203 $ 19,115 $ (4,912 ) (25.7 )%
Nine Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Net interest income $ 84,534 $ 92,857 $ (8,323 ) (9.0 )%
Provision for credit losses 766 723 43 5.9
Noninterest income 191,128 170,118 21,010 12.4
Noninterest expense 215,073 196,871 18,202 9.2
Income before taxes 59,823 65,381 (5,558 ) (8.5 )
Income tax expense 7,125 9,903 (2,778 ) (28.1 )
Net income $ 52,698 $ 55,478 $ (2,780 ) (5.0 )%
For the nine-month period ended September 30, 2020 , Institutional Banking net
income decreased $2.8 million , or 5.0%, compared to the same period last year.
Net interest income decreased $8.3 million , or 9.0%, compared to the same period
last year, driven by a decrease in funds transfer pricing due to the decline in
interest rates. Noninterest income increased $21.0 million , or 12.4%, primarily
due to increases of $10.3 million in bond trading income, $6.4 million in fund
services income and $5.8 million in corporate trust income, both recorded in
trust and securities processing revenue, and $4.4 million in service charges on
deposit accounts due to healthcare customer transfer and conversion fees. These
increases were partially offset by a decrease of $3.4 million in bankcard fees
driven by lower interchange income and a decrease of $2.3 million in brokerage
fees primarily due to lower 12b-1 fee income. Noninterest expense increased
$18.2 million , or 9.2%, primarily driven by an increase of $10.3 million in
salary and employee benefits expense, an increase of $6.4 million in technology,
service, and overhead expenses, increased bankcard expense of $1.8 million , and
increased amortization expense of $1.6 million . These increases were partially
offset by a decrease of $1.7 million in marketing and business development
expense due to decreased travel and entertainment expense as a result of the
COVID-19 pandemic.
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Table 8
Personal Banking Operating Results (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Net interest income $ 38,647 $ 33,296 $ 5,351 16.1 %
Provision for credit losses 1,775 1,278 497 38.9
Noninterest income 27,844 26,118 1,726 6.6
Noninterest expense 63,153 58,328 4,825 8.3
Income (loss) before taxes 1,563 (192 ) 1,755 >100.0
Income tax expense (benefit) 193 (28 ) 221 >100.0
Net income (loss) $ 1,370 $ (164 ) $ 1,534 >100.0%
Nine Months Ended Dollar Percent
September 30, Change Change
2020 2019 20-19 20-19
Net interest income $ 109,614 $ 98,933 $ 10,681 10.8 %
Provision for credit losses 9,201 4,525 4,676 >100.0
Noninterest income 82,966 83,855 (889 ) (1.1 )
Noninterest expense 193,733 176,762 16,971 9.6
(Loss) income before taxes (10,354 ) 1,501 (11,855 ) (>100.0)
Income tax (benefit) expense (1,233 ) 227 (1,460 ) (>100.0)
Net (loss) income $ (9,121 ) $ 1,274 $ (10,395 ) (>100.0)%
For the nine-month period ended September 30, 2020 , Personal Banking recognized
a net loss of $9.1 million , which represents a decrease of $10.4 million as
compared to the same period last year. Net interest income increased $10.7
million , or 10.8%, compared to the same period last year due to increased loan
balances. Provision for credit losses increased $4.7 million due to adoption of
CECL, coupled with the current economic environment and reasonable and
supportable economic forecasts. The impacts of the COVID-19 pandemic are key
elements of these forecasts. Noninterest income decreased $0.9 million , or 1.1%,
for the same period. This decrease is primarily driven by a decrease of $2.0
million in deposit service charges and a decrease of $1.1 million in other
noninterest income due to lower company-owned life insurance income. These
decreases were partially offset by an increase of $2.0 million in equity
earnings on alternative investments. Noninterest expense increased $17.0
million , or 9.6%, primarily due to an increase of $10.1 million in technology,
service, and overhead expenses, $6.6 million in salary and employee benefits
expense, and $1.8 million in other expense due to higher operational losses
recorded in 2020. These increases were partially offset by a decrease of $0.7
million in marketing and business development expense due to decreased travel
and entertainment expense as a result of the COVID-19 pandemic, and a decrease
of $0.7 million in furniture and equipment expense.
Balance Sheet Analysis
Total assets of the Company increased by$3.7 billion , or 13.9%, as ofSeptember 30, 2020 , compared toDecember 31, 2019 , primarily due to an increase of$2.5 billion , or 18.8%, in loan balances and an increase of$1.3 billion , or 17.1%, in available for sale securities. Total assets of the Company increased$6.1 billion , or 25.3%, as ofSeptember 30, 2020 , compared toSeptember 30, 2019 , primarily due to an increase in loan balances of$2.9 billion , or 22.3%, an increase in AFS securities of$1.3 billion , or 17.6%, an increase in interest-bearing due from banks of$1.5 billion , or 919.1%, and an increase in securities purchased under agreements to resell of$638.2 million , or 137.8%. Total assets, including interest-bearing due from banks and securities purchased under agreements to resell, are being impacted by excess liquidity in the market due to PPP. 68 --------------------------------------------------------------------------------
Table 9
SELECTED FINANCIAL INFORMATION (unaudited, dollars in thousands)
September 30, December 31,
2020 2019 2019
Total assets $ 30,250,972 $ 24,143,092 $ 26,561,355 Loans, net of unearned interest 15,961,155 13,054,865 13,439,525 Total securities
9,998,701 8,688,163 8,717,502
Interest-bearing due from banks 1,613,675 158,339 1,225,491 Total earning assets 28,460,350 22,257,353 24,859,075 Total deposits 24,737,907 19,309,345 21,603,244 Total borrowed funds 2,213,048 1,861,091 1,966,880 Loans represent the Company's largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services and generate additional noninterest income for the Company. Actual loan balances totaled$16.0 billion as ofSeptember 30, 2020 , and increased$2.5 billion , or 18.8%, compared toDecember 31, 2019 , and increased$2.9 billion , or 22.3%, compared toSeptember 30, 2019 . Compared toDecember 31, 2019 , commercial and industrial loans increased$1.4 billion , or 24.7%, commercial real estate loans increased$695.5 million , or 13.5%, and consumer real estate loans increased$447.6 million , or 32.1%. Compared toSeptember 30, 2019 , commercial and industrial loans increased$1.7 billion , or 31.1%, commercial real estate loans increased$789.7 million , or 15.6%, and consumer real estate loans increased$532.6 million , or 40.7%, partially offset by a decrease of$109.8 million , or 18.1% in specialty lending loans. The increase in commercial and industrial loans as compared to bothDecember 31, 2019 andSeptember 30, 2019 is primarily related to the Company's participation in the PPP, with PPP loans totaling$1.5 billion as ofSeptember 30, 2020 .
Nonaccrual, past due and restructured loans are discussed under "Credit Risk Management" within "Item 3. Quantitative and Qualitative Disclosures About Market Risk" in this report.
The Company's investment portfolio contains trading, AFS, and HTM securities, as well as FRB stock, FHLB stock, and other miscellaneous investments. Investment securities totaled$10.0 billion as ofSeptember 30, 2020 , and$8.7 billion as ofDecember 31, 2019 , and comprised 35.1% of the Company's earning assets as of both dates. The Company's AFS securities portfolio comprised 87.2% of the Company's investment securities portfolio atSeptember 30, 2020 and 85.4% atDecember 31, 2019 . The Company's AFS securities portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. The average life of the AFS securities portfolio was 70.2 months atSeptember 30, 2020 , compared to 70.9 months atDecember 31, 2019 , and 60.8 months atSeptember 30, 2019 . In addition to providing a potential source of liquidity, the AFS securities portfolio can be used as a tool to manage interest rate sensitivity. The Company's goal in the management of its AFS securities portfolio is to maximize return within the Company's parameters of liquidity goals, interest rate risk, and credit risk. Management expects collateral pledging requirements for public funds, loan demand, and deposit funding to be the primary factors impacting changes in the level of AFS securities. There were$6.9 billion of AFS securities pledged to secureU.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements atSeptember 30, 2020 . Of this amount, securities with a market value of$393.6 million atSeptember 30, 2020 were pledged at the Federal Reserve Discount Window but were unencumbered as of that date.
The Company's HTM securities portfolio consists of private placement bonds, which are issued primarily to refinance existing revenue bonds in the healthcare and education sectors. The HTM portfolio, net of the ACL
69
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totaled
The securities portfolio generates the Company's second largest component of
interest income. The securities portfolio achieved an average yield on a
tax-equivalent basis of 2.52% for the nine-month period ended
Deposits and Borrowed Funds
Deposits increased$3.1 billion , or 14.5%, fromDecember 31, 2019 toSeptember 30, 2020 and increased$5.4 billion , or 28.1%, fromSeptember 30, 2019 toSeptember 30, 2020 . Noninterest-bearing deposits increased$1.8 billion , and total interest-bearing deposits increased$1.3 billion fromDecember 31, 2019 toSeptember 30, 2020 . Total interest-bearing deposits increased$3.3 billion , and noninterest-bearing deposits increased$2.1 billion fromSeptember 30, 2019 toSeptember 30, 2020 . The increase in deposits as compared to prior periods is related to the excess liquidity in the market created by the PPP and customer behavior changes related to the COVID-19 pandemic. Deposits represent the Company's primary funding source for its asset base. In addition to the core deposits garnered by the Company's retail branch structure, the Company continues to focus on its cash management services, as well as its trust and mutual fund servicing businesses, in order to attract and retain additional deposits. Management believes a strong core deposit composition is one of the Company's key strengths given its competitive product mix. Long-term debt totaled$269.0 million atSeptember 30, 2020 , compared to$70.4 million as ofDecember 31, 2019 , and$70.1 million as ofSeptember 30, 2019 . InSeptember 2020 , the Company issued$200.0 million in aggregate subordinated notes due inSeptember 2030 . The Company received$197.4 million , after deducting underwriting discounts and commissions and offering expenses, and used the proceeds from the offering for general corporate purposes, including, among other uses, contributing Tier 1 capital into the Bank. The subordinated notes were issued with a fixed-to-fixed rate of 3.70% and an effective rate of 3.93%, due to issuance costs, with an interest rate reset date ofSeptember 2025 . The remainder of the Company's long-term debt was assumed from the acquisition ofMarquette Financial Companies (Marquette ) and consists of debt obligations payable to four unconsolidated trusts (Marquette Capital Trust I,Marquette Capital Trust II, Marquette Capital Trust III, and Marquette Capital Trust IV) that previously issued trust preferred securities. These long-term debt obligations have an aggregate contractual balance of$103.1 million . Interest rates on trust preferred securities are tied to the three-month LIBOR rate with spreads ranging from 133 basis points to 160 basis points, and reset quarterly. The trust preferred securities have maturity dates ranging fromJanuary 2036 toSeptember 2036 . The Company has a revolving line of credit withWells Fargo Bank, N.A . which allows the Company to borrow up to$50.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company's option either 1.00% above LIBOR or 1.75% below the prime rate on the date of an advance. The Company pays a 0.3% unused commitment fee for unused portions of the revolving line of credit. As ofSeptember 30, 2020 , the Company had an outstanding balance of$15.0 million on this revolving line of credit. This borrowing is included in the Short-term debt line on the Company's Consolidated Balance Sheets. Federal funds purchased and securities sold under agreements to repurchase totaled$1.9 billion as ofSeptember 30, 2020 andDecember 31, 2019 , and$1.8 billion atSeptember 30, 2019 . Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company under an agreement to repurchase the same or similar issues at an agreed-upon price and date. The level of borrowings could be impacted by earning asset mix changes in the Company's balance sheet from the impacts of the COVID-19 pandemic.
Capital and Liquidity
The Company places a significant emphasis on the maintenance of a strong capital
position, which promotes investor confidence, provides access to funding sources
under favorable terms, and enhances the Company's ability to capitalize on
business growth and acquisition opportunities. Higher levels of liquidity,
however, bear
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--------------------------------------------------------------------------------corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiary's respective risks and growth opportunities as well as regulatory requirements.
Total shareholders' equity was
The Company's Board of Directors authorized, at itsApril 28, 2020 ,April 23, 2019 , andApril 24, 2018 meetings, the repurchase of up to two million shares of the Company's common stock during the twelve months following each meeting (each a Repurchase Authorization). During the nine-month periods endedSeptember 30, 2020 and 2019, the Company acquired 1,140,399 shares and 65,463 shares, respectively, of its common stock pursuant to the applicable Repurchase Authorization. InMarch 2020 , the Company entered into an agreement withBank of America (BoA) to repurchase an aggregate of$30.0 million of the Company's common stock through an accelerated share repurchase agreement (the ASR). The Company repurchased a total of 653,498 shares under the ASR, which was completed during the second quarter. The ASR was entered into pursuant to theApril 23, 2019 Repurchase Authorization and the Company has not made any repurchase of its securities other than pursuant to the Repurchase Authorizations. The Company is not currently engaging in repurchases. In the future, it may determine to resume repurchases.
At the Company's quarterly board meeting, the Board of Directors declared a
Through the Company's relationship with the FHLB ofDes Moines , the Company owns$10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company's borrowing capacity is dependent upon the amount of collateral the Company places at the FHLB. The Company's borrowing capacity with the FHLB was$1.4 billion as ofSeptember 30, 2020 . The Company had no outstanding FHLB advances at FHLB ofDes Moines as ofSeptember 30, 2020 . Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institution's assets. The Company has implemented the Basel III regulatory capital rules adopted by the FRB. Basel III capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a minimum tier 1 risk-based capital ratio of 6%. A financial institution's total capital is also required to equal at least 8% of risk-weighted assets. The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. The Company is also required to maintain a leverage ratio equal to or greater than 4%. The leverage ratio is calculated as the ratio of tier 1 core capital to total average assets, less goodwill and intangibles.U.S. banking agencies inDecember 2018 approved a final rule to address the impact of CECL on regulatory capital by allowing banking organizations the option to phase in the day-one impact of CECL until the first quarter of 2023. InMarch 2020 , theU.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period. The Company is electing this alternative option instead of the one described in theDecember 2018 rule. 71 --------------------------------------------------------------------------------
The Company's capital position as of
Table 10
Three Months Ended Nine Months Ended
September 30, September 30,
RATIOS 2020 2019 2020 2019Common equity tier 1 capital ratio 11.93 % 12.53 % 11.93 % 12.53 % Tier 1 risk-based capital ratio
11.93 12.53 11.93 12.53
Total risk-based capital ratio 14.17 13.51 14.17 13.51 Leverage ratio 8.19 9.62 8.19 9.62 Return on average assets 0.99 1.03 0.62 1.01 Return on average equity 10.23 9.69 6.30 9.86 Average equity to assets 9.64 10.67 9.90 10.29
The Company's per share data is summarized in the table below.
Three Months Ended Nine Months Ended
September 30, September 30,
Per Share Data 2020 2019 2020 2019
Earnings - basic $ 1.52 $ 1.28 $ 2.70 $ 3.63
Earnings - diluted 1.52 1.27 2.69 3.61
Cash dividends 0.31 0.30 0.93 0.90
Dividend payout ratio 20.39 % 23.44 % 34.44 % 24.79 %
Book value $ 59.43 $ 52.23 $ 59.43 $ 52.23 Off-balance Sheet Arrangements
The Company's main off-balance sheet arrangements are loan commitments, commercial and standby letters of credit, futures contracts and forward exchange contracts, which have maturity dates rather than payment due dates. See Note 10, "Commitments, Contingencies and Guarantees" in the Notes to Consolidated Financial Statements for detailed information on these arrangements. The level of the outstanding commitments will be impacted by financial impacts related to the COVID-19 pandemic.
Critical Accounting Policies and Estimates
The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to customers and suppliers, allowance for credit losses, bad debts, investments, financing operations, long-lived assets, taxes, other contingencies, and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from the recorded estimates.
A summary of critical accounting policies is listed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Form 10-K.
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