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 six-month periods endedJune 30, 2021 . 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;
57
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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 the Company's 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 and the American
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Rescue Plan Act of 2021, both including the Paycheck Protection Program (PPP)
administered by the Small Business Administration , and a variety of rulings from
the Company's banking regulators.
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 second quarter of 2021, the Company's results of
operations included continued maintenance of the ACL at a level appropriate
given the state of key macroeconomic variables utilized in the econometric
models at June 30, 2021 . 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 a Pandemic 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. 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 has actively worked 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."
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. The Company transitioned most of its workforce off-site or to
work-from-home to help mitigate health risks and is currently moving forward
with plans to bring associates back in the office in a phased approach during
the last half of 2021. 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 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 four core financial objectives. Management believes these objectives will 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 financial 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 second quarter of 2021, total revenue increased$34.0 million , or 11.4%, as compared to the second quarter of 2020, while noninterest expense decreased$7.2 million , or 3.5%, for the same period. As part of the initiative to improve operating efficiencies, the Company continues to invest in technological advances that it believes will help management drive 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 financial objective is to increase net interest income through profitable loan and deposit growth and the optimization of the balance sheet. During the second quarter of 2021, the Company had an increase in net interest income of$22.8 million , or 12.8%, from the same period in 2020. The Company has shown increased net interest income through the effects of increased volume and mix of average earning assets, partially offset by a decrease in rates compared to the second quarter of 2020. Loans recorded under the PPP increased loan interest income by$5.5 million in the second quarter of 2021. Average loan balances increased$1.7 billion , or 11.4%, for the second quarter of 2021, compared to the same period in 2020. Average PPP loans decreased$26.1 million , compared to the second quarter of 2020. Average liquidity increased$2.2 billion and average securities balances increased$2.1 billion , compared to the same period in 2021. The funding for these assets was driven primarily by a 39.7% increase in noninterest-bearing deposits and a 15.9% increase in average interest-bearing liabilities. Net interest margin, on a tax-equivalent basis, decreased 23 basis points compared to the same period in 2020, in large 59
-------------------------------------------------------------------------------- part due to a decrease in one-month LIBOR rates, excess liquidity buildup, and repricing of earning assets in the low interest rate environment. These declines were partially offset by a 15-basis point decrease in cost of interest-bearing deposits. Net interest spread contracted by 20 basis points during the same period. The Company expects to see continued volatility in the economic markets and governmental responses to the COVID-19 pandemic. These changing conditions could have impacts on the balance sheet and income statement of the Company for the remainder of the year. The third financial 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$11.1 million , or 9.2%, to$131.6 million for the three months endedJune 30, 2021 , compared to the same period in 2020. This change is primarily due to an increase in investment securities gains, trust and securities processing, and deposit service charges. These are offset by decreases in the market value of company-owned life insurance 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. AtJune 30, 2021 , noninterest income represented 39.6% of total revenues, compared to 40.3% atJune 30, 2020 . The recent economic changes have impacted fee income, especially those with assets tied to market values and interest rates. The fourth financial 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. AtJune 30, 2021 , the Company had$3.1 billion in total shareholders' equity. This is an increase of$312.8 million , or 11.3%, compared to total shareholders' equity atJune 30, 2020 . AtJune 30, 2021 , the Company had a total risk-based capital ratio of 13.84%. The Company repurchased 716 shares of common stock at an average price of$85.71 per share during the second quarter of 2021. Total risk-based capital was favorably impacted by the$200 million subordinated note issuance during the third quarter of 2020. 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 second quarter of 2021. The changes identified in the summary are explained in greater detail below. The Company recorded net income of$87.4 million for the three-month period endedJune 30, 2021 , compared to net income of$60.5 million for the same period a year earlier. Basic earnings per share for the second quarter of 2021 were$1.81 per share ($1.79 per share fully-diluted) compared to$1.26 per share ($1.26 per share fully-diluted) for the second quarter of 2020. Return on average assets and return on average common shareholders' equity for the three-month period endedJune 30, 2021 were 1.02% and 11.43%, respectively, compared to 0.87% and 8.95%, respectively, for the three-month period endedJune 30, 2020 . The Company recorded net income of$180.1 million for the six-month period endedJune 30, 2021 , compared to net income of$57.1 million for the same period a year earlier. Basic earnings per share for the six-month period endedJune 30, 2021 were$3.74 per share ($3.70 per share fully-diluted) compared to$1.18 per share ($1.18 per share fully-diluted) for the same period in 2020. Return on average assets and return on average common shareholders' equity for the six-month period endedJune 30, 2021 were 1.08% and 11.98%, respectively, compared to 0.42% and 4.22%, respectively, for the six-month period endedJune 30, 2020 . Net interest income for the three and six-month periods endedJune 30, 2021 increased$22.8 million , or 12.8%, and$43.0 million , or 12.2%, respectively, compared to the same periods in 2020. For the three-month period endedJune 30, 2021 , average earning assets increased by$6.0 billion , or 22.4%, and for the six-month period endedJune 30, 2021 , they increased by$6.5 billion , or 25.3%, compared to the same periods in 2020. Net interest margin, on a tax-equivalent basis, decreased to 2.56% and 2.57% for the three and six-month periods endedJune 30, 2021 , respectively, compared to 2.79% and 2.88% for the same periods in 2020. 60
-------------------------------------------------------------------------------- The provision for credit losses increased by$2.5 million for the three-month period endedJune 30, 2021 and decreased by$93.0 million for the six-month period endedJune 30, 2021 , as compared to the same periods in 2020. Provision expense in 2020 included increased expense related to the impact of numerous economic variables due to the COVID-19 pandemic. The increase in the second quarter of 2021 is driven by impacts to the ACL of a large charge-off during the quarter, offset by the impacts of positive macro-economic metrics. The Company's nonperforming loans decreased$24.0 million to$58.2 million atJune 30, 2021 , compared toJune 30, 2020 . The ACL on loans as a percentage of total loans decreased to 1.19% as ofJune 30, 2021 , compared to 1.31% atJune 30, 2020 . 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
Noninterest expense decreased by
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 six-month periods endedJune 30, 2021 increased$22.8 million , or 12.8%, and$43.0 million , or 12.2%, compared to the same periods in 2020. 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 endedJune 30, 2021 decreased 20 basis points as compared to the same period in 2020. Net interest margin for the three months endedJune 30, 2021 decreased 23 basis points compared to the same period in 2020. Net interest spread for the six-month period endedJune 30, 2021 decreased by 18 basis points as compared to the same period in 2020. Net interest margin for the six-month period endedJune 30, 2021 decreased by 31 basis points compared to the same period in 2020. 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. Average PPP loans account for$1.2 billion of the Company's total loan balances for both the three and six-month periods endedJune 30, 2021 . These variances have led to an increase in the Company's net interest income during 2021, as compared to results for the same periods in 2020. The changes compared to last year have been impacted by loan growth and increased liquidity, partially offset by short-term interest rate cuts. The Company expects to see continued volatility in the economic markets and governmental responses to these changes as the result of the COVID-19 pandemic. These changing conditions could have impacts on the balance sheet and income statement of the Company the remainder of the year. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and interest rates have resulted in an increase in net interest income. 61 --------------------------------------------------------------------------------
Table 1
AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)
The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax-equivalent basis adjustment would have been 2.62% for the three-month period endedJune 30, 2021 , and 2.91% for the same period in 2020. The average yield on earning assets without the tax-equivalent basis adjustment would have been 2.64% for the six-month period endedJune 30, 2021 , and 3.18% for the same period in 2020. Three Months Ended June 30, 2021 2020 Average Average Average Average Balance Yield/Rate Balance Yield/Rate ASSETS Loans, net of unearned interest$ 16,817,674 3.69 %$ 15,098,366 3.73 % Securities: Taxable 6,994,559 1.71 5,069,290 2.05 Tax-exempt 4,289,443 2.93 4,108,075 3.05 Total securities 11,284,002 2.17 9,177,365 2.50 Federal funds and resell agreements 1,110,433 0.92 807,245 0.78 Interest-bearing due from banks 3,343,311 0.10 1,492,798 0.11 Other earning assets 21,409 4.27 37,816 3.79 Total earning assets 32,576,829 2.70 26,613,590 3.01 Allowance for credit losses (199,379 ) (195,373 ) Other assets 1,886,774 1,717,808 Total assets$ 34,264,224 $ 28,136,025 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits$ 17,080,970 0.15 %$ 15,117,729 0.30 % Federal funds and repurchase agreements 2,744,516 0.26 2,138,156 0.37 Borrowed funds 270,305 4.76 85,681 6.32 Total interest-bearing liabilities 20,095,791 0.23 17,341,566 0.34 Noninterest-bearing demand deposits 10,701,656 7,662,836 Other liabilities 398,319 411,964 Shareholders' equity 3,068,458 2,719,659 Total liabilities and shareholders' equity$ 34,264,224 $ 28,136,025 Net interest spread 2.47 % 2.67 % Net interest margin 2.56 2.79 62
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Six Months Ended June 30,
2021 2020
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
ASSETS
Loans, net of unearned interest $ 16,533,463 3.72 % $ 14,357,466 4.08 %
Securities:
Taxable 6,698,020 1.71 4,881,854 2.19
Tax-exempt 4,295,317 2.95 4,085,558 3.05
Total securities 10,993,337 2.20 8,967,412 2.58
Federal funds and resell agreements 1,375,689 0.79 1,015,720 1.39
Interest-bearing due from banks 3,079,684 0.10 1,164,405 0.53
Other earning assets 19,485 4.28 42,959 4.93
Total earning assets 32,001,658 2.72 25,547,962 3.28
Allowance for credit losses (209,469 ) (154,062 )
Other assets 1,862,036 1,693,684
Total assets $ 33,654,225 $ 27,087,584
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 17,076,681 0.16 % $ 14,723,895 0.56 %
Federal funds and repurchase agreements 2,632,567 0.28 2,084,271 0.80
Borrowed funds 269,942 4.77 78,164 6.96
Total interest-bearing liabilities 19,979,190 0.24 16,886,330 0.62
Noninterest-bearing demand deposits 10,230,287 7,079,224
Other liabilities 414,535 401,724
Shareholders' equity 3,030,213 2,720,306
Total liabilities and shareholders' equity $ 33,654,225 $ 27,087,584
Net interest spread 2.48 % 2.66 %
Net interest margin 2.57 2.88
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 $3.2 billion
for the three-month period ended June 30, 2021 , and increased $3.4 billion for
the six-month period ended June 30, 2021 , compared to the same periods in
2020. The benefit from interest-free funds decreased three and 13 basis points
in the three and six-month periods ended June 30, 2021 , respectively, compared
to the same periods in 2020, due to decreased yields on earning assets, offset
by a decrease in interest rates of interest-bearing liabilities.
63
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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 Six Months Ended
June 30, 2021 and 2020 June 30, 2021 and 2020
Volume Rate Total Volume Rate Total
Change in interest earned on:
Loans $ 16,155 $ (1,622 ) $ 14,533 $ 41,009 $ (27,332 ) $ 13,677
Securities:
Taxable 8,754 (4,844 ) 3,910 16,909 (13,049 ) 3,860
Tax-exempt 1,386 (1,255 ) 131 2,869 (2,178 ) 691
Federal funds sold and resell
agreements 667 312 979 1,990 (3,642 ) (1,652 )
Interest-bearing due from banks 464 (29 ) 435 2,291 (3,816 ) (1,525 )
Trading (166 ) 43 (123 ) (498 ) (120 ) (618 )
Interest income 27,260 (7,395 ) 19,865 64,570 (50,137 ) 14,433
Change in interest incurred on:
Interest-bearing deposits 1,321 (5,990 ) (4,669 ) 5,655 (33,258 ) (27,603 )
Federal funds purchased and repurchase
agreements 477 (648 ) (171 ) 1,770 (6,436 ) (4,666 )
Other borrowed funds 2,269 (406 ) 1,863 4,768 (1,082 ) 3,686
Interest expense 4,067 (7,044 ) (2,977 ) 12,193 (40,776 ) (28,583 )
Net interest income $ 23,193 $ (351 ) $ 22,842 $ 52,377 $ (9,361 ) $ 43,016
ANALYSIS OF NET INTEREST MARGIN
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 Change 2021 2020 Change
Average earning assets $ 32,576,829 $ 26,613,590
20,095,791 17,341,566 2,754,225 19,979,190 16,886,330 3,092,860 Interest-free funds
$ 12,481,038 $ 9,272,024
38.31 % 34.84 % 3.47 % 37.57 % 33.90 % 3.67 %
Tax-equivalent yield on earning assets 2.70 3.01 (0.31 ) 2.72 3.28 (0.56 )
Cost of interest-bearing liabilities 0.23 0.34 (0.11 ) 0.24 0.62 (0.38 )
Net interest spread 2.47 2.67 (0.20 ) 2.48 2.66 (0.18 )
Benefit of interest-free funds 0.09 0.12 (0.03 ) 0.09 0.22 (0.13 )
Net interest margin 2.56 % 2.79 % (0.23 )% 2.57 % 2.88 % (0.31 )%
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.
64
-------------------------------------------------------------------------------- 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 theOffice 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$24.0 million and$16.5 million as provision for credit losses for the three and six-month periods endedJune 30, 2021 , respectively, compared to$21.5 million and$109.5 million for the same periods in 2020, respectively. These changes are the result of applying the methodology for computing the allowance for credit losses, coupled with the impacts of the current and forecasted economic environment. As illustrated in Table 3 below, the ACL on loans decreased to 1.19% of total loans as ofJune 30, 2021 , compared to 1.31% of total loans as ofJune 30, 2020 . Table 3 presents a summary of the Company's ACL for the six-month periods endedJune 30, 2021 and 2020, and for the year endedDecember 31, 2020 . Net charge-offs were$33.7 million for the six-month period endedJune 30, 2021 , compared to$13.2 million for the same period in 2020. 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. 65 --------------------------------------------------------------------------------
Table 3
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES (unaudited, dollars in thousands)
Six Months Ended Year Ended
June 30, December 31,
2021 2020 2020
Allowance - January 1 $ 218,583 $ 101,788 $ 101,788
Cumulative effect adjustment(1) - 9,030 9,030
Adjusted allowance - January 1 218,583 110,818 110,818
Provision for credit losses 18,500 106,000 127,890
Charge-offs:
Commercial and industrial (4,719 ) (2,436 ) (8,587 ) Specialty lending (31,945 ) - - Commercial real estate - (8,920 ) (11,939 ) Consumer real estate (86 ) (219 ) (219 ) Consumer (248 ) (406 ) (607 ) Credit cards (3,169 ) (4,130 ) (7,326 ) Leases and other (8 ) (11 ) (11 ) Total charge-offs (40,175 ) (16,122 ) (28,689 ) Recoveries: Commercial and industrial 3,761 1,717 6,473 Specialty lending 151 - - Commercial real estate 1,347 76 91 Consumer real estate 113 48 69 Consumer 87 215 307 Credit cards 1,014 853 1,618 Leases and other 18 - 6 Total recoveries 6,491 2,909 8,564 Net charge-offs (33,684 ) (13,213 ) (20,125 ) Allowance for credit losses - end of period$ 203,399 $ 203,605 $ 218,583 Allowance for credit losses on loans$ 200,563 $ 200,300 $ 215,973 Allowance for credit losses on held-to-maturity securities 2,836 3,305 2,610 Loans at end of period, net of unearned interest 16,910,790 15,305,097 16,103,651 Held-to-maturity securities at end of period 1,084,009 1,114,930 1,014,614 Total assets at amortized cost 17,994,799 16,420,027 17,118,265 Average loans, net of unearned interest 16,517,950 14,346,891 15,109,392 Allowance for credit losses on loans to loans at end of period 1.19 % 1.31 % 1.34 % Allowance for credit losses - end of period to total assets at amortized cost 1.13 % 1.24 % 1.28 % Allowance as a multiple of net charge-offs 2.99x 7.66x 10.86x Net charge-offs to average loans 0.41 % 0.19 % 0.13 %
(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
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--------------------------------------------------------------------------------trust and securities processing, bankcard, securities trading and brokerage, and cash and treasury management. 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
June 30, Change Change
2021 2020 21-20 21-20
Trust and securities processing
16.3 % Trading and investment banking 8,670 12,851 (4,181 ) (32.5 ) Service charges on deposits 22,592 19,074 3,518
18.4
Insurance fees and commissions 245 533 (288 ) (54.0 ) Brokerage fees 2,592 5,753 (3,161 ) (54.9 ) Bankcard fees 16,063 12,916 3,147 24.4
Investment securities gains, net 15,455 4,579 10,876
237.5 Other 12,109 18,429 (6,320 ) (34.3 ) Total noninterest income$ 131,589 $ 120,456 $ 11,133 9.2 % Six Months Ended Dollar Percent June 30, Change Change 2021 2020 21-20 21-20
Trust and securities processing
16.5 % Trading and investment banking 18,026 14,574 3,452
23.7
Service charges on deposits 44,568 44,155 413
0.9
Insurance fees and commissions 665 792 (127 ) (16.0 ) Brokerage fees 5,926 15,613 (9,687 ) (62.0 ) Bankcard fees 30,736 29,461 1,275 4.3
Investment securities gains, net 7,119 8,099 (980 )
(12.1 ) Other 24,749 12,865 11,884 92.4 Total noninterest income$ 240,486 $ 218,880 $ 21,606 9.9 % Noninterest income increased by$11.1 million , or 9.2%, during the three-month period endedJune 30, 2021 , and increased$21.6 million , or 9.9%, during the six-month period endedJune 30, 2021 , compared to the same periods in 2020. 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 six-month periods endedJune 30, 2021 , compared to the same periods in 2020, was primarily due to an increase in fund services and corporate trust revenues. For the three-month period endedJune 30, 2021 , fund services revenue increased$6.7 million , or 29.9%, and corporate trust revenue increased$2.0 million , or 23.4%, compared to the same period in 2020. For the six-month period endedJune 30, 2021 , fund services revenue increased$11.7 million , or 26.5%, and corporate trust revenue increased$3.2 million , or 18.5%, compared to the same period in 2020. 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 six-month periods endedJune 30, 2021 decreased$4.2 million , or 32.5%, but increased$3.5 million , or 23.7%, respectively, compared to the same periods in 2020. These 67 --------------------------------------------------------------------------------
changes were primarily driven by the volatile markets impact on trading volume. 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 endedJune 30, 2021 increased by$3.5 million , or 18.4%, compared to the same period last year, driven by higher healthcare income related to customer transfer and conversion fees. For the six-month period, service charges on deposit accounts increased by$0.4 million , or 0.9%, compared to the same period last year. Brokerage fees for the three-month period endedJune 30, 2021 decreased$3.2 million , or 55.0%, compared to the same period in 2020. For the six-month period endedJune 30, 2021 , brokerage fees decreased$9.7 million , or 62.0%, compared to the same period in 2020. The decreases in both periods were driven by lower money market income and 12b-1 fees. The reduction in short-term interest rates will impact the income in this category the remainder of the year. Investment securities gains, net for the three and six-month periods endedJune 30, 2021 increased by$10.9 million , or 237.5%, and decreased by$1.0 million , or 12.1%, respectively, compared to the same periods in 2020. The increase for the three-month period was driven by a$14.2 million increase in gains on equity investments, primarily related to the company's investment in Tattooed Chef, Inc. (TTCF). This is partially offset by decreased gains on sales of available-for-sale securities. The decrease for the six-month period is driven by decreased gains on securities available for sale. The income in this category is highly correlated to the change in market value of the assets, and the related income for the remainder of the year will be affected by changes in the securities markets. The Company's 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 on this portfolio. Other noninterest income for the three-month period endedJune 30, 2021 , decreased$6.3 million , or 34.3%, driven by a decrease of$9.8 million in company-owned life insurance, offset by a$2.5 million increase in derivative income, and an increase of$0.7 million in bank-owned life insurance. For the six-month period, other noninterest income increased$11.9 million , or 92.4%, compared to the same period in 2020 driven by a$5.2 million increase in company-owned life insurance, a$2.4 million increase in gains on the sale of mortgage loans, a$1.9 million increase in derivative income, and a$1.1 million increase in bank-owned life insurance. The changes in company-owned life insurance are offset by proportionate changes in deferred compensation expense.
Table 5
SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
June 30, Change Change
2021 2020 21-20 21-20
Salaries and employee benefits $ 120,415 $ 130,938 $ (10,523 ) (8.0 )%
Occupancy, net 12,296 11,411 885 7.8
Equipment 19,196 21,502 (2,306 ) (10.7 )
Supplies and services 3,469 3,785 (316 ) (8.3 )
Marketing and business development 4,797 3,284 1,513 46.1
Processing fees 16,501 13,603 2,898 21.3
Legal and consulting 8,147 6,220 1,927 31.0
Bankcard 4,529 4,549 (20 ) (0.4 )
Amortization of other intangible assets 1,157 1,658 (501 ) (30.2 )
Regulatory fees 2,769 3,211 (442 ) (13.8 )
Other 8,062 8,372 (310 ) (3.7 )
Total noninterest expense $ 201,338 $ 208,533 $ (7,195 ) (3.5 )%
68
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Six Months Ended Dollar Percent
June 30, Change Change
2021 2020 21-20 21-20
Salaries and employee benefits $ 248,096 $ 241,998 $ 6,098 2.5 %
Occupancy, net 24,231 23,591 640 2.7
Equipment 38,811 42,743 (3,932 ) (9.2 )
Supplies and services 6,961 7,970 (1,009 ) (12.7 )
Marketing and business development 7,142 7,924 (782 ) (9.9 )
Processing fees 31,918 26,993 4,925 18.2
Legal and consulting 13,902 12,330 1,572 12.7
Bankcard 9,485 9,409 76 0.8
Amortization of other intangible assets 2,537 3,392 (855 ) (25.2 )
Regulatory fees 5,315 5,577 (262 ) (4.7 )
Other 13,886 15,225 (1,339 ) (8.8 )
Total noninterest expense $ 402,284 $ 397,152 $ 5,132 1.3 %
Noninterest expense decreased by
Salaries and employee benefits decreased by$10.5 million , or 8.0%, and increased$6.1 million , or 2.5%, for the three and six-month periods endedJune 30, 2021 , respectively, compared to the same periods in 2020. Employee benefits expense decreased$10.3 million , or 34.2%, and increased$4.6 million , or 11.0%, for the three and six-month periods endedJune 30, 2021 , compared to the same periods in 2020, driven by changes in deferred compensation expense. Bonus and commission expense decreased$1.4 million , or 5.0%, and increased$0.7 million , or 1.4%, for the three and six-month periods endedJune 30, 2021 , respectively, compared to the same periods in 2020. Salaries and wages expense increased$1.1 million , or 1.5%, and$0.7 million , or 0.5%, for the three and six-month periods endedJune 30, 2021 , respectively, compared to the same periods in 2020. Equipment expense decreased$2.3 million , or 10.7%, and$3.9 million , or 9.2%, for the three and six-month periods endedJune 30, 2021 , respectively, compared to the same periods in 2020, primarily due to lower software and equipment maintenance expense. Marketing and business development expense increased$1.5 million , or 46.1%, and decreased$0.8 million , or 9.9%, for the three and six-month periods endedJune 30, 2021 , respectively, compared to the same periods in 2020, primarily due to timing of multiple marketing initiatives. Processing fees increased$2.9 million , or 21.3%, and$4.9 million , or 18.2%, for the three and six-month periods endedJune 30, 2021 , respectively, compared to the same periods in 2020, primarily due to the increased software subscription costs and higher institutional foreign currency processing costs. Legal and consulting expense increased$1.9 million , or 31.0%, and increased$1.6 million , or 12.7%, for the three and six-month periods endedJune 30, 2021 , respectively, compared to the same periods in 2020, primarily due to timing of multiple projects. Income Tax Expense The Company's effective tax rate was 17.0% for the six months endedJune 30, 2021 , compared to 11.3% for the same period in 2020. The increase in the effective rate for 2021 is primarily attributable to a smaller portion of income being earned from tax-exempt municipal securities. 69 --------------------------------------------------------------------------------
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. For comparability purposes, amounts in all periods are based on methodologies in effect atJune 30, 2021 . 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
June 30, Change Change
2021 2020 21-20 21-20
Net interest income $ 135,656 $ 113,095 $ 22,561 19.9 %
Provision for credit losses 22,009 19,281 2,728 14.1
Noninterest income 36,391 24,078 12,313 51.1
Noninterest expense 69,144 62,123 7,021 11.3
Income before taxes 80,894 55,769 25,125 45.1
Income tax expense 15,007 6,597 8,410 127.5
Net income $ 65,887 $ 49,172 $ 16,715 34.0 %
Six Months Ended Dollar Percent
June 30, Change Change
2021 2020 21-20 21-20
Net interest income $ 268,687 $ 220,044 $ 48,643 22.1 %
Provision for credit losses 13,827 101,501 (87,674 ) (86.4 )
Noninterest income 43,777 35,318 8,459 24.0
Noninterest expense 134,789 121,166 13,623 11.2
Income before taxes 163,848 32,695 131,153 401.1
Income tax expense 27,825 3,709 24,116 650.2
Net income $ 136,023 $ 28,986 $ 107,037 369.3 %
For the six-month period ended June 30, 2021 , Commercial Banking net income
increased $107.0 million to $136.0 million , as compared to the same period in
2020. Net interest income increased $48.6 million , or 22.1%, for the six-month
period ended June 30, 2021 , compared to the same period in 2020, primarily
driven by strong loan growth due to the Company's participation in the PPP, and
earning asset mix changes. Commercial Banking had loans with an average balance
of $1.2 billion and loan interest income of $25.8 million related to PPP during
the first six months of 2021. Provision for credit losses decreased by $87.7
million for the period. Provision expense in 2020 included increased expense
related to the impact on various economic variables of the COVID-19
pandemic. The decline in provision expense in 2021 represents a release of ACL
based on positive macro-economic data and credit metrics. Noninterest income
increased $8.5 million , or 24.0%, over the same period in 2020, primarily due to
an increase of $4.1 million in company-owned life insurance income, an increase
of $2.0 million in deposit service charges, and an increase of $1.9 million in
derivative income. Noninterest expense increased $13.6 million , or 11.2%, to
$134.8 million for the six-month period ended June 30, 2021 , compared to the
same period in 2020. This increase was driven by a $13.5 million increase in
technology, service, and overhead expenses, and an increase of $0.9 million in
losses on sales of other real estate owned. These increases were partially
offset by a decrease of $0.9 million in bankcard expense.
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--------------------------------------------------------------------------------Table 7
Institutional Banking Operating Results (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
June 30, Change Change
2021 2020 21-20 21-20
Net interest income $ 21,258 $ 28,124 $ (6,866 ) (24.4 )%
Provision for credit losses 147 298 (151 ) (50.7 )
Noninterest income 68,745 66,488 2,257 3.4
Noninterest expense 72,575 76,953 (4,378 ) (5.7 )
Income before taxes 17,281 17,361 (80 ) (0.5 )
Income tax expense 3,206 2,055 1,151 56.0
Net income $ 14,075 $ 15,306 $ (1,231 ) (8.0 )%
Six Months Ended Dollar Percent
June 30, Change Change
2021 2020 21-20 21-20
Net interest income $ 43,397 $ 61,159 $ (17,762 ) (29.0 )%
Provision for credit losses 367 573 (206 ) (36.0 )
Noninterest income 137,166 128,440 8,726 6.8
Noninterest expense 143,857 145,406 (1,549 ) (1.1 )
Income before taxes 36,339 43,620 (7,281 ) (16.7 )
Income tax expense 6,171 4,951 1,220 24.6
Net income $ 30,168 $ 38,669 $ (8,501 ) (22.0 )%
For the six-month period ended June 30, 2021 , Institutional Banking net income
decreased $8.5 million , or 22.0%, compared to the same period last year. Net
interest income decreased $17.8 million , or 29.0%, 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 $8.7 million , or 6.8%, primarily
due to increases of $11.7 million in fund services income and $3.2 million in
corporate trust income, both recorded in trust and securities processing
revenue, $1.5 million in company-owned life insurance income, $1.0 million in
bond trading income, and $0.8 million in bankcard fees. These increases were
partially offset by decreases of $9.4 million in brokerage fees due to lower
12b-1 and money market income, and $1.0 million in service charges on deposit
accounts due to decreased healthcare customer transfer and conversion fees.
Noninterest expense decreased $1.5 million , or 1.1%, primarily driven by a
decrease of $5.4 million in salary and employee benefits expense, partially
offset by increases of $2.2 million in processing fees expense and $1.1 million
in bankcard expense.
Table 8
Personal Banking Operating Results (unaudited, dollars in thousands)
Three Months Ended Dollar Percent
June 30, Change Change
2021 2020 21-20 21-20
Net interest income $ 44,157 $ 37,010 $ 7,147 19.3 %
Provision for credit losses 1,844 1,921 (77 ) (4.0 )
Noninterest income 26,453 29,890 (3,437 ) (11.5 )
Noninterest expense 59,619 69,457 (9,838 ) (14.2 )
Income (loss) before taxes 9,147 (4,478 ) 13,625 304.3
Income tax expense (benefit) 1,697 (529 ) 2,226 420.8
Net income (loss) $ 7,450 $ (3,949 ) $ 11,399 288.7 %
71
--------------------------------------------------------------------------------
Six Months Ended Dollar Percent
June 30, Change Change
2021 2020 21-20 21-20
Net interest income $ 83,102 $ 70,967 $ 12,135 17.1 %
Provision for credit losses 2,306 7,426 (5,120 ) (68.9 )
Noninterest income 59,543 55,122 4,421 8.0
Noninterest expense 123,638 130,580 (6,942 ) (5.3 )
Income (loss) before taxes 16,701 (11,917 ) 28,618 240.1
Income tax expense (benefit) 2,837 (1,352 ) 4,189 309.8
Net income (loss) $ 13,864 $ (10,565 ) $ 24,429 231.2 %
For the six-month period ended June 30, 2021 , Personal Banking net income
increased by $24.4 million to $13.9 million , as compared to the same period in
2020. Net interest income increased $12.1 million , or 17.1%, compared to the
same period last year due to increased loan balances. Provision for credit
losses decreased $5.1 million due to 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 increased $4.4
million , or 8.0%, for the same period. This increase is primarily driven by an
increase of $2.4 million on gains on sale of mortgage originations and an
increase of $1.9 million in company-owned life insurance income. Noninterest
expense decreased $6.9 million , or 5.3%, primarily due to decreases of $2.6
million in salaries and employee benefits, $1.4 million in technology, service,
and overhead expenses, $1.4 million in operational losses, $0.4 million in
processing fees, and $0.4 million in amortization of intangibles.
Balance Sheet Analysis
Total assets of the Company increased by
Total assets of the Company increased$6.9 billion , or 23.1%, as ofJune 30, 2021 , compared toJune 30, 2020 , primarily due to an increase in interest-bearing due from banks of$3.3 billion , or 195.1%, an increase in AFS securities of$1.9 billion , or 22.0%, and an increase in loan balances of$1.6 billion , or 10.5%. Total assets, including interest-bearing due from banks, are being impacted by excess liquidity in the market due to PPP.
Table 9
SELECTED FINANCIAL INFORMATION (unaudited, dollars in thousands)
June 30, December 31,
2021 2020 2020
Total assets $ 36,619,015 $ 29,753,608 $ 33,127,504 Loans, net of unearned interest 16,916,093 15,313,310 16,110,359 Total securities
11,726,407 9,804,143 10,645,375
Interest-bearing due from banks 5,059,098 1,714,478 3,110,042
Total earning assets 34,644,720 27,975,969 31,297,528
Total deposits 30,048,471 24,459,404 27,051,251
Total borrowed funds 3,053,947 2,049,690 2,585,092
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.
72
-------------------------------------------------------------------------------- Actual loan balances totaled$16.9 billion as ofJune 30, 2021 , and increased$807.1 million , or 5.0%, compared toDecember 31, 2020 , and increased$1.6 billion , or 10.5%, compared toJune 30, 2020 . Compared toDecember 31, 2020 , commercial real estate loans increased$337.4 million , or 5.7%, commercial and industrial loans increased$322.6 million , or 4.6%, and consumer real estate loans increased$193.3 million , or 9.9%. Compared toJune 30, 2020 , commercial real estate loans increased$677.7 million , or 12.2%, consumer real estate loans increased$508.2 million , or 31.2%, and commercial and industrial loans increased$384.5 million , or 5.5%.
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$11.7 billion as ofJune 30, 2021 , and$10.6 billion as ofDecember 31, 2020 , and comprised 33.8% and 34.0% of the Company's earning assets, respectively, as of those dates. The Company's AFS securities portfolio comprised 88.2% of the Company's investment securities portfolio atJune 30, 2021 and 87.4% atDecember 31, 2020 . 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 78.4 months atJune 30, 2021 , compared to 70.1 months atDecember 31, 2020 , and 65.0 months atJune 30, 2020 . 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$8.7 billion of AFS securities pledged to secureU.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements atJune 30, 2021 . Of this amount, securities with a market value of$205.3 million atJune 30, 2021 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 totaled$1.1 billion and$1.0 billion atJune 30, 2021 andDecember 31, 2020 , respectively. The average life of the HTM portfolio was 5.8 years atJune 30, 2021 , compared to 6.1 years atDecember 31, 2020 , and 6.2 years atJune 30, 2020 .
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 2.20% for the six-month period ended
Deposits and Borrowed Funds
Deposits increased$3.0 billion , or 11.1%, fromDecember 31, 2020 toJune 30, 2021 and increased$5.6 billion , or 22.9%, fromJune 30, 2020 toJune 30, 2021 . Noninterest-bearing deposits increased$2.6 billion , and total interest-bearing deposits increased$364.2 million fromDecember 31, 2020 toJune 30, 2021 . Noninterest-bearing deposits increased$3.9 billion , and total interest-bearing deposits increased$1.7 billion fromJune 30, 2020 toJune 30, 2021 . 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. 73 -------------------------------------------------------------------------------- Long-term debt totaled$270.6 million atJune 30, 2021 , compared to$269.6 million as ofDecember 31, 2020 , and$71.0 million as ofJune 30, 2020 . InSeptember 2020 , the Company issued$200.0 million in aggregate subordinated notes due inSeptember 2030 . The Company received$197.7 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$30.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company's option either 1.25% above LIBOR or 1.75% below the prime rate on the date of an advance. The Company pays a 0.4% unused commitment fee for unused portions of the revolving line of credit. As ofJune 30, 2021 , the Company had no advances outstanding on this revolving line of credit. Federal funds purchased and securities sold under agreements to repurchase totaled$2.8 billion as ofJune 30, 2021 ,$2.3 billion atDecember 31, 2020 , and$2.0 billion atJune 30, 2020 . 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 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$3.1 billion atJune 30, 2021 , a$73.3 million increase compared toDecember 31, 2020 , and a$312.8 million increase compared toJune 30, 2020 . The Company's Board of Directors authorized, at itsApril 27, 2021 ,April 28, 2020 , andApril 23, 2019 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 six-month periods endedJune 30, 2021 and 2020, the Company acquired 53,374 shares and 1,138,137 shares, respectively, of its common stock pursuant to the applicable Repurchase Authorization. InMarch 2020 , the Company entered into an agreement withBank of America Merrill Lynch (BAML) 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 of 2020. 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.
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 74 --------------------------------------------------------------------------------
borrowing capacity with the FHLB was
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 elected this alternative option instead of the one described in theDecember 2018 rule.
The Company's capital position as of
Table 10
Three Months Ended Six Months Ended
June 30, June 30,
RATIOS 2021 2020 2021 2020Common equity tier 1 capital ratio 11.91 % 11.92 % 11.91 % 11.92 % Tier 1 risk-based capital ratio
11.91 11.92 11.91 11.92
Total risk-based capital ratio 13.84 13.17 13.84 13.17 Leverage ratio 8.00 8.35 8.00 8.35 Return on average assets 1.02 0.87 1.08 0.42 Return on average equity 11.43 8.95 11.98 4.22 Average equity to assets 8.96 9.67 9.00 10.04
The Company's per share data is summarized in the table below.
Three Months Ended Six Months Ended
June 30, June 30,
Per Share Data 2021 2020 2021 2020
Earnings - basic $ 1.81 $ 1.26 $ 3.74 $ 1.18
Earnings - diluted 1.79 1.26 3.70 1.18
Cash dividends 0.32 0.31 0.64 0.62
Dividend payout ratio 17.68 % 24.60 % 17.11 % 52.54 %
Book value $ 63.92 $ 57.84 $ 63.92 $ 57.84 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
75
--------------------------------------------------------------------------------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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