UMPQUA HLDGS. FORWARD LOOKING STATEMENTS AND RISK FACTORS
See the discussion of forward-looking statements and risk factors in Part I Item 1 and Item 1A of this report.
The following discussion and analysis of our financial condition and results of operations constitutes management's review of the factors that affected our financial and operating performance for the years endedDecember 31, 2021 and 2020. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in this report. For a discussion of the year endedDecember 31, 2019 , including a comparison to the year endedDecember 31, 2020 , see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, on Registrant's Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onFebruary 25, 2021 .
EXECUTIVE OVERVIEW
COVID-19 Update
We continue to manage our response to the pandemic by adapting to the recommendations of healthcare officials in order to provide a safe environment for our customers and associates. To limit the impact of COVID-19 on our business operations, we have incorporated remote work programs for associates, where possible, as well as social distancing, enhanced cleaning practices, and face coverings. We also continue to encourage customers to utilize our mobile banking app and online access to address their needs. While we do not know and cannot quantify all of the specific impacts, the extent to which the COVID-19 pandemic continues to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, continues to depend on future developments, which are highly uncertain and cannot be predicted, including the continued scope and duration of the pandemic; actions taken by governmental authorities and other third parties in response to the pandemic, including vaccinations; the effect on our customers, counterparties, employees and third party service providers; and the effect on the economy and markets. The risks to our business are more fully described in Part I, item 1A "Risk Factors" of this Annual Report on Form 10-K. We are closely monitoring the impact of COVID-19 on all aspects of our business.
Financial Performance
•Earnings per diluted common share were$1.91 for the year endedDecember 31, 2021 , compared to net loss per diluted common share of$6.92 for the year endedDecember 31, 2020 . The increase in net income for the year endedDecember 31, 2021 , as compared to the prior year, is due mainly to the goodwill impairment of$1.8 billion taken in 2020. There is no goodwill impairment recorded in the current period. In addition, we recorded a recapture of the provision for credit losses of$42.7 million for the year endedDecember 31, 2021 , as compared to a provision for credit losses of$204.9 million for the year endedDecember 31, 2020 . •Net interest income was$919.6 million for the year endedDecember 31, 2021 , compared to$882.5 million for the year endedDecember 31, 2020 . The increase in net interest income compared to the prior year was primarily due to a decrease in interest expense as the Bank allowed higher cost deposits to run off and decreased borrowings during the year, with the impact partially offset by loans and leases repricing to lower interest rates. •Net interest margin, on a tax equivalent basis, was 3.18% for the year endedDecember 31, 2021 , compared to 3.23% for the year endedDecember 31, 2020 . The decrease in net interest margin compared to the prior year was driven by lower yields on interest-earning assets, as rates continue to remain low based on the interest rate cuts that theFederal Reserve instituted as a response to the COVID-19 pandemic. The decrease was partially offset by a reduction in the cost of interest-bearing liabilities from the Company's management of the cost of our funding sources. 38
-------------------------------------------------------------------------------- Table of Contents •Non-interest income was$356.3 million for the year endedDecember 31, 2021 , compared to$412.0 million for the year endedDecember 31, 2020 . The decline was due primarily to the decrease in residential mortgage banking revenue, as discussed below, and a decrease in brokerage revenue of$10.5 million , due to theApril 2021 sale ofUmpqua Investments . The decrease was partially offset by a$17.8 million increase in swap derivative gain (loss) recorded in other income. •Residential mortgage banking revenue was$186.8 million for the year endedDecember 31, 2021 , compared to$270.8 million for year endedDecember 31, 2020 . The decrease in residential mortgage banking revenue was primarily driven by a decline in for-sale originations and in the gain on sale margin due to normalizing margins, caused by rising rates that resulted in a slow-down in refinancing demand. In addition, in mid-2021, the Company strategically shifted a portion of residential mortgage production to portfolio loans. The decrease was partially offset by a lower loss on fair value of the MSR asset for the year endedDecember 31, 2021 , as compared to the prior year. •For-sale mortgage closed loan volume decreased by 29% in 2021, as compared to 2020. In addition, the gain on sale margin decreased to 3.32%, for the year endedDecember 31, 2021 , as compared to 4.62% for the year endedDecember 31, 2020 . •Non-interest expense was$760.5 million for the year endedDecember 31, 2021 , compared to$2.5 billion for the year endedDecember 31, 2020 . The decrease in non-interest expense compared to the prior year was driven by the$1.8 billion goodwill impairment that was recorded in the first quarter of 2020. In addition, the Bank had a decrease in occupancy and equipment expense, offset by an increase in merger related expenses due to the pending merger withColumbia . The efficiency ratio for the year endedDecember 31, 2021 is 60%, as compared to 196% for the year endedDecember 31, 2020 , with the decrease due to goodwill impairment taken in 2020. •Total gross loans and leases were$22.6 billion as ofDecember 31, 2021 , an increase of$773.8 million , or 4%, compared toDecember 31, 2020 . The increase in total loans is primarily due to an increase in commercial real estate balances of$1.1 billion , mostly within multifamily lending, and an increase in residential real estate balances of$706.5 million . The increase was offset by a decrease of$957.0 million in commercial balances, due to the decrease in PPP loans of$1.4 billion during the period, as the majority of these loans were forgiven by the SBA, as expected. •Total deposits were$26.6 billion as ofDecember 31, 2021 , an increase of$2.0 billion , or 8%, fromDecember 31, 2020 . This increase was due to growth in demand, money market, and savings deposits of$2.1 billion ,$437.8 million , and$463.0 million , respectively. The increases are mainly attributable to customer saving habits in the current economic environment, resulting in higher average balances per deposit account. The increase in total deposits also includes a decline in higher cost time deposits of$1.0 billion .
•Total consolidated assets were
Credit Quality
•Non-performing assets decreased to$53.1 million , or 0.17% of total assets, as ofDecember 31, 2021 , compared to$69.2 million , or 0.24% of total assets, as ofDecember 31, 2020 . Non-performing loans were$51.2 million , or 0.23% of total loans and leases, as ofDecember 31, 2021 , compared to$67.4 million , or 0.31% of total loans and leases, as ofDecember 31, 2020 . •The allowance for credit losses on loans and leases was$248.4 million , as ofDecember 31, 2021 , a decrease of$80.0 million , as compared toDecember 31, 2020 . The reserve for unfunded commitments was$12.8 million , as ofDecember 31, 2021 , a decrease of$7.5 million , as compared toDecember 31, 2020 . The decrease in the allowance for credit losses is due to the improvement in economic forecasts used in the credit models. 39 -------------------------------------------------------------------------------- Table of Contents •The Company had a recapture of the provision for credit losses of$42.7 million for the year endedDecember 31, 2021 . The recapture of the provision for credit losses in the current period was due to stabilization of credit quality metrics and improved economic forecasts used in credit models as ofDecember 31, 2021 . As an annualized percentage of average outstanding loans and leases, the provision for credit losses for the year endedDecember 31, 2021 was (0.19)%, as compared to 0.92% for the prior year.
Liquidity
•Total cash and cash equivalents was$2.8 billion as ofDecember 31, 2021 , an increase of$188.4 million fromDecember 31, 2020 . The increase in cash and cash equivalents is consistent with the growth in deposit balances, which will provide flexibility to fund continued growth in the lending and investment portfolios.
Capital and Growth Initiatives
•In
•Umpqua's Next Gen 2.0 is a continuation of our initiative to modernize the Bank. Like its predecessor, the Next Gen 2.0 program includes initiatives to grow revenue, invest in strategic areas for future growth-including technology and digital enhancements-and advance operational excellence goals to reduce operating costs and invest the savings in strategic growth opportunities. We continue to focus on the successful acquisition of customers and talent, as well as the implementation of new technology to gain efficiencies and advance the customer experience. The consolidation of stores and back-office facilities, as well as other related cost-savings initiatives, resulted in expense reduction. We consolidated 99 stores under Next Gen and Next Gen 2.0, which represents the rationalization of one-third of our footprint over the past four years. Since we launched our original Next Gen plans in late 2017, our deposit balances are up$6.7 billion or 34%; and the number of demand deposit accounts has grown by 4.1% betweenSeptember 30, 2017 andDecember 31, 2021 . •The Company's total risk based capital was 14.3% and its Tier 1 common to risk weighted assets ratio was 11.6% as ofDecember 31, 2021 . As ofDecember 31, 2020 , the Company's total risk based ratio was 15.6% and its Tier 1 common to risk weighted assets ratio was 12.3%. •The Company repurchased 4.0 million shares for a total of$78.2 million during the year endedDecember 31, 2021 , under the new share repurchase program, which authorizes the Company to repurchase up to$400 million of common stock throughJuly 2022 , from time to time in open market transactions, accelerated share repurchases, or in privately negotiated transactions as permitted under applicable rules and regulations. The Company does not anticipate any additional share repurchases under our existing repurchase program given our pending combination withColumbia .
•The Company declared cash dividends of
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates. The
estimate that is particularly susceptible to significant change is the
determination of the ACL.
The consolidated financial statements are prepared in conformity with GAAP and
follow general practices within the financial services industry, in which the
Company operates. This preparation requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, actual results could differ from the
estimates, assumptions, and judgments reflected in the financial statements.
Certain estimates inherently have a greater reliance on the use of assumptions
and judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported. Management believes the
following estimate is both important to the portrayal of the Company's financial
condition and results of operations and requires difficult, subjective or
complex judgments and, therefore, management considers the following to be a
critical accounting estimate.
40
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Allowance for Credit Losses
The Bank has established an Allowance for Credit Losses Committee, which is
responsible for, among other things, regularly reviewing the ACL methodology,
including allowance levels, and ensuring that it is designed and applied in
accordance with generally accepted accounting principles. The Company's Audit
and Compliance Committee provides board oversight of the ACL process and reviews
the ACL methodology on a quarterly basis.
CECL is not prescriptive in the methodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments, utilizing quantitative and qualitative factors.
The Company utilizes complex models to obtain reasonable and supportable forecasts of future economic conditions dependent upon specific macroeconomic variables related to each of the Company's loan and lease portfolios. Loans and leases deemed to be collateral dependent, or loans deemed to be reasonably expected to become troubled debt restructured or are troubled debt restructured, are individually evaluated for loss based on the value of the underlying collateral or a discounted cash flow analysis. The adequacy of the ACL is monitored on a regular basis and is based on management's evaluation of numerous factors, including: the CECL model outputs; quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information. As ofDecember 31, 2021 , the Bank usedMoody's Analytics November consensus scenario to estimate the ACL. To assess the sensitivity in the ACL results and to inform qualitative adjustments, the Bank used a second scenario,Moody's Analytics November S2 scenario, that differs in terms of severity within the variables, both favorable and unfavorable. For additional information related to the Company's ACL, see Note 5 in the Notes to Consolidated Financial Statements in Item 8 of this report. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans, and therefore the appropriateness of the ACL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Management believes that the ACL was adequate as ofDecember 31, 2021 .
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding Recent Accounting Pronouncements is included in Note 1 of the Notes to Consolidated Financial Statements in Item 8 below.
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RESULTS OF OPERATIONS
In the first quarter of 2021, the Company realigned its operating segments based
on changes in management's focus and its internal reporting structure. The
Company now reports two segments: Core Banking and Mortgage Banking. This aligns
with how we manage the profitability of the Company and also provides greater
transparency into the financial contribution of mortgage banking activities.
The Core Banking segment includes all lines of business, except Mortgage
Banking, including wholesale, retail, private banking, as well as the
operations, technology, and administrative functions of the Bank and Holding
Company. The Mortgage Banking segment includes the revenue earned from the
production and sale of residential real estate loans, the servicing income from
our serviced loan portfolio, the quarterly changes in the MSR asset, and the
specific expenses that are related to mortgage banking activities including
variable commission expenses. Revenue and related expenses related to
residential real estate loans held for investment are included in the Core
Banking segment as portfolio loans are an anchor product for our consumer
channels and are originated through a variety of channels throughout the
Company. Refer to the segment information footnote for additional detail of the
segments' financial statements.
The Core Banking segment had net income of $372.0 million for the year ended
December 31, 2021 , compared to a net loss of $1.6 billion for the year ended
December 31, 2020 . Net income for the Core Banking segment increased for the
year ended December 31, 2021 , as compared to the same period in the prior year,
due to the impact of goodwill impairment in 2020 of $1.8 billion and a provision
for credit losses of $204.9 million in 2020. In 2021, the Core Banking segment
had a recapture of the provision for credit losses of $42.7 million , as economic
forecasts improved.
The Mortgage Banking segment had net income of $48.3 million for the year ended
December 31, 2021 , compared to net income of $94.9 million for the year ended
December 31, 2020 . The decrease in net income for the Mortgage Banking segment
was primarily due to a decrease in for-sale origination revenue from $308.2
million in 2020 to $157.8 million in the current period, due to a decline in the
gain on sale margin from 4.62% in the prior year to 3.32% in the current period,
as well as a decrease in the volume of loans sold for 2021. The closed loan
volume declined as a result of rate changes which rose during the year,
resulting in a slowing of loan refinance activity and the decision to place a
higher percentage of production into the loan portfolio in order to support
interest earning asset growth.
The following table presents the returns on average assets, average common
shareholders' equity and average tangible common shareholders' equity for the
years ended December 31, 2021 , 2020, and 2019. For each of the periods
presented, the table includes the calculated ratios based on reported net income
(loss). Our return on average common shareholders' equity prior to 2021 was
negatively impacted as the result of capital required to support goodwill. To
the extent this performance metric is used to compare our historical performance
with other financial institutions that did not have merger and
acquisition-related intangible assets, we believe it is beneficial to also
consider the return on average tangible common shareholders' equity. The return
on average tangible common shareholders' equity is calculated by dividing net
income (loss) by average shareholders' common equity less average goodwill and
intangible assets, net (excluding MSRs). The return on average tangible common
shareholders' equity is considered a non-GAAP financial measure and should be
viewed in conjunction with the return on average common shareholders' equity.
Return on Average Assets, Common Shareholders' Equity and Tangible Common
Shareholders' Equity
For the Years Ended
(dollars in thousands) 2021 2020 2019 Return on average assets 1.39 % (5.22) % 1.27 % Return on average common shareholders' equity 15.56 % (51.08) % 8.42 %
Return on average tangible common shareholders' equity 15.63 %
(60.34) % 14.77 %
Calculation of average common tangible shareholders' equity: Average common shareholders' equity
$ 2,700,711
(12,057) (457,550) (1,808,879)
Average tangible common shareholders' equity $ 2,688,654 $ 2,524,908 $ 2,397,501
42-------------------------------------------------------------------------------- Table of Contents Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy. Umpqua believes the exclusion of certain intangible assets in the computation of tangible common equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company. Tangible common equity is calculated as total shareholders' equity less preferred stock and less goodwill and other intangible assets, net (excluding MSRs). In addition, tangible assets are total assets less goodwill and other intangible assets, net (excluding MSRs). The tangible common equity ratio is calculated as tangible common shareholders' equity divided by tangible assets. The tangible common equity and tangible common equity ratio is considered a non-GAAP financial measure and should be viewed in conjunction with the total shareholders' equity and the total shareholders' equity ratio. The following table provides a reconciliation of ending shareholders' equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as ofDecember 31, 2021 , and 2020: (dollars in thousands) December 31, 2021 December 31, 2020 Total shareholders' equity$ 2,749,270 $ 2,704,577 Subtract: Goodwill - 2,715 Other intangible assets, net 8,840
13,360
Tangible common shareholders' equity$ 2,740,430 $ 2,688,502 Total assets$ 30,640,936 $ 29,235,175 Subtract: Goodwill - 2,715 Other intangible assets, net 8,840
13,360
Tangible assets$ 30,632,096 $
29,219,100
Tangible common equity ratio 8.95 %
9.20 %
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
NET INTEREST INCOME
Net interest income for 2021 increased by$37.1 million or 4% compared to the same period in 2020. The increase in net interest income in 2021 compared to 2020 was mainly due to the lower cost of interest-bearing liabilities due to lower volume of retail and brokered time deposits as the Bank has allowed these higher-cost deposits to run off as well as a decrease in borrowings during the year. The Bank has reduced deposit exception pricing on money market and time deposits to reduce the cost of these deposits. The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax equivalent basis was 3.18% for 2021, a decrease of 5 basis points compared to 2020. The decrease in the net interest margin primarily resulted from a decrease in the average yields on interest-earning assets, partially offset by the decline in the cost of interest-bearing liabilities. The yield on loans and leases for 2021 decreased by 23 basis points as compared to 2020, primarily attributable to loans and leases repricing at lower interest rates as compared to prior periods. The cost of interest-bearing liabilities decreased 49 basis points, for 2021, as compared to 2020, due to the decrease in interest rates and corresponding deposit pricing strategy, as well as a decrease in average borrowings. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds. The Company continues to be "asset-sensitive." The decrease in yields on earning assets has continued to impact net interest margin, even as liabilities reprice downward. 43 -------------------------------------------------------------------------------- Table of Contents The following table presents condensed average balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for years endedDecember 31, 2021 , 2020, and 2019: 2021 2020 2019 Interest Average Interest Average Interest Average Income or Yields or Income or Yields or Income or Yields or (dollars in thousands) Average Balance Expense Rates Average Balance Expense Rates Average Balance Expense
Rates
INTEREST-EARNING ASSETS: Loans held for sale$ 500,070 $ 15,149 3.03 %$ 588,058 $ 20,509 3.49 %$ 299,560 $ 14,477 4.83 % Loans and leases (1) 21,925,108 875,366 3.99 % 22,082,359 930,930 4.22 % 20,889,769 1,036,600 4.96 % Taxable securities 3,321,142 61,717 1.86 % 2,796,581 50,354 1.80 % 2,701,821 58,419 2.16 % Non-taxable securities (2) 248,256 7,458 3.00 % 240,054 7,500 3.12 % 264,017 8,971 3.40 % Temporary investments and interest-bearing deposits 2,936,273 3,864 0.13 % 1,637,440 4,739 0.29 % 688,258 14,180 2.06 % Total interest earning assets (1), (2) 28,930,849 963,554 3.33 % 27,344,492 1,014,032 3.71 % 24,843,425 1,132,647 4.56 % Other assets 1,336,523 1,867,241 3,128,419 Total assets$ 30,267,372 $ 29,211,733 $ 27,971,844 INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits$ 3,462,035 $ 1,865 0.05 %$ 2,754,417 $ 5,712 0.21 %$ 2,365,845 $ 12,040 0.51 % Money market deposits 7,624,707 5,964 0.08 % 7,193,470 19,811 0.28 % 6,740,502 56,633 0.84 % Savings deposits 2,200,608 729 0.03 % 1,697,353 801 0.05 % 1,467,263 1,746 0.12 % Time deposits 2,217,464 18,593 0.84 % 3,882,684 73,876 1.90 % 4,483,818 97,522 2.17 % Total interest-bearing deposits 15,504,814 27,151 0.18 % 15,527,924 100,200 0.65 % 15,057,428 167,941 1.12 % Repurchase agreements and federal funds purchased 454,994 280 0.06 % 370,091 766 0.21 % 319,723 2,092 0.65 % Borrowings 195,985 2,838 1.45 % 1,014,240 13,921 1.37 % 896,681 17,564 1.96 % Junior subordinated debentures 369,259 12,127 3.28 % 325,633 15,221 4.67 % 373,253 22,845 6.12 % Total interest-bearing liabilities 16,525,052 42,396 0.26 % 17,237,888 130,108 0.75 % 16,647,085 210,442 1.26 % Non-interest-bearing deposits 10,669,531 8,576,436 6,746,607 Other liabilities 372,078 414,951 371,772 Total liabilities 27,566,661 26,229,275 23,765,464 Common equity 2,700,711 2,982,458 4,206,380 Total liabilities and shareholders' equity$ 30,267,372 $ 29,211,733 $ 27,971,844 NET INTEREST INCOME (2)$ 921,158 $ 883,924 $ 922,205 NET INTEREST SPREAD 3.07 % 2.96 % 3.30 % NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2) 3.18 % 3.23 % 3.71 % (1)Non-accrual loans and leases are included in the average balance. (2)Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. The amount of such adjustment was an addition to recorded income of approximately$1.5 million ,$1.4 million , and$1.6 million for the years ended 2021, 2020, and 2019, respectively. 44 -------------------------------------------------------------------------------- Table of Contents The following table sets forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for 2021 compared to 2020. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances. 2021 compared to 2020 2020 compared to 2019 Increase (decrease) in interest income and Increase (decrease) in interest income and expense expense due to changes in due to changes in (in thousands) Volume Rate Total Volume Rate Total Interest-earning assets: Loans held for sale$ (2,854) $ (2,506) $ (5,360) $ 10,932 $ (4,900) $ 6,032 Loans and leases (6,587) (48,977) (55,564) 56,730 (162,400) (105,670) Taxable securities 9,683 1,680 11,363 1,988 (10,053) (8,065) Non-taxable securities (1) 251 (293) (42) (779) (692) (1,471) Temporary investments and interest bearing deposits 2,544 (3,419) (875) 9,197 (18,638) (9,441) Total interest-earning assets(1) 3,037 (53,515) (50,478) 78,068 (196,683) (118,615) Interest-bearing liabilities: Interest bearing demand 1,188 (5,035) (3,847) 1,723 (8,051) (6,328) Money market 1,122 (14,969) (13,847) 3,573 (40,395) (36,822) Savings 202 (274) (72) 239 (1,184) (945) Time deposits (23,993) (31,290) (55,283) (12,228) (11,418) (23,646) Repurchase agreements and federal funds 146 (632) (486) 30 (1,356) (1,326) Borrowings (11,810) 727 (11,083) 2,093 (5,736) (3,643) Junior subordinated debentures 1,851 (4,945) (3,094) (2,673) (4,951) (7,624) Total interest-bearing liabilities (31,294) (56,418) (87,712) (7,243) (73,091) (80,334) Net increase (decrease) in net interest income (1)$ 34,331 $ 2,903
(1) Tax exempt income has been adjusted to a tax equivalent basis at a 21% tax rate.
PROVISION FOR CREDIT LOSSES The Company had a$42.7 million recapture of provision for credit losses for 2021, as compared to a$204.9 million provision for credit losses for 2020. The change in the provision for credit losses for 2021 as compared to the prior year, is primarily attributable to the stabilizing of credit quality metrics and the improvement in economic forecasts used in credit models as well as loan mix changes, which allowed for a recapture of previous provision for credit losses. The Company adopted CECL as ofJanuary 1, 2020 , CECL requires a current expected credit loss for the life of loans, which may result in volatility in the provision for credit losses. As an annualized percentage of average outstanding loans and leases, the recapture of provision for credit losses recorded for 2021 was (0.19)%. As an annualized percentage of average outstanding loans and leases, the provision for credit losses for 2020 was 0.92%.
Net-charge offs were
45
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Typically, loans in a non-accrual status will not have an allowance for credit
loss as they will be written down to their net realizable value or charged-off.
However, the net realizable value for homogeneous leases and equipment finance
agreements are determined by the loss given default calculated by the CECL
model, and therefore homogeneous leases and equipment finance agreements on
non-accrual will have an allowance for credit loss amount until they become 181
days past due, at which time they are charged-off. The non-accrual leases and
equipment finance agreements of $8.9 million as of December 31, 2021 have a
related allowance for credit losses of $7.0 million , with the remaining loans
written-down to their estimated fair value, less estimated costs to sell, and
are expected to be resolved with no additional material loss, absent further
decline in market prices.
NON-INTEREST INCOME
The following table presents the key components of non-interest income for years
ended
2021 compared to 2020
(dollars in thousands) 2021 2020 Change Amount Change Percent
Service charges on deposits $ 42,086 $ 40,838 $ 1,248 3 %
Card-based fees 36,114 28,190 7,924 28 %
Brokerage revenue 5,112 15,599 (10,487) (67) %
Residential mortgage banking revenue, net 186,811 270,822 (84,011) (31) %
Gain (loss) on sale of debt securities,
net 8 190 (182) (96) %
(Loss) gain on equity securities, net (1,511) 769 (2,280) (296) %
Gain on loan and lease sales, net 15,715 6,707 9,008 134 %
BOLI income 8,302 8,399 (97) (1) %
Other income 63,681 40,495 23,186 57 %
Total non-interest income $ 356,318 $ 412,009 $ (55,691) (14) %
During the current year, the Company added the card-based fees line item, which
we previously included in the service charges on deposits and other income line
items. Prior periods have been reclassified to conform to the current
presentation. Card-based fees are comprised of debit and credit card income, ATM
fees, and merchant services income. Debit and credit card income is primarily
comprised of interchange fees earned when our customers' debit and credit cards
are processed through card payment networks. The increase in the year ended
December 31, 2021 , as compared to prior year, is attributable to increased
customer spending with debit and credit cards, given strengthening economic
activity combined with an increase in contactless payment options and customer
activity. Included in service charges on deposits are non-sufficient funds and
overdraft fees, which were $15.1 million and $15.7 million for the years ended
December 31, 2021 and 2020, respectively.
Brokerage revenue decreased for the year ended
Residential mortgage banking revenue, which is the primary source of income for the Mortgage Banking segment, decreased for the year endedDecember 31, 2021 . The decrease is due to lower refinance demand as well as a decline in gain on sale margin, due to normalizing margins, caused by rising rates. Revenue related to origination and sale of residential mortgages decreased by$150.4 million , as compared to the prior period. This is offset by lower loss on fair value of the MSR asset as the loss on fair value of$7.8 million for the year endedDecember 31, 2021 , compares to a loss on fair value of$73.1 million for the same period in 2020. For-sale mortgage closed loan volume decreased 29% as compared to the prior period. Gain on sale margin decreased to 3.32% in 2021, compared to 4.62% in 2020 due to decreases in refinance demand. Direct expense related to the origination of for-sale mortgage loans as a percentage of loan production was 2.00% for the year endedDecember 31, 2021 , compared to 1.90% for the year endedDecember 31, 2020 . 46
-------------------------------------------------------------------------------- Table of Contents Origination volume for mortgage loans is generally linked to the level of interest rates. When rates fall, origination volumes are expected to be elevated relative to historical levels. If rates rise, origination volumes would be expected to fall. Margins observed in the current period could be expected to narrow somewhat in future periods as mortgage industry capacity constraints ease and refinance demand is met. The MSR asset value is also sensitive to interest rates, and generally falls with lower rates and rises with higher rates. The following table presents our residential mortgage banking revenues for the years endedDecember 31, 2021 and 2020: (in thousands) 2021 2020 Origination and sale$ 157,789 $ 308,219 Servicing 36,836 35,706 Change in fair value of MSR asset: Changes due to collection/realization of expected cash flows over time (18,903) (19,680) Changes in valuation inputs or assumptions (1) 11,089 (53,423) Balance, end of period $
186,811
LHFS Production Statistics: Closed loan volume for-sale$ 4,747,104 $ 6,666,500 Gain on sale margin 3.32 % 4.62 % (1)The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.
The gain on loan and lease sales in 2021 increased compared to 2020 due to an increase in SBA loan sales, driven by higher government guarantees and incentives for borrowers.
Other income in 2021 compared to 2020 increased primarily due to an increase in
swap derivative gain (loss) of
NON-INTEREST EXPENSE
The following table presents the key elements of non-interest expense for the
years ended
2021 compared to 2020
(dollars in thousands) 2021 2020 Change Amount Change Percent
Salaries and employee benefits $ 480,820 $ 479,247 $ 1,573 - %
Occupancy and equipment, net 137,546 151,650 (14,104) (9) %
Communications 11,564 11,843 (279) (2) %
Marketing 7,381 8,313 (932) (11) %
Services 48,800 46,640 2,160 5 %
FDIC assessments 9,238 12,516 (3,278) (26) %
Intangible amortization 4,520 4,986 (466) (9) %
Merger related expenses 15,183 - 15,183 nm
Other expenses 45,404 45,956 (552) (1) %
Non-interest expense before goodwill
impairment 760,456 761,151 (695) - %
Goodwill impairment - 1,784,936 (1,784,936) nm
Total non-interest expense $ 760,456 $ 2,546,087 $ (1,785,631) (70) %
nm = not meaningful
47-------------------------------------------------------------------------------- Table of ContentsGoodwill impairment of$1.8 billion was recorded as ofMarch 31, 2020 , following an interim impairment analysis triggered by the decline in interest rates and economic impacts of COVID-19, as well as declines in the Company's stock price. There is no impairment recorded in the current period. Occupancy and equipment decreased primarily due to a decrease in rent-related expenses with the consolidation of store and back office locations as well as decreased software and software amortization expense, mainly due to one-time software impairment charges in 2020 associated with technology contract exits not repeated in the period.
Merger related expenses are directly related to the pending merger with
Other non-interest expense was consistent with the prior year despite an increase in exit and disposal costs, as the Company closed store locations and exited back-office leases as part of the Next Gen 2.0 strategy. Exit and disposal costs were$12.8 million and$2.6 million for the years 2021 and 2020, respectively. The increase was offset by a decrease of$3.5 million in charitable donations, a decrease of$2.2 million in debit card fraud losses, and a decrease of$1.8 million in losses on disposal of fixed assets, as well as other miscellaneous fluctuations in other expenses.
INCOME TAXES
Our consolidated effective tax rate as a percentage of pre-tax income for 2021
was 24.7%, compared to an effective rate of pre-tax net loss of (4.6)% for 2020.
The 2020 effective tax rate became negative primarily due to impairment of
non-deductible goodwill. The 2021 effective tax rate differed from the federal
statutory rate of 21% principally because of state taxes, income on tax-exempt
investment securities, reversals of unrecognized tax benefits, nondeductible
merger expenses, non-taxable income arising from bank-owned life insurance, tax
credits arising from low-income housing investments, and state audit refunds.
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FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
Cash and cash equivalents were $2.8 billion at December 31, 2021 , compared to
$2.6 billion at December 31, 2020 . The increase of interest bearing cash and
temporary investments reflects strong deposit growth of $2.0 billion and the
decrease in loans held for sale of $413.1 million that outpaced investment
growth of $937.8 million and portfolio loan growth of $773.8 million . In
addition, the Company paid down borrowings by $765.0 million during the year. An
elevated on-balance sheet liquidity position enhances the Company's liquidity
flexibility.
INVESTMENT SECURITIES
The composition of our investment securities portfolio reflects management's
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of interest income. The investment
securities portfolio provides a vehicle for the investment of available funds, a
source of liquidity (by pledging as collateral or through repurchase agreements)
and collateral for certain public funds deposits.
Equity and other securities consist primarily of investments in fixed income
mutual funds to support our CRA initiatives and securities invested in rabbi
trusts for the benefit of certain current or former executives and employees as
required by the underlying agreements. Equity and other securities were $81.2
million at December 31, 2021 , compared to $83.1 million at December 31, 2020 .
This decrease is primarily due to losses on equity securities of $1.5 million
during the year due to changes in fair value.
Investment debt securities available for sale were $3.9 billion as of
December 31, 2021 , compared to $2.9 billion at December 31, 2020 . The increase
is due to purchases of $1.8 billion of investment securities, offset by sales
and paydowns of $761.2 million and a decrease in the fair value of investment
securities available for sale of $125.0 million .
The following table presents information regarding the amortized cost, fair
value, average yield and maturity structure of the investment portfolio at
Amortized Cost Fair Value Average Yield (1)
U.S. treasury and agencies
One year or less $ - $ - - %
One to five years 316,029 321,482 1.55 %
Five to ten years 558,259 574,309 1.96 %
Over ten years 20,681 22,262 2.60 %
Total U.S. treasury and agencies 894,969 918,053 1.83 %
Obligations of states and political subdivisions
One year or less 23,166 23,507 3.26 %
One to five years 137,668 145,980 3.32 %
Five to ten years 138,542 140,044 2.36 %
Over ten years 20,962 21,253 2.60 %
Total obligations of states and political
subdivisions 320,338 330,784 2.86 %
Other Securities
Residential mortgage-backed securities and
collateralized mortgage obligations 2,651,792 2,625,112 1.68 %
Total debt securities $ 3,867,099 $ 3,873,949 1.82 %
(1) Weighted average yields are stated on a federal tax-equivalent basis of 21%.
Weighted average yields for available for sale investments have been calculated
on an amortized cost basis.
49-------------------------------------------------------------------------------- Table of Contents The mortgage-related securities in the table above include both pooled mortgage-backed issues and high-quality collateralized mortgage obligation structures, with an average duration of 4.8 years. These mortgage-related securities provide yield spread toU.S. Treasury or agency securities; however, the cash flows arising from them can be volatile due to refinancing of the underlying mortgage loans. We review investment securities on an ongoing basis for the presence of impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is more likely than not that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors. Gross unrealized losses in the available for sale investment portfolio was$52.0 million atDecember 31, 2021 . This consisted primarily of unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations of$46.5 million . The unrealized losses were primarily attributable to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not attributable to changes in credit quality. In the opinion of management, no allowance for credit losses was considered necessary on our debt securities as ofDecember 31, 2021 .
RESTRICTED EQUITY SECURITIES
Restricted equity securities were$10.9 million and$41.7 million atDecember 31, 2021 and 2020, respectively, the majority of which represents the Bank's investment in theFederal Home Loan Bank of Des Moines . The decrease is attributable to redemptions of FHLB stock during the period due to decreased FHLB borrowing activity during the period. FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member institutions, and can only be purchased and redeemed at par. AtDecember 31, 2021 , the Bank's minimum required investment in FHLB stock was$10.7 million . LOANS AND LEASES Total loans and leases outstanding atDecember 31, 2021 increased$773.8 million compared toDecember 31, 2020 . This increase was principally attributable to net new loan and lease originations of$735.4 million , with the majority of the increase in multifamily and residential mortgage loans, as well as a transfer of$315.9 million from loans held for sale to loans held for investment. The increase was partially offset by PPP loan forgiveness and payoffs, as well as loans sold of$231.0 million and charge-offs of$59.3 million . The loan to deposit ratio as ofDecember 31, 2021 is 85%, as compared to 88% for the year endedDecember 31, 2020 , which is an indication that deposit growth is outpacing loan growth. 50
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The following table presents the concentration distribution of our loan and
lease portfolio by major type as of
December 31, 2021 December 31, 2020
(dollars in thousands) Amount Percentage Amount Percentage
Commercial real estate
Non-owner occupied term, net $ 3,786,887 17 % $ 3,505,802 16 %
Owner occupied term, net 2,332,422 10 % 2,333,945 11 %
Multifamily, net 4,051,202 18 % 3,349,196 15 %
Construction & development, net 890,338 4 % 828,478 4 %
Residential development, net 206,990 1 % 192,761 1 %
Commercial
Term, net 3,008,473 13 % 4,024,467 18 %
Lines of credit & other, net 910,733 4 % 862,760 4 %
Leases & equipment finance, net 1,467,676 7 % 1,456,630 7 %
Residential
Mortgage, net 4,517,266 20 % 3,871,906 18 % Home equity loans & lines, net 1,197,170 5 % 1,136,064 5 % Consumer & other, net 184,023 1 % 217,358 1 % Total, net of deferred fees and costs$ 22,553,180 100 %$ 21,779,367 100 %
The following table presents the maturity distribution of our loan portfolios
and the rate sensitivity of these loans to changes in interest rates as of
By Maturity Loans Over One Year by Rate Sensitivity
One Through Five Through 15
(in thousands) One Year or Less Five Years Years Over 15 Years Total Fixed Rate Floating/Adjustable Rate
Commercial real estate $ 949,276 $ 2,209,198 $ 4,794,003 $ 3,315,362 $ 11,267,839 $ 1,347,300 $ 8,971,263
Commercial $ 1,765,117 $ 2,777,152 $ 751,572 $ 93,041 $ 5,386,882 $ 2,359,074 $ 1,262,691
Residential $ 5,591 $ 13,079 $ 643,176 $ 5,052,590 $ 5,714,436 $ 2,736,739 $ 2,972,106
Consumer & other $ 10,194 $ 154,208 $ 18,891 $ 730 $ 184,023 $ 49,029 $ 124,800
In April 2020 , the Bank began originating loans to qualified small businesses
under the PPP administered by the SBA. The remaining unamortized balance of the
PPP-related net loan processing fees will be recognized as a yield adjustment
over the remaining term of these loans, although the forgiveness of these loans
by the SBA accelerates the recognition of these fees.
(dollars in thousands) December 31, 2021 December 31, 2020
PPP principal balance $ 392,038 $ 1,777,145
PPP deferred fees (11,598) (26,934)
Net PPP Balance $ 380,440 $ 1,750,211
PPP loan count 4,101 14,788
51-------------------------------------------------------------------------------- Table of Contents ASSET QUALITY AND NON-PERFORMING ASSETS The following table summarizes our non-performing assets and restructured loans, as ofDecember 31, 2021 and 2020: (dollars in thousands) December 31, 2021 December 31, 2020 Loans and leases on non-accrual status $ 18,865 $ 31,076 Loans and leases past due 90 days or more and accruing 32,336 36,361 Total non-performing loans and leases 51,201 67,437 Other real estate owned 1,868 1,810 Total non-performing assets $ 53,069 $ 69,247 Restructured loans (1) $ 6,694 $ 14,991 Allowance for credit losses on loans and leases$ 248,412 $ 328,401 Reserve for unfunded commitments 12,767 20,286 Allowance for credit losses$ 261,179 $ 348,687 Asset quality ratios: Non-performing assets to total assets 0.17 % 0.24 % Non-performing loans and leases to total loans and leases 0.23 % 0.31 %
Allowance for credit losses on loan and lease losses to total loans and leases
1.10 % 1.51 %
Allowance for credit losses to total loans and leases 1.16 % 1.60 %
Allowance for credit losses to total non-performing loans and leases
510 % 517 %
(1)Represents accruing TDR loans performing according to their restructured terms.
AtDecember 31, 2021 and 2020, loans of$6.7 million and$15.0 million , respectively, were classified as accruing restructured loans. The restructurings were granted in response to borrower financial difficulty, and generally provide for a modification of loan repayment terms. A decline in the economic conditions due to the COVID-19 pandemic as well as in our general market areas or other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, placed on non-accrual status, restructured or transferred to other real estate owned in the future. 52
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COVID-19 Related Payment Deferral and Forbearance
Due to the deterioration of theU.S. economy resulting from the COVID-19 pandemic, the Company has had an increase in loan payment deferral and forbearance requests. Once a deferral or forbearance request is received, a late charge waiver is put in place and payments are suspended for an agreed-upon period. Accrued and unpaid interest during the deferral period will be collected upon the expiration of the deferral or on a regular repayment schedule at the end of the deferral period. For certain loan types, the maturity date may be extended to allow for full amortization. In accordance with the deferral guidance at the federal and state levels, these loans are generally classified based on their past due status prior to their deferral period, so they are classified as performing loans that accrue interest.
A summary of outstanding loan balances with active payment deferral or
forbearance as of
Loans with Deferrals or Forbearances
(dollars in thousands) Number of Loans Loan Balance Outstanding
Commercial real estate 13 $ 72,823
Commercial 2 586
Residential 91 45,447
Consumer & other, net 7 101
Total 113 $ 118,957
Excluded from the mortgage loans with payment deferrals or forbearance in the
above table are $89.8 million of repurchased GNMA loans on deferral, as the
credit risk of these loans are guaranteed by government programs such as the
Federal Housing Agency , Veterans Affairs , and USDA Rural Development .
The Bank continues to monitor COVID-19 deferrals and if a customer continues to experience financial difficulty after the initial deferral and further concessions are granted, the loan will be reviewed to determine if a TDR designation is appropriate.
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ALLOWANCE FOR CREDIT LOSSES
The ACL totaled
2021 2020
Allowance for credit losses on loans and leases
Balance, beginning of period $
328,401
Impact of CECL adoption - 49,999
Adjusted balance, beginning of period 328,401 207,628
(Recapture) provision for credit losses on loans and leases (35,132)
191,875
Loans charged-off:
Commercial real estate, net (1,144) (1,413)
Commercial, net (54,425) (76,488)
Residential, net (70) (521)
Consumer & other, net (3,658) (6,074)
Total loans charged-off (59,297) (84,496)
Recoveries:
Commercial real estate, net 645 1,013
Commercial, net 10,703 8,045
Residential, net 924 1,862
Consumer & other, net 2,168 2,474
Total recoveries 14,440 13,394
Net charge-offs:
Commercial real estate, net (499) (400)
Commercial, net (43,722) (68,443)
Residential, net 854 1,341
Consumer & other, net (1,490) (3,600)
Total net charge-offs (44,857) (71,102)
Balance, end of period $ 248,412 $ 328,401
Reserve for unfunded commitments
Balance, beginning of period $
20,286
Impact of CECL adoption - 3,238
Adjusted balance, beginning of period 20,286 8,344
(Recapture) provision for credit losses on unfunded
commitments (7,519) 11,942
Balance, end of period 12,767 20,286
Total allowance for credit losses $ 261,179 $ 348,687
As a percentage of average loans and leases (annualized):
Net charge-offs 0.20 % 0.32 %
Commercial real estate - % - %
Commercial 0.73 % 1.12 %
Residential (0.02) % (0.03) %
Consumer & other 0.82 % 1.13 %
(Recapture) provision for credit losses (0.19) % 0.92 %
Recoveries as a percentage of charge-offs 24.35 % 15.85 %
With the adoption of CECL as of January 1, 2020 , we recorded a one-time
cumulative-effect pre-tax adjustment in the amount of $53.2 million . The
allowance for credit losses on loans and leases increased by $50.0 million and
the allowance for unfunded commitments increased by $3.2 million , resulting in a
January 1, 2020 , or day 1, balance of the Allowance for Credit Losses of $216.0
million .
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The (recapture) provision for credit losses includes the (recapture) provision for credit losses on loans and leases, the (recapture) provision for unfunded commitments, and the (recapture) provision for credit losses related to accrued interest on loans. The recapture for credit losses in the current year is due to the stabilization of credit quality metrics and economic forecasts used in credit models, as well as loan mix changes. The following table sets forth the allocation of the allowance for credit losses on loans and leases and percent of loans and leases in each category to total loans and leases, net of deferred fees, as ofDecember 31 for each of the last two years: December 31, 2021 December 31, 2020 (dollars in thousands) Amount % Amount % Commercial real estate, net$ 99,075 50 %$ 141,710 47 % Commercial, net 117,573 24 % 150,864 29 % Residential, net 29,068 25 % 27,964 23 % Consumer & other, net 2,696 1 % 7,863 1 % Allowance for credit losses on loans and leases$ 248,412 $ 328,401
The following table shows the change in the allowance for credit losses from
2021 net Reserve
December 31, (charge-offs) (reduction) December 31, % of Loans and
2020 recoveries build 2021 Leases Outstanding
Commercial real estate $ 157,070 $ (499) $ (49,035) $ 107,536 0.95 %
Commercial 153,054 (43,722) 10,269 119,601 2.22 %
Residential 29,625 854 546 31,025 0.54 %
Consumer 8,938 (1,490) (4,431) 3,017 1.64 %
Total allowance for credit
losses $ 348,687 $ (44,857) $ (42,651) $ 261,179 1.16 %
% of loans and leases
outstanding 1.60 % 1.16 %
To calculate the ACL, the CECL models use a forecast of future economic
conditions and are dependent upon specific macroeconomic variables that are
relevant to each of the Bank's loan and lease portfolios. The forward-looking
assumptions revert to historical data when they reach the point where future
assumptions are no longer estimated. As of December 31, 2021 , the Bank used
Moody's Analytics November consensus economic forecast to estimate the ACL. Key
macroeconomic variables within this forecast include U.S. real GDP, U.S.
unemployment rate, and Federal Reserve Fed Funds rate. The U.S. real GDP growth
factor forecast used in the model for year one remained consistent at 4.1% as of
December 31, 2021 and December 31, 2020 . The U.S. unemployment rate average over
a forecasted two year period improved in year one by 3.3% to 4.1% as of December
31, 2021 compared to 7.4% as of December 31, 2020 . The average improved in year
two by 2.2% to 4.0% as of December 31, 2021 compared to 6.2% as of December 31,
2020 . The estimated time horizon for increasing the Federal Reserve Fed Funds
Rate from the current target range of 0% to 0.25% has been shortened to the
fourth quarter of 2022 for the December 31, 2021 estimate, compared to an
estimated time horizon of late 2023 used in the December 31, 2020 estimate. The
models for calculating the ACL are sensitive to changes in these and other
economic variables, which could result in volatility as these assumptions change
over time.
We believe that the allowance for credit losses as of
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RESIDENTIAL MORTGAGE SERVICING RIGHTS
The following table presents the key elements of our residential mortgage
servicing rights asset as of
2021 2020 2019
Balance, beginning of period $ 92,907 Additions for new MSR capitalized 38,522 51,000 25,169 Sale of MSR assets - - (34,401)
Changes in fair value:
Changes due to collection/realization of expected cash flows over time
(18,903) (19,680) (25,408)
Changes due to valuation inputs or assumptions (1) 11,089 (53,423) (19,375)
Balance, end of period $ 123,615 (1) The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates. Information related to our serviced loan portfolio as ofDecember 31, 2021 and 2020 were as follows: (dollars in thousands) December 31, 2021 December 31, 2020 Balance of loans serviced for others$ 12,755,671 $ 13,026,720 MSR as a percentage of serviced loans 0.97 %
0.71 %
Residential mortgage servicing rights are adjusted to fair value quarterly with the change recorded in residential mortgage banking revenue. The value of servicing rights can fluctuate based on changes in interest rates and other factors. Generally, as interest rates decline and borrowers are able to take advantage of a refinance incentive, prepayments increase, and the total value of existing servicing rights declines as expectations of future servicing fees collections decline. Historically, the fair value of our residential mortgage servicing rights will increase as market rates for mortgage loans rise and decrease if market rates fall. Mortgage rates increased during the period and are expected to continue to rise which have caused accelerated prepayment speeds to slow. Due to changes to inputs in the valuation model including changes in discount rates and prepayment speeds, the fair value of the MSR asset increased by$11.1 million for the year endedDecember 31, 2021 , as compared to a decrease of$53.4 million for the year endedDecember 31, 2020 . The fair value of the MSR asset decreased by$18.9 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs, as compared to the decrease of$19.7 million in 2020.
GOODWILL AND OTHER INTANGIBLE ASSETS
AtDecember 31, 2021 , the Company had no goodwill as compared to$2.7 million atDecember 31, 2020 .Goodwill impairment of$1.8 billion was recorded during the year endedDecember 31, 2020 , based on an interim impairment analysis that was triggered by the decline in interest rates and economic impacts of COVID-19, as well as declines in the Company's stock price. The remaining goodwill of$2.7 million was reduced due to the sale ofUmpqua Investments inApril 2021 . AtDecember 31, 2021 , we had other intangible assets of$8.8 million , compared to$13.4 million atDecember 31, 2020 , which decreased as a result of amortization of the other intangible assets of$4.5 million during the year endedDecember 31, 2021 . We amortize other intangible assets on an accelerated or straight-line basis over an estimated ten year life. 56 -------------------------------------------------------------------------------- Table of Contents DEPOSITS Total deposits were$26.6 billion atDecember 31, 2021 , an increase of$2.0 billion , or 8%, compared to year-end 2020. The increase is mainly attributable to growth in demand, money market and savings deposits, offset by a decline in time deposits. The increase in non-maturity deposit account categories is attributable to the impact of economic assistance payments, in addition to increased customer savings rates as customers continue to increase their own liquidity in this uncertain economic environment. The decrease in time deposits is mainly due to the Bank allowing these higher-cost deposits to run off.
The following table presents the deposit balances by major category as of
December 31, 2021 December 31, 2020
(dollars in thousands) Amount % Amount %
Non-interest bearing demand $ 11,023,724 41 % $ 9,632,773 39 %
Interest bearing demand 3,774,937 14 % 3,051,487 12 %
Money market 7,611,718 29 % 7,173,920 29 %
Savings 2,375,723 9 % 1,912,752 8 %
Time, greater than $250,000 480,432 2 % 899,563 4 %
Time, $250,000 or less 1,328,151 5 % 1,951,706 8 %
Total deposits $ 26,594,685 100 % $ 24,622,201 100 %
The following table presents the scheduled maturities of uninsured deposits
greater than
Amount
Three months or less $ 140,133 Over three months through six months 104,760 Over six months through twelve months 96,398 Over twelve months
139,141
Uninsured deposits, greater than
The Company's total core deposits, which are deposits less time deposits greater than$250,000 and all brokered deposits, were$26.0 billion atDecember 31, 2021 , compared to$23.3 billion atDecember 31, 2020 . The Company's total brokered deposits were$149.9 million or 1% of total deposits atDecember 31, 2021 , compared to$424.1 million or 2% atDecember 31, 2020 .
BORROWINGS
AtDecember 31, 2021 , the Bank had outstanding$492.2 million of securities sold under agreements to repurchase and no outstanding federal funds purchased balances. The Bank had outstanding borrowings of$6.3 million atDecember 31, 2021 , consisting of advances from the FHLB, which decreased$765.2 million sinceDecember 31, 2020 as a result of maturity payoffs during the period. The Company allowed these borrowings to mature, utilizing our excess liquidity.
JUNIOR SUBORDINATED DEBENTURES
We had junior subordinated debentures with carrying values of$381.1 million and$343.5 million atDecember 31, 2021 and 2020, respectively. The increase is mainly due to the$37.9 million change in the fair value for the junior subordinated debentures elected to be carried at fair value, which is due mostly to the implied forward curve shifting higher and a decrease in the discount rate, driven by the decrease in the credit spread. As ofDecember 31, 2021 , substantially all of the junior subordinated debentures had interest rates that are adjustable on a quarterly basis based on a spread over three month LIBOR. These instruments mature afterJune 2023 and we anticipate they will be covered under pending federal legislation that will allow us to replace the LIBOR index with SOFR under a safe-harbor provision. 57 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CASH FLOW The principal objective of our liquidity management program is to maintain the Bank's ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank's liquidity strategy includes maintaining a sufficient on-balance sheet liquidity position to provide flexibility, to grow deposit balances and fund growth in lending and investment portfolios, as well as to deleverage non-deposit liabilities as economic conditions permit. As a result, the Company believes that it has sufficient cash and access to borrowings to effectively manage through the COVID-19 pandemic as well as meet its working capital and other needs. The Company will continue to prudently evaluate and maintain liquidity sources, including the ability to fund future loan growth and manage our borrowing sources. We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. Individual state laws require banks to collateralize public deposits, typically as a percentage of their public deposit balance in excess ofFDIC insurance. Public deposits represent 5% and 7% of total deposits atDecember 31, 2021 and 2020 respectively. The amount of collateral required varies by state and may also vary by institution within each state, depending on the individual state's risk assessment of depository institutions. Changes in the pledging requirements for uninsured public deposits may require pledging additional collateral to secure these deposits, drawing on other sources of funds to finance the purchase of assets that would be available to be pledged to satisfy a pledging requirement, or could lead to the withdrawal of certain public deposits from the Bank. AtDecember 31, 2021 , the Bank has$1.4 billion in time deposits scheduled to mature within the next 12 months, which we anticipate the majority of personal time deposits will renew or transfer to other deposit products of the Bank at prevailing rates, although no assurance can be given in this regard. In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or issue brokered certificates of deposit. The Bank had available lines of credit with the FHLB totaling$8.5 billion atDecember 31, 2021 , subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The Bank had available lines of credit with theFederal Reserve totaling$999.5 million , subject to certain collateral requirements, namely the amount of certain pledged loans. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling$460.0 million atDecember 31, 2021 . Availability of these lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage. The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company's revenues are obtained from dividends declared and paid by the Bank. There were$398.0 million of dividends paid by the Bank to the Company in 2021, including the special dividend of$200.0 million paid inJuly 2021 , to fund the repurchase plan announced by the Company. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Company. The Company is required to seekFDIC andOregon Division of Financial Regulation approval for quarterly dividends fromUmpqua Bank to the Company. The timing of the quarterly dividend is after each quarter's earnings release to provide the Board and regulators with the opportunity to review final quarterly financial results and financial projections, prior to the announcement of any dividend. Due to the Company's announcement of its pending merger withColumbia , Umpqua is restricted from paying quarterly cash dividends in excess of the current level and from repurchasing shares of Company common stock. As disclosed in the Consolidated Statements of Cash Flows, net cash provided by operating activities was$662.7 million during 2021, with the difference between cash provided by operating activities and net income consisting primarily of proceeds from the sale of loans held for sale of$5.0 billion , the decrease in other assets of$153.1 million and deferred income tax expense of$40.8 million , offset by originations of loans held for sale of$4.7 billion , the gain on sale of loans of$145.7 million , as well as the (recapture) provision for credit losses of$42.7 million . This compares to net cash provided by operating activities of$93.8 million during 2020, with the difference between cash provided by operating activities and net loss consisting primarily of proceeds from the sale of loans held for sale of$6.8 billion , non-cash goodwill impairment of$1.8 billion , as well as the provision for credit losses of$204.9 million , offset by originations of loans held for sale of$6.7 billion , the gain on sale of loans of$289.2 million , and the increase in other assets of$209.8 million . 58
-------------------------------------------------------------------------------- Table of Contents Net cash of$1.5 billion used in investing activities during 2021 consisted principally of$1.8 billion in purchases of investment securities available for sale and$735.4 million of the net change in loans and leases, partially offset by proceeds from investment securities available for sale of$761.2 million and proceeds from the sale of loans and leases of$246.7 million . This compares to net cash of$960.1 million used in investing activities during 2020, which consisted principally of purchases of investment securities available for sale of$867.7 million , the net changes in loans and leases of$862.1 million , and the net cash paid in divestiture of stores of$171.4 million , partially offset by proceeds from investment securities available for sale of$828.8 million and proceeds from sale of loans and leases of$111.9 million . Net cash of$1.1 billion provided by financing activities during 2021 primarily consisted of the$2.0 billion increase in net deposits and the net increase in securities sold under agreements to repurchase of$116.9 million , partially offset by repayment of borrowings of$765.0 million , dividends paid on common stock of$183.7 million , and the repurchase and retirement of common stock of$80.7 million . This compares to net cash of$2.1 billion provided by financing activities during 2020 primarily consisted of$2.3 billion increase in net deposits and proceeds from borrowings of$600.0 million , partially offset by repayment of borrowings of$735.0 million and dividends paid on common stock of$185.0 million . Although we expect the Bank's and the Company's liquidity positions to remain satisfactory during 2022, it is possible that our deposit balances may not be maintained at previous levels due to pricing pressure, store consolidations, or customers' spending habits due to the COVID-19 pandemic. In addition, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased interest expense on deposits.
CONCENTRATIONS OF CREDIT RISK
Information regarding Concentrations of Credit Risk is included in Note 2, 4, and 18 of the Notes to Consolidated Financial Statements in Item 8 below.
CAPITAL RESOURCES
Shareholders' equity atDecember 31, 2021 and 2020 was$2.7 billion . The fluctuation in shareholders' equity during the year endedDecember 31, 2021 was principally due to net income of$420.3 million for the year endedDecember 31, 2021 , offset by cash dividends paid of$184.9 million , the other comprehensive loss, net of tax of$121.0 million , and stock repurchased during the period of$80.7 million . TheFederal Reserve Board has in place guidelines for risk-based capital requirements applicable toU.S. banks and bank/financial holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulation, associated with various categories of assets, both on and off-balance sheet. Refer to the discussion of the capital adequacy requirements in Supervision and Regulation in Item 1 of this 10-K. Under the Basel III guidelines, capital strength is measured in three tiers, which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. The guidelines require an 8% total risk-based capital ratio, of which 6% must be Tier 1 capital and 4.5% must be CET1. Our CET1 capital primarily includes shareholders' equity less certain deductions for goodwill and other intangibles, net of taxes, net unrealized gains (losses) on AFS securities, net of tax, net unrealized gains (losses) related to fair value of liabilities, net of tax, and certain deferred tax assets that arise from tax loss and credit carry-forwards, and totaled$2.8 billion atDecember 31, 2021 . Tier 1 capital is primarily comprised of common equity Tier 1 capital, less certain additional deductions applied during the phase-in period, totaled$2.8 billion atDecember 31, 2021 . Tier 2 capital components include all, or a portion of, the allowance for credit losses in excess of Tier 1 statutory limits and combined trust preferred security debt issuances. The total of Tier 1 capital plus Tier 2 capital components is referred to asTotal Risk-Based Capital , and was$3.4 billion atDecember 31, 2021 . The percentage ratios, as calculated under the guidelines, were 11.58%, 11.58% and 14.26% for CET1, Tier 1 andTotal Risk-Based Capital , respectively, atDecember 31, 2021 . The CET1, Tier 1 andTotal Risk-Based Capital ratios atDecember 31, 2020 were 12.31%, 12.31% and 15.63%, respectively. 59
-------------------------------------------------------------------------------- Table of Contents A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as period-end shareholders' equity, less accumulated other comprehensive income, goodwill and deposit-based intangibles, divided by average assets as adjusted for goodwill and other intangible assets. Although a minimum leverage ratio of 4% is required for the highest-rated financial holding companies that are not undertaking significant expansion programs, theFederal Reserve Board may require a financial holding company to maintain a leverage ratio greater than 4% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of theFederal Reserve Board . TheFederal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and financial holding companies. Our consolidated leverage ratios atDecember 31, 2021 and 2020 were 9.01% and 8.98%, respectively. As ofDecember 31, 2021 , the most recent notification from theFDIC categorized the Bank as "well-capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's regulatory capital category. Along with enactment of the CARES Act, the federal bank regulatory authorities issued an interim final rule to provide banking organizations that are required to implement CECL before the end of 2020 the option to delay the estimated impact on regulatory capital by up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. The Company has elected this capital relief and delayed the estimated regulatory capital impact of adopting CECL, relative to the incurred loss methodology's effect on regulatory capital.
During the year ended
The Company's dividend policy considers, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth to determine the amount of dividends declared, if any, on a quarterly basis. There is no assurance that future cash dividends on common shares will be declared or increased. We cannot predict the extent of the economic decline due to COVID-19 or other factors that could result in inadequate earnings, regulatory restrictions and limitations, changes to our capital requirements, or a decision to increase capital by retention of earnings, that may result in the inability to pay dividends at previous levels, or at all. Umpqua is currently restricted from paying quarterly cash dividends in excess of the current level based on the Merger Agreement. During 2021, Umpqua's Board approved dividends of$0.21 for all quarters. The timing of the quarterly dividend is after each quarter's earnings release to provide the Board with the opportunity to review final quarterly financial results and financial projections, prior to the announcement of any dividend. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth.
The payment of future cash dividends is at the discretion of our Board and subject to a number of factors, including results of operations, general business conditions, growth, financial condition and other factors deemed relevant by the Board. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in the Supervision and Regulation section in Item 1 above.
The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the years endedDecember 31, 2021 , 2020, and 2019: 2021 2020 2019
Dividend declared per common share
44 % (9 %) 52 %
In July 2021 , the Company announced that its Board approved a new share
repurchase program, which authorizes the Company to repurchase up to $400
million of common stock over the next twelve months from time to time in open
market transactions, accelerated share repurchases, or in privately negotiated
transactions as permitted under applicable rules and regulations. The program
replaces and supersedes the previously approved share repurchase program, which
was scheduled to expire on July 31, 2021 . As of December 31, 2021 , a total of
$321.8 million remained available to repurchase shares under the new share
repurchase program. The Company repurchased 4.0 million shares during 2021 under
the new plan.
60-------------------------------------------------------------------------------- Table of Contents The repurchase program is currently halted, based on the announced merger withColumbia and in accordance with the Merger Agreement. The timing and amount of future repurchases would depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, our capital plan, and bank or bank holding company regulatory approvals. In addition, our stock plans provide that option and award holders may pay for the exercise price and tax withholdings in part or entirely by tendering previously held shares. 61
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