UMB FINANCIAL CORPORATION Management's Discussion and Analysis
This Management's Discussion and Analysis highlights the material changes in the results of operations and changes in financial condition for each of the three years in the period endedDecember 31, 2020 . It should be read in conjunction with the accompanying Consolidated Financial Statements, Notes to Consolidated Financial Statements, and other financial statistics appearing elsewhere in this Annual Report on 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. This report, including any information incorporated by reference in this report, contains forward-looking statements. The Company also may make forward-looking statements in other documents that are filed or furnished with theSEC . 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;
23
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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 environment 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 Risk Factors
(Item 1A), Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 7), or the Notes to the Consolidated
Financial Statements (Item 8) in this Annual Report on Form 10-K or
described in any of the Company's annual, 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.
Results of Operations
Overview
During the first quarter of 2020, the global economy began experiencing a
downturn related to the impacts of the COVID-19 global 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 CARES Act, including the PPP administered by the Small Business
Administration , and a variety of rulings from the Company's banking regulators.
24
-------------------------------------------------------------------------------- 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 year endedDecember 31, 2020 , the Company's results of operations included building of the allowance for credit losses (ACL) and monitoring key macroeconomic variables utilized in the econometric models under the CECL accounting standard adopted onJanuary 1, 2020 and$6.9 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. As ofDecember 31, 2020 , 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. In addition, the Company is actively working with customers impacted by the economic downturn by offering payment deferrals and other loan modifications where appropriate. See further details under "Credit Risk Management" within "Item 7A. 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 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. For 2020, total revenue increased 17.6%, and noninterest expense also increased 5.5%, as compared to the previous year. 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. For 2020, net interest income increased$60.3 million , or 9.0%, as compared to the previous year. 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$29.5 million in 2020. The additional increase in interest income was driven by an increase of$1.3 billion in PPP loans. These increases were offset by the recent interest rate reductions related to the pandemic. Average loan balances increased$2.4 billion , or 18.5%, from prior year. Average PPP loans account for$1.0 billion of this increase. The funding for these assets was driven primarily by a 17.4% increase in average interest-bearing liabilities. Net interest margin, on a tax-equivalent basis, decreased 31 basis points compared to the same period in 2019. 25
-------------------------------------------------------------------------------- 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$133.4 million , or 31.3%, to$560.2 million for the year endedDecember 31, 2020 , compared to the same period in 2019. This increase was primarily attributable to an increase of$118.4 million in Investment securities gains, net, principally driven by the$108.8 million gain on the Company's investment in Tattooed Chef, Inc., as well as increased fund serving income, and trading and investment banking income. These changes are discussed in greater detail below under Noninterest income. As ofDecember 31, 2020 , noninterest income represented 43.4% of total revenues, as compared to 38.9% for 2019. 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. AtDecember 31, 2020 , the Company had a total risk-based capital ratio of 14.26% and$3.0 billion in total shareholders' equity, an increase of$410.5 million , or 15.7%, compared to total shareholders' equity atDecember 31, 2019 . The Company repurchased 1.2 million shares of common stock at an average price of$53.27 per share during 2020 and declared$60.7 million in dividends, which represents a 1.8% increase compared to dividends declared during 2019.
Earnings Summary
The Company recorded consolidated income from continuing operations of$286.5 million for the year endedDecember 31, 2020 . This represents a 17.6% increase over 2019. Income from continuing operations for 2019 was$243.6 million , or an increase of 24.1% compared to 2018. Basic earnings per share from continuing operations for the year endedDecember 31, 2020 , were$5.95 per share compared to$4.99 per share in 2019, an increase of 19.2%. Basic earnings per share from continuing operations were$3.98 per share in 2018, or an increase of 25.4% from 2018 to 2019. Fully diluted earnings per share from continuing operations increased 19.6% from 2019 to 2020 and increased 25.9% from 2018 to 2019. The Company's net interest income increased to$731.2 million in 2020 compared to$670.9 million in 2019 and$610.4 million in 2018. In total, a favorable volume variance, partially offset by an unfavorable rate variance, resulted in a$60.3 million increase in net interest income in 2020, compared to 2019. See Table 2 on page 30. The favorable volume variance on earning assets was predominantly driven by the increase in average loan balances of$2.4 billion , or 18.5%, for 2020 compared to the same period in 2019. Net interest margin, on a tax-equivalent basis, decreased to 2.81% for 2020, compared to 3.12% for the same period in 2019, as the asset yields and the cost of interest-bearing liabilities decreased, coupled with an increased balance sheet. This created significant margin compression. The Company has seen a decrease in the benefit from interest-free funds as compared to 2019 driven by the lower rate environment. The impact of this benefit decreased 28 basis points compared to 2019 and is illustrated on Table 3 on page 31. The magnitude and duration of this impact will be largely dependent upon the FRB's policy decisions and market movements. See Table 20 in Item 7A on page 52 for an illustration of the impact of an interest rate increase or decrease on net interest income as ofDecember 31, 2020 . The provision for credit losses totaled$130.5 million for the year endedDecember 31, 2020 , which is an increase of$97.7 million , or 297.3%, compared to the same period in 2019. This change is the result of the adoption of the CECL standard and applying this methodology for computing the allowance for credit losses, coupled with the impacts of the current and forecasted economic environment related to the COVID-19 pandemic. See further discussion in "Provision and Allowance for Credit Losses" on page 31. The Company had an increase of$133.4 million , or 31.3%, in noninterest income in 2020, as compared to 2019, and an increase of$25.1 million , or 6.2%, in 2019, compared to 2018. The increase in 2020 is primarily attributable to an increase of$118.4 million in Investment securities gains, net, primarily driven by the$108.8 million gain on the Company's investment in Tattooed Chef, Inc., as well as increased fund serving income, and trading and investment banking income. These are offset by decreases in brokerage and bankcard income. The change in noninterest income in 2020 from 2019, and 2019 from 2018 is illustrated in Table 6 on page 35. Noninterest expense increased in 2020 by$43.1 million , or 5.5%, compared to 2019 and increased by$61.1 million , or 8.5%, in 2019 compared to 2018. The increase in 2020 is primarily driven by increases in salary and employee benefits expense, operating losses, and equipment expense. These increases were offset by a decrease in 26
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marketing and business development expense. The increase in noninterest expense in 2020 from 2019, and 2019 from 2018 is illustrated in Table 7 on page 36.
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 interest rates paid on each affect net interest income. Table 2 summarizes the change in net interest income resulting from changes in volume and rates for 2020, 2019 and 2018. Net interest margin, presented in Table 1 on page 28, is calculated as net interest income on a fully tax- equivalent basis (FTE) as a percentage of average earning assets. Net interest income is presented on a tax-equivalent basis to adjust for the tax-exempt status of earnings from certain loans and investments, which are primarily obligations of state and local governments. A critical component of net interest income and related net interest margin is the percentage of earning assets funded by interest-free sources. Table 3 analyzes net interest margin for the three years endedDecember 31, 2020 , 2019 and 2018. Net interest income, average balance sheet amounts and the corresponding yields earned and rates paid for the years 2018 through 2020 are presented in Table 1 below. 27
-------------------------------------------------------------------------------- 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.
Table 1
THREE YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis)
(in millions)
2020 2019
Interest Interest
Average Income/ Rate Earned/ Average Income/ Rate Earned/
Balance Expense (1) Paid (1) Balance Expense (1) Paid (1)
ASSETS
Loans and loans held for sale
(FTE) (2) (3) $ 15,126.1 $ 586.0 3.87 % $ 12,764.6 $ 637.9 5.00 %
Securities:
Taxable 5,256.7 105.7 2.01 4,524.9 106.1 2.34
Tax-exempt (FTE) 4,226.4 126.3 2.99 3,797.0 113.7 3.00
Total securities 9,483.1 232.0 2.45 8,321.9 219.8 2.64
Federal funds sold and resell
agreements 1,099.4 11.8 1.08 535.4 13.8 2.59
Interest-bearing due from banks 1,218.9 3.8 0.31 584.8 12.9 2.20
Other earning assets (FTE) 37.1 1.6 4.28 52.3 2.5 4.79
Total earning assets (FTE) 26,964.6 835.2 3.10 22,259.0 886.9 3.98
Allowance for credit losses (184.5 ) (107.4 )
Cash and due from banks 440.5 454.6
Other assets 1,347.5 1,178.4
Total assets $ 28,568.1 $ 23,784.6
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing demand and
savings deposits $ 14,446.2 $ 49.1 0.34 % $ 12,161.8 $ 138.7 1.14 %
Time deposits under $250,000 488.3 5.0 1.02 366.3 5.6 1.53
Time deposits of $250,000 or more 402.0 4.1 1.02 644.1 9.9 1.54
Total interest-bearing deposits 15,336.5 58.2 0.38 13,172.2 154.2 1.17
Borrowed funds 137.0 7.3 5.30 69.8 5.2 7.51
Federal funds purchased and
repurchase agreements 2,023.8 11.8 0.58 1,657.3 32.6 1.96
Total interest-bearing
liabilities 17,497.3 77.3 0.44 14,899.3 192.0 1.29
Noninterest-bearing demand
deposits 7,845.6 6,132.2
Other 420.2 301.3
Total 25,763.1 21,332.8
Total shareholders' equity 2,805.0 2,451.8
Total liabilities and
shareholders' equity $ 28,568.1 $ 23,784.6
Net interest income (FTE) $ 757.9 $ 694.9
Net interest spread (FTE) 2.66 % 2.69 %
Net interest margin (FTE) 2.81 % 3.12 %
(1) Interest income and yields are stated on a fully tax-equivalent (FTE) basis,
using a marginal tax rate of 21% for 2020, 2019, and 2018. The
tax-equivalent interest income and yields give effect to tax-exempt interest
income net of the disallowance of interest expense, for federal income tax
purposes related to certain tax-free assets. Rates earned/paid may not
compute to the rates shown due to presentation in millions. The
tax-equivalent interest income totaled $26.7 million , $24.0 million , and
$20.0 million in 2020, 2019, and 2018, respectively.
(2) Loan fees are included in interest income. Such fees totaled
(3) Loans on nonaccrual are included in the computation of average
balances. Interest income on these loans is also included in loan income.
28
--------------------------------------------------------------------------------THREE YEAR AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis)
(in millions)
2018
Interest
Average Income/ Rate Earned/
Balance Expense (1) Paid (1)
ASSETS
Loans and loans held for sale (FTE) (2) (3) $ 11,606.5 $ 559.4 4.82 %
Securities:
Taxable 3,858.8 83.3 2.16
Tax-exempt (FTE) 3,505.6 94.1 2.68
Total securities 7,364.4 177.4 2.41
Federal funds sold and resell agreements 178.8 4.8 2.69
Interest-bearing due from banks 419.8 7.9 1.88
Other earning assets (FTE) 49.3 2.5 4.97
Total earning assets (FTE) 19,618.8 752.0 3.83
Allowance for credit losses (100.9 )
Cash and due from banks 396.1
Other assets 1,085.8
Total assets $ 20,999.8
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand and savings deposits $ 10,113.3 $ 80.9 0.80 %
Time deposits under $250,000 355.3 3.8 1.07
Time deposits of $250,000 or more 687.4 7.4 1.08
Total interest-bearing deposits 11,156.0 92.1 0.83
Borrowed funds 68.9 4.7 6.80
Federal funds purchased and repurchase agreements 1,559.1 24.7 1.59
Total interest-bearing liabilities 12,784.0 121.5 0.95
Noninterest-bearing demand deposits 5,828.5
Other 192.5
Total 18,805.0
Total shareholders' equity 2,194.8
Total liabilities and shareholders' equity $ 20,999.8
Net interest income (FTE) $ 630.5
Net interest spread (FTE) 2.88 %
Net interest margin (FTE) 3.21 %
29
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Table 2
RATE-VOLUME ANALYSIS (in thousands)
This analysis attributes changes in net interest income either to changes in
average balances or to changes in average interest rates for earning assets and
interest-bearing liabilities. The change in net interest income that is due to
both volume and interest rate has been allocated to volume and interest rate in
proportion to the relationship of the absolute dollar amount of the change in
each. All interest rates are presented on a tax-equivalent basis and give effect
to tax-exempt interest income net of the disallowance of interest expense for
federal income tax purposes, related to certain tax-free assets. The loan
average balances and rates include nonaccrual loans.
Average Volume Average Rate Increase (Decrease)
2020 2019 2020 2019 2020 vs. 2019 Volume Rate Total
Change in interest earned
on:$ 106,011 $ (157,899 ) $ (51,888 ) Securities:
5,256,715 4,524,955 2.01 2.34 Taxable
15,854 (16,206 ) (352 )
4,226,363 3,796,983 2.99 3.00 Tax-exempt 10,048 (292 ) 9,756
Federal funds and resell
1,099,447 535,393 1.08 2.59 agreements 9,107 (11,110 ) (2,003 )
Interest-bearing due from
1,218,919 584,756 0.31 2.20 banks 7,267 (16,405 ) (9,138 )
37,086 52,306 4.28 4.79 Trading securities (569 ) (209 ) (778 )
26,964,640 22,259,016 3.10 3.98 Total 147,718 (202,121 ) (54,403 )
Change in interest
incurred on:15,336,492 13,172,181 0.38 1.17 Interest-bearing deposits 21,986 (117,964 ) (95,978 )
Federal funds and
2,023,813 1,657,283 0.58 1.96 repurchase agreements 5,988 (26,754 ) (20,766 )
136,957 69,809 5.30 7.51 Borrowed Funds 3,906 (1,889 ) 2,017
$ 17,497,262 $ 14,899,273 0.44 % 1.29 % Total 31,880 (146,607 ) (114,727 )
Net interest income $ 115,838 $ (55,514 ) $ 60,324
Average Volume Average Rate Increase (Decrease)
2019 2018 2019 2018 2019 vs. 2018 Volume Rate Total
Change in interest
earned on:
Securities:
4,524,955 3,858,829 2.34 2.16 Taxable
15,206 7,514 22,720
3,796,983 3,505,602 3.00 2.68 Tax-exempt
6,539 9,114 15,653
Federal funds and
535,393 178,801 2.59 2.69 resell agreements 9,227 (192 ) 9,035
Interest-bearing due
584,756 419,768 2.20 1.88 from banks 3,477 1,495 4,972
52,306 49,345 4.79 4.97 Trading securities 146 (89 ) 5722,259,016 19,618,889 3.98 3.83 Total
91,910 39,021 130,931
Change in interest
incurred on:
Interest-bearing
13,172,181 11,156,002 1.17 0.83 deposits 18,745 43,346 62,091
Federal funds and
1,657,283 1,559,149 1.96 1.59 repurchase agreements 1,635 6,181 7,816
69,809 68,814 7.51 6.80 Borrowed Funds 69 496 565
$ 14,899,273 $ 12,783,965 1.29 % 0.95 % Total
20,449 50,023 70,472
Net interest income $ 71,461 $ (11,002 ) $ 60,459
30
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Table 3
ANALYSIS OF NET INTEREST MARGIN (in thousands)
2020 2019 2018
Average earning assets $ 26,964,640 $ 22,259,016 $ 19,618,889
Interest-bearing liabilities 17,497,262 14,899,273 12,783,965
Interest-free funds $ 9,467,378 $ 7,359,743 $ 6,834,924
Free funds ratio (interest free funds to
average earning assets) 35.11 % 33.06 % 34.84 %
Tax-equivalent yield on earning assets 3.10 % 3.98 % 3.83 %
Cost of interest-bearing liabilities 0.44 1.29 0.95
Net interest spread 2.66 % 2.69 % 2.88 %
Benefit of interest-free funds 0.15 0.43 0.33
Net interest margin 2.81 % 3.12 % 3.21 %
The Company experienced an increase in net interest income of $60.3 million , or
9.0%, for the year ended December 31, 2020 , compared to 2019. This follows an
increase of $60.5 million , or 9.9%, for the year ended December 31, 2019 ,
compared to 2018. Average earning assets for the year ended December 31, 2020
increased by $4.7 billion , or 21.1%, compared to the same period in 2019. Net
interest margin, on a tax-equivalent basis, decreased to 2.81% for 2020 compared
to 3.12% in 2019.
The Company funds a significant portion of its balance sheet with
noninterest-bearing demand deposits. Noninterest-bearing demand deposits
represented 36.5%, 32.1% and 34.6% of total outstanding deposits at December 31,
2020 , 2019 and 2018, respectively. As illustrated in Table 3, the impact from
these interest-free funds was 15 basis points in 2020, as compared to 43 basis
points in 2019 and 33 basis points in 2018.
The Company has experienced an increase in net interest income during 2020 due
to a volume variance of $115.8 million , offset by a negative rate variance of
$55.5 million . The average rate on earning assets during 2020 has decreased by
88 basis points, while the average rate on interest-bearing liabilities
decreased by 85 basis points, resulting in a three basis-point decrease in
spread. The volume of loans has increased from an average of $12.8 billion in
2019 to an average of $15.1 billion in 2020 driven both by organic loan growth
and participation in the PPP loan program. The volume of interest-bearing
liabilities increased from $14.9 billion in 2019 to $17.5 billion in 2020. 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 in
2021. Loan-related earning assets tend to generate a higher spread than those
earned in the Company's investment portfolio. By design, the Company's
investment portfolio is moderate in duration and liquid in its composition of
assets.
During 2021, approximately $1.8 billion of available-for-sale securities are
expected to have principal repayments. This includes approximately $592 million
which will have principal repayments during the first quarter of 2021. The
available-for-sale investment portfolio had an average life of 70.1 months, 70.9
months, and 56.8 months as of December 31, 2020 , 2019, and 2018, respectively.
Provision and Allowance for Credit Losses
The ACL represents management's judgment of 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.
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 Accounting Standards
Codification (ASC) Topic 326, Financial Instruments - Credit Losses (ASC
326). 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.
31
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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.
Table 4 presents the components of the allowance by loan portfolio segment. The
Company manages the ACL against the risk in the entire loan portfolio and
therefore, the allocation of the ACL to a particular loan segment may change in
the future. Management of the Company believes the present ACL is adequate
considering the Company's loss experience, delinquency trends and current
economic conditions. Future economic conditions and borrowers' ability to meet
their obligations, however, are uncertainties which could affect the Company's
ACL and/or need to change its current level of provision. For more information
on loan portfolio segments and ACL methodology refer to Note 3, "Loans and
Allowance for Credit Losses," in the Notes to the Consolidated Financial
Statements.
Table 4
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES (in thousands)
This table presents an allocation of the allowance for credit losses by loan portfolio segment, which represents the total expected losses derived by both quantitative and qualitative methods. The amounts presented are not necessarily indicative of actual future charge-offs in any particular category and are subject to change. The disclosure as ofDecember 31, 2020 and 2019 are presented based on the loan classes upon adoption of ASC 326, while prior period amounts continue to be presented in accordance with the loan classes under previously applicable GAAP. December 31, Loan Category 2020 2019 Commercial and industrial$ 122,700 $ 63,313 Specialty lending 5,219 2,545 Commercial real estate 61,931 15,951 Consumer real estate 6,586 2,623 Consumer 1,480 543 Credit cards 15,786 15,739 Leases and other 2,271 1,074 Held-to-maturity securities 2,610 - Total allowance$ 218,583 $ 101,788 32
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December 31,
Loan Category 2018 2017 2016
Commercial $ 80,888 $ 81,156 $ 71,657
Real estate 13,664 9,312 10,569
Consumer 9,071 10,083 9,311
Leases 12 53 112
Total allowance
Table 5 presents a five-year summary of the Company's ACL. Also, please see "Quantitative and Qualitative Disclosures About Market Risk - Credit Risk Management" on page 54 in this report for information relating to nonaccrual, past due, restructured loans, and other credit risk matters. For more information on loan portfolio segments and ACL methodology refer to Note 3, "Loans and Allowance for Credit Losses," in the Notes to the Consolidated Financial Statements.
As illustrated in Table 5 below, the ACL increased as a percentage of total loans to 1.34% as ofDecember 31, 2020 , compared to 0.76% as ofDecember 31, 2019 . The provision for credit losses, including provision for off-balance sheet credit exposures, totaled$130.5 million for the year endedDecember 31, 2020 , which is an increase of$97.7 million , or 297.3%, compared to the same period in 2019. This increase is the result of the adoption of the CECL standard and applying this methodology for computing the allowance for credit losses, coupled with the impacts of the current and forecasted economic environment related to the COVID-19 pandemic. The provision for loan losses totaled$32.9 million and$70.8 million for the years endedDecember 31, 2019 and 2018, respectively. 33 --------------------------------------------------------------------------------
Table 5
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES (in thousands)
2020 2019 2018 2017 2016
Allowance - January 1 $ 101,788 $ 103,635 $ 100,604 $ 91,649 $ 81,143
Cumulative effect adjustment(1) 9,030 - - - -
Adjusted allowance - January 1 110,818 103,635 100,604 91,649 81,143
Provision for credit losses 127,890 32,850 70,750 41,000 32,500
Charge-offs:
Commercial (8,587 ) (19,267 ) (15,110 ) (26,708 ) (11,745 )
Specialty lending - (16,813 ) (48,828 ) (648 ) (513 )
Commercial real estate (11,939 ) (392 ) (3,185 ) (534 ) (5,973 )
Consumer real estate (219 ) (52 ) (243 ) (458 ) (783 )
Consumer (607 ) (909 ) (1,143 ) (948 ) (843 )
Credit cards (7,326 ) (8,647 ) (9,034 ) (9,310 ) (8,966 )
Leases and other (11 ) - - - -
Total charge-offs (28,689 ) (46,080 ) (77,543 ) (38,606 ) (28,823 )
Recoveries:
Commercial and industrial 6,473 3,579 6,661 3,168 3,596
Specialty lending - 3,992 - - -
Commercial real estate 91 738 197 681 839
Consumer real estate 69 384 248 285 146
Consumer 307 509 898 533 518
Credit cards 1,618 2,181 1,820 1,894 1,730
Leases and other 6 - - - -
Total recoveries 8,564 11,383 9,824 6,561 6,829
Net charge-offs (20,125 ) (34,697 ) (67,719 ) (32,045 ) (21,994 )
Allowance for credit losses - end of
period $ 218,583 $ 101,788 $ 103,635 $ 100,604 $ 91,649
Allowance for credit losses on loans $ 215,973 $ 101,788 $ 103,635 $ 100,604 $ 91,649
Allowance for credit losses on
held-to-maturity securities 2,610 - - - -
Loans at end of year, net of
unearned interest 16,103,651 13,431,722 12,178,150 11,280,514 10,540,383
Held-to-maturity securities at end
of period 1,014,614 1,116,102 1,170,646 1,261,014 1,115,932
Total assets at amortized cost 17,118,265 14,547,824 13,348,796 12,541,528 11,656,315
Average loans, net of unearned
interest 15,109,392 12,759,387 11,604,633 10,841,486 9,986,151
Allowance for credit losses on loans
to loans at end of period 1.34 % 0.76 % 0.85 % 0.89 % 0.87 %
Allowance for credit losses - end of
period to total assets at amortized
cost 1.28 % N/A(1) N/A(1) N/A(1) N/A(1)
Allowance as a multiple of net
charge-offs 10.86x 2.93x 1.53x 3.14x 4.17x
Net charge-offs to average loans 0.13 % 0.27 % 0.58 % 0.30 % 0.22 %
(1) Related to the adoption of ASU No. 2016-13. See Note 2, "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. Noninterest income increased in 2020 by$133.4 million , or 31.3%, compared to 2019 and increased in 2019 by$25.1 million , or 6.2%, compared to 2018. The increase in 2020 is primarily attributable to an increase in investment securities gains, net, fund servicing income, and trading and investment banking income. These are offset by decreases in brokerage and bankcard income. The increase in 2019 is 34 --------------------------------------------------------------------------------
primarily attributable to trading and investment banking, brokerage, trust and securities processing, company-owned life insurance, and derivative income.
The Company's fee-based services offer multiple products and services, which management believes will more closely align with customer product demands. The Company is currently emphasizing fee-based services including 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 6
SUMMARY OF NONINTEREST INCOME (in thousands)
Year Ended December 31, Dollar Change Percent Change
2020 2019 2018 20-19 19-18 20-19 19-18
Trust and securities
processing $ 194,646 $ 176,913 $ 172,163 $ 17,733 $ 4,750 10.0 % 2.8 %
Trading and investment
banking 32,945 23,466 15,584 9,479 7,882 40.4 50.6
Service charges on deposit
accounts 83,879 82,748 84,287 1,131 (1,539 ) 1.4 (1.8 )
Insurance fees and
commissions 1,369 1,634 1,292 (265 ) 342 (16.2 ) 26.5
Brokerage fees 24,350 31,261 25,807 (6,911 ) 5,454 (22.1 ) 21.1
Bankcard fees 60,544 66,727 68,520 (6,183 ) (1,793 ) (9.3 ) (2.6 )
Investment securities gains,
net 120,634 2,245 3,521 118,389 (1,276 ) 5,273.5 (36.2 )
Other 41,799 41,776 30,524 23 11,252 0.1 36.9
Total noninterest income $ 560,166 $ 426,770 $ 401,698 $ 133,396 $ 25,072 31.3 % 6.2 %
Noninterest income and the year-over-year changes in noninterest income are summarized in Table 6 above. The dollar change and percent change columns highlight the respective net increase or decrease in the categories of noninterest income in 2020 compared to 2019, and in 2019 compared to 2018.
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, and mutual fund assets servicing. This income category increased by$17.7 million , or 10.0% in 2020, compared to 2019, and increased by$4.8 million , or 2.8%, in 2019, compared to 2018. During 2020, fund services income increased$10.6 million and corporate trust income increased$7.2 million . During 2019, corporate trust revenue increased$6.9 million , partially offset by a decrease of$1.4 million in fee income from fund services fees. Trading and investment banking income increased$9.5 million , or 40.4%, in 2020 compared to 2019 and increased$7.9 million , or 50.6%, in 2019 compared to 2018. The increase in 2020 compared to 2019 and the increase in 2019 compared to 2018 was driven by increased bond trading income. Brokerage fees decreased$6.9 million , or 22.1%, in 2020 compared to 2019 but increased$5.5 million , or 21.1%, in 2019 compared to 2018. The decrease in 2020 was driven by lower 12b-1 fees related to the reduction in interest rates during the year. The increase from 2018 to 2019 primarily due to an increase in money market and 12b-1 income driven by an increase in volume and interest rates. Bankcard fees decreased$6.2 million , or 9.3%, in 2020 compared to 2019, and decreased$1.8 million , or 2.6%, in 2019 compared to 2018. The decrease in 2020 compared to 2019 was primarily driven by decreased interchange income, offset by decreased rewards and rebate expense. The decrease in 2019 compared to 2018 was primarily driven by increased rebate expense. Investment securities gains, net increased$118.4 million in 2020 compared to 2019 but decreased by$1.3 million in 2019 compared to 2018. The increase in 2020 was driven by the$108.8 million gain on the Company's investment in Tattooed Chef, Inc., an increase of$3.9 million in gains on equity securities without readily determinable fair values, and an increase of$3.8 million in gains on sales of available-for-sale securities. The decrease in 2019 was driven by a decrease in gains on equity securities without readily determinable fair values of$3.9 million , offset by an increase in gains on sale of available-for-sale securities of$2.6 million . 35 -------------------------------------------------------------------------------- Other noninterest income is flat in 2020 compared to 2019 and increased$11.3 million , or 36.9%, in 2019 compared to 2018. The increase from 2018 to 2019 was primarily due to an increase in company-owned life insurance income and derivative income. Changes in company-owned life insurance are offset by proportionate changes in deferred compensation expense noted below.
Noninterest Expense
Noninterest expense increased in 2020 by$43.1 million , or 5.5%, compared to 2019 and increased in 2019 by$61.1 million , or 8.5%, compared to 2018. From 2019 to 2020 the increases were driven by salary and employee benefits expense, other miscellaneous expense, and equipment expense, offset by a decrease in marketing and business development expense. The main drivers of the increase from 2018 to 2019 were salary and employee benefits expense, processing fees, and equipment expense. Table 7 below summarizes the components of noninterest expense and the respective year-over-year changes for each category.
Table 7
SUMMARY OF NONINTEREST EXPENSE (in thousands)
Year Ended December 31, Dollar Change Percent Change
2020 2019 2018 20-19 19-18 20-19 19-18
Salaries and employee
benefits $ 495,464 $ 461,445 $ 419,091 $ 34,019 $ 42,354 7.4 % 10.1 %
Occupancy, net 47,476 47,771 45,239 (295 ) 2,532 (0.6 ) 5.6
Equipment 85,719 79,086 75,184 6,633 3,902 8.4 5.2
Supplies and services 15,537 18,699 16,103 (3,162 ) 2,596 (16.9 ) 16.1
Marketing and business
development 14,679 26,257 24,372 (11,578 ) 1,885 (44.1 ) 7.7
Processing fees 54,213 52,198 46,977 2,015 5,221 3.9 11.1
Legal and consulting 29,765 31,504 29,859 (1,739 ) 1,645 (5.5 ) 5.5
Bankcard 18,954 17,750 17,514 1,204 236 6.8 1.3
Amortization of other
intangible assets 6,517 5,506 5,764 1,011 (258 ) 18.4 (4.5 )
Regulatory fees 10,279 11,489 12,695 (1,210 ) (1,206 ) (10.5 ) (9.5 )
Other 43,402 27,155 25,002 16,247 2,153 59.8 8.6
Total noninterest expense $ 822,005 $ 778,860 $ 717,800 $ 43,145 $ 61,060 5.5 % 8.5 %
Salaries and employee benefits expense increased $34.0 million , or 7.4%, in 2020
compared to 2019 and $42.4 million , or 10.1%, in 2019 compared to 2018. In 2020,
bonus and commission expense increased $23.6 million , or 25.3%, driven by
business volumes and revenue growth, and higher company performance. Salary and
wage expense increased $12.1 million , or 4.3%. These increases were offset by a
decrease in employee benefits expense of $1.7 million , or 2.1%. In 2019,
employee benefit expense increased $16.1 million , or 23.8%, driven by higher
deferred compensation expense. Salary and wage expense increased $14.4 million ,
or 5.3%, and bonus and commission expense increased $11.9 million , or 14.6%.
Equipment expense increased $6.6 million , or 8.4%, and $3.9 million , or 5.2% in
2020 and 2019, respectively. This increase is driven by increased computer
hardware and software expenses for the ongoing investments in digital channel
and integrated platform solutions to support business growth and the continued
modernization of the Company's core systems in both years.
Marketing and business development expense decreased $11.6 million , or 44.1%, in
2020 compared to 2019, but increased $1.9 million , or 7.7%, in 2019 compared to
2018. The decrease in 2020 is driven by reduced travel and entertainment
expenses and business development expense related to the COVID-19 pandemic. The
increase in 2019 was driven by the timing of advertising and business
development projects and higher travel expenses as compared to 2018.
Processing fees expense increased $2.0 million , or 3.9%, in 2020 compared to
2019, and increased $5.2 million , or 11.1%, in 2019 compared to 2018. The
increases in 2020 and 2019 are primarily driven by ongoing investments in
digital channel and integrated platform solutions to support business growth and
the continued modernization of the Company's core systems.
36
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Other noninterest expense increased $16.2 million , or 59.8%, and increased $2.2
million , or 8.6%, in 2020 and 2019, respectively. The increase in 2020 is
primarily driven by higher operational losses and derivative expense. The
increase in 2019 is primarily driven by higher operational losses, offset by
lower other real estate and repossession expenses as compared to 2018.
Income Taxes
Income tax expense for continuing operations totaled$52.4 million ,$42.4 million , and$27.3 million in 2020, 2019, and 2018 respectively. These amounts equate to effective tax rates of 15.5%, 14.8%, and 12.2% for 2020, 2019 and 2018, respectively. The increase in the effective tax rate from 2019 to 2020 is primarily attributable to a smaller portion of pre-tax income being earned from tax-exempt municipal securities. The increase in the effective tax rate from 2018 to 2019 is primarily attributable to a discrete tax benefit of$5.1 million related to 2017 federal provision-to-return adjustments recorded in 2018 with no corresponding adjustment in 2019. Of this amount,$5.0 million was due to the remeasurement of deferred tax assets and liabilities upon completion of the 2017 federal tax return during the fourth quarter of 2018.
For further information on income taxes refer to Note 17, "Income Taxes," in the Notes to the Consolidated Financial Statements.
Business Segments
The Company has strategically aligned its operations into the following three reportable segments: Commercial Banking, Institutional Banking, and Personal Banking (collectively, the Business Segments). 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. The management accounting system assigns balance sheet and income statement items to each Business Segment using methodologies that are refined on an ongoing basis. For comparability purposes, amounts in all periods are based on methodologies in effect atDecember 31, 2020 . Previously reported results have been reclassified in this Form 10-K to conform to the Company's current organizational structure.
Table 8
COMMERCIAL BANKING OPERATING RESULTS (in thousands)
Year Ended Dollar Percent
December 31, Change Change
2020 2019 20-19 20-19
Net interest income $ 475,425 $ 412,232 $ 63,193 15.3 %
Provision for credit losses 119,424 26,159 93,265 356.5
Noninterest income 189,412 81,609 107,803 132.1
Noninterest expense 272,283 267,345 4,938 1.8
Income before taxes 273,130 200,337 72,793 36.3
Income tax expense 42,223 29,679 12,544 42.3
Income from continuing operations
35.3 % For the year endedDecember 31, 2020 , Commercial Banking income from continuing operations increased by$60.2 million , or 35.3%, to$230.9 million compared to the same period in 2019. Net interest income increased$63.2 million , or 15.3%, for the year endedDecember 31, 2020 , compared to the same period last year, primarily driven by strong loan growth, and earning asset mix changes. Commercial Banking added loans with an average balance of$1.0 billion and loan interest income of$29.5 million related to the PPP during 2020. Provision for credit losses increased by$93.3 million as compared to 2019 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 increased$107.8 million , or 132.1%, over the same period in 2019 primarily due to a gain on Tattooed Chef, Inc. of$108.8 million , recognized in the fourth quarter of 2020. 37
-------------------------------------------------------------------------------- Additionally, there was an increase of$1.2 million in derivative income. These increases were offset by a decrease of$2.7 million in bankcard fees due to driven by decreased interchange income. Noninterest expense increased$4.9 million , or 1.8%, as compared to the same period in 2019. This increase was driven by an increase of$12.8 million in operational losses in 2020 and an increase of$1.1 million in salary and employee benefit expense. These increases were partially offset by a decrease of$4.6 million in marketing and business development expense due to decreased travel and entertainment expense as a result of the COVID-19 pandemic, a decrease of$2.7 million in technology, service, and overhead expenses, and a decrease of$1.1 million in processing fees. Table 9
INSTITUTIONAL BANKING OPERATING RESULTS (in thousands)
Year Ended Dollar Percent
December 31, Change Change
2020 2019 20-19 20-19
Net interest income $ 106,856 $ 126,591 $ (19,735 ) (15.6 )%
Provision for credit losses 882 975 (93 ) (9.5 )
Noninterest income 254,874 232,444 22,430 9.6
Noninterest expense 286,635 268,423 18,212 6.8
Income before taxes 74,213 89,637 (15,424 ) (17.2 )
Income tax expense 11,472 13,280 (1,808 ) (13.6 )
Income from continuing operations $ 62,741 $ 76,357 $ (13,616 ) (17.8 )%
For the year ended December 31, 2020 , Institutional Banking income from
continuing operations decreased $13.6 million , or 17.8%, compared to the same
period last year. Net interest income decreased $19.7 million , or 15.6%,
compared to the same period last year, due to a decrease in funds transfer
pricing driven by lower interest rates. Noninterest income increased $22.4
million , or 9.6%, primarily due to increases of $12.3 million in bond trading
income, $8.0 million in fund services income and $7.2 million in corporate trust
income, both recorded in trust and securities processing revenue, and $4.8
million in service charges on deposit accounts due to healthcare customer
transfer and conversion fees. These increases were partially offset by a
decrease of $7.2 million in brokerage fees primarily due to lower 12b-1 fee
income and a decrease of $4.0 million in bankcard fees driven by lower
interchange income. Noninterest expense increased $18.2 million , or 6.8%,
primarily driven by increases of $8.4 million in technology, service, and
overhead expenses, $8.3 million in salary and employee benefits expense, $2.3
million in bankcard expense, and increased amortization expense of $1.7 million .
These increases were partially offset by a decrease of $2.6 million in
marketing and business development expense due to decreased travel and
entertainment expense as a result of the COVID-19 pandemic.
Table 10
PERSONAL BANKING OPERATING RESULTS (in thousands)
Year Ended Dollar Percent
December 31, Change Change
2020 2019 20-19 20-19
Net interest income $ 148,948 $ 132,082 $ 16,866 12.8 %
Provision for credit losses 10,194 5,716 4,478 78.3
Noninterest income 115,880 112,717 3,163 2.8
Noninterest expense 263,087 243,092 19,995 8.2
Loss before taxes (8,453 ) (4,009 ) (4,444 ) (110.9 )
Income tax benefit (1,307 ) (594 ) (713 ) (120.0 )
Loss from continuing operations $ (7,146 ) $ (3,415 ) $ (3,731 ) (109.3 )%
For the year ended December 31, 2020 , Personal Banking recognized a net loss
from continuing operations of $7.1 million , a decrease of $3.7 million as
compared to the same period last year. Net interest income increased $16.9
million , or 12.8%, compared to the same period last year due to increased loan
balances. Provision for credit losses increased $4.5 million due to the 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 increased $3.2 million , or 2.8%,
primarily driven by an increase of $3.1 million in
38
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equity earnings on alternative investments, and an increase of $2.9 million on
gains on the sale of mortgage originations. These increases were partially
offset by a decrease of $2.6 million in deposit service charges. Noninterest
expense increased $20.0 million , or 8.2%, primarily due to an increase of $11.1
million in technology, service, and overhead expense for investments to support
growth across the segment's lines of business, an increase of $8.1 million in
salary and employee benefits expense, an increase of $2.3 million in other
expense due to higher operational losses in 2020, and an increase of $2.3
million in legal expense. These increases were partially offset by a decrease of
$2.0 million in marketing and business development due to decreased travel and
entertainment expense as a result of the COVID-19 pandemic, and a decrease of
$2.0 million in supplies and services expense.
Balance Sheet Analysis
Loans and Loans Held For Sale
Loans represent the Company's largest source of interest income. Loan balances held for investment increased by$2.7 billion , or 19.9%, in 2020. This increase was primarily driven by an increase of$1.4 billion , or 24.7%, in commercial loans,$765.5 million , or 14.9%, in commercial real estate loans, and$551.7 million , or 39.6%, in consumer real estate loans. The increase in commercial loans is largely driven by the Company's participation in the PPP. PPP loans totaled$1.3 billion as ofDecember 31, 2020 .
Table 11
ANALYSIS OF LOANS BY TYPE (in thousands)
December 31,
2020 2019 2018 2017 2016
Commercial and
industrial $ 7,062,074 $ 5,661,464 $ 5,042,697 $ 4,412,391 $ 4,233,341
Specialty lending 511,300 493,854 687,118 581,508 374,381
Commercial real estate 5,908,934 5,143,424 4,477,053 4,258,973 3,898,916
Consumer real estate 1,945,494 1,393,827 1,235,461 1,286,145 1,260,144
Consumer 117,986 133,474 144,785 151,783 139,562
Credit cards 366,968 408,980 397,316 424,988 416,833
Leases and other 190,895 196,699 193,720 164,725 217,206
Loans before allowance
and loans held for sale 16,103,651 13,431,722 12,178,150 11,280,513 10,540,383
Allowance for credit
losses on loans (215,973 ) (101,788 ) (103,635 ) (100,604 ) (91,649 )
Net loans 15,887,678 13,329,934 12,074,515 11,179,909 10,448,734
Loans held for sale 6,708 7,803 3,192 1,460 5,279
Net loans and loans
held for sale $ 15,894,386 $ 13,337,737 $ 12,077,707 As a % of total loans and loans held for sale Commercial and industrial 43.84 % 42.13 % 41.40 % 39.11 % 40.14 % Specialty lending 3.17 3.68 5.64 5.15 3.55 Commercial real estate 36.68 38.27 36.75 37.75 36.97 Consumer real estate 12.08 10.37 10.14 11.40 11.95 Consumer 0.73 0.99 1.19 1.35 1.33 Credit cards 2.28 3.04 3.26 3.77 3.95 Leases and other 1.18 1.46 1.59 1.46 2.06 Total 99.96 99.94 99.97 99.99 99.95 Loans held for sale 0.04 0.06 0.03 0.01 0.05 Total loans and loans held for sale 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %
Included in Table 11 is a five-year breakdown of loans by type. Commercial & industrial loans and commercial real estate loans continue to represent the largest segments of the Company's loan portfolio, comprising
39
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approximately 43.8% and 36.7%, respectively, of total loans and loans held for
sale at the end of 2020 and 42.1% and 38.3%, respectively, of total loans and
loans held for sale at the end of 2019.
Commercial loans represent the largest percent of total loans. Commercial loans
at December 31, 2020 have increased $1.4 billion , or 24.7%, as compared to
December 31, 2019 , to 43.8% of total loans. Commercial loans represented 42.1%
of total loans at December 31, 2019 . The increase in commercial loans is largely
driven by the Company's participation in the PPP. PPP loans totaled $1.3 billion
as of December 31, 2020 .
As a percentage of total loans, commercial real estate now comprises 36.7% of
total loans compared to 38.3% in 2019. Commercial real estate loans increased
$765.5 million , or 14.9%, compared to 2019. Generally, these loans are made for
investment and real estate development or working capital and business expansion
purposes and are primarily secured by real estate with a maximum loan-to-value
of 80%. Most of these properties are non-owner occupied and have guarantees as
additional security.
Consumer real estate loans increased $551.7 million , or 39.6%, and represented
12.1% of total loans. Specialty lending loans increased $17.4 million , or 3.5%,
and represented 3.2% of total loans as of December 31, 2020 .
Nonaccrual, past due and restructured loans are discussed under "Quantitative
and Qualitative Disclosure about Market Risk - Credit Risk Management" in Item
7A on page 54 of this report.
Investment Securities
The Company's investment portfolio contains trading, available-for-sale (AFS),
and held-to-maturity (HTM) securities as well as FRB stock, Federal Home Loan
Bank (FHLB) stock, and other miscellaneous investments. Investment securities
totaled $10.6 billion as of December 31, 2020 and $8.7 billion as of December
31, 2019 and comprised 34.0% and 35.1% of the Company's earning assets,
respectively, as of those dates.
The Company's AFS securities portfolio comprised 87.4% of the Company's
investment securities portfolio at December 31, 2020 , compared to 85.4% at
December 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
decreased from 70.9 months at December 31, 2019 to 70.1 months at December 31,
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 $7.8 billion of AFS securities pledged to
secure U.S. Government deposits, other public deposits, certain trust deposits,
derivative transactions, and repurchase agreements at December 31, 2020 . Of this
amount, securities with a market value of $371.5 million at December 31, 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 totaled $1.0 billion as of December 31,
2020 , a decrease of $101.5 million , or 9.1%, from December 31, 2019 . The average
life of the HTM portfolio was 6.1 years at December 31, 2020 , compared to 6.3
years at December 31, 2019 .
The securities portfolio generates the Company's second largest component of
interest income. The AFS and HTM securities portfolios achieved an average yield
on a tax-equivalent basis of 2.45% for 2020, compared to 2.64% in 2019, and
2.41% in 2018. Securities available for sale had a net unrealized gain of $412.0
million at year-end, compared to a net unrealized gain of $123.4 million the
preceding year. This market value change primarily reflects the impact of a
larger portfolio size and declining market interest rates as of December 31,
2020 , compared to December 31, 2019 . These amounts are reflected, on an
after-tax basis, in the Company's Accumulated other comprehensive income (loss)
in shareholders' equity, as an unrealized gain of $314.5 million at year-end
2020, compared to an unrealized gain of $93.7 million for 2019. The AFS
securities portfolio contains securities that have unrealized losses (see the
table of these securities in Note 4, "Securities," in the Notes to the
Consolidated Financial Statements on page 92 of this document). The unrealized
losses in the Company's investments in Government
40
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Sponsored Entity (GSE) mortgage-backed securities, State and political
subdivisions, and Corporates were caused by changes in interest rates, and not
from a decline in credit of the underlying issuers. The U.S. Treasury , U.S.
Agency , and GSE mortgage-backed securities are all considered to be
agency-backed securities with no risk of loss as they are either explicitly or
implicitly guaranteed by the U.S. government. The changes in fair value in the
agency-backed portfolios are solely driven by change in interest rates caused by
changing economic conditions. The Company has no knowledge of any underlying
credit issues and the cash flows underlying the debt securities have not changed
and are not expected to be impacted by changes in interest rates. As of December
31, 2020 , the Company does not believe the decline in value in these portfolios
is related to credit impairments and instead is due to declining interest
rates. The Company does not have the intent to sell these securities and does
not believe it is more likely than not that the Company will be required to sell
these securities before a recovery of amortized cost. As of December 31, 2020 ,
there is no ACL related to the Company's available-for-sale securities as the
decline in fair value did not result from credit issues.
Included in Tables 12 and 13 are analyses of the cost, fair value and average
yield (tax-equivalent basis) of securities available for sale and securities
held to maturity.
Table 12
SECURITIES AVAILABLE FOR SALE (in thousands)
December 31, 2020 Amortized Cost Fair Value U.S. Treasury $ 29,911$ 30,740 U.S. Agencies 89,554 95,949 Mortgage-backed 5,266,394 5,468,181 State and political subdivisions 3,424,309 3,623,619 Corporates 77,566 81,199 Total$ 8,887,734 $ 9,299,688 December 31, 2019 Amortized Cost Fair Value U.S. Treasury $ 63,835$ 64,078 U.S. Agencies 89,867 93,021 Mortgage-backed 4,030,688 4,071,794 State and political subdivisions 2,954,276 3,029,917 Corporates 185,314 188,552 Total$ 7,323,980 $ 7,447,362 December 31, 2018 Amortized Cost Fair Value U.S. Treasury$ 248,494 $ 247,130 U.S. Agencies 200 199 Mortgage-backed 3,914,289 3,812,211 State and political subdivisions 2,507,107 2,483,260 Total$ 6,670,090 $ 6,542,800 U.S. Treasury Securities U.S. Agency Securities Weighted Weighted December 31, 2020 Fair Value Average Yield Fair Value Average Yield Due in one year or less$ 20,102 1.03 % $ 202 1.89 % Due after 1 year through 5 years 10,638 2.59 95,747 2.68 Due after 5 years through 10 years - - - - Due after 10 years - - - - Total$ 30,740 1.55 %$ 95,949 2.67 % 41
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State and Political
Mortgage-backed Securities Subdivisions
Weighted Weighted
December 31, 2020 Fair Value Average Yield Fair Value Average Yield
Due in one year or less $ 171,564 (3.18 )% $ 226,929 2.21 %
Due after 1 year through 5 years 2,834,805 2.19 450,435 2.36
Due after 5 years through 10 years 2,283,389 1.99 641,051 2.63
Due after 10 years 178,423 1.76 2,305,204 3.37
Total $ 5,468,181 1.93 % $ 3,623,619 3.02 %
Corporates
Weighted
December 31, 2020 Fair Value Average Yield
Due in one year or less $ - - %
Due after 1 year through 5 years 55,249 2.98
Due after 5 years through 10 years 25,950 3.85
Due after 10 years - -
Total $ 81,199 3.27 %
U.S. Treasury Securities U.S. Agency Securities
Weighted Weighted
December 31, 2019 Fair Value Average Yield Fair Value Average Yield
Due in one year or less $ 33,983 2.69 % $ - - %
Due after 1 year through 5 years 30,095 1.56 93,021 2.67
Due after 5 years through 10 years - - - -
Due after 10 years - - - -
Total $ 64,078 2.16 % $ 93,021 2.67 %
State and Political
Mortgage-backed Securities Subdivisions
Weighted Weighted
December 31, 2019 Fair Value Average Yield Fair Value Average Yield Due in one year or less
$ 13,353 2.50 % $ 218,870 2.23 %
Due after 1 year through 5 years 2,834,652 2.31 585,728 2.23
Due after 5 years through 10 years 1,050,939 3.03 608,959 2.61
Due after 10 years 172,850 2.81 1,616,360 3.75
Total $ 4,071,794 2.52 % $ 3,029,917 3.11 %
Corporates
Weighted
December 31, 2019 Fair Value Average Yield
Due in one year or less $ - - %
Due after 1 year through 5 years 188,552 2.74
Due after 5 years through 10 years - -
Due after 10 years - -
Total $ 188,552 2.74 %
U.S. Treasury Securities U.S. Agency Securities
Weighted Weighted
December 31, 2018 Fair Value Average Yield Fair Value Average Yield
Due in one year or less $ 184,916 2.66 % $ 199 1.46 %
Due after 1 year through 5 years 52,874 2.08 - -
Due after 5 years through 10 years 9,340 1.48 - -
Due after 10 years - - - -
Total $ 247,130 2.49 % $ 199 1.46 %
42
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State and Political
Mortgage-backed Securities Subdivisions
Weighted Weighted
December 31, 2018 Fair Value Average Yield Fair Value Average Yield Due in one year or less
$ 32,859 2.26 % $ 349,303 1.97 %
Due after 1 year through 5 years 2,756,639 2.27 877,224 2.24
Due after 5 years through 10 years 983,288 2.80 699,227 2.48
Due after 10 years 39,425 3.49 557,506 3.66
Total $ 3,812,211 2.42 % $ 2,483,260 2.59 %
Table 13
SECURITIES HELD TO MATURITY (in thousands)
Weighted
Average
Yield/Average
December 31, 2020 Amortized Cost Fair Value Maturity
Due in one year or less $ 4,907 $ 4,936 1.78 %
Due after 1 year through 5 years 123,643 126,901 2.30
Due after 5 years through 10 years 423,759 435,038 2.47 Due over 10 years 462,305 462,569 2.30 Total$ 1,014,614 $ 1,029,444 2.37 % Weighted Average Yield/Average December 31, 2019 Amortized Cost Fair Value Maturity Due in one year or less $ 15,323$ 15,268 3.38 % Due after 1 year through 5 years 100,623 100,298
2.46
Due after 5 years through 10 years 394,591 386,580 2.37 Due over 10 years 605,565 580,199 2.61 Total$ 1,116,102 $ 1,082,345 2.52 % Weighted Average Yield/Average December 31, 2018 Amortized Cost Fair Value Maturity Due in one year or less $ 3,386$ 3,395 2.02 % Due after 1 year through 5 years 115,162 107,641
2.64
Due after 5 years through 10 years 380,108 357,381 2.38 Due over 10 years 671,990 602,115 2.74 Total$ 1,170,646 $ 1,070,532 2.61 % Table 14
OTHER SECURITIES (in thousands)
December 31,
2020 2019 2018
FRB and FHLB stock $ 33,222 $ 33,262 $ 33,262
Equity securities with readily determinable
fair values 134,197 - 4,385
Equity securities without readily determinable fair values 128,634 75,158 36,045 Total$ 296,053 $ 108,420 $ 73,692 Equity securities with readily determinable fair values are generally traded on an exchange and market prices are readily available. As ofDecember 31, 2020 , equity securities with readily determinable fair values includes the 43 -------------------------------------------------------------------------------- Company's investment in Tattooed Chef, Inc., which had a fair value of$106.9 million as ofDecember 31, 2020 . Equity securities without readily determinable fair values are generally carried at cost less impairment. Equity securities without readily determinable fair values also includesPrairie Capital Management (PCM) alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments.
Other Earning Assets
Federal funds transactions essentially are overnight loans between financial institutions, which allow for either the daily investment of excess funds or the daily borrowing of another institution's funds in order to meet short-term liquidity needs. The net borrowed position was$65.6 million atDecember 31, 2020 compared to$28.9 million atDecember 31, 2019 . The Bank buys and sells federal funds as agent for non-affiliated banks. Because the transactions are pursuant to agency arrangements, these transactions do not appear on the balance sheet and averaged$362.5 million in 2020 and$239.2 million in 2019. AtDecember 31, 2020 , the Company held securities purchased under agreements to resell of$1.7 billion compared to$1.6 billion atDecember 31, 2019 . The Company uses these instruments as short-term secured investments, in lieu of selling federal funds, or to acquire securities required for collateral purposes. Balances will fluctuate based on the Company's liquidity and investment decisions as well as the Company's correspondent bank borrowing levels. These investments averaged$1.1 billion in 2020 and$533.1 million in 2019. The Company also maintains an active securities trading inventory. The average holdings in the securities trading inventory in 2020 were$37.1 million , compared to$52.3 million in 2019, and were recorded at fair market value. As discussed in "Quantitative and Qualitative Disclosures About Market Risk - Trading Account" in Part II, Item 7A on page 54, the Company offsets the trading account securities by the sale of exchange-traded financial futures contracts, with both the trading account and futures contracts marked to market daily. Interest-bearing due from banks totaled$3.1 billion as ofDecember 31, 2020 compared to$1.2 billion as ofDecember 31, 2019 and includes amounts due from the FRB and interest-bearing accounts held at other financial institutions. The amount due from the FRB averaged$1.2 billion and$560.9 million duringDecember 31, 2020 and 2019, respectively. The increase in the FRB balance from 2019 to 2020 is primarily due to an increase in deposit balances as a result of the Company's participation in the PPP. The interest-bearing accounts held at other financial institutions totaled$43.1 million and$29.3 million atDecember 31, 2020 and 2019, respectively. Deposits and Borrowed Funds 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 asset management and mutual fund servicing businesses in order to attract and retain additional core deposits. Deposits totaled$27.1 billion atDecember 31, 2020 and$21.6 billion atDecember 31, 2019 , an increase of$5.4 billion , or 25.2%. Deposits averaged$23.2 billion in 2020, and$19.3 billion in 2019. Noninterest-bearing demand deposits averaged$7.8 billion in 2020 and$6.1 billion in 2019. These deposits represented 33.8% of average deposits in 2020, compared to 31.8% in 2019. The Company's large commercial customer base provides a significant source of noninterest-bearing deposits. Many of these commercial accounts do not earn interest; however, they receive an earnings credit to offset the cost of other services provided by the Company. 44 --------------------------------------------------------------------------------
Table 15
MATURITIES OF TIME DEPOSITS OF
December 31,
2020 2019 2018
Maturing within 3 months $ 286,489 $ 400,142 $ 426,912 After 3 months but within 6 months 36,096 126,143 34,880 After 6 months but within 12 months 44,776 64,870 35,918 After 12 months
30,986 23,622 55,134
Total $ 398,347 $ 614,777 $ 552,844
Table 16
ANALYSIS OF AVERAGE DEPOSITS (in thousands)
December 31,
2020 2019 2018
Amount:
Noninterest-bearing demand $ 7,845,667 $ 6,132,187 $ 5,828,545
Interest-bearing demand and savings 14,446,164 12,161,786 10,113,263
Time deposits under $250,000 488,346 366,266 355,344
Total core deposits 22,780,177 18,660,239 16,297,152
Time deposits of
687,395 Total deposits$ 23,182,159 $ 19,304,368 $ 16,984,547 As a % of total deposits: Noninterest-bearing demand 33.84 % 31.76 % 34.32 % Interest-bearing demand and savings 62.32 63.00 59.54 Time deposits under$250,000 2.11 1.90 2.09 Total core deposits 98.27 96.66 95.95 Time deposits of$250,000 or more 1.73 3.34 4.05 Total deposits 100.00 % 100.00 % 100.00 % 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 issues at an agreed-upon price and date. Securities sold under agreements to repurchase and federal funds purchased totaled$2.3 billion atDecember 31, 2020 , and$1.9 billion atDecember 31, 2019 . These agreements averaged$2.0 billion in 2020 and$1.7 billion in 2019. The Company enters into these transactions with its downstream correspondent banks, commercial customers, and various trust, mutual fund, and local government relationships. The Company is a member bank with the FHLB ofDes Moines , and through this relationship, 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. Based on the collateral pledged, the Company had$1.5 billion of borrowing capacity at the FHLB atDecember 31, 2020 . The Company had no outstanding advances at FHLB Des Moines as ofDecember 31, 2020 . 45 --------------------------------------------------------------------------------
Table 17
SHORT-TERM BORROWINGS (in thousands)
2020 2019 2018
Amount Rate Amount Rate Amount Rate
At December 31 :
Federal funds purchased $ 65,636 0.04 % $ 31,873 1.48 % $ 6,679 2.42 %
Repurchase agreements 2,249,861 0.52 1,864,635 1.52 1,512,241 2.08
Other - - - - - -
Total $ 2,315,497 0.51 % $ 1,896,508 1.52 % $ 1,518,920 2.09 %
Average for year:
Federal funds purchased $ 60,314 0.26 % $ 123,870 2.13 % $ 301,503 2.54 %
Repurchase agreements 1,963,499 0.59 1,533,413 1.95 1,257,646 1.53
Other 8,811 1.40 3 - 3 -
Total $ 2,032,624 0.59 % $ 1,657,286 1.96 % $ 1,559,152 1.59 %
Maximum month-end balance:
Federal funds purchased $ 105,678 $ 147,239 $ 631,578
Repurchase agreements 2,469,756 1,864,635 1,512,241
Other 15,000 - -
Long-term debt totaled $270.0 million at December 31, 2020 , compared to $70.4
million at December 31, 2019 . In September 2020 , the Company issued $200.0
million in aggregate subordinated notes due in September 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 of September 2025 . The remainder of the Company's long-term debt
was assumed from the acquisition of 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 had an aggregate contractual balance of $103.1 million and had a
carrying value of $71.7 million at December 31, 2020 . Interest rates on trust
preferred securities are tied to the three-month LIBOR with spreads ranging from
133 basis points to 160 basis points, and reset quarterly. The trust preferred
securities have maturity dates ranging from January 2036 to September 2036 . For
further information on long-term debt refer to Note 9, "Borrowed Funds," in the
Notes to the Consolidated Financial Statements.
Capital Resources and Liquidity
The Company places a significant emphasis on the maintenance of a strong capital position, which it 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. 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 increased
The Board 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 2020 and 2019, the Company acquired 1,208,623 shares and 67,923 shares, respectively, of its common stock pursuant to the applicable Repurchase Authorization. DuringMarch 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). Under the ASR, the Company repurchased a total of 653,498 shares, which was completed during the second quarter of 2020. The ASR was entered into pursuant to theApril 23, 2019 Repurchase Authorization. The Company has not made any repurchase of its securities other than pursuant to the Repurchase Authorizations. 46 -------------------------------------------------------------------------------- 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$1.5 billion as ofDecember 31, 2020 . The Company had no outstanding FHLB advances at FHLB ofDes Moines as ofDecember 31, 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 tier 1 core capital to total average assets less goodwill and intangibles. The Company's capital position as ofDecember 31, 2020 is summarized in the table below and exceeded regulatory requirements.
For further discussion of capital and liquidity, see the "Quantitative and Qualitative Disclosures about Market Risk - Liquidity Risk" in Item 7A on page 56 of this report.
Table 18
RISK-BASED CAPITAL (in thousands)
This table computes risk-based capital in accordance with current regulatory guidelines. These guidelines as ofDecember 31, 2020 , excluded net unrealized gains or losses on securities available for sale from the computation of regulatory capital and the related risk-based capital ratios. Risk-Weighted Category 0% 20% 50% 100% 150% Total Risk-Weighted Assets Loans held for sale $ - $ -$ 6,708 $ - $ -$ 6,708 Loans and leases 1,290,474 48,726 1,237,585 13,409,495 117,371 16,103,651 Securities available for sale 437,394 8,358,242 14,531 77,567 - 8,887,734 Securities held to maturity - 29,676 984,939 - - 1,014,615 Trading securities 651 1,571 18,545 14,253 - 35,020 Cash and due from banks 3,165,301 375,380 - - - 3,540,681 All other assets 23,352 21,867 36,220 1,305,859 - 1,387,298 Category totals$ 4,917,172 $ 8,835,462 $ 2,298,528 $ 14,807,174 $ 117,371 $ 30,975,707 Risk-weighted totals $ -$ 1,767,092 $ 1,149,264 $ 14,807,174 $ 176,057 $ 17,899,587 Off-balance-sheet items (3) - 280,469 17,484 2,857,538 177 3,155,668
Total risk-weighted assets $ -
$ 17,664,712 $ 176,234 $ 21,055,255 Total Regulatory Capital Shareholders' equity$ 3,016,948 Less adjustments (1) (469,314 ) Common equity Tier 1/Tier 1 capital 2,547,634 Additional Tier 2 capital (2) 454,911 Total capital$ 3,002,545 47
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Company
Capital ratios
Common Equity Tier 1 capital to risk-weighted assets 12.10 %
Tier 1 capital to risk-weighted assets 12.10 %
Total capital to risk-weighted assets 14.26 %
Leverage ratio (Tier 1 capital to total average assets less
adjustments (1)) 8.37 %
(1) Adjustments include a portion of goodwill and intangibles as well as
unrealized gains/losses on available-for-sale securities, cash flow hedges,
and the impact of the Company's election to use the five-year CECL
transition.
(2) Includes the Company's ACL (inclusive of the reserve for off-balance sheet
arrangements), subordinated long-term debt, and trust preferred subordinated
notes.
(3) After credit conversion factor and risk weighting is applied.
For further discussion of regulatory capital requirements, see Note 10, "Regulatory Requirements" within the Notes to Consolidated Financial Statements under Item 8 on pages 100 through 101.
Commitments, Contractual Obligations and 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. These commitments and contingent liabilities are not required to be recorded on the Company's balance sheet. Since commitments associated with letters of credit and lending and financing arrangements may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. See Table 19 below, as well as Note 15, "Commitments, Contingencies and Guarantees" in the Notes to Consolidated Financial Statements under Item 8 on pages 110 through 112 for detailed information and further discussion of these arrangements. Management does not anticipate any material losses from its off-balance sheet arrangements.
Table 19
COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS (in thousands)
The table below details the contractual obligations for the Company as of
Payments due by Period
Less than 1 More than 5
Total year 1-3 years 3-5 years years
Contractual Obligations
Federal funds purchased and
repurchase agreements $ 2,315,497 $ 2,315,497 $ - $ - $ -
Long-term debt obligations 271,714 - - - 271,714
Operating lease obligations 81,146 12,725 21,443 16,521 30,457
Time deposits 876,095 710,419 129,455 32,211 4,010
Total $ 3,544,452 $ 3,038,641 $ 150,898 $ 48,732 $ 306,181
48
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Maturities due by Period
Less than 1 More than 5
Total year 1-3 years 3-5 years years
Commitments, Contingencies and
Guarantees
Commitments to extend credit for
loans (excluding credit card loans) $ 8,851,333 $ 4,241,863 $ 2,696,300 $ 1,163,132 $ 750,038
Commitments to extend credit under
credit card loans 3,472,339 3,472,339 - - -
Commercial letters of credit 3,160 3,160 - - -
Standby letters of credit 346,617 264,169 72,000 10,448 -
Forward contracts 51,273 51,273 - - -
Spot foreign exchange contracts 680 680 - - -
Total $ 12,725,402 $ 8,033,484 $ 2,768,300 $ 1,173,580 $ 750,038
As of December 31, 2020 , our total liabilities for unrecognized tax benefits
were $6.7 million . The Company cannot reasonably estimate the settlement of
these liabilities. Therefore, these liabilities have been excluded from the
table above. See Note 17, "Income Taxes," in the Notes to the Consolidated
Financial Statements for information regarding the liabilities associated with
unrecognized tax benefits.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America (GAAP). 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 on-going 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.
Management believes that the Company's critical accounting policies are those relating to: the allowance for credit losses and fair value measurements.
Allowance for Credit Losses
The Company's ACL represents management's judgment of the total expected losses included in the Company's assets held at amortized cost. 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. 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 49 -------------------------------------------------------------------------------- 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.
For more information on loan portfolio segments and ACL methodology refer to Note 3, "Loans and Allowance for Credit Losses," in the Notes to the Consolidated Financial Statements.
Fair Value Measurements
Fair value is measured in accordance with GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value include the market approach, income approach and cost approach. The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves discounting future amounts to a single present amount and is based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset. GAAP establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument's fair value measurement. The three levels within the fair value hierarchy are described as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that are available at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2
inputs include: quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in markets
that are not active; inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from or corroborated
by observable market data by correlation or other means.
Level 3 - Unobservable inputs for the asset or liability for which there is
little, if any, market activity at the measurement date. Unobservable inputs
reflect assumptions about what market participants would use to price the asset
or liability. The inputs are developed based on the best information available
in the circumstances, which might include the Company's own financial data such
as internally developed pricing models and discounted cash flow methodologies,
as well as instruments for which the fair value determination requires
significant management judgment.
The Company's fair value measurements involve various valuation techniques and
models, which involve inputs that are observable, when available, and the most
significant of which include available-for-sale and trading securities measured
at fair value on a recurring basis.
Fair value pricing information obtained from third party data providers and
pricing services for investment securities is reviewed for appropriateness on a
periodic basis. The third-party service providers are also analyzed to
understand and evaluate the valuation methodologies utilized. This review
includes an analysis of current market prices compared to pricing provided by
the third-party pricing service to assess the relative accuracy of the data
provided.
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