(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information This Form 10-Q contains certain "forward-looking statements" about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our operating expenses, profitability, allowance for loan and lease losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions, maintaining capital adequacy, liquidity, goodwill, and interest rate risk management. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words "anticipate," "assume," "intend," "believe," "forecast," "expect," "estimate," "plan," "continue," "will," "should," "look forward" and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation: the COVID-19 pandemic continues to affect the Company, its employees, customers and third-party service providers, and the ultimate extent of the impacts of the pandemic and related government stimulus programs on its business, financial position, results of operations, liquidity and prospects is still uncertain, due in part to the Delta variant of COVID-19. Weaker than expected improvement in general business and economic conditions could adversely affect the Company's revenues, the values of its assets and liabilities and continue to negatively impact loan growth; our ability to complete pending and future acquisitions, and to successfully integrate such acquired entities or achieve expected benefits, synergies and/or operating efficiencies within expected time frames or at all; our ability to compete effectively against other financial service providers in our markets; the impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios; deterioration, weaker than expected improvement, or other changes in the state of the economy or the markets in which we conduct business (including the levels of IPOs and mergers and acquisitions), which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans; changes in credit quality and the effect of credit quality and the CECL accounting standard on our provision for credit losses and allowance for credit losses; our ability to attract deposits and other sources of funding or liquidity; our ability to efficiently deploy excess liquidity; the need to retain capital for strategic or regulatory reasons; compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases, changes in our asset or liability mix, and/or changes to the cost of deposits and borrowings; uncertainty regarding the future of LIBOR and the transition away from LIBOR toward new reference rates by the end of 2021; reduced demand for our services due to strategic or regulatory reasons or reduced demand for our products due to legislative changes such as new rent control laws; our ability to successfully execute on initiatives relating to enhancements of our technology infrastructure, including client-facing systems and applications; legislative or regulatory requirements or changes, including an increase of capital requirements, and increased political and regulatory uncertainty; the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties; higher than anticipated increases in operating expenses; lower than expected dividends paid from the Bank to the holding company; the amount and exact timing of any common stock repurchases will depend upon market conditions and other factors;
a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge;
At June 30, 2021, the Company had total liabilities of $31.0 billion, including total deposits of $29.6 billion and subordinated debt of $861.8 million, compared to $25.9 billion of total liabilities, including $24.9 billion of total deposits and $465.8 million of subordinated debt at December 31, 2020. The $5.1 billion increase in total liabilities since year-end was due mainly to increases of $4.8 billion in core deposits and $396.0 million in subordinated debt. The increase in core deposits was due primarily to continued strong deposit growth from our venture banking clients. At June 30, 2021, core deposits totaled $27.0 billion, or 91% of total deposits, including $11.3 billion of noninterest-bearing demand deposits, or 38% of total deposits. The increase in subordinated debt was due to the $400 million of subordinated notes issued by the Bank on April 30, 2021. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
COVID-19 Pandemic - Impact to Our Business From a business perspective, the impact in 2021 from the COVID-19 pandemic has decreased, however, new variants may continue to impact key macro-economic indicators such as unemployment and GDP and we will continue to closely monitor our loan portfolio. In the early stages of the COVID-19 pandemic, we experienced an increase in customers seeking loan modifications through payment deferrals and extension of terms. Most of the modifications were for payment deferrals for three months, while some deferrals were up to six months. Some loans were subsequently modified with deferrals of three to twelve months. As of June 30, 2021, there were 29 loans with a balance of $48.4 million on deferral. The Company did not apply a TDR classification to COVID-19 related loan modifications that met all of the requisite criteria as stipulated in the CARES Act.
June 30, 2021 % of Special Total Loans Loan and Lease Portfolio Classified Mention Pass Total and Leases (Dollars in thousands) Hotel $ 16,678 $ 224,812 $ 792,773 $ 1,034,263 5.3 % Retail CRE 233 1,449 432,533 434,215 2.2 % Commercial aviation 19,248 77,236 89,410 185,894 1.0 % Restaurant 5,090 28,883 121,672 155,645 0.8 % Total $ 41,249 $ 332,380 $ 1,436,388 $ 1,810,017 9.3 %
From a credit perspective, most of our credit metrics improved during the second quarter of 2021 as economic conditions and economic forecasts continued to improve. This improvement led to a provision for credit losses benefit of $88.0 million for the second quarter of 2021 compared to a provision for credit losses benefit of $48.0 million for the first quarter of 2021 compared to a provision for credit losses of $120.0 million for the second quarter of 2020. For further details on CECL and the impacts to our process, see "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" contained herein.
Key Performance Indicators
The Level of Noninterest Expense
Three Months Ended Six Months Ended June 30, March 31, June 30, June 30, Efficiency Ratio 2021 2021 2020 2021 2020 (Dollars in thousands) Noninterest expense $ 151,750 $ 150,136 $ 126,965 $ 301,886 $ 1,714,935 Less: Intangible asset amortization 2,889 3,079 3,882 5,968 7,830 Foreclosed assets (income) expense, net (119) 1 (146) (118) (80) Goodwill impairment - - - - 1,470,000 Acquisition, integration and reorganization costs 200 3,425 - 3,625 - Noninterest expense used for efficiency ratio $ 148,780 $ 143,631 $ 123,229 $ 292,411 $ 237,185 Net interest income (tax equivalent) $ 270,083 $ 264,635 $ 256,294 $ 534,718 $ 507,722 Noninterest income 40,371 44,829 38,858 85,200 67,958 Net revenues 310,454 309,464 295,152 619,918 575,680 Less: Gain on sale of securities - 101 7,715 101 7,897 Net revenues used for efficiency ratio $ 310,454 $ 309,363 $ 287,437 $ 619,817 $ 567,783 Efficiency ratio 47.9 % 46.4 % 42.9 % 47.2 % 41.8 %
Critical Accounting Policies and Estimates Our accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the allowance for credit losses on loans and leases held for investment, the carrying value of goodwill and other intangible assets, and the realization of deferred income tax assets and liabilities.
Aug 06, 2021
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