What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-06 · 181 added, 131 removed, 352 unchanged (47% of the section changed)

6 unchanged sentences

Reference should be made to the Company’s consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company’s Annual Report on Form 10‑K for the year ended December 31, 2020 for an understanding of the following discussion and analysis.

Operating results for the three month period ending March 31, 2021 are not necessarily indicative of the results of the full year ending December 31, 2021 or any future period.

Operating results for the three and six month periods ending June 30, 2021 are not necessarily indicative of the results of the full year ending December 31, 2021 or any future period.

Forward-looking Statements

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(20) the adverse impact on the U.S.

economy, including the markets in which we operate, of the novel coronavirus, which causes COVID-19 global pandemic;

economy, including the markets in which we operate, of the COVID-19 global pandemic;

and (21) the Company’s success at managing the risks involved in the foregoing items.

45 unchanged sentences

The Company’s results in 2021 and 2020 have been impacted by the COVID-19 pandemic and the CECL accounting methodology, including the estimated impact of the COVID-19 pandemic on expected credit losses.

The following information should be considered in connection with the Company’s results for the three months ended March 31, 2021:

net income of $39.8 million, up $5.7 million from the fourth quarter of 2020 and up $29.5 million from the first quarter of 2020;

diluted earnings per share of $0.91, up $0.13 from the fourth quarter of 2020 and up $0.68 from the first quarter of 2020;

pre-provision net revenue (“PPNR”) (1) for the first quarter of 2021 was $47.5 million compared to $48.2 million in the previous quarter and $44.9 million in the first quarter of 2020;

The following information should be considered in connection with the Company’s results for the three and six months ended June 30, 2021:

net income for the three months ended June 30, 2021 was $40.3 million, up $15.6 million from the second quarter of 2020 and up $0.5 million from the first quarter of 2021;

diluted earnings per share of $0.92 for the three months ended June 30, 2021, up $0.36 from the second quarter of 2020 and up $0.01 from the first quarter of 2021;

period end loans were $7.5 billion, up 1%, annualized, from December 31, 2020 (2.6% excluding Paycheck Protection Program (“PPP”) loans);

net charge-offs to average loans of 0.07%, annualized (0.07% excluding PPP loans) and allowance for loan losses to total loans at 1.31% (1.38% excluding PPP loans and related allowance);

book value per share of $27.43 at March 31, 2021;

tangible book value per share grew 1% for the quarter and 9% from March 31, 2020 to $20.71 (2) .

PPNR is a Non-GAAP financial measure that management believes is useful in evaluating the underlying operating results of the Company excluding the volatility in loan loss provision due to CECL adoption and the impact of the COVID-19 pandemic, net securities gains (losses) and non-recurring income and/or expense.

Three Months Ended

(In thousands)

Net income before income tax expense

FTE adjustment

Provision for loan losses

Net securities (gains) losses

Nonrecurring expense

Provision for unfunded loan commitments reserve

book value per share of $28.19 at June 30, 2021;

tangible book value per share grew 4% for the quarter and 10% from June 30, 2020 to $21.50 (1) .

(1) Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by common shares outstanding.

5 unchanged sentences

The expected impact of the pandemic on the Company’s business, financial condition, results of operations, and its customers has not fully manifested.

The fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to the Company.

The fiscal stimulus and relief programs appear to have delayed or mitigated any materially adverse financial impact to the Company.

Once these stimulus programs have been exhausted, the Company’s credit metrics may worsen and loan losses could ultimately materialize.

7 unchanged sentences

The Company believes our historically strong underwriting practices, diverse and granular portfolios, and geographic footprint will help to mitigate any adverse impact to the Company.

The Company has been a participant in the Small Business Administration’s Paycheck Protection Program (“PPP”), a loan guarantee program created under the CARES Act targeted to provide small businesses with support to cover payroll and certain other expenses.

The Company has been a participant in the Small Business Administration’s Paycheck Protection Program, a loan guarantee program created under the CARES Act targeted to provide small businesses with support to cover payroll and certain other expenses.

Loans made under the PPP are fully guaranteed by the Small Business Administration (“SBA”), whose guarantee is backed by the full faith and credit of the United States.

3 unchanged sentences

In addition, PPP loans are risk-weighted at zero percent under the generally-applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes.

The Company processed approximately 2,500 loans totaling $250 million in relief as of March 31, 2021 as compared to 3,000 loans totaling over $548 million in 2020.

The Company processed approximately 3,100 loans totaling $287 million in relief during the six months ended June 30, 2021 as compared to 3,000 loans totaling over $548 million in 2020.

The Company is supporting PPP’s application and forgiveness processes with online resources, educational webinars and a CPA partnership.

As of April 23, 2021, the Company has received payment from the SBA on 1,773 of our loans totaling $281.6 million.

As of June 30, 2021, the Company has received payment from the SBA on 2,348 of our loans totaling $365.1 million.

On December 27, 2020, the President signed into law the Consolidated Appropriation Act (“CAA”).

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In mid-January the Company opened its lending portal and began processing PPP loan applications from current and new customers.

As of March 31, 2021, the Company has originated $250 million in PPP loans during this round with an average loan size of $99,000 and is continuing to receive applications.

As of June 30, 2021, the Company has originated $287 million in PPP loans during this round with an average loan size of $93,000.

The Company established a committee to ensure employee and customer safety and nimble response across geographic and functional areas.

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The Committee monitored state and local responses and adapted physical locations across its footprint in its re-opening plans and will continue to monitor and adapt its response as the impact of COVID-19 continues to develop.

The Company has taken significant actions to address the needs of employees and customers

The Company has taken further steps to address the safety of its employees and its customers:

Health and safety protocols protect branch and onsite workers.

Full-time remote and hybrid work arrangements continue for the majority of non-branch staff.

Work-from-home experiences have been enhanced through investment in digital tools and technology.

Offered additional benefits for health, childcare/eldercare needs and well-being including paid time off flexibility and childcare assistance program.

Cross-training and redeployment programs directing staff resources to areas of greatest need.

Branch lobbies fully accessible starting March 8, 2021.

31% increase in consumer digital adoption since March 2020, including a 60% increase in online account opening and a 95% increase in mobile dollars deposited.

30% increase in self service transactions from March 2020, previously conducted at teller lines or through a call center.

New mobile, online, business banking and mortgage banking platforms launched in 2020.

The Company has taken several steps to address the safety of its employees and its customers including health and safety protocols to protect branch and onsite workers, full-time remote and hybrid work arrangement, additional benefits for health, childcare/eldercare needs and well-being and new mobile, online, business banking and mortgage platforms were launched in 2020.

Results of Operations

The Company reported net income of $39.8 million for the three months ended March 31, 2021, up $5.7 million from the fourth quarter of 2020 and up $29.5 million from the first quarter of 2020.

Diluted earnings per share for the three months ended March 31, 2021 was $0.91, as compared with $0.78 for the prior quarter, and $0.23 for the first quarter of 2020.

Net interest income was $79.1 million for the three months ended March 31, 2021, down $1.1 million, or 1.3%, from the fourth quarter of 2020 and up $1.9 million or 2.4% from the first quarter of 2020.

The fully taxable equivalent (“FTE”) net interest margin (annualized) for the first quarter of 2021 was 3.17%, down 3 basis points (“bps”) from the fourth quarter of 2020 and down 35 bps from the first quarter of 2020.

Average interest earning assets were up $155.5 million, or 1.6%, from the prior quarter and grew $1.3 billion, or 14.4%, from the first quarter of 2020.

The provision for loan losses totaled ($2.8) million for the three months ended March 31, 2021, as compared with ($0.6) million in the fourth quarter of 2020 and $29.6 million in the first quarter of 2020.

Return on average assets (annualized) was 1.46% for the three months ended March 31, 2021 as compared to 1.24% for the prior quarter and 0.43% for the same period last year.

Return on average equity (annualized) was 13.57% for the three months ended March 31, 2021 as compared to 11.59% for the prior quarter and 3.69% for the three months ended March 31, 2020.

Return on average tangible common equity (annualized) was 18.24% for the three months ended March 31, 2021 as compared to 15.71% for the prior quarter and 5.24% for the three months ended March 31, 2020.

Net income for the three months ended June 30, 2021 was $40.3 million, up $0.5 million from $39.8 million for the first quarter of 2021 and up $15.6 million from $24.7 million for the second quarter of 2020.

Diluted earnings per share for the three months ended June 30, 2021 was $0.92, as compared with $0.91 for the prior quarter, and $0.56 for the second quarter of 2020.

Return on average assets (annualized) was 1.39% for the three months ended June 30, 2021 as compared to 1.46% for the prior quarter and 0.94% for the same period last year.

Return on average equity (annualized) was 13.42% for the three months ended June 30, 2021 as compared to 13.57% for the prior quarter and 8.76% for the three months ended June 30, 2020.

Return on average tangible common equity (annualized) was 17.93% for the three months ended June 30, 2021 as compared to 18.24% for the prior quarter and 12.14% for the three months ended June 30, 2020.

Net income for the six months ended June 30, 2021 was $80.1 million, up $45.1 from $35.1 million for the same period last year.

Diluted earnings per share for the six months ended June 30, 2021 was $1.83 as compared with $0.80 for the same period in 2020.

Return on average assets (annualized) was 1.42% for the six months ended June 30, 2021 as compared to 0.69% for the same period last year.

Return on average equity (annualized) was 13.49% for the six months ended June 30, 2021 as compared to 6.23% for the six months ended June 30, 2020.

Return on average tangible common equity (annualized) was 18.08% for the six months ended June 30, 2021 as compared to 8.69% for the six months ended June 30, 2020.

Return on average tangible common equity is a non-GAAP measure and excludes amortization of intangible assets (net of tax) from net income and average tangible equity calculated as follows:

Three Months Ended

Six Months Ended

(In thousands)

8 unchanged sentences

Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.

Net interest income was $79.1 million for the first quarter of 2021, down $1.1 million, or 1.3%, from the fourth quarter of 2020.

The FTE net interest margin was 3.17% for the three months ended March 31, 2021, a decrease of 3 bps from the previous quarter.

Interest income decreased $2.1 million, or 2.5%, as the yield on average interest-earning assets decreased 8 bps from the prior quarter to 3.38%, while average interest-earning assets of $10.1 billion increased $155.5 million from the prior quarter.

Interest expense was down $1.1 million, or 17.0%, as the cost of interest-bearing liabilities decreased 6 bps to 0.34% for the quarter ended March 31, 2021, driven by interest-bearing deposit costs decreasing 5 bps along with decreased short-term and long-term borrowings cost.

Net interest income was $79.1 million for the first quarter of 2021, up $1.9 million, or 2.4%, from the first quarter of 2020.

The FTE net interest margin of 3.17% was down 35 bps from the first quarter of 2020.

Interest income decreased $5.1 million, or 5.7%, as the yield on average interest-earning assets decreased 69 bps from the same period in 2020, and average interest-earning assets increased $1.3 billion, or 14.4%, primarily due to higher levels of short-term interest bearing assets as deposit inflows from federal stimulus programs earning asset growth and an increase in average loans due to PPP loan originations.

Interest expense decreased $7.0 million, or 57.0%, as the cost of interest-bearing liabilities decreased 48 bps, driven by interest-bearing deposit costs decreasing 48 bps along with a 110 bps decrease in short-term borrowings cost.

Net interest income was $79.2 million for the second quarter of 2021, up $0.1 million, or 0.2%, from the previous quarter.

The fully taxable equivalent (“FTE”) net interest margin was 3.00% for the three months ended June 30, 2021, a decrease of 17 bps from the previous quarter.

Interest income decreased $0.3 million, or 0.3%, as the yield on average interest-earning assets decreased 20 bps from the prior quarter to 3.18%, while average interest-earning assets of $10.6 billion increased $490.0 million from the prior quarter, primarily due to an increase in short-term interest-bearing accounts due to higher levels of short-term interest bearing accounts (“excess liquidity”) and an increase in average investment securities.

Interest expense was down $0.4 million, or 7.4%, as the cost of interest-bearing liabilities decreased 5 bps to 0.29% for the quarter ended June 30, 2021, driven by interest-bearing deposit costs decreasing 3 bps.

Net interest income was $79.2 million for the second quarter of 2021, down $1.3 million, or 1.6%, from the second quarter of 2020.

The FTE net interest margin was 3.00% for the three months ended June 30, 2021, a decrease of 38 bps from the second quarter of 2020.

Interest income decreased $3.4 million, or 3.9%, as the yield on average interest-earning assets decreased 50 bps from the same period in 2020 to 3.18%, while average interest-earning assets of $10.6 billion increased $1.0 billion from the second quarter of 2020, primarily due to excess liquidity and an increase in average investment securities.

Interest expense was down $2.1 million, or 30.5%, as the cost of interest-bearing liabilities decreased 16 bps to 0.29% for the quarter ended June 30, 2021, driven by interest-bearing deposit costs decreasing 16 bps along with a 79 bps decrease in short-term borrowings cost.

Net interest income for the first six months of 2021 was $158.2 million, up $0.6 million, or 0.4%, from the same period in 2020.

FTE net interest margin of 3.08% for the six months ended June 30, 2021, was down from 3.45% for the same period in 2020.

Interest income decreased $8.5 million, or 4.8%, as the yield on average interest-earning assets decreased 59 bps from the same period in 2020 to 3.28%, while average interest-earning assets of $10.4 billion increased $1.2 billion primarily due to excess liquidity and an increase in average investment securities.

Interest expense was down $9.1 million, or 47.3%, for the six months ended June 30, 2021 as compared to the same period in 2020 as the cost of interest-bearing liabilities decreased 32 bps to 0.31%, driven by interest-bearing deposit costs decreasing 31 bps along with a 96 bps decrease in short-term borrowings cost.

The Federal Reserve lowered its target fed funds rate by 150 basis points in the first quarter of 2020.

Average Balances and Net Interest Income

1 unchanged sentence

Three Months Ended

March 31, 2021

December 31, 2020

March 31, 2020

June 30, 2021

June 30, 2020

(Dollars in thousands)

28 unchanged sentences

Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

Six Months Ended

June 30, 2021

June 30, 2020

(Dollars in thousands)

Short-term interest-bearing accounts

Securities available for sale (1) (3)

Securities held to maturity (1) (3)

Federal Reserve Bank and FHLB stock

Loans (2) (3)

Total interest-earning assets

Liabilities and stockholders’ equity:

Money market deposit accounts

NOW deposit accounts

Savings deposits

Time deposits

Total interest-bearing deposits

Short-term borrowings

Long-term debt

Subordinated debt

Junior subordinated debt

Total interest-bearing liabilities

Demand deposits

Other liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

Net interest income (FTE)

Interest rate spread

Net interest margin (FTE)

Taxable equivalent adjustment

Net interest income

Securities are shown at average amortized cost.

For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.

Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.

The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume) and the net change in net interest income.

The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.

Three Months Ended March 31,

Three Months Ended June 30,

Increase (Decrease)

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Change in FTE net interest income

Six Months Ended June 30,

Increase (Decrease)

2021 over 2020

(In thousands)

Short-term interest-bearing accounts

Securities available for sale

Securities held to maturity

Federal Reserve Bank and FHLB stock

Total FTE interest income

Money market deposit accounts

NOW deposit accounts

Savings deposits

Time deposits

Short-term borrowings

Long-term debt

Subordinated debt

Junior subordinated debt

Total FTE interest expense

Change in net FTE interest income

Noninterest Income

1 unchanged sentence

The following table sets forth information by category of noninterest income for the periods indicated:

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

2 unchanged sentences

Retirement plan administration fees

Wealth management

Wealth management fees

Insurance services

Bank owned life insurance

1 unchanged sentence

Total noninterest income

Noninterest income for the three months ended March 31, 2021 was $37.0 million, down $1.1 million, or 2.8%, from the prior quarter and up $1.6 million, or 4.6%, from the first quarter of 2020.

Excluding net securities gains (losses), noninterest income for the three months ended March 31, 2021 would have been $36.6 million, down $1.4 million, or 3.6% from the prior quarter and up $0.3 million, or 0.9% from the first quarter of 2020.

Excluding net securities gains (losses), the decrease from the prior quarter was primarily driven by lower service charges on deposit accounts due to lower overdraft charges as customer average account balances have increased due to inflows of federal stimulus payments during the COVID-19 pandemic and lower swap fees, partly offset by an increase in retirement plan administration fees driven by market performance and organic growth.

Excluding net securities gains (losses), the increase from the first quarter of 2020 was primarily due to an increase in retirement plan administration fees due to the April 1, 2020 acquisition of Alliance Benefit Group of Illinois, Inc.

(“ABG”), and an increase in ATM and debit card fees due to increased volume and higher per transaction rates, partly offset by lower swap fees and lower mortgage banking income.

Noninterest income for the three months ended June 30, 2021 was $39.3 million, up $2.3 million, or 6.2%, from the prior quarter and up $4.3 million, or 12.3%, from the second quarter of 2020.

Excluding net securities gains (losses), noninterest income for the three months ended June 30, 2021 was $39.1 million, up $2.5 million, or 7.0%, from the prior quarter and up $4.3 million, or 12.3%, from the second quarter of 2020.

The increase from the prior quarter was primarily driven by higher ATM and debit card fees due to increased volume and higher per transaction rates and higher wealth management fees driven by market performance and organic growth.

The increase from the second quarter of 2020 was primarily due to higher ATM and debit card fees due to increased volume and higher per transaction rates, higher wealth management fees driven by market performance and organic growth, an increase in retirement plan administration fees driven by driven by market performance and organic growth, and higher service charges on deposit accounts due to lower overdraft charges during the COVID-19 pandemic, partly offset by lower swap fees and lower mortgage banking income.

Noninterest income for the six months ended June 30, 2021 was $76.4 million, up $5.9 million, or 8.4%, from the same period in 2020.

Excluding net securities gains (losses), noninterest income for the six months ended June 30, 2021 would have been $75.7 million, up $4.6 million, or 6.5%, from the same period in 2020.

The increase from the prior year was primarily due to higher ATM and debit card fess due to increased volume and higher per transaction rates, higher wealth management fees driven by market performance and organic growth and an increase in retirement plan administration fees driven by the April 1, 2020 acquisition of Alliance Benefit Group of Illinois, Inc.

(“ABG”), partly offset by lower swap fees and lower mortgage banking income.

Noninterest Expense

1 unchanged sentence

The following table sets forth the major components of noninterest expense for the periods indicated:

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

3 unchanged sentences

Office supplies and postage

FDIC expenses

Amortization of intangible assets

1 unchanged sentence

Total noninterest expense

Noninterest expense for the three months ended March 31, 2021 was $67.9 million, down $7.3 million, or 9.7%, from the prior quarter and down $3.0 million, or 4.2%, from the first quarter of 2020.

The decrease from the prior quarter was primarily due to $4.1 million in branch optimization costs incurred during the fourth quarter of 2020, a $1.4 million decrease in the provision for the reserve for unfunded commitments, lower professional fees and outside services due to timing of initiatives, partly offset by an increase in salaries and employee benefits expense driven by seasonally higher payroll taxes and stock-based compensation expense and an increase in data processing and communications driven by charges related to the addition of a digitized PPP platform.

The decrease from the first quarter of 2020 was driven by decreases in other noninterest expense due to a $2.5 million decrease in the reserve for unfunded commitments, lower travel training expenses during the COVID-19 pandemic and lower pension costs, partly offset by an increase in salary and employee benefits expense due to the ABG acquisition and an increase in data processing and communications driven by charges related to the addition of a digitized PPP platform.

Income tax expense for the three months ended March 31, 2021 was $11.2 million, up $1.7 million, from the prior quarter and up $9.4 million from the first quarter of 2020.

The effective tax rate was 21.9% for the first quarter of 2021 compared to 21.6% for the fourth quarter of 2020 and 14.2% for the first quarter of 2020.

The increase in income tax expense from the prior quarter and from the first quarter of 2020 was due to a higher level of taxable income.

Noninterest expense for the three months ended June 30, 2021 was $71.4 million, up $3.5 million, or 5.2%, from the prior quarter and up $6.1 million, or 9.3%, from the second quarter of 2020.

The increase from the prior quarter was due to higher salaries and employee benefits due to one additional day of payroll in the second quarter, annual merit pay increases and higher medical expenses, partially offset by lower stock-based compensation.

Other expenses increased due to $1.9 million in non-recurring costs, including an estimated legal settlement charge, which was partly offset by lower occupancy expense due to lower seasonal maintenance and utility expenses.

The increase in noninterest expense from the second quarter of 2020 was due to higher salaries and employee benefits due to annual merit pay increases and higher medical expenses, higher equipment expense due to higher technology costs associated with several digital upgrades, and an increase in professional fees and outside services as a result of projects paused during the COVID-19 pandemic.

Other expenses increased due to $1.9 million in non-recurring costs, including an estimated legal settlement charge.

Noninterest expense for the six months ended June 30, 2021 was $139.3 million, up $3.1 million, or 2.3%, from the same period in 2020.

The increase from the prior year was driven by higher salaries and employee benefits due to annual merit pay increases, the ABG acquisition and higher medical expenses, increase in data processing communication expense driven by continued investments in digital platform solutions including a PPP specific platform, higher equipment expense due to higher technology costs associated with several digital upgrades, partly offset by $2.7 million in lower other expenses driven by the change in the reserve for unfunded commitments and lower travel and training expenses.

Income tax expense for the three months ended June 30, 2021 was $12.0 million, up $0.8 million from the prior quarter and up $5.4 million from the second quarter of 2020.

The effective tax rate was 22.9% for the second quarter of 2021, 21.9% in the prior quarter and 21.0% for the second quarter of 2020.

The higher effective tax rate compared to the prior quarter and the second quarter of 2021 was due to higher level of taxable income relative to total income.

Income tax expense for the six months ended June 30, 2021 was $23.2 million, up $14.9 million from the same period of 2020.

The effective tax rate of 22.4% for the first six months of 2021 was up from 19.1% for the same period in the prior year.

The increase in income tax expense from the prior year was due to a higher level of taxable income as a result of the COVID-19 pandemic and decreased provision for loan losses.

ANALYSIS OF FINANCIAL CONDITION

Total securities increased $16.3 million, or 0.8%, from December 31, 2020 to March 31, 2021.

The securities portfolio represented 17.4% of total assets as of March 31, 2021 as compared to 18.3% of total assets as of December 31, 2020.

The following table details the composition of securities available for sale, securities held to maturity and regulatory investments for the periods indicated:

March 31, 2021

Total securities increased $193.9 million, or 9.7%, from December 31, 2020 to June 30, 2021.

The securities portfolio represented 18.9% of total assets as of June 30, 2021 as compared to 18.3% of total assets as of December 31, 2020.

The following table details the composition of securities available for sale, securities held to maturity and equity securities for the periods indicated:

June 30, 2021

December 31, 2020

2 unchanged sentences

With maturities greater than 15 years

Collateral mortgage obligations

Collateralized mortgage obligations

Municipal securities

7 unchanged sentences

(In thousands)

March 31, 2021

June 30, 2021

December 31, 2020

6 unchanged sentences

Loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL.

Total loans increased $134.6 million, or 7.3% annualized from December 31, 2020 to March 31, 2021.

Total PPP loans as of March 31, 2021 were $536.5 million (net of unamortized fees).

The following PPP loan activity occurred during the first quarter of 2021:

Total loans increased by $18.7 million, or 1% annualized from December 31, 2020 to June 30, 2021.

Total PPP loans as of June 30, 2021 were $359.7 million (net of unamortized fees).

The following PPP loan activity occurred during the six months ended June 30, 2021:

$286.6 million in PPP loan originations, $365.1 million of loans forgiven and $10.9 million of interest and fees recognized into interest income.

Excluding PPP loans, period end loans increased $89.8 million from December 31, 2020.

Commercial and industrial loans decreased $3.6 million to $1.3 billion;

Commercial and industrial loans increased $27.7 million to $1.5 billion;

commercial real estate loans increased $69.3 million to $2.3 billion;

and total consumer loans decreased $7.2 million to $3.4 billion.

Total loans represented approximately 66.2% of assets as of March 31, 2021, as compared to 68.6% as of December 31, 2020.

Allowance for Credit Losses, Provision for Loan Losses and Nonperforming Assets

Total loans represent approximately 64.9% of assets as of June 30, 2021, as compared to 68.6% as of December 31, 2020.

Allowance for Loan Losses, Provision for Loan Losses and Nonperforming Assets

Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.

4 unchanged sentences

Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.

The allowance for credit losses totaled $105.0 million at March 31, 2021, compared to $110.0 million at December 31, 2020 and $100.0 million at March 31, 2020.

The allowance for credit losses as a percentage of loans was 1.38% (1.48% excluding PPP loans) at March 31, 2021, compared to 1.47% (1.56% excluding PPP loans) at December 31, 2020 and 1.38% at March 31, 2020.

The decrease in the allowance for credit losses from December 31, 2020 to March 31, 2021 was primarily due to the improved economic conditions in the CECL forecast.

The increase in the allowance for credit losses from March 31, 2020 was primarily due to specific allowance for credit losses on individually analyzed credits.

The provision for loan losses was ($2.8) million for three months ended March 31, 2021, compared to ($0.6) million in the prior quarter and $29.6 million for the same period in the prior year.

The allowance for credit losses totaled $98.5 million at June 30, 2021, compared to $105.0 million at March 31, 2021 and $113.5 million at June 30, 2020.

The allowance for credit losses as a percentage of loans was 1.31% (1.38% excluding PPP loans) at June 30, 2021, compared to 1.38% (1.48% excluding PPP loans) at March 31, 2021 and 1.49% (1.59% excluding PPP loans) at June 30, 2020.

The decrease in the allowance for credit losses from March 31, 2021 and June 30, 2020 to June 30, 2021 was primarily due to the improved economic conditions in the CECL forecast.

The provision for loan losses was ($5.2) million for three months ended June 30, 2021, compared to ($2.8) million in the prior quarter and $18.8 million for the same period in the prior year.

Provision expense decreased from the prior quarter due to improved economic conditions in the CECL forecast.

Provision expense decreased from the same period in the prior year due primarily to the improved economic condition forecast in the current quarter as compared to significant deterioration of the economic forecast that took place at the end of first quarter in 2020 due to COVID-19.

Net charge-offs totaled $2.2 million during the three months ended March 31, 2021, compared to net charge-offs of $3.9 million during the fourth quarter of 2020 and $5.6 million in the first quarter of 2020.

As of March 31, 2021, the unfunded commitment reserve totaled $5.9 million, compared to $6.4 million as of December 31, 2020 and $5.7 million as of March 31, 2020.

The decrease in the unfunded commitment reserve in 2021 compared to 2020 is primarily related to the improved economic conditions.

Net charge-offs totaled $1.3 million during the three months ended June 30, 2021, compared to net charge-offs of $2.2 million during the first quarter of 2021 and $5.3 million in the second quarter of 2020.

The provision for loan losses was ($8.0) million for the six months ended June 30, 2021, compared to $48.5 million for the six months ended June 30, 2020.

Net charge-offs totaled $3.5 million during the six months ended June 30, 2021, compared to net charge-offs of $11.0 million during the six months ended June 30, 2020.

As of June 30, 2021, the unfunded commitment reserve totaled $5.8 million, compared to $5.9 million as of March 31, 2021 and $5.5 million as of June 30, 2020.

Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities.

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OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.

March 31, 2021

June 30, 2021

December 31, 2020

(Dollars in thousands)

N onaccrual loans:

Nonaccrual loans:

Troubled debt restructured loans

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Total nonperforming assets to total assets

Allowance for credit losses to total nonperforming loans

Total nonperforming assets were $46.9 million at March 31, 2021, compared to $49.3 million at December 31, 2020 and $34.6 million at March 31, 2020.

Nonperforming loans at March 31, 2021 were $45.6 million, or 0.60%, of total loans (0.64% excluding PPP loan originations), compared with $47.8 million, or 0.64% of total loans (0.68% excluding PPP loan originations) and $32.3 million, or 0.45% at March 31, 2020.

The increase in nonperforming loans as compared to a year ago resulted primarily from five COVID-19 impacted commercial relationships totaling $15.8 million on non-accrual as of March 31, 2021.

Past due loans as a percentage of total loans was 0.22% at March 31, 2021 (0.23% excluding PPP loan originations), down from 0.37% at December 31, 2020 (0.39% excluding PPP loan originations) and down from 0.51% at March 31, 2020.

Allowance for loan losses to total nonperforming loans

Total nonperforming assets were $43.9 million at June 30, 2021, compared to $49.3 million at December 31, 2020 and $29.4 million at June 30, 2020.

Nonperforming loans at June 30, 2021 were $43.1 million, or 0.57%, of total loans (0.60% excluding PPP loan originations), compared with $47.8 million, or 0.64% of total loans (0.68% excluding PPP loan originations) at December 31, 2020 and $27.6 million, or 0.36% of total loans (0.39% excluding PPP loan originations) at June 30, 2020.

The increase in nonperforming loans as compared to a year ago resulted primarily from five commercial relationships totaling $15.0 million on non-accrual as of June 30, 2021.

Past due loans as a percentage of total loans was 0.26% at June 30, 2021 (0.27% excluding PPP loan originations), down from 0.37% at December 31, 2020 (0.39% excluding PPP loan originations) and down from 0.30% at June 30, 2020 (0.32% excluding PPP loan originations).

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic.

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The Company evaluated the short-term modification programs provided to its borrowers and has concluded the modifications were generally made to borrowers who were in good standing prior to the COVID-19 pandemic and the modifications were temporary and minor in nature and therefore do not qualify for designation as TDRs.

As of March 31, 2021, 1.0% of total loans outstanding (excluding PPP loan originations) were in payment deferral programs, of which 87% are commercial borrowers and 13% are consumer borrowers.

As of June 30, 2021, 0.5% of total loans outstanding (excluding PPP loan originations) were in payment deferral programs, of which 85% are commercial borrowers and 15% are consumer borrowers.

As of December 31, 2020, 1.6% of total loans outstanding (excluding PPP loan originations) were in payment deferral programs, of which 80% were commercial borrowers and 20% were consumer borrowers.

In addition to nonperforming loans discussed above, the Company has also identified approximately $136.7 million in potential problem loans at March 31, 2021 as compared to $136.6 million at December 31, 2020.

The increase in potential problem loans is primarily due to the Company’s proactive approach to risk ratings throughout the deferral process and relates to higher risk industries impacted by the COVID-19 pandemic.

In addition to nonperforming loans discussed above, the Company has also identified approximately $120.5 million in potential problem loans at June 30, 2021 as compared to $136.6 million at December 31, 2020 and $115.3 million at June 30, 2020.

The increase in potential problem loans from June 30, 2020 is primarily due to the Company’s proactive approach to risk ratings throughout the deferral process and relates to higher risk industries impacted by the COVID-19 pandemic.

Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations.

As of March 31, 2021, 8.7% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic.

As of June 30, 2021, 8.9% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic.

Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected.

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To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.

Total deposits were $9.8 billion at March 31, 2021, up $734.2 million, or 8.1%, from December 31, 2020.

Total deposits were $9.8 billion at June 30, 2021, up $703.6 million, or 7.7%, from December 31, 2020.

Total average deposits increased $1.5 billion, or 17.9%, from the same period last year.

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The Company’s borrowed funds consist of short-term borrowings and long-term debt.

Short-term borrowings totaled $95.3 million at March 31, 2021 compared to $168.4 million at December 31, 2020.

The notional value of interest rate swaps hedging cash flow related to short-term borrowings totaled $25.0 million at December 31, 2020 and matured during the three months ending March 31, 2021.

Long-term debt was $14.1 million at March 31, 2021 and $39.1 million at December 31, 2020.

Short-term borrowings totaled $90.6 million at June 30, 2021 compared to $168.4 million at December 31, 2020.

The notional value of interest rate swaps hedging cash flows related to short-term borrowings totaled $25.0 million at December 31, 2020 and matured during the six months ended June 30, 2021.

Long-term debt was $14.0 million at June 30, 2021 and $39.1 million at December 31, 2020.

For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below.

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On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030.

The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025.

The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025.

The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.2 million.

As of March 31, 2021 and December 31, 2020 the subordinated debt net of unamortized issuance costs was $98.2 million and $98.1 million, respectively.

As of June 30, 2021 and December 31, 2020 the subordinated debt net of unamortized issuance costs was $98.3 million and $98.1 million, respectively.

Capital Resources

Stockholders’ equity of $1.2 billion represented 10.32% of total assets at March 31, 2021 compared with $1.2 billion, or 10.86% as of December 31, 2020.

Stockholders’ equity was consistent with December 31, 2020 as net income of $39.8 million for the three months ending March 31, 2021 was offset by a decrease in accumulated other comprehensive income of $17.1 million, dividends declared of $11.7 million during the period and repurchase of common stock of $9.0 million.

The Company purchased 257,031 shares of common stock during the first quarter of 2021 at a weighted average price of $35.09 per share excluding commissions under a previously announced plan.

As of March 31, 2021, there were 1,742,969 shares available for repurchase under this plan authorized on October 28, 2019, amended on January 27, 2021 and set to expire on December 31, 2021.

Stockholders’ equity of $1.2 billion represented 10.58% of total assets at June 30, 2021 compared with $1.2 billion, or 10.86%, as of December 31, 2020.

Stockholders’ equity was consistent with December 31, 2020 as net income of $80.1 million for the six months ending June 30, 2021 was offset by a decrease in accumulated other comprehensive income of $9.7 million, dividends declared of $23.5 million during the period and repurchase of common stock of $9.9 million.

The Company repurchased 23,627 shares of common stock during the second quarter of 2021 at a weighted average price of $36.03 per share excluding commissions under a previous announced plan.

As of June 30, 2021, there were 1,719,342 shares available for repurchase under this plan authorized on October 28, 2019, amended on March 23, 2020 and January 27, 2021, and set to expire on December 31, 2021.

The Board of Directors considers the Company’s earnings position and earnings potential when making dividend decisions.

The Board of Directors approved a second-quarter 2021 cash dividend of $0.27 per share at a meeting held on April 26, 2021.

The dividend will be paid on June 15, 2021 to stockholders of record as of June 1, 2021.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at March 31, 2021 under applicable bank regulatory requirements.

The Board of Directors approved a third-quarter 2021 cash dividend of $0.28 per share at a meeting held on July 26, 2021.

The dividend, which represents a $0.01, or 3.7% increase, will be paid on September 15, 2021 to shareholders of record as of September 1, 2021.

As the capital ratios in the following table indicate, the Company remained “well capitalized” at June 30, 2021 under applicable bank regulatory requirements.

Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented.

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Capital Measurements

March 31, 2021

June 30, 2021

December 31, 2020

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Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets.

In March 2020, the Office of Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”)announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

In March 2020, the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL.

Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022.

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Net interest income for the next twelve months in the +200/+100/-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income.

The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the March 31, 2021 balance sheet position:

Interest Rate Sensitivity Analysis

Change in interest rates

(In basis points)

Percent change in

(in bps points)

net interest income

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This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary.

At March 31, 2021, the Company’s Basic Surplus measurement was 29.4% of total assets or approximately $3.4 billion as compared to the December 31, 2020 Basic Surplus of 25.7% or $2.8 billion and which was above the Company’s minimum of 5% (calculated at $576.9 million and $546.6 million, of period end total assets at March 31, 2021 and December 31, 2020, respectively) set forth in its liquidity policies.

At March 31, 2021 and December 31, 2020, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $14.1 million and $64.1 million, respectively.

At March 31, 2021 and December 31, 2020, the Bank had $65.0 million and $74.0 million, respectively, of collateral encumbered by municipal letters of credit.

The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.7 billion at March 31, 2021 and $1.6 billion at December 31, 2020.

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $743.3 million and $839.4 million at March 31, 2021 and December 31, 2020, respectively, or used to collateralize other borrowings, such as repurchase agreements.

The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $1.9 billion at March 31, 2021 and $1.8 billion at December 31, 2020.

At June 30, 2021, the Company’s Basic Surplus measurement was 28.9% of total assets or approximately $3.3 billion as compared to the December 31, 2020 Basic Surplus of 25.7% or $2.8 billion and was above the Company’s minimum of 5% (calculated at $578.7 million and $546.6 million, of period end total assets as June 30, 2021 and December 31, 2020, respectively) set forth in its liquidity policies.

At June 30, 2021 and December 31, 2020, Federal Home Loan Bank (“FHLB”) advances outstanding totaled $14.0 million and $64.1 million, respectively.

At June 30, 2021 and December 31, 2020, the Bank had $105.0 million and $74.0 million, respectively, of collateral encumbered by municipal letters of credit.

The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.7 billion at June 30, 2021 and $1.6 billion at December 31, 2020.

In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $934.8 million and $839.4 million at June 30, 2021 and December 31, 2020, respectively, or used to collateralize other borrowings, such as repurchase agreements.

The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.0 billion at June 30, 2021 and $1.8 billion at December 31, 2020.

In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral.

At March 31, 2021 and December 31, 2020, the Bank had the capacity to borrow $619.2 million and $658.1 million, respectively, from this program.

In addition, due to the creation of the Paycheck Protection Program Liquidity Facility during 2020, the Bank has the ability to borrow $568.5 million and $447.8 million through this program as of 568.5 and December 31, 2020, respectively.

The Company’s internal policies authorize borrowings up to 25% of assets.

Under this policy, remaining available borrowing capacity totaled $2.8 billion at March 31, 2021 and $2.6 billion at December 31, 2020.

At June 30, 2021 and December 31, 2020, the Bank had the capacity to borrow $609.2 million and $658.1 million, respectively, from this program.

The Company’s internal policies authorize borrowing up to 25% of assets.

Under this policy, remaining available borrowing capacity totaled $2.8 billion at June 30, 2021 and $2.6 billion at December 31, 2020.

This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives.

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Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.

At March 31, 2021, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

At June 30, 2021, a portion of the Company’s loans and securities were pledged as collateral on borrowings.

Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.

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The approval of the OCC is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations.

At March 31, 2021, approximately $149.3 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC.

At June 30, 2021, approximately $188.7 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC.

The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements.

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Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis