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UMBF UMB Financial

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to         

Commission file number001-38481

 

UMB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Missouri

 

43-0903811

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

1010 Grand Boulevard, Kansas City, Missouri

 

64106

(Address of principal executive offices)

 

(Zip Code)

(Registrant's telephone number, including area code): (816) 860-7000

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 Par Value

UMBF

The NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non- accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 24, 2020, UMB Financial Corporation had 48,136,923 shares of common stock outstanding.

 

 

 


 

UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

CONSOLIDATED BALANCE SHEETS

3

CONSOLIDATED STATEMENTS OF INCOME

4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

5

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

6

CONSOLIDATED STATEMENTS OF CASH FLOWS

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

48

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

65

ITEM 4.

CONTROLS AND PROCEDURES

70

 

 

 

PART II - OTHER INFORMATION

71

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

71

ITEM 1A.

RISK FACTORS

71

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

72

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

72

ITEM 4.

MINE SAFETY DISCLOSURES

72

ITEM 5.

OTHER INFORMATION

72

ITEM 6.

EXHIBITS

73

SIGNATURES

74

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Loans

 

$

13,949,710

 

 

$

13,431,722

 

Allowance for credit losses on loans(1)

 

 

(187,911

)

 

 

(101,788

)

Net loans

 

 

13,761,799

 

 

 

13,329,934

 

Loans held for sale

 

 

9,585

 

 

 

7,803

 

Securities:

 

 

 

 

 

 

 

 

Available for sale (amortized cost of $7,353,180 and $7,323,980, respectively)

 

 

7,639,451

 

 

 

7,447,362

 

Held to maturity, net of allowance for credit losses of $3,235 and $0, respectively (fair value of $1,146,909 and $1,082,345, respectively)

 

 

1,110,925

 

 

 

1,116,102

 

Trading securities

 

 

61,177

 

 

 

45,618

 

Other securities

 

 

135,194

 

 

 

108,420

 

Total securities

 

 

8,946,747

 

 

 

8,717,502

 

Federal funds sold and securities purchased under agreements to resell

 

 

784,750

 

 

 

1,578,345

 

Interest-bearing due from banks

 

 

1,109,254

 

 

 

1,225,491

 

Cash and due from banks

 

 

340,553

 

 

 

472,958

 

Premises and equipment, net

 

 

297,668

 

 

 

300,334

 

Accrued income

 

 

111,879

 

 

 

124,508

 

Goodwill

 

 

180,867

 

 

 

180,867

 

Other intangibles, net

 

 

25,839

 

 

 

27,597

 

Other assets

 

 

675,945

 

 

 

596,016

 

Total assets

 

$

26,244,886

 

 

$

26,561,355

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

7,269,520

 

 

$

6,944,465

 

Interest-bearing demand and savings

 

 

12,920,980

 

 

 

13,432,415

 

Time deposits under $250,000

 

 

595,128

 

 

 

611,587

 

Time deposits of $250,000 or more

 

 

389,892

 

 

 

614,777

 

Total deposits

 

 

21,175,520

 

 

 

21,603,244

 

Federal funds purchased and repurchase agreements

 

 

1,890,917

 

 

 

1,896,508

 

Short-term debt

 

 

15,000

 

 

 

 

Long-term debt

 

 

121,582

 

 

 

97,490

 

Accrued expenses and taxes

 

 

216,272

 

 

 

232,200

 

Other liabilities

 

 

162,154

 

 

 

125,473

 

Total liabilities

 

 

23,581,445

 

 

 

23,954,915

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued, 48,134,601 and 49,097,606 shares outstanding, respectively

 

 

55,057

 

 

 

55,057

 

Capital surplus

 

 

1,073,089

 

 

 

1,073,764

 

Retained earnings

 

 

1,646,751

 

 

 

1,672,438

 

Accumulated other comprehensive income, net

 

 

219,390

 

 

 

83,180

 

Treasury stock, 6,922,129 and 5,959,124 shares, at cost, respectively

 

 

(330,846

)

 

 

(277,999

)

Total shareholders' equity

 

 

2,663,441

 

 

 

2,606,440

 

Total liabilities and shareholders' equity

 

$

26,244,886

 

 

$

26,561,355

 

 

(1)

As of December 31, 2019, this line represents the Allowance for loan losses. See further discussion of this change in Note 3, “New Accounting Pronouncements.”

See Notes to Consolidated Financial Statements.

3


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans

 

$

151,026

 

 

$

157,261

 

Securities:

 

 

 

 

 

 

 

 

Taxable interest

 

 

27,212

 

 

 

25,391

 

Tax-exempt interest

 

 

24,404

 

 

 

20,697

 

Total securities income

 

 

51,616

 

 

 

46,088

 

Federal funds and resell agreements

 

 

5,452

 

 

 

3,625

 

Interest-bearing due from banks

 

 

2,663

 

 

 

3,899

 

Trading securities

 

 

654

 

 

 

434

 

Total interest income

 

 

211,411

 

 

 

211,307

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

29,732

 

 

 

37,834

 

Federal funds and repurchase agreements

 

 

6,381

 

 

 

8,264

 

Other

 

 

1,357

 

 

 

1,341

 

Total interest expense

 

 

37,470

 

 

 

47,439

 

Net interest income

 

 

173,941

 

 

 

163,868

 

Provision for credit losses(1)

 

 

88,000

 

 

 

12,350

 

Net interest income after provision for credit losses

 

 

85,941

 

 

 

151,518

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Trust and securities processing

 

 

47,000

 

 

 

41,957

 

Trading and investment banking

 

 

1,723

 

 

 

5,581

 

Service charges on deposit accounts

 

 

25,081

 

 

 

21,281

 

Insurance fees and commissions

 

 

259

 

 

 

338

 

Brokerage fees

 

 

9,860

 

 

 

7,243

 

Bankcard fees

 

 

16,545

 

 

 

17,067

 

Gains on sales of securities available for sale, net

 

 

1,227

 

 

 

809

 

Other

 

 

(3,271

)

 

 

13,106

 

Total noninterest income

 

 

98,424

 

 

 

107,382

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

111,060

 

 

 

116,032

 

Occupancy, net

 

 

12,180

 

 

 

11,743

 

Equipment

 

 

21,241

 

 

 

19,684

 

Supplies and services

 

 

4,185

 

 

 

3,873

 

Marketing and business development

 

 

4,640

 

 

 

4,913

 

Processing fees

 

 

13,390

 

 

 

12,132

 

Legal and consulting

 

 

6,110

 

 

 

5,633

 

Bankcard

 

 

4,860

 

 

 

4,345

 

Amortization of other intangible assets

 

 

1,734

 

 

 

1,327

 

Regulatory fees

 

 

2,366

 

 

 

2,890

 

Other

 

 

6,853

 

 

 

8,054

 

Total noninterest expense

 

 

188,619

 

 

 

190,626

 

(Loss) income before income taxes

 

 

(4,254

)

 

 

68,274

 

Income tax (benefit) expense

 

 

(815

)

 

 

10,530

 

NET (LOSS) INCOME

 

$

(3,439

)

 

$

57,744

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

Net (loss) income – basic

 

$

(0.07

)

 

$

1.19

 

Net (loss) income – diluted

 

 

(0.07

)

 

 

1.18

 

Dividends

 

 

0.31

 

 

 

0.30

 

Weighted average shares outstanding – basic

 

 

48,689,876

 

 

 

48,712,153

 

Weighted average shares outstanding – diluted

 

 

48,689,876

 

 

 

48,998,571

 

 

(1)

For the three months ended March 31, 2019, this line represents the Provision for loan losses. See further discussion of this change in Note 3, “New Accounting Pronouncements.”

See Notes to Consolidated Financial Statements.

4


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(3,439

)

 

$

57,744

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

Unrealized gains and losses on debt securities:

 

 

 

 

 

 

 

 

Change in unrealized holding gains and losses, net

 

 

164,116

 

 

 

106,434

 

Less:  Reclassification adjustment for gains included in net income

 

 

(1,227

)

 

 

(809

)

Change in unrealized gains and losses on debt securities during the period

 

 

162,889

 

 

 

105,625

 

Unrealized gains and losses on derivative hedges:

 

 

 

 

 

 

 

 

Change in unrealized gains and losses on derivative hedges

 

 

14,525

 

 

 

(2,088

)

Less: Reclassification adjustment for losses (gains) included in net income

 

 

768

 

 

 

(5

)

Change in unrealized gains and losses on derivative hedges

 

 

15,293

 

 

 

(2,093

)

Other comprehensive income, before tax

 

 

178,182

 

 

 

103,532

 

Income tax expense

 

 

(41,972

)

 

 

(25,389

)

Other comprehensive income

 

 

136,210

 

 

 

78,143

 

Comprehensive income

 

$

132,771

 

 

$

135,887

 

 

See Notes to Consolidated Financial Statements.

5


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited, dollars in thousands, except per share data)

 

 

 

Common

Stock

 

 

Capital

Surplus

 

 

Retained

Earnings

 

 

Accumulated Other Comprehensive (Loss) Income

 

 

Treasury

Stock

 

 

Total

 

Balance – January 1, 2019

 

$

55,057

 

 

$

1,054,601

 

 

$

1,488,421

 

 

$

(95,782

)

 

$

(273,827

)

 

$

2,228,470

 

Total comprehensive income

 

 

 

 

 

 

 

 

57,744

 

 

 

78,143

 

 

 

 

 

 

135,887

 

Dividends ($0.30 per share)

 

 

 

 

 

 

 

 

(14,769

)

 

 

 

 

 

 

 

 

(14,769

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,086

)

 

 

(4,086

)

Forfeitures of equity awards, net of issuances

 

 

 

 

 

2,383

 

 

 

 

 

 

 

 

 

(1,779

)

 

 

604

 

Recognition of equity-based compensation

 

 

 

 

 

3,289

 

 

 

 

 

 

 

 

 

 

 

 

3,289

 

Sale of treasury stock

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

161

 

 

 

261

 

Exercise of stock options

 

 

 

 

 

257

 

 

 

 

 

 

 

 

 

930

 

 

 

1,187

 

Balance – March 31, 2019

 

$

55,057

 

 

$

1,060,630

 

 

$

1,531,396

 

 

$

(17,639

)

 

$

(278,601

)

 

$

2,350,843

 

Balance – January 1, 2020

 

$

55,057

 

 

$

1,073,764

 

 

$

1,672,438

 

 

$

83,180

 

 

$

(277,999

)

 

$

2,606,440

 

Total comprehensive (loss) income

 

 

 

 

 

 

 

 

(3,439

)

 

 

136,210

 

 

 

 

 

 

132,771

 

Dividends ($0.31 per share)

 

 

 

 

 

 

 

 

(15,209

)

 

 

 

 

 

 

 

 

(15,209

)

Purchase of treasury stock

 

 

 

 

 

(4,500

)

 

 

 

 

 

 

 

 

(54,886

)

 

 

(59,386

)

Issuances of equity awards, net of forfeitures

 

 

 

 

 

521

 

 

 

 

 

 

 

 

 

72

 

 

 

593

 

Recognition of equity-based compensation

 

 

 

 

 

2,817

 

 

 

 

 

 

 

 

 

 

 

 

2,817

 

Sale of treasury stock

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

89

 

 

 

184

 

Exercise of stock options

 

 

 

 

 

392

 

 

 

 

 

 

 

 

 

1,878

 

 

 

2,270

 

Cumulative effect adjustment (1)

 

 

 

 

 

 

 

 

(7,039

)

 

 

 

 

 

 

 

 

(7,039

)

Balance – March 31, 2020

 

$

55,057

 

 

$

1,073,089

 

 

$

1,646,751

 

 

$

219,390

 

 

$

(330,846

)

 

$

2,663,441

 

 

(1)

Related to the adoption of ASU No. 2016-13. See Note 3, “New Accounting Pronouncements,” for further detail.

 

See Notes to Consolidated Financial Statements.

6


 

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,439

)

 

$

57,744

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for credit losses(1)

 

 

88,000

 

 

 

12,350

 

Net (accretion) amortization of premiums and discounts from acquisition

 

 

(275

)

 

 

135

 

Depreciation and amortization

 

 

15,591

 

 

 

13,614

 

Deferred income tax (benefit) expense

 

 

(11,134

)

 

 

295

 

Net (increase) decrease in trading securities and other earning assets

 

 

(17,789

)

 

 

4,507

 

Gains on sales of securities available for sale, net

 

 

(1,227

)

 

 

(809

)

Gains on sales of assets

 

 

(1,922

)

 

 

(236

)

Amortization of securities premiums, net of discount accretion

 

 

8,795

 

 

 

8,859

 

Originations of loans held for sale

 

 

(77,129

)

 

 

(19,156

)

Gains on sales of loans held for sale, net

 

 

(320

)

 

 

(177

)

Proceeds from sales of loans held for sale

 

 

75,667

 

 

 

21,258

 

Equity-based compensation

 

 

3,410

 

 

 

3,893

 

Net tax benefit related to equity compensation plans

 

 

312

 

 

 

539

 

Changes in:

 

 

 

 

 

 

 

 

Accrued income

 

 

12,629

 

 

 

(6,839

)

Accrued expenses and taxes

 

 

(2,803

)

 

 

(13,319

)

Other assets and liabilities, net

 

 

(79,008

)

 

 

(36,453

)

Net cash provided by operating activities

 

 

9,358

 

 

 

46,205

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities of securities held to maturity

 

 

19,507

 

 

 

22,769

 

Proceeds from sales of securities available for sale

 

 

84,439

 

 

 

53,329

 

Proceeds from maturities of securities available for sale

 

 

313,871

 

 

 

267,255

 

Purchases of securities held to maturity

 

 

(18,662

)

 

 

(1,893

)

Purchases of securities available for sale

 

 

(422,003

)

 

 

(579,392

)

Payment on low-income housing tax credit investment commitments

 

 

(4,039

)

 

 

 

Net increase in loans

 

 

(525,091

)

 

 

(383,799

)

Net decrease in fed funds sold and resell agreements

 

 

793,595

 

 

 

362,229

 

Net cash activity from acquisitions and divestitures

 

 

24

 

 

 

 

Net increase in interest bearing balances due from other financial institutions

 

 

(1,274

)

 

 

(3,867

)

Purchases of premises and equipment

 

 

(17,652

)

 

 

(10,066

)

Proceeds from sales of premises and equipment

 

 

8,389

 

 

 

2,904

 

Proceeds from bank-owned and company-owned life insurance death benefit

 

 

19

 

 

 

 

Net cash provided by (used in) investing activities

 

 

231,123

 

 

 

(270,531

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net (decrease) increase in demand and savings deposits

 

 

(186,380

)

 

 

332,490

 

Net decrease in time deposits

 

 

(241,344

)

 

 

(248,535

)

Net decrease in fed funds purchased and repurchase agreements

 

 

(5,591

)

 

 

(24,872

)

Proceeds from short-term debt

 

 

15,000

 

 

 

 

Repayment of long-term debt

 

 

 

 

 

(1,305

)

Cash dividends paid

 

 

(15,150

)

 

 

(14,777

)

Proceeds from exercise of stock options and sales of treasury shares

 

 

2,454

 

 

 

1,448

 

Purchases of treasury stock

 

 

(59,386

)

 

 

(4,086

)

Net cash (used in) provided by financing activities

 

 

(490,397

)

 

 

40,363

 

Decrease in cash and cash equivalents

 

 

(249,916

)

 

 

(183,963

)

Cash and cash equivalents at beginning of period

 

 

1,669,170

 

 

 

1,674,121

 

Cash and cash equivalents at end of period

 

$

1,419,254

 

 

$

1,490,158

 

 

 

 

 

 

 

 

 

 

7


 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Income tax refunds

 

$

(1,530

)

 

$

(12

)

Total interest payments

 

 

42,134

 

 

 

39,524

 

Noncash disclosures:

 

 

 

 

 

 

 

 

Acquisition of low-income housing tax credit investments

 

$

27,834

 

 

$

 

Commitment to fund low-income housing tax credit investments

 

 

27,834

 

 

 

 

 

(1)

For the three months ended March 31, 2019, this line represents the Provision for loan losses. See further discussion of this change in Note 3, “New Accounting Pronouncements.”

 

See Notes to Consolidated Financial Statements.

8


 

UMB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 (UNAUDITED)

1.  Financial Statement Presentation

The Consolidated Financial Statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after the elimination of all intercompany transactions.  In the opinion of management of the Company, all adjustments relating to items that are of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations have been made.  The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year ending December 31, 2020.  The financial statements should be read in conjunction with “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” within this Quarterly Report on Form 10-Q (the Form 10-Q) and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on February 27, 2020 (the Form 10-K).

The Company is a financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices. The Company’s national bank, UMB Bank, National Association (the Bank), has its principal office in Missouri and also has branches in Arizona, Colorado, Illinois, Kansas, Nebraska, Oklahoma, and Texas. The Company also has offices in Pennsylvania, South Dakota, Indiana, Utah, Minnesota, California, and Wisconsin.

2.  Summary of Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  A summary of the significant accounting policies to assist the reader in understanding the financial presentation is provided in the Notes to Consolidated Financial Statements in the Form 10-K.

Cash and cash equivalents

Cash and cash equivalents includes Cash and due from banks and amounts due from the Federal Reserve Bank (FRB).  Cash on hand, cash items in the process of collection, and amounts due from correspondent banks are included in Cash and due from banks.  Amounts due from the FRB are interest-bearing for all periods presented and are included in the Interest-bearing due from banks line on the Company’s Consolidated Balance Sheets.

This table provides a summary of cash and cash equivalents as presented on the Consolidated Statements of Cash Flows as of March 31, 2020 and March 31, 2019 (in thousands):

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Due from the FRB

 

$

1,078,701

 

 

$

1,090,771

 

Cash and due from banks

 

 

340,553

 

 

 

399,387

 

Cash and cash equivalents at end of period

 

$

1,419,254

 

 

$

1,490,158

 

 

Also included in the Interest-bearing due from banks, but not considered cash and cash equivalents, are interest-bearing accounts held at other financial institutions, which totaled $30.6 million and $22.7 million at March 31, 2020 and March 31, 2019, respectively.

9


 

Per Share Data  

Basic net (loss) income per share is computed based on the weighted average number of shares of common stock outstanding during each period.  Basic and diluted net loss per share were the same at March 31, 2020 as the impact of all potentially dilutive shares was anti-dilutive.  Diluted net income per share includes the dilutive effect of 286,418 shares issuable upon the exercise of stock options, nonvested restricted shares, and nonvested restricted stock units granted by the Company and outstanding at March 31, 2019.

Certain options, restricted stock and restricted stock units issued under employee benefits plans are excluded from the computation of diluted earnings per share because they were anti-dilutive.  At March 31, 2020, all outstanding options, restricted stock and restricted stock units were excluded.  At March 31, 2019, 123,384 stock options were excluded.

Derivatives  

The Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, four of the Company’s derivatives are designated in qualifying hedging relationships. However, the remainder of the Company’s derivatives are not designated in qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities. All changes in fair value of the Company’s non-designated derivatives and fair value hedges are recognized directly in earnings. Changes in fair value of the Company’s cash flow hedges are recognized in accumulated other comprehensive income (AOCI) and are reclassified to earnings when the hedged transaction affects earnings.

3.  New Accounting Pronouncements

Leases In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases – Accounting Standards Codification (ASC) Topic 842. In January, July, and December 2018 and March 2019, the FASB issued implementation amendments to the February 2016 ASU (collectively, the amended guidance).  The amended guidance changed the accounting treatment of leases, in that lessees recognize most leases on-balance sheet. This increased reported assets and liabilities, as lessees are required to recognize a right-of-use asset along with a lease liability, measured on a discounted basis. The amended guidance allows an entity to choose either the effective date, or the beginning of the earliest comparative period presented in the financial statements, as its date of initial application.  The Company adopted the amended guidance on January 1, 2019, using the effective date as the date of initial application.  Adoption of the amended guidance resulted in the recording of a right-of-use asset of $58.2 million and a lease liability of $63.0 million to its Consolidated Balance Sheets as of January 1, 2019.

 

Credit Losses In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.”  In April and November 2019, the FASB issued implementation amendments to the June 2016 ASU (collectively, the amended guidance).  The amended guidance replaced the current incurred loss methodology for recognizing credit losses with a current expected credit loss (CECL) model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amended guidance broadened the information that an entity must consider in developing its expected credit loss estimates.  Additionally, the updates amended the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination.  The amended guidance required enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. The Company adopted the amended guidance on January 1, 2020 using a modified retrospective approach for adoption.  Results for reporting periods beginning after January 1, 2020 are presented under ASC Topic 326, Financial Instruments – Credit Losses, while prior period amounts continue to be reported in accordance with previously applicable Generally Accepted Accounting Principles (GAAP).  Upon adoption, the Company recorded a

10


 

cumulative effect adjustment to the Company’s Consolidated Balance Sheets of $9.0 million as increase to the allowance for credit losses and $7.0 million as a reduction to retained earnings, net of deferred tax balances.  See Note 4, “Loans and Allowance for Credit Losses” for related disclosures.

 

4.  Loans and Allowance for Credit Losses

The Company adopted the CECL methodology for measuring credit losses as of January 1, 2020.  All disclosures as of and for the three months ended March 31, 2020 are presented in accordance with ASC 326, Financial Instruments – Credit Losses (ASC 326).  The Company did not recast comparative financial periods and has presented those disclosures under previously applicable GAAP.

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio.  Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions.  Authority levels are established for the extension of credit to ensure consistency throughout the Company.  It is necessary that policies, processes and practices implemented to control the risks of individual credit transactions and portfolio segments are sound and adhered to.  The Company maintains an independent loan review department that reviews and validates the risk assessment on a continual basis.  Management regularly evaluates the results of the loan reviews.  The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.  Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower.  The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers.  

Specialty lending loans include Asset-based and Factoring loans. Asset-based loans are offered primarily in the form of revolving lines of credit to commercial borrowers that do not generally qualify for traditional bank financing.  Asset-based loans are underwritten based primarily upon the value of the collateral pledged to secure the loan, rather than on the borrower’s general financial condition.  The Company utilizes pre-loan due diligence techniques, monitoring disciplines, and loan management practices common within the asset-based lending industry to underwrite loans to these borrowers.  Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing.  

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans.  These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  The Company requires that an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements.  The underwriting standards address both owner and non-owner occupied real estate.  Also included in Commercial real estate are Construction loans that are underwritten using feasibility studies, independent appraisal reviews, sensitivity analysis or absorption and lease rates, and financial analysis of the developers and property owners.  Construction loans are based upon estimates of costs and value associated with the complete project.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions, and the availability of long-term financing.

11


 

Consumer real estate loans, including residential real estate and home equity loans, are underwritten based on the borrower’s loan-to-value percentage, collection remedies, and overall credit history.  

Consumer loans are underwritten based on the borrower’s repayment ability.  The Company monitors delinquencies on all of its consumer loans and leases.  The underwriting and review practices combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk.  Consumer loans and leases that are 90 days past due or more are considered non-performing.

Credit cards include both commercial and consumer credit cards.  Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans, including an analysis of the borrower’s cash flow, available business capital, and overall credit-worthiness of the borrower.  Consumer credit cards are underwritten based on the borrower’s repayment ability.  The Company monitors delinquencies on all of its consumer credit cards and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its consumer credit card loans.  

Credit risk is a potential loss resulting from nonpayment of either the primary or secondary exposure.  Credit risk is mitigated with formal risk management practices and a thorough initial credit-granting process including consistent underwriting standards and approval process.  Control factors or techniques to minimize credit risk include knowing the client, understanding total exposure, analyzing the client and debtor’s financial capacity, and monitoring the client’s activities.  Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics.  

Loan Aging Analysis

This table provides a summary of loan classes and an aging of past due loans at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31, 2020

 

 

 

30-89

Days Past

Due and

Accruing

 

 

Greater than

90 Days Past

Due and

Accruing

 

 

Non-

Accrual

Loans

 

 

Total

Past Due

 

 

Current

 

 

Total Loans

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

8,663

 

 

$

34

 

 

$

42,613

 

 

$

51,310

 

 

$

5,901,054

 

 

$

5,952,364

 

Specialty lending

 

 

 

 

 

 

 

 

1,455

 

 

 

1,455

 

 

 

521,970

 

 

 

523,425

 

Commercial real estate

 

 

7,180

 

 

 

115

 

 

 

46,379

 

 

 

53,674

 

 

 

5,230,113

 

 

 

5,283,787

 

Consumer real estate

 

 

1,282

 

 

 

154

 

 

 

5,521

 

 

 

6,957

 

 

 

1,437,554

 

 

 

1,444,511

 

Consumer

 

 

124

 

 

 

23

 

 

 

184

 

 

 

331

 

 

 

146,390

 

 

 

146,721

 

Credit cards

 

 

2,175

 

 

 

1,885

 

 

 

808

 

 

 

4,868

 

 

 

368,739

 

 

 

373,607

 

Leases and other

 

 

 

 

 

 

 

 

69

 

 

 

69

 

 

 

225,226

 

 

 

225,295

 

Total loans

 

$

19,424

 

 

$

2,211

 

 

$

97,029

 

 

$

118,664

 

 

$

13,831,046

 

 

$

13,949,710

 

12


 

 

 

 

December 31, 2019

 

 

 

30-89

Days Past

Due and

Accruing

 

 

Greater than

90 Days Past

Due and

Accruing

 

 

Non-

Accrual

Loans

 

 

Total

Past Due

 

 

Current

 

 

Total Loans

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

10,491

 

 

$

250

 

 

$

25,592

 

 

$

36,333

 

 

$

5,805,669

 

 

$

5,842,002

 

Asset-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

292,231

 

 

 

292,231

 

Factoring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

170,560

 

 

 

170,560

 

Commercial – credit card

 

 

760

 

 

 

52

 

 

 

24

 

 

 

836

 

 

 

181,402

 

 

 

182,238

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate – construction

 

 

3,933

 

 

 

 

 

 

95

 

 

 

4,028

 

 

 

838,318

 

 

 

842,346

 

Real estate – commercial

 

 

3,365

 

 

 

36

 

 

 

24,030

 

 

 

27,431

 

 

 

4,301,293

 

 

 

4,328,724

 

Real estate – residential

 

 

485

 

 

 

 

 

 

2,748

 

 

 

3,233

 

 

 

930,043

 

 

 

933,276

 

Real estate – HELOC

 

 

544

 

 

 

 

 

 

2,798

 

 

 

3,342

 

 

 

474,809

 

 

 

478,151

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer – credit card

 

 

1,835

 

 

 

1,681

 

 

 

803

 

 

 

4,319

 

 

 

222,423

 

 

 

226,742

 

Consumer – other

 

 

81

 

 

 

50

 

 

 

257

 

 

 

388

 

 

 

133,086

 

 

 

133,474

 

Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,978

 

 

 

1,978

 

Total loans

 

$

21,494

 

 

$

2,069

 

 

$

56,347

 

 

$

79,910

 

 

$

13,351,812

 

 

$

13,431,722

 

 

The Company sold consumer real estate loans with proceeds of $75.7 million and $21.3 million in the secondary market without recourse during the three months ended March 31, 2020 and March 31, 2019, respectively.  

The Company has ceased the recognition of interest on loans with a carrying value of $97.0 million and $56.3 million at March 31, 2020 and December 31, 2019, respectively.  Restructured loans totaled $14.3 million and $19.8 million at March 31, 2020 and December 31, 2019, respectively.  Loans 90 days past due and still accruing interest amounted to $2.2 million and $2.1 million at March 31, 2020 and December 31, 2019, respectively.  All interest accrued but not received for loans placed on nonaccrual is reversed against interest income.  There was an insignificant amount of interest reversed related to loans on nonaccrual during 2020.  Nonaccrual loans with no related allowance for credit losses totaled $68.2 million at March 31, 2020.

The following table provides the amortized cost of nonaccrual loans with no related allowance for credit losses by loan class at March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

 

 

Non-

Accrual

Loans

 

 

Amortized Cost of Non-Accrual Loans with no related Allowance

 

Loans

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

42,613

 

 

$

22,102

 

Specialty lending

 

 

1,455

 

 

 

1,011

 

Commercial real estate

 

 

46,379

 

 

 

38,495

 

Consumer real estate

 

 

5,521

 

 

 

5,521

 

Consumer

 

 

184

 

 

 

184

 

Credit cards

 

 

808

 

 

 

808

 

Leases and other

 

 

69

 

 

 

69

 

Total loans

 

$

97,029

 

 

$

68,190

 

13


 

 

Amortized Cost

The following disclosure is presented in accordance with ASC 326.

The following table provides a summary of the amortized cost balance of each of the Company’s loan classes disaggregated by collateral type and origination year as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost - Revolving Loans

 

 

Amortized Cost - Revolving Loans Converted to Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Segment

and Type

 

Amortized Cost Basis by Origination Year - Term Loans

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

 

 

 

 

Total

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment/Accounts Receivable/Inventory

 

$

955,311

 

 

$

1,012,606

 

 

$

660,657

 

 

$

267,071

 

 

$

235,386

 

 

$

186,903

 

 

$

2,429,565

 

 

$

10,701

 

 

$

5,758,200

 

Agriculture

 

 

967

 

 

 

12,068

 

 

 

3,946

 

 

 

6,332

 

 

 

4,556

 

 

 

1,949

 

 

 

148,744

 

 

 

 

 

 

178,562

 

Overdrafts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,602

 

 

 

 

 

 

15,602

 

Total Commercial and industrial

 

 

956,278

 

 

 

1,024,674

 

 

 

664,603

 

 

 

273,403

 

 

 

239,942

 

 

 

188,852

 

 

 

2,593,911

 

 

 

10,701

 

 

 

5,952,364

 

Specialty lending:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based lending

 

 

8,503

 

 

 

61,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

286,844

 

 

 

 

 

 

356,636

 

Factoring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

166,789

 

 

 

 

 

 

166,789

 

Total Specialty lending

 

 

8,503

 

 

 

61,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

453,633

 

 

 

 

 

 

523,425

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-occupied

 

 

89,443

 

 

 

426,334

 

 

 

300,415

 

 

 

237,437

 

 

 

175,338

 

 

 

290,695

 

 

 

30,328

 

 

 

17,368

 

 

 

1,567,358

 

Non-owner-occupied

 

 

111,865

 

 

 

566,992

 

 

 

288,939

 

 

 

267,792

 

 

 

263,488

 

 

 

279,534

 

 

 

69,403

 

 

 

73,130

 

 

 

1,921,143

 

Farmland

 

 

22,470

 

 

 

75,807

 

 

 

54,607

 

 

 

52,831

 

 

 

92,875

 

 

 

77,722

 

 

 

50,267

 

 

 

177

 

 

 

426,756

 

5+ Multi-family

 

 

7,257

 

 

 

110,450

 

 

 

48,822

 

 

 

91,199

 

 

 

119,504

 

 

 

11,714

 

 

 

1,770

 

 

 

 

 

 

390,716

 

1-4 Family construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,463

 

 

 

 

 

 

40,463

 

General construction

 

 

7,750

 

 

 

4,807

 

 

 

5,857

 

 

 

936

 

 

 

548

 

 

 

2,957

 

 

 

910,394

 

 

 

4,102

 

 

 

937,351

 

Total Commercial real estate

 

 

238,785

 

 

 

1,184,390

 

 

 

698,640

 

 

 

650,195

 

 

 

651,753

 

 

 

662,622

 

 

 

1,102,625

 

 

 

94,777

 

 

 

5,283,787

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HELOC

 

 

17,606

 

 

 

23,227

 

 

 

13,430

 

 

 

454

 

 

 

86

 

 

 

2,916

 

 

 

419,468

 

 

 

 

 

 

477,187

 

First lien: 1-4 family

 

 

119,235

 

 

 

358,923

 

 

 

110,014

 

 

 

126,240

 

 

 

111,528

 

 

 

118,687

 

 

 

1,412

 

 

 

 

 

 

946,039

 

Junior lien: 1-4 family

 

 

2,298

 

 

 

9,308

 

 

 

3,559

 

 

 

2,267

 

 

 

1,201

 

 

 

2,361

 

 

 

291

 

 

 

 

 

 

21,285

 

Total Consumer real estate

 

 

139,139

 

 

 

391,458

 

 

 

127,003

 

 

 

128,961

 

 

 

112,815

 

 

 

123,964

 

 

 

421,171

 

 

 

 

 

 

1,444,511

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving line

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85

 

 

 

85,927

 

 

 

 

 

 

86,012

 

Auto

 

 

4,314

 

 

 

13,670

 

 

 

5,117

 

 

 

3,110

 

 

 

1,553

 

 

 

1,036

 

 

 

 

 

 

 

 

 

28,800

 

Other

 

 

1,245

 

 

 

8,509

 

 

 

3,156

 

 

 

638

 

 

 

1,271

 

 

 

355

 

 

 

16,735

 

 

 

 

 

 

31,909

 

Total Consumer

 

 

5,559

 

 

 

22,179

 

 

 

8,273

 

 

 

3,748

 

 

 

2,824

 

 

 

1,476

 

 

 

102,662

 

 

 

 

 

 

146,721

 

Credit cards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

203,318

 

 

 

 

 

 

203,318

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

170,289

 

 

 

 

 

 

170,289

 

Total Credit cards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

373,607

 

 

 

 

 

 

373,607

 

Leases and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leases

 

 

 

 

 

557

 

 

 

 

 

 

833

 

 

 

 

 

 

769

 

 

 

 

 

 

 

 

 

2,159

 

Other

 

 

586

 

 

 

12,693

 

 

 

9,470

 

 

 

3,444

 

 

 

2,414

 

 

 

5,889

 

 

 

188,640

 

 

 

 

 

 

223,136

 

Total Leases and other

 

 

586

 

 

 

13,250

 

 

 

9,470

 

 

 

4,277

 

 

 

2,414

 

 

 

6,658

 

 

 

188,640

 

 

 

 

 

 

225,295

 

Total loans

 

$

1,348,850

 

 

$

2,697,240

 

 

$

1,507,989

 

 

$

1,060,584

 

 

$

1,009,748

 

 

$

983,572

 

 

$

5,236,249

 

 

$

105,478

 

 

$

13,949,710

 

14


 

Accrued interest on loans totaled $44.1 million as of March 31, 2020 and is included in the Accrued income line on the Company’s Consolidated Balance Sheets.  The total amount of accrued interest is excluded from the amortized cost basis of loans presented above.  Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivables.

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.

The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. The loan ratings are summarized into the following categories:  Non-watch list, Watch, Special Mention, Substandard, and Doubtful.  Any loan not classified in one of the categories described below is considered to be a Non-watch list loan.  A description of the general characteristics of the loan rating categories is as follows:

 

Watch – This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the borrower’s industry or the economic environment.  These conditions have resulted in some degree of uncertainty that results in higher than average credit risk.

 

Special Mention – This rating reflects a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the borrower’s credit position at some future date.  The rating is not adversely classified and does not expose an institution to sufficient risk to warrant adverse classification.

 

Substandard – This rating represents an asset inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  Loans in this category are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

 

Doubtful – This rating represents an asset that has all the weaknesses inherent in an asset classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage of strengthening the asset, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, or perfecting liens.

Commercial and industrial

A discussion of the credit quality indicators that impact each type of collateral securing Commercial and industrial loans is included below:

Equipment, accounts receivable, and inventory General commercial and industrial loans are secured by working capital assets and non-real estate assets.  The general purpose of these loans is for financing capital expenditures and current operations for commercial and industrial entities.  These assets are short-term in nature.  In the case of accounts receivable and inventories, the repayment of debt is reliant upon converting assets into cash or through goods and services being sold and collected.  Collateral based-risk is due to aged short-term assets, which can be indicative of underlying issues with the borrower and lead to the value of the collateral being overstated.

Agriculture Agricultural loans are secured by non-real estate agricultural assets.  These include shorter-term assets such as equipment, crops, and livestock.  The risks associated with loans to finance crops or livestock include the borrower’s ability to successfully raise and market the commodity.  Adverse weather conditions and other

15


 

natural perils can dramatically affect farmers’ or ranchers’ production and ability to service debt.  Volatile commodity prices present another significant risk for agriculture borrowers.  Market price volatility and production cost volatility can affect both revenues and expenses.

Overdrafts Commercial overdrafts are typically short-term and unsecured.  Some commercial borrowers tie their overdraft obligation to their line of credit, so any draw on the line of credit will satisfy the overdraft.

Based on the factors noted above for each type of collateral, the Company assigns risk ratings to borrowers based on their most recently assessed financial position.  The following table provides a summary of the amortized cost balance by collateral type and risk rating as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost - Revolving Loans

 

 

Amortized Cost - Revolving Loans Converted to Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk by Collateral

 

Amortized Cost Basis by Origination Year - Term Loans

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

 

 

 

 

Total

 

Equipment/Accounts Receivable/Inventory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

889,106

 

 

$

970,210

 

 

$

608,207

 

 

$

249,951

 

 

$

198,513

 

 

$

182,297

 

 

$

2,231,968

 

 

$

6,191

 

 

$

5,336,443

 

Watch

 

 

28,487

 

 

 

17,722

 

 

 

40,462

 

 

 

6,142

 

 

 

25,592

 

 

 

3,224

 

 

 

82,337

 

 

 

 

 

 

203,966

 

Special Mention

 

 

97

 

 

 

408

 

 

 

2,366

 

 

 

2,251

 

 

 

9,240

 

 

 

624

 

 

 

27,778

 

 

 

3,990

 

 

 

46,754

 

Substandard

 

 

37,621

 

 

 

24,127

 

 

 

9,622

 

 

 

2,947

 

 

 

2,041

 

 

 

719

 

 

 

87,157

 

 

 

520

 

 

 

164,754

 

Doubtful

 

 

 

 

 

139

 

 

 

 

 

 

5,780

 

 

 

 

 

 

39

 

 

 

325

 

 

 

 

 

 

6,283

 

Total Equipment/Accounts Receivable/Inventory

 

$

955,311

 

 

$

1,012,606

 

 

$

660,657

 

 

$

267,071

 

 

$

235,386

 

 

$

186,903

 

 

$

2,429,565

 

 

$

10,701

 

 

$

5,758,200

 

Agriculture

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

832

 

 

$

10,113

 

 

$

3,374

 

 

$

2,991

 

 

$

3,982

 

 

$

1,769

 

 

$

102,899

 

 

$

 

 

$

125,960

 

Watch

 

 

135

 

 

 

161

 

 

 

532

 

 

 

144

 

 

 

503

 

 

 

45

 

 

 

12,223

 

 

 

 

 

 

13,743

 

Special Mention

 

 

 

 

 

475

 

 

 

22

 

 

 

163

 

 

 

22

 

 

 

 

 

 

3,285

 

 

 

 

 

 

3,967

 

Substandard

 

 

 

 

 

1,319

 

 

 

18

 

 

 

3,034

 

 

 

49

 

 

 

135

 

 

 

30,337

 

 

 

 

 

 

34,892

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Agriculture

 

$

967

 

 

$

12,068

 

 

$

3,946

 

 

$

6,332

 

 

$

4,556

 

 

$

1,949

 

 

$

148,744

 

 

$

 

 

$

178,562

 

 

Specialty lending

A discussion of the credit quality indicators that impact each type of collateral securing Specialty loans is included below:

Asset-based lending General asset-based loans are secured by accounts receivable, inventory, equipment, and real estate.  The purpose of these loans is for financing current operations for commercial customers.  The repayment of debt is reliant upon collection of the accounts receivable within 30 to 90 days or converting assets into cash or through goods and services being sold and collected.  The Company tracks each individual borrower credit risk based on their loan to collateral position.  Any borrower position where the underlying value of collateral is below the fair value of the loan is considered out-of-margin and inherently higher risk.

Factoring General factoring loans are secured by accounts receivable.  The purpose of these loans is for financing current operations for trucking or other commercial customers.  The repayment of debt is reliant upon collection of the accounts receivable within 30 to 90 days.  The Company tracks each individual borrower credit risk based on their loan to collateral position.  Any borrower that has experienced a position where the underlying value of collateral is below the fair value of the loan is considered out-of-margin and inherently higher risk.

16


 

The following table provides a summary of the amortized cost balance by collateral type and risk rating as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Risk

 

Asset-based lending

 

 

Factoring

 

In-margin

 

$

350,487

 

 

$

23,160

 

Out-of-margin

 

 

6,149

 

 

 

143,629

 

Total

 

$

356,636

 

 

$

166,789

 

 

Commercial real estate

A discussion of the credit quality indicators that impact each type of collateral securing Commercial real estate loans is included below:

Owner-occupied Owner-occupied loans are secured by commercial real estate.  These loans are often longer tenured and susceptible to multiple economic cycles.  The loans rely on the owner-occupied operations to service debt which cover a broad spectrum of industries.  Real estate debt can carry a significant amount of leverage for a borrower to maintain.

Non-owner-occupied Non-owner-occupied loans are secured by commercial real estate.  These loans are often longer tenured and susceptible to multiple economic cycles.  The key element of risk in this type of lending is the cyclical nature of real estate markets.  Although national conditions affect the overall real estate industry, the effect of national conditions on local markets is equally important.  Factors such as unemployment rates, consumer demand, household formation, and the level of economic activity can vary widely from state to state and among metropolitan areas.  In addition to geographic considerations, markets can be defined by property type. ��While all sectors are influenced by economic conditions, some sectors are more sensitive to certain economic factors than others.

Farmland Farmland loans are secured by real estate used for agricultural purposes such as crop and livestock production. Assets used as collateral are long-term assets that carry the ability to have longer amortizations and maturities.  Longer terms carry the risk of added susceptibility to market conditions. The limited purpose of some Agriculture-related collateral affects credit risk because such collateral may have limited or no other uses to support values when loan repayment problems emerge.

5+ Multi-family 5+ multi-family loans are secured by a multi-family residential property. The primary risks associated with this type of collateral are largely driven by economic conditions. The national and local market conditions can change with unemployment rates or competing supply of multi-family housing.   Tenants may not be able to afford their housing or have better options and this can result in increased vacancy.  Rents may need to be lowered to fill apartment units.  Increased vacancy and lower rental rates not only drive the borrower’s ability to repay debt but also contribute to how the collateral is valued.

1-4 Family construction 1-4 family construction loans are secured by 1-4 family residential real estate and are in the process of construction or improvements being made. The predominant risk inherent to this portfolio is the risk associated with a borrower’s ability to successfully complete a project on time and within budget. Market conditions also play an important role in understanding the risk profile.  Risk from adverse changes in market conditions from the start of development to completion can result in deflated collateral values

General construction General construction loans are secured by commercial real estate in process of construction or improvements being made and their repayment is dependent on the collateral’s completion.  Construction lending presents unique risks not encountered in term financing of existing real estate. The predominant risk inherent to this portfolio is the risk associated with a borrower’s ability to successfully complete a project on time and within budget.  Commercial properties under construction are susceptible to market and economic conditions.  Demand from prospective customers may erode after construction begins because of a general economic slowdown or an increase in the supply of competing properties.

Based on the factors noted above for each type of collateral, the Company assigns risk ratings to borrowers based on their most recently assessed financial position.  The following table provides a summary of the amortized cost balance by collateral type and risk rating as of March 31, 2020 (in thousands):

17


 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost - Revolving Loans

 

 

Amortized Cost - Revolving Loans Converted to Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk by Collateral

 

Amortized Cost Basis by Origination Year - Term Loans

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

 

 

 

 

Total

 

Owner-occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

84,399

 

 

$

418,347

 

 

$

252,193

 

 

$

203,728

 

 

$

166,497

 

 

$

281,410

 

 

$

18,351

 

 

$

17,368

 

 

$

1,442,293

 

Watch

 

 

 

 

 

6,398

 

 

 

35,581

 

 

 

 

 

 

 

 

 

502

 

 

 

 

 

 

 

 

 

42,481

 

Special Mention

 

 

 

 

 

990

 

 

 

6,327

 

 

 

1,722

 

 

 

2,100

 

 

 

1,987

 

 

 

43

 

 

 

 

 

 

13,169

 

Substandard

 

 

5,044

 

 

 

599

 

 

 

6,314

 

 

 

31,987

 

 

 

6,102

 

 

 

6,796

 

 

 

11,934

 

 

 

 

 

 

68,776

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

639

 

 

 

 

 

 

 

 

 

 

 

 

639

 

Total Owner-occupied

 

$

89,443

 

 

$

426,334

 

 

$

300,415

 

 

$

237,437

 

 

$

175,338

 

 

$

290,695

 

 

$

30,328

 

 

$

17,368

 

 

$

1,567,358

 

Non-owner-occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

111,681

 

 

$

566,241

 

 

$

288,939

 

 

$

260,214

 

 

$

260,735

 

 

$

273,040

 

 

$

69,403

 

 

$

73,130

 

 

$

1,903,383

 

Watch

 

 

 

 

 

300

 

 

 

 

 

 

7,578

 

 

 

1,983

 

 

 

5,105

 

 

 

 

 

 

 

 

 

14,966

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,329

 

 

 

 

 

 

 

 

 

1,329

 

Substandard

 

 

184

 

 

 

451

 

 

 

 

 

 

 

 

 

770

 

 

 

60

 

 

 

 

 

 

 

 

 

1,465

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-owner-occupied

 

$

111,865

 

 

$

566,992

 

 

$

288,939

 

 

$

267,792

 

 

$

263,488

 

 

$

279,534

 

 

$

69,403

 

 

$

73,130

 

 

$

1,921,143

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

20,730

 

 

$

56,685

 

 

$

31,484

 

 

$

38,394

 

 

$

65,139

 

 

$

34,394

 

 

$

27,597

 

 

$

177

 

 

$

274,600

 

Watch

 

 

123

 

 

 

3,727

 

 

 

15,251

 

 

 

6,299

 

 

 

5,294

 

 

 

26,809

 

 

 

19,193

 

 

 

 

 

 

76,696

 

Special Mention

 

 

 

 

 

 

 

 

1,220

 

 

 

510

 

 

 

1,462

 

 

 

507

 

 

 

205

 

 

 

 

 

 

3,904

 

Substandard

 

 

1,617

 

 

 

15,395

 

 

 

6,652

 

 

 

7,628

 

 

 

20,980

 

 

 

16,012

 

 

 

3,272

 

 

 

 

 

 

71,556

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Farmland

 

$

22,470

 

 

$

75,807

 

 

$

54,607

 

 

$

52,831

 

 

$

92,875

 

 

$

77,722

 

 

$

50,267

 

 

$

177

 

 

$

426,756

 

5+ Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

7,257

 

 

$

107,990

 

 

$

48,822

 

 

$

89,850

 

 

$

111,374

 

 

$

11,714

 

 

$

1,770

 

 

$

 

 

$

378,777

 

Watch

 

 

 

 

 

 

 

 

 

 

 

1,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,349

 

Special Mention

 

 

 

 

 

2,460

 

 

 

 

 

 

 

 

 

6,269

 

 

 

 

 

 

 

 

 

 

 

 

8,729

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,861

 

 

 

 

 

 

 

 

 

 

 

 

1,861

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 5+ Multi-family

 

$

7,257

 

 

$

110,450

 

 

$

48,822

 

 

$

91,199

 

 

$

119,504

 

 

$

11,714

 

 

$

1,770

 

 

$

 

 

$

390,716

 

1-4 Family construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

40,463

 

 

$

 

 

$

40,463

 

Watch

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total 1-4 Family construction

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

40,463

 

 

$

 

 

$

40,463

 

General construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-watch list

 

$

6,828

 

 

$

4,713

 

 

$

5,689

 

 

$

936

 

 

$

548

 

 

$

2,957

 

 

$

907,000

 

 

$

4,102

 

 

$

932,773

 

Watch

 

 

617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

617

 

Special Mention

 

 

305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

305

 

Substandard

 

 

 

 

 

 

 

 

168

 

 

 

 

 

 

 

 

 

 

 

 

3,394

 

 

 

 

 

 

3,562

 

Doubtful

 

 

 

 

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

94

 

Total General construction

 

$

7,750

 

 

$

4,807

 

 

$

5,857

 

 

$

936

 

 

$

548

 

 

$

2,957

 

 

$

910,394

 

 

$

4,102

 

 

$

937,351

 

 

18


 

Consumer real estate

A discussion of the credit quality indicators that impact each type of collateral securing Consumer real estate loans is included below:

HELOC HELOC loans are revolving lines of credit secured by 1-4 family residential property. The primary risk is the borrower’s inability to repay debt.  Revolving notes are often associated with HELOCs that can be secured by real estate without a 1st lien priority.  Collateral is susceptible to market volatility impacting home values or economic downturns.

First lien: 1-4 family First lien 1-4 family loans are secured by a first lien on 1-4 family residential property. These term loans carry longer maturities and amortizations.  The longer tenure exposes the borrower to multiple economic cycles, coupled with longer amortizations that result in smaller principal reduction early in the life of the loan. Collateral is susceptible to market volatility impacting home values.

Junior lien: 1-4 family Junior lien 1-4 family loans are secured by a junior lien on 1-4 family residential property. The Company’s primary risk is the borrower’s inability to repay debt and not being in a priority lien position. Collateral is susceptible to market volatility impacting home values or economic downturns.

A borrower is considered non-performing if the Company has ceased the recognition of interest and the loan is placed on non-accrual.  Charge-offs and borrower performance are tracked on a loan origination vintage basis. Certain vintages, based on their maturation cycle, could be at higher risk due to collateral-based risk factors.  The following table provides a summary of the amortized cost balance by collateral type and risk rating as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Risk

 

HELOC

 

 

First lien: 1-4 family

 

 

Junior lien: 1-4 family

 

Performing

 

$

473,836

 

 

$

943,957

 

 

$

21,196

 

Nonperforming:

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

 

2019

 

 

190

 

 

 

138

 

 

 

 

2018

 

 

130

 

 

 

78

 

 

 

49

 

2017

 

 

208

 

 

 

1,072

 

 

 

 

2016

 

 

144

 

 

 

472

 

 

 

24

 

Prior to 2016

 

 

2,679

 

 

 

322

 

 

 

16

 

Total

 

$

477,187

 

 

$

946,039

 

 

$

21,285

 

 

Consumer

A discussion of the credit quality indicators that impact each type of collateral securing Consumer loans is included below:

Revolving line Consumer Revolving lines of credit are secured by consumer assets other than real estate.  The primary risk associated with this collateral is related to market volatility and the value of the underlying financial assets.

Auto Direct consumer auto loans are secured by new and used consumer vehicles.  The primary risk with this collateral class is the rate at which the collateral depreciates.

Other This category includes Other consumer loans made to an individual.  The primary risk for this category is for those loans where the loan is unsecured.  This collateral type also includes other unsecured lending such as consumer overdrafts.

A borrower is considered non-performing if the Company has ceased the recognition of interest and the loan is placed on non-accrual.  Charge-offs and borrower performance are tracked on a loan origination vintage basis. Certain vintages, based on their maturation cycle, could be at higher risk due to collateral-based risk factors.  The

19


 

following table provides a summary of the amortized cost balance by collateral type and risk rating as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Risk

 

Revolving line

 

 

Auto

 

 

Other

 

Performing

 

$

85,888

 

 

$

28,744

 

 

$

31,905

 

Nonperforming:

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

55

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

2017

 

 

124

 

 

 

 

 

 

4

 

2016

 

 

 

 

 

 

 

 

 

Prior to 2016

 

 

 

 

 

1

 

 

 

 

Total

 

$

86,012

 

 

$

28,800

 

 

$

31,909

 

 

Credit cards

A discussion of the credit quality indicators that impact Credit card loans is included below:

Consumer Consumer credit card loans are revolving loans made to individuals.  The primary risk associated with this collateral class is credit card debt is generally unsecured; therefore, repayment depends primarily on a borrower’s willingness and capacity to repay. The highly competitive environment for credit card lending provides consumers with ample opportunity to hold several credit cards from different issuers and to pay only minimum monthly payments on outstanding balances. In such an environment, borrowers may become over-extended and unable to repay, particularly in times of an economic downturn or a personal catastrophic event.

The consumer credit card portfolio is segmented by borrower payment activity.  Transactors are defined as accounts that pay off their balance by the end of each statement cycle.  Revolvers are defined as an account that carries a balance from statement cycle to the next.  These accounts incur monthly finance charges, and, sometimes, late fees.  Revolvers are inherently higher risk and are tracked by FICO score.

Commercial Commercial credit card loans are revolving loans made to small and commercial businesses.   The primary risk associated with this collateral class is credit card debt is generally unsecured; therefore, repayment depends primarily on a borrower’s willingness and capacity to repay. Borrowers may become over-extended and unable to repay, particularly in times of an economic downturn or a catastrophic event.

The commercial credit card portfolio is segmented by current and past due payment status.  A borrower is past due after 30 days.  In general, commercial credit card customers do not have incentive to hold a balance resulting in paying interest on credit card debt as commercial customers will typically have other debt obligations with lower interest rates in which they can utilize for capital.

20


 

The following table provides a summary of the amortized cost balance of consumer credit cards by risk rating as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Risk

 

Consumer

 

Transactor accounts

 

$

48,428

 

Revolver accounts (by FICO score):

 

 

 

 

Less than 600

 

 

9,795

 

600-619

 

 

3,642

 

620-639

 

 

6,569

 

640-659

 

 

11,654

 

660-679

 

 

19,194

 

680-699

 

 

20,566

 

700-719

 

 

19,869

 

720-739

 

 

18,228

 

740-759

 

 

14,799

 

760-779

 

 

9,994

 

780-799

 

 

7,894

 

800-819

 

 

5,590

 

820-839

 

 

4,558

 

840+

 

 

2,538

 

Total

 

$

203,318

 

 

The following table provides a summary of the amortized cost balance of commercial credit cards by risk rating as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Risk

 

Commercial

 

Current

 

$

157,772

 

Past Due

 

 

12,517

 

Total

 

$

170,289

 

 

Leases and other

A discussion of the credit quality indicators that impact each type of collateral securing Leases and other loans is included below:

Leases Leases are either loans to individuals for household, family and other personal expenditures or are loans related to all other direct financing and leveraged leases on property for leasing to lessees other than for household, family and other personal expenditure purposes.  Leases to individuals are secured by the lease between the lessor and the lessee. All other leases are secured by the lease between the lessor and the lessee. These assignments grant the creditor a security interest in the rent stream from any lease, an important source of cash to pay the note in case of the borrower’s default.

Other Other loans are loans that are obligations of states and political subdivisions in the U.S., loans to non-depository financial institutions, loans for purchasing or carrying securities, or all other non-consumer loans.  Risk associated with other loans is tied to the underlying collateral by each type of loan.  Collateral is generally equipment, account receivable, inventory, 1-4 family residential construction and susceptible to the same risks mentioned with those collateral types previously.  Other risks consist of collateral that is secured by the stock of the non-depository financial institution, which can be unlisted stock with a limited market for the stock or volatility of asset values driven by market performance.

21


 

Based on the factors noted above for each type of collateral, the Company assigns risk ratings to borrowers based on their most recently assessed financial position.  The following table provides a summary of the amortized cost balance by collateral type and risk rating as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Risk

 

Leases

 

 

Other

 

Non-watch list

 

$

2,159

 

 

$

222,234

 

Watch

 

 

 

 

 

700

 

Special Mention

 

 

 

 

 

 

Substandard

 

 

 

 

 

202

 

Doubtful

 

 

 

 

 

 

Total

 

$

2,159

 

 

$

223,136

 

 

The following disclosures are presented under previously applicable GAAP.

The description of the general characteristics of the loan rating categories is as described above, however in the prior period disclosures the Substandard loan rating category may also include loans where the collection of full principal is doubtful or remote.

All other classes of loans are generally evaluated and monitored based on payment activity.  Non-performing loans include restructured loans on non-accrual and all other non-accrual loans.

This table provides an analysis of the credit risk profile of each loan class at December 31, 2019 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

 

 

 

December 31, 2019

 

 

 

Commercial

 

 

Asset-based

 

 

Factoring

 

 

Real estate – construction

 

 

Real estate – commercial

 

Non-watch list

 

$

5,380,205

 

 

$

230,526

 

 

$

127,310

 

 

$

837,836

 

 

$

4,078,673

 

Watch

 

 

257,040

 

 

 

 

 

 

 

 

 

175

 

 

 

110,530

 

Special Mention

 

 

91,020

 

 

 

34,640

 

 

 

1,376

 

 

 

307

 

 

 

28,020

 

Substandard

 

 

113,737

 

 

 

27,065

 

 

 

41,874

 

 

 

4,028

 

 

 

111,501

 

Total

 

$

5,842,002

 

 

$

292,231

 

 

$

170,560

 

 

$

842,346

 

 

$

4,328,724

 

 

Credit Exposure

Credit Risk Profile Based on Payment Activity

 

 

 

December 31, 2019

 

 

 

Commercial – credit card

 

 

Real estate – residential

 

 

Real estate – HELOC

 

 

Consumer – credit card

 

 

Consumer – other

 

 

Leases

 

Performing

 

$

182,214

 

 

$

926,312

 

 

$

468,228

 

 

$

225,939

 

 

$

132,414

 

 

$

1,978

 

Non-performing

 

 

24

 

 

 

6,964

 

 

 

9,923

 

 

 

803

 

 

 

1,060

 

 

 

 

Total

 

$

182,238

 

 

$

933,276

 

 

$

478,151

 

 

$

226,742

 

 

$

133,474

 

 

$

1,978

 

 

 

Allowance for Credit Losses

 

The allowance for credit losses (ACL) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.  Loans are charged off against the allowance

22


 

when management believes the loan balance becomes uncollectible.  Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.  

 

Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts.  Historical credit loss experience provides the basis for the estimation of expected credit losses.  Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in portfolio industry-based segmentation, risk rating and FICO score changes, prepayment assumptions, changes in environmental conditions, or other relevant factors.  For economic forecasts, the Company uses the Moody’s baseline scenario.  The Company has developed a dynamic reasonable and supportable forecast period that ranges from one to three years and changes based on economic conditions.  Due to current economic conditions, the Company’s reasonable and supportable forecast period is one year.  After the reasonable and supportable forecast period, the Company reverts to historical losses.  The reversion method applied to each portfolio can either be cliff or straight-line over four periods.  The method is determined by loss specific data at the end of the reasonable and supportable forecast period.

  

The ACL is measured on a collective (pool) basis when similar risk characteristics exists.  The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods.  The Company’s portfolio segmentation consists of Commercial and industrial, Specialty lending, Commercial real estate, Consumer real estate, Consumer, Credit cards, Leases and other, and Held-to-maturity securities.  Multiple modeling techniques are used to measure credit losses based on the portfolio.  

 

The Commercial & industrial and Leases and other segments are measured using a probability of default and loss given default method.  Primary risk drivers within the segment are risk ratings of the individual loans along with changes of macro-economic variables such as unemployment, the 2-Year Treasury Rate, and farm income.

 

Collateral positions for Specialty lending loans are continuously monitored by the Company and the borrower is required to continually adjust the amount of collateral securing the loan.  Credit losses are measured for any position where the amortized cost basis is greater than the fair value of the collateral.

 

The Commercial real estate segment is measured using a probability of default and loss given default method.  Primary risk drivers within the segment are risk ratings of the individual loans, along with changes of macro-economic variables, such as unemployment, interest rates, construction activity, farm income, and vacancy rates.

 

The Consumer real estate and Consumer segments are measured using an origination vintage loss rate method.  The primary risk driver within the segments is year of origination along with changes of macro-economic variables such as unemployment and the home price index.

 

The Credit card segment contains both consumer and commercial credit cards.  Consumer credit cards are measured using a probability of default and loss given default method.  Primary risk drivers within the segment are FICO ratings of the individual card holders along with changes of macro-economic variables such as unemployment and retail sales.  Commercial credit cards are measured using roll-rate loss rate method based on days past due.

 

The Held-to-maturity (HTM) securities segment is measured using a loss rate method based on historical bond rating transitions.  Primary risk drivers within the segment are bond ratings in the portfolio along with changes of macro-economic conditions.  For further discussion on these securities, including the aging and amortized cost balance of HTM securities, see Note 5, “Securities.”

 

See the credit quality indicators presented previously for a summary of current risk in the Company’s portfolio.  Changes in economic forecasts will affect all portfolio segments, updated financial records from borrowers will affect portfolio segments by risk rating, updated FICO scores will affect consumer credit cards, payment performance will affect consumer and commercial credit card portfolio segments, and updated bond credit ratings will affect held-to-maturity securities.  The Company actively monitors all credit quality indicators for risk changes that will influence the current estimate.

 

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.  The contractual term excludes expected extensions, renewals, and modifications unless either of

23


 

the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (TDR) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by the Company.

 

Credit card receivables do not have stated maturities.  In determining the estimated life of a credit card receivable, management first estimates the future cash flows expected to be received and then applies those expected future cash flows to the credit card balance.  Expected credit losses for credit cards are determined by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting period until the expected payments have been fully allocated.  The ACL is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments.  

 

Loans that do not share risk characteristics are evaluated on an individual basis.  Loans evaluated individually are excluded from the collective evaluation.  When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for undiscounted selling costs as appropriate.  All loans are considered collateral dependent if placed on non-accrual or are considered to be a TDR.  

 

A loan modification is considered a TDR when a concession has been granted to a debtor experiencing financial difficulties.  The allowance for credit loss on a TDR is measured using the discounted cash flow method.  When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original effective interest rate of the loan.

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides a rollforward of the allowance for credit losses by portfolio segment for the three months ended March 31, 2020 (in thousands):

 

 

 

Three Months Ended March 31, 2020

 

 

 

Commercial and industrial

 

 

Specialty lending

 

 

Commercial real estate

 

 

Consumer real estate

 

 

Consumer

 

 

Credit cards

 

 

Leases and other

 

 

Total - Loans

 

 

HTM

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

63,313

 

 

$

2,545

 

 

$

15,951

 

 

$

2,623

 

 

$

543

 

 

$

15,739

 

 

$

1,074

 

 

$

101,788

 

 

$

 

 

$

101,788

 

ASU 2016-13 adjustment

 

 

3,677

 

 

 

148

 

 

 

926

 

 

 

152

 

 

 

31

 

 

 

914

 

 

 

62

 

 

 

5,910

 

 

 

3,120

 

 

 

9,030

 

Charge-offs

 

 

(1,315

)

 

 

 

 

 

(6,062

)

 

 

(13

)

 

 

(248

)

 

 

(2,126

)

 

 

 

 

 

(9,764

)

 

 

 

 

 

(9,764

)

Recoveries

 

 

1,476

 

 

 

 

 

 

21

 

 

 

14

 

 

 

97

 

 

 

484

 

 

 

 

 

 

2,092

 

 

 

 

 

 

2,092

 

Provision

 

 

55,381

 

 

 

856

 

 

 

24,559

 

 

 

1,401

 

 

 

704

 

 

 

3,812

 

 

 

1,172

 

 

 

87,885

 

 

 

115

 

 

 

88,000

 

Ending balance

 

$

122,532

 

 

$

3,549

 

 

$

35,395

 

 

$

4,177

 

 

$

1,127

 

 

$

18,823

 

 

$

2,308

 

 

$

187,911

 

 

$

3,235

 

 

$

191,146

 

24


 

 

This table provides a rollforward of the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 (in thousands):

 

 

 

Three Months Ended March 31, 2019

 

 

 

Commercial

 

 

Real estate

 

 

Consumer

 

 

Leases

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

80,888

 

 

$

13,664

 

 

$

9,071

 

 

$

12

 

 

$

103,635

 

Charge-offs

 

 

(11,163

)

 

 

(114

)

 

 

(2,467

)

 

 

 

 

 

(13,744

)

Recoveries

 

 

626

 

 

 

73

 

 

 

721

 

 

 

 

 

 

1,420

 

Provision

 

 

9,981

 

 

 

767

 

 

 

1,603

 

 

 

(1

)

 

 

12,350

 

Ending balance

 

$

80,332

 

 

$

14,390

 

 

$

8,928

 

 

$

11

 

 

$

103,661

 

Ending balance: individually evaluated for impairment

 

$

5,547

 

 

$

101

 

 

$

 

 

$

 

 

$

5,648

 

Ending balance: collectively evaluated for impairment

 

 

74,785

 

 

 

14,289

 

 

 

8,928

 

 

 

11

 

 

 

98,013

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: loans

 

$

6,261,244

 

 

$

5,928,139

 

 

$

355,538

 

 

$

4,811

 

 

$

12,549,732

 

Ending balance: individually evaluated for impairment

 

 

37,493

 

 

 

21,197

 

 

 

349

 

 

 

 

 

 

59,039

 

Ending balance: collectively evaluated for impairment

 

 

6,223,751

 

 

 

5,906,942

 

 

 

355,189

 

 

 

4,811

 

 

 

12,490,693

 

Collateral Dependent Financial Assets

The following disclosure is presented in accordance with ASC 326.

25


 

This table provides the amortized cost balance of financial assets considered collateral dependent as of March 31, 2020 (in thousands):

 

 

 

March 31, 2020

 

Loan Segment and Type

 

Amortized Cost of Collateral Dependent Assets

 

 

Related Allowance for Credit Losses

 

 

Amortized Cost of Collateral Dependent Assets with no related Allowance

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

Equipment/Accounts Receivable/Inventory

 

$

34,636

 

 

$

6,607

 

 

$

14,125

 

Agriculture

 

 

7,977

 

 

 

 

 

 

7,977

 

Total Commercial and industrial

 

 

42,613

 

 

 

6,607

 

 

 

22,102

 

Specialty lending:

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based lending

 

 

907

 

 

 

 

 

 

907

 

Factoring

 

 

548

 

 

 

41

 

 

 

104

 

Total Specialty lending

 

 

1,455

 

 

 

41

 

 

 

1,011

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Owner-occupied

 

 

32,561

 

 

 

21

 

 

 

27,389

 

Non-owner-occupied

 

 

1,221

 

 

 

 

 

 

1,221

 

Farmland

 

 

9,316

 

 

 

 

 

 

9,316

 

5+ Multi-family

 

 

 

 

 

 

 

 

 

1-4 Family construction

 

 

 

 

 

 

 

 

 

General construction

 

 

3,489

 

 

 

595

 

 

 

777

 

Total Commercial real estate

 

 

46,587

 

 

 

616

 

 

 

38,703

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

HELOC

 

 

3,351

 

 

 

 

 

 

3,351

 

First lien: 1-4 family

 

 

2,082

 

 

 

 

 

 

2,082

 

Junior lien: 1-4 family

 

 

268

 

 

 

81

 

 

 

175

 

Total Consumer real estate

 

 

5,701

 

 

 

81

 

 

 

5,608

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

Revolving line

 

 

124

 

 

 

 

 

 

124

 

Auto

 

 

56

 

 

 

 

 

 

56

 

Other

 

 

4

 

 

 

 

 

 

4

 

Total Consumer

 

 

184

 

 

 

 

 

 

184

 

Leases and other:

 

 

 

 

 

 

 

 

 

 

 

 

Leases

 

 

 

 

 

 

 

 

 

Other

 

 

69

 

 

 

 

 

 

69

 

Total Leases and other

 

 

69

 

 

 

 

 

 

69

 

Total loans

 

$

96,609

 

 

$

7,345

 

 

$

67,677

 

 

26


 

Impaired Loans

The following disclosure is presented under previously applicable GAAP.

This table provides an analysis of impaired loans by class at December 31, 2019 (in thousands):

  

 

 

As of December 31, 2019

 

 

 

Unpaid

Principal

Balance

 

 

Recorded Investment with No Allowance

 

 

Recorded

Investment

with Allowance

 

 

Total

Recorded

Investment

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

32,301

 

 

$

20,986

 

 

$

856

 

 

$

21,842

 

 

$

271

 

 

$

31,271

 

Asset-based

 

 

948

 

 

 

948

 

 

 

 

 

 

948

 

 

 

 

 

 

190

 

Factoring

 

 

2,979

 

 

 

2,979

 

 

 

 

 

 

2,979

 

 

 

 

 

 

3,917

 

Commercial – credit card

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate – construction

 

 

97

 

 

 

95

 

 

 

 

 

 

95

 

 

 

 

 

 

19

 

Real estate – commercial

 

 

28,258

 

 

 

19,314

 

 

 

4,928

 

 

 

24,242

 

 

 

387

 

 

 

19,826

 

Real estate – residential

 

 

1,751

 

 

 

1,617

 

 

 

93

 

 

 

1,710

 

 

 

80

 

 

 

846

 

Real estate – HELOC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer – credit card

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer – other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70

 

Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

66,334

 

 

$

45,939

 

 

$

5,877

 

 

$

51,816

 

 

$

738

 

 

$

56,139

 

 

Troubled Debt Restructurings

A loan modification is considered a TDR when a concession has been granted to a debtor experiencing financial difficulties.  The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions.  These modifications allow the debtor short-term cash relief to allow them to improve their financial condition.  The Company’s TDRs are considered collateral dependent and evaluated as part of the allowance for credit loss as described above in the Allowance for Credit Losses section of this note.  

The Company had 0 outstanding commitments to lend to borrowers with loan modifications classified as TDRs as of March 31, 2020 and March 31, 2019.  The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default.  Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term.  

For the three-month periods ended March 31, 2020 and March 31, 2019, the Company had 0 new TDRs.  For the three-month periods ended March 31, 2020 and March 31, 2019, the Company had 0 TDRs for which there was a payment default within the 12 months following the restructure date.

For the three-month period ended March 31, 2020, the Company had one loan modification for $7 thousand due to the effects of Coronavirus Disease 2019 (COVID-19) which was not identified as a TDR, consistent with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.  The Company anticipates additional loans to be restructured due to the effects of COVID-19 in the coming periods that will not be identified as TDRs.  See further discussion of the impacts of COVID-19 on the Company’s consolidated financial statements in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

27


 

5. Securities

Securities Available for Sale

This table provides detailed information about securities available for sale at March 31, 2020 and December 31, 2019 (in thousands):

 

March 31, 2020

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

U.S. Treasury

 

$

30,549

 

 

$

1,056

 

 

$

 

 

$

31,605

 

U.S. Agencies

 

 

94,195

 

 

 

6,421

 

 

 

 

 

 

100,616

 

Mortgage-backed

 

 

4,067,786

 

 

 

171,441

 

 

 

(4,578

)

 

 

4,234,649

 

State and political subdivisions

 

 

2,980,676

 

 

 

114,292

 

 

 

(1,276

)

 

 

3,093,692

 

Corporates

 

 

179,974

 

 

 

1,368

 

 

 

(2,453

)

 

 

178,889

 

Total

 

$

7,353,180

 

 

$

294,578

 

 

$

(8,307

)

 

$

7,639,451

 

 

December 31, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

U.S. Treasury

 

$

63,835

 

 

$

408

 

 

$

(165

)

 

$

64,078

 

U.S. Agencies

 

 

89,867

 

 

 

3,154

 

 

 

 

 

 

93,021

 

Mortgage-backed

 

 

4,030,688

 

 

 

58,184

 

 

 

(17,078

)

 

 

4,071,794

 

State and political subdivisions

 

 

2,954,276

 

 

 

78,867

 

 

 

(3,226

)

 

 

3,029,917

 

Corporates

 

 

185,314

 

 

 

3,259

 

 

 

(21

)

 

 

188,552

 

Total

 

$

7,323,980

 

 

$

143,872

 

 

$

(20,490

)

 

$

7,447,362

 

 

The following table presents contractual maturity information for securities available for sale at March 31, 2020 (in thousands):

 

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

Due in 1 year or less

 

$

225,943

 

 

$

226,438

 

Due after 1 year through 5 years

 

 

842,108

 

 

 

852,880

 

Due after 5 years through 10 years

 

 

580,312

 

 

 

594,772

 

Due after 10 years

 

 

1,637,031

 

 

 

1,730,712

 

Total

 

 

3,285,394

 

 

 

3,404,802

 

Mortgage-backed securities

 

 

4,067,786

 

 

 

4,234,649

 

Total securities available for sale

 

$

7,353,180

 

 

$

7,639,451

 

 

Securities may be disposed of before contractual maturities due to sales by the Company or because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the three months ended March 31, 2020, proceeds from the sales of securities available for sale were $84.4 million compared to $53.3 million for the same period in 2019.  Securities transactions resulted in gross realized gains of $1.2 million and $809 thousand for the three months ended March 31, 2020 and 2019, respectively. There were 0 gross realized losses for either the three months ended March 31, 2020 or 2019.    

Securities available for sale with a fair value of $6.0 billion at March 31, 2020 and $5.8 billion at December 31, 2019 were pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements. Of these amounts, securities with a market value of $979.2 million and $481.2 million at March 31, 2020 and December 31, 2019, respectively, were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

28


 

Accrued interest on securities available for sale totaled $32.5 million as of March 31, 2020 and is included in the Accrued income line on the Company’s Consolidated Balance Sheets.  The total amount of accrued interest is excluded from the amortized cost of available for sale securities presented above.  Further, the Company has elected not to measure an ACL for accrued interest receivable.

The following table shows the Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

March 31, 2020

 

Count

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Count

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Count

 

 

Fair Value

 

 

Unrealized

Losses

 

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

 

 

$

 

 

$

 

 

 

 

 

$

 

 

$

 

 

 

 

 

$

 

 

$

 

U.S. Agencies

 

 

1

 

 

 

4,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

4,406

 

 

 

 

Mortgage-backed

 

 

36

 

 

 

159,593

 

 

 

(4,079

)

 

 

10

 

 

 

34,227

 

 

 

(499

)

 

 

46

 

 

 

193,820

 

 

 

(4,578

)

State and political subdivisions

 

 

184

 

 

 

127,235

 

 

 

(1,267

)

 

 

4

 

 

 

1,158

 

 

 

(9

)

 

 

188

 

 

 

128,393

 

 

 

(1,276

)

Corporates

 

 

63

 

 

 

96,594

 

 

 

(2,453

)

 

 

 

 

 

 

 

 

 

 

 

63

 

 

 

96,594

 

 

 

(2,453

)

Total

 

 

284

 

 

$

387,828

 

 

$

(7,799

)

 

 

14

 

 

$

35,385

 

 

$

(508

)

 

 

298

 

 

$

423,213

 

 

$

(8,307

)

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2019

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Description of Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

 

 

$

 

 

$

19,863

 

 

$

(165

)

 

$

19,863

 

 

$

(165

)

U.S. Agencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed

 

 

947,415

 

 

 

(5,236

)

 

 

517,824

 

 

 

(11,842

)

 

 

1,465,239

 

 

 

(17,078

)

State and political subdivisions

 

 

361,440

 

 

 

(3,084

)

 

 

27,501

 

 

 

(142

)

 

 

388,941

 

 

 

(3,226

)

Corporates

 

 

13,685

 

 

 

(21

)

 

 

 

 

 

 

 

 

13,685

 

 

 

(21

)

Total

 

$

1,322,540

 

 

$

(8,341

)

 

$

565,188

 

 

$

(12,149

)

 

$

1,887,728

 

 

$

(20,490

)

 

The unrealized losses in the Company’s investments in U.S. Treasury securities, U.S. Agency securities, Government Sponsored Entity (GSE) mortgage-backed securities, State and political subdivisions, and Corporates were caused by changes in interest rates, and not from a decline in credit of the underlying issuers. The U.S. Treasury, U.S. Agency, and GSE mortgage-backed securities are all considered to be agency-backed securities with no risk of loss as they are either explicitly or implicitly guaranteed by the U.S. government. The changes in fair value in the agency-backed portfolios are solely driven by change in interest rates caused by changing economic conditions. The Company has no knowledge of any underlying credit issues and the cash flows underlying the debt securities have not changed and are not expected to be impacted by changes in interest rates.  For the State and political subdivision portfolio, the majority of the Company’s holdings are in general obligation bonds, which have a very low historical default rate due to issuers generally having unlimited taxing authority to service the debt.  For both the State and political subdivision and Corporate portfolios, the Company has a robust process for monitoring credit risk, including both pre-purchase and ongoing post-purchase credit reviews and analysis.  The Company monitors credit ratings of all bond issuers in these segments and reviews available financial data, including market and sector trends. As of March 31, 2020, the Company does not believe the decline in value in these portfolios is related to credit impairments and instead is due to declining interest rates.  The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.  As of March 31, 2020, there is 0 ACL related to the Company’s AFS securities as the decline in fair value did not result from credit issues.  

 

29


 

Securities Held to Maturity

The following table shows the Company’s held to maturity investments’ amortized cost, fair value, and gross unrealized gains and losses at March 31, 2020 and December 31, 2019, respectively (in thousands):

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

March 31, 2020

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in 1 year or less

 

$

14,151

 

 

$

20

 

 

$

 

 

$

14,171

 

Due after 1 year through 5 years

 

 

93,532

 

 

 

2,785

 

 

 

(135

)

 

 

96,182

 

Due after 5 years through 10 years

 

 

414,223

 

 

 

11,534

 

 

 

(760

)

 

 

424,997

 

Due after 10 years

 

 

592,254

 

 

 

22,230

 

 

 

(2,925

)

 

 

611,559

 

Total state and political subdivisions

 

$

1,114,160

 

 

$

36,569

 

 

$

(3,820

)

 

$

1,146,909

 

Allowance for credit losses

 

 

(3,235

)

 

 

 

 

 

 

 

 

 

 

 

 

Total state and political subdivisions, net of allowance for credit losses

 

$

1,110,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2019

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in 1 year or less

 

$

15,323

 

 

$

5

 

 

$

(60

)

 

$

15,268

 

Due after 1 year through 5 years

 

 

100,623

 

 

 

374

 

 

 

(699

)

 

 

100,298

 

Due after 5 years through 10 years

 

 

394,591

 

 

 

389

 

 

 

(8,400

)

 

 

386,580

 

Due after 10 years

 

 

605,565

 

 

 

494

 

 

 

(25,860

)

 

 

580,199

 

Total state and political subdivisions

 

$

1,116,102

 

 

$

1,262

 

 

$

(35,019

)

 

$

1,082,345

 

 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There were 0 sales of securities held to maturity during the three months ended March 31, 2020 or 2019.

The following table shows the Company’s held to maturity investments’ gross unrealized losses and fair value, aggregated by length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019, respectively (in thousands):

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

March 31, 2020

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

State and political subdivisions

 

$

20,357

 

 

$

(384

)

 

$

113,935

 

 

$

(3,436

)

 

$

134,292

 

 

$

(3,820

)

Total

 

$

20,357

 

 

$

(384

)

 

$

113,935

 

 

$

(3,436

)

 

$

134,292

 

 

$

(3,820

)

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2019

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

State and political subdivisions

 

$

471,544

 

 

$

(12,424

)

 

$

546,572

 

 

$

(22,595

)

 

$

1,018,116

 

 

$

(35,019

)

Total

 

$

471,544

 

 

$

(12,424

)

 

$

546,572

 

 

$

(22,595

)

 

$

1,018,116

 

 

$

(35,019

)

The unrealized losses in the Company’s held to maturity portfolio were caused by changes in the interest rate environment.  The underlying bonds are evaluated for credit losses in conjunction with management’s estimate of the ACL based on credit rating.

30


 

The following table shows the amortized cost basis by credit rating of the Company’s held to maturity investments at March 31, 2020 (in thousands):

 

 

 

Amortized Cost Basis by Credit Rating - HTM Debt Securities

 

March 31, 2020

 

AA

 

 

A

 

 

BBB

 

 

BB

 

 

B

 

 

CCC-C

 

 

Total

 

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Competitive

 

$

8,998

 

 

$

394,082

 

 

$

597,984

 

 

$

22,519

 

 

$

685

 

 

$

12,576

 

 

$

1,036,844

 

Utilities

 

 

 

 

 

57,349

 

 

 

19,967

 

 

 

 

 

 

 

 

 

 

 

 

77,316

 

Total state and political subdivisions

 

$

8,998

 

 

$

451,431

 

 

$

617,951

 

 

$

22,519

 

 

$

685

 

 

$

12,576

 

 

$

1,114,160

 

 

Competitive held-to-maturity securities include not-for-profit enterprises that provide an public functions such as housing, higher education or healthcare, but do so in a competitive environment. It also includes project financings that can have relatively high enterprise risk, such as deals backed by revenues from sports or convention facilities or start-up transportation ventures.

 

Utilities are public enterprises providing essential services with a monopoly or near-monopoly over the service area. This includes environmental utilities (water, sewer, solid waste), power utilities (electric distribution and generation, gas), and transportation utilities (airports, parking, toll roads, mass transit, ports).

All held to maturity securities were current and not past due at March 31, 2020.

Accrued interest on securities held to maturity totaled $6.5 million as of March 31, 2020 and is included in the Accrued income line on the Company’s Consolidated Balance Sheets.  The total amount of accrued interest is excluded from the amortized cost of available for sale securities presented above.  Further, the Company has elected not to measure an ACL for accrued interest receivable.

Trading Securities

There were net unrealized gains on trading securities of $150 thousand and $52 thousand at March 31, 2020 and March 31, 2019, respectively.  Net unrealized gains/losses are included in trading and investment banking income on the Company’s Consolidated Statements of Income. Securities sold not yet purchased totaled $17.6 million and $14.6 million at March 31, 2020 and December 31, 2019, respectively, and are classified within the Other liabilities line of the Company’s Consolidated Balance Sheets.

31


 

Other Securities

The table below provides detailed information for FRB stock and Federal Home Loan Bank (FHLB) stock and other securities at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

March 31, 2020

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

FRB and FHLB stock

 

$

33,252

 

 

$

 

 

$

 

 

$

33,252

 

Other securities – non-marketable

 

 

99,543

 

 

 

2,428

 

 

 

(29

)

 

 

101,942

 

Total Other securities

 

$

132,795

 

 

$

2,428

 

 

$

(29

)

 

$

135,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2019

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

FRB and FHLB stock

 

$

33,262

 

 

$

 

 

$

 

 

$

33,262

 

Other securities – non-marketable

 

 

69,868

 

 

 

5,295

 

 

 

(5

)

 

 

75,158

 

Total Other securities

 

$

103,130

 

 

$

5,295

 

 

$

(5

)

 

$

108,420

 

 

Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost.  Other non-marketable securities include Prairie Capital Management (PCM) alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. Also included in other non-marketable securities are equity investments which are held by a subsidiary qualified as a Small Business Investment Company, as well as investments in low-income housing partnerships within the areas the Company serves.  The fair value of other non-marketable securities includes alternative investment securities of $5.6 million at March 31, 2020 and $7.0 million at December 31, 2019. Unrealized gains or losses on alternative investments are recognized in the Other noninterest income line on the Company’s Consolidated Statements of Income.  

6. Goodwill and Other Intangibles

Changes in the carrying amount of goodwill for the periods ended March 31, 2020 and December 31, 2019 by reportable segment are as follows (in thousands):

 

 

 

Commercial Banking

 

 

Institutional Banking

 

 

Personal Banking

 

 

Total

 

Balances as of January 1, 2020

 

$

59,419

 

 

$

51,332

 

 

$

70,116

 

 

$

180,867

 

Balances as of March 31, 2020

 

$

59,419

 

 

$

51,332

 

 

$

70,116

 

 

$

180,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of January 1, 2019

 

$

59,419

 

 

$

51,332

 

 

$

70,116

 

 

$

180,867

 

Balances as of December 31, 2019

 

$

59,419

 

 

$

51,332

 

 

$

70,116

 

 

$

180,867

 

 

The following table lists the finite-lived intangible assets that continue to be subject to amortization as of March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

As of March 31, 2020

 

 

 

Core Deposit

Intangible

Assets

 

 

Customer Relationships

 

 

Total

 

Gross carrying amount

 

$

50,059

 

 

$

89,928

 

 

$

139,987

 

Accumulated amortization

 

 

47,607

 

 

 

66,541

 

 

 

114,148

 

Net carrying amount

 

$

2,452

 

 

$

23,387

 

 

$

25,839

 

32


 

 

 

 

As of December 31, 2019

 

 

 

Core Deposit

Intangible

Assets

 

 

Customer Relationships

 

 

Total

 

Gross carrying amount

 

$

50,059

 

 

$

89,952

 

 

$

140,011

 

Accumulated amortization

 

 

47,140

 

 

 

65,274

 

 

 

112,414

 

Net carrying amount

 

$

2,919

 

 

$

24,678

 

 

$

27,597

 

 

During the year ended December 31, 2019, the Company acquired 2 corporate trust business with aggregate customer relationship intangibles of $18.1 million. During the three months ended March 31, 2020, the Company recorded a $24 thousand post-closing purchase adjustment related to one of these acquisitions.

The following table has the aggregate amortization expense recognized in each period (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Aggregate amortization expense

 

$

1,734

 

 

$

1,327

 

 

The following table lists estimated amortization expense of intangible assets in future periods (in thousands):

 

For the nine months ending December 31, 2020

 

$

4,678

 

For the year ending December 31, 2021

 

 

5,408

 

For the year ending December 31, 2022

 

 

4,468

 

For the year ending December 31, 2023

 

 

3,750

 

For the year ending December 31, 2024

 

 

2,965

 

 

7. Securities Sold Under Agreements to Repurchase

The Company utilizes repurchase agreements to facilitate the needs of customers and to facilitate secured short-term funding needs. Repurchase agreements are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with the Company’s safekeeping agents.

The table below presents the remaining contractual maturities of repurchase agreements outstanding at March 31, 2020 and December 31, 2019, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings (in thousands):

 

 

 

As of March 31, 2020

 

 

 

Remaining Contractual Maturities of the Agreements

 

 

 

Overnight

 

 

30-90 Days

 

 

Over 90 Days

 

 

Total

 

Repurchase agreements, secured by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agencies

 

$

1,664,427

 

 

$

202,930

 

 

$

500

 

 

$

1,867,857

 

Total repurchase agreements

 

$

1,664,427

 

 

$

202,930

 

 

$

500

 

 

$

1,867,857

 

 

 

 

As of December 31, 2019

 

 

 

Remaining Contractual Maturities of the Agreements

 

 

 

2-29 Days

 

 

30-90 Days

 

 

Total

 

Repurchase agreements, secured by:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agencies

 

$

1,753,870

 

 

$

110,765

 

 

$

1,864,635

 

Total repurchase agreements

 

$

1,753,870

 

 

$

110,765

 

 

$

1,864,635

 

 

33


 

8.  Business Segment Reporting

The Company has strategically aligned its operations into the following 3 reportable segments: Commercial Banking, Institutional Banking, and Personal Banking (collectively, the Business Segments, and each, a Business Segment).  The Company’s senior executive officers regularly evaluate the Business Segment financial results produced by the Company’s internal reporting system in deciding how to allocate resources and assess performance for individual Business Segments.  Prior to 2020, the Company had the following 4 Business Segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services.  In the first quarter of 2020, the Company merged the Healthcare Services segment into the Institutional Banking segment to better reflect how the core businesses, products and services are currently being evaluated by management.  The Company’s Healthcare Services leadership structure and financial performance assessments are now included in the Institutional Banking segment, and accordingly, the reportable segments were realigned to reflect these changes.  For comparability purposes, amounts in all periods are based on methodologies in effect at March 31, 2020.  Previously reported results have been reclassified in this Form 10-Q to conform to the Company’s current organizational structure. 

The following summaries provide information about the activities of each Business Segment:

Commercial Banking serves the commercial banking and treasury management needs of the small to middle-market businesses through a variety of products and services. Such services include commercial loans, commercial real estate financing, commercial credit cards, letters of credit, loan syndication services, and consultative services. In addition, our specialty lending group offers a variety of business solutions including asset-based lending, accounts receivable financing, mezzanine debt and minority equity investments.  Treasury management services include depository services, account reconciliation and cash management tools such as, accounts payable and receivable solutions, electronic funds transfer and automated payments, controlled disbursements, lockbox services and remote deposit capture services.

Institutional Banking is a combination of banking services, fund services, asset management services and healthcare services provided to institutional clients.  This segment also provides fixed income sales, trading and underwriting, corporate trust and escrow services, as well as institutional custody.  Institutional Banking includes UMB Fund Services, which provides fund administration and accounting, investor services and transfer agency, marketing and distribution, custody, and alternative investment services.  Healthcare services provides healthcare payment solutions including custodial services for health savings accounts (HSAs) and private label, multipurpose debit cards to insurance carriers, third-party administrators, software companies, employers, and financial institutions.

Personal Banking combines consumer banking and wealth management services offered to clients and delivered through personal relationships and the Company’s bank branches, ATM network and internet banking.  Products offered include deposit accounts, retail credit cards, installment loans, home equity lines of credit, residential mortgages and small business loans.  The range of client services extends from a basic checking account to estate planning and trust services and includes private banking, brokerage services, and insurance services in addition to a full spectrum of investment advisory, trust, and custody services.

34


 

Business Segment Information

Business Segment financial results for the three months ended March 31, 2020 and March 31, 2019 were as follows (in thousands):

 

 

 

Three Months Ended March 31, 2020

 

 

 

Commercial Banking

 

 

Institutional Banking

 

 

Personal Banking

 

 

Total

 

Net interest income

 

$

106,948

 

 

$

33,036

 

 

$

33,957

 

 

$

173,941

 

Provision for credit losses

 

 

82,220

 

 

 

275

 

 

 

5,505

 

 

 

88,000

 

Noninterest income

 

 

11,240

 

 

 

61,952

 

 

 

25,232

 

 

 

98,424

 

Noninterest expense

 

 

59,043

 

 

 

68,453

 

 

 

61,123

 

 

 

188,619

 

(Loss) income before taxes

 

 

(23,075

)

 

 

26,260

 

 

 

(7,439

)

 

 

(4,254

)

Income tax (benefit) expense

 

 

(4,421

)

 

 

5,032

 

 

 

(1,426

)

 

 

(815

)

Net (loss) income

 

$

(18,654

)

 

$

21,228

 

 

$

(6,013

)

 

$

(3,439

)

Average assets

 

$

11,609,000

 

 

$

9,006,000

 

 

$

5,425,000

 

 

$

26,040,000

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Commercial Banking

 

 

Institutional Banking

 

 

Personal Banking

 

 

Total

 

Net interest income

 

$

99,814

 

 

$

31,752

 

 

$

32,302

 

 

$

163,868

 

Provision for credit losses

 

 

10,329

 

 

 

286

 

 

 

1,735

 

 

 

12,350

 

Noninterest income

 

 

23,181

 

 

 

55,850

 

 

 

28,351

 

 

 

107,382

 

Noninterest expense

 

 

66,820

 

 

 

65,398

 

 

 

58,408

 

 

 

190,626

 

Income before taxes

 

 

45,846

 

 

 

21,918

 

 

 

510

 

 

 

68,274

 

Income tax expense

 

 

7,071

 

 

 

3,380

 

 

 

79

 

 

 

10,530

 

Net income

 

$

38,775

 

 

$

18,538

 

 

$

431

 

 

$

57,744

 

Average assets

 

$

10,448,000

 

 

$

7,013,000

 

 

$

5,393,000

 

 

$

22,854,000

 

 

9.  Revenue Recognition

The following is a description of the principal activities from which the Company generates revenue that are within the scope of ASC Topic 606, Revenue from Contracts with Customers:

 

Trust and securities processing – Trust and securities processing income consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and wealth management services, and mutual fund and alternative asset servicing.  The performance obligations related to this revenue include items such as performing full bond trustee service administration, investment advisory services, custody and record-keeping services, and fund administrative and accounting services.  These fees are part of long-term contractual agreements and the performance obligations are satisfied upon completion of service and fees are generally a fixed flat monthly rate or based on a percentage of the account’s market value per the contract with the customer.  These fees are primarily recorded within the Company’s Institutional and Personal Banking segments.  

 

Trading and investment banking – Trading and investment banking income consists of income earned related to the Company’s trading securities portfolio, including futures hedging, dividends, bond underwriting, and other securities incomes.  The vast majority of this revenue is recognized in accordance with ASC 320, Debt and Equity Securities, and is out of the scope of ASC 606. A portion of trading and investment banking represents fees earned for management fees, commissions, and underwriting of corporate bond issuances.  The performance obligations related to these fees include reviewing the credit worthiness of the customer, ensuring appropriate regulatory approval and participating in due diligence.  The fees are fixed per the bond prospectus and the performance obligations are satisfied upon registration approval of the bonds by the applicable regulatory agencies.  Revenue is recognized at the point in time upon completion of service and when approval is granted by the regulators.

 

35


 

Service charges on deposits – Service charges on deposit accounts represent monthly analysis fees recognized for the services related to customer deposit accounts, including account maintenance and depository transactions processing fees.  Commercial Banking and Institutional Banking depository accounts charge fees in accordance with the customer’s pricing schedule while Personal Banking account holders are generally charged a flat service fee per month.  Deposit service charges for the healthcare accounts included in the Institutional Banking segment are priced according to either standard pricing schedules with individual account holders or according to service agreements between the Company and employer groups or third party administrators.  The Company satisfies the performance obligation related to providing depository accounts monthly as transactions are processed and deposit service charge revenue is recorded monthly.  These fees are recognized within all Business Segments.  

 

Insurance fees and commissions – Insurance fees and commissions includes all insurance-related fees earned, including commissions for individual life, variable life, group life, health, group health, fixed annuity, and variable annuity insurance contracts. The performance obligations related to these revenues primarily represent the placement of insurance policies with the insurance company partners.  The fees are based on the contracts with insurance company partners and the performance obligations are satisfied when the terms of the policy have been agreed to and the insurance policy becomes effective.

 

Brokerage fees – Brokerage fees represent income earned related to providing brokerage transaction services, including commissions on equity and commodity trades, and fees for investment management, advisory and administration.  The performance obligations related to transaction services are executing the specified trade and are priced according to the customer’s fee schedule.  Such income is recognized at a point in time as the trade occurs and the performance obligation is fulfilled.  The performance obligations related to investment management, advisory and administration include allocating customer assets across a wide range of mutual funds and other investments, on-going account monitoring and re-balancing of the portfolio.  These performance obligations are satisfied over time and the related revenue is calculated monthly based on the assets under management of each customer.  All material performance obligations are satisfied as of the end of each accounting period.

 

Bankcard fees – Bankcard fees primarily represent income earned from interchange revenue from MasterCard and Visa for the Company’s processing of debit, credit, HSA, and flexible spending account transactions.  Additionally, the Company earns income and incentives related to various referrals of customers to card programs.  The performance obligation for interchange revenue is the processing of each transaction through the Company’s access to the banking system.  This performance obligation is completed for each individual transaction and income is recognized per transaction in accordance with interchange rates established by MasterCard and Visa.  The performance obligations for various referral and incentive programs include either referring customers to certain card products or issuing exclusively branded cards for certain customer segments.  The pricing of these incentive and referral programs are in accordance with the agreement with the individual card partner.  These performance obligations are completed as the referrals are made or over a period of time when the Company is exclusively issuing branded cards.  For the three months ended March 31, 2020 and March 31, 2019, the Company had approximately $8.4 million and $8.3 million of expense, respectively, recorded within the Bankcard fees line on the Company’s Consolidated Income Statements related to rebates and rewards programs that are outside of the scope of ASC 606.  All material performance obligations are satisfied as of the end of each accounting period.

 

Gains on sales of securities available for sale, net – In the regular course of business, the Company recognizes gains on the sale of available for sale securities. These gains are recognized in accordance with ASC 320, Debt and Equity Securities, and are outside of the scope of ASC 606.

 

Other income – The Company recognizes other miscellaneous income through a variety of other revenue streams, the most material of which include letter of credit fees, certain loan origination fees, gains on the sale of assets, gains and losses on equity-method investments, derivative income, and bank-owned and company-owned life insurance income.  These revenue streams are outside of the scope of ASC 606 and are recognized in accordance with the applicable U.S. GAAP.  The remainder of Other income is primarily earned through transactions with personal banking customers, including wire transfer service charges, stop payment charges, and fees for items like money orders and cashier’s checks.  The performance obligations of these types of fees are satisfied as transactions are completed and revenue is recognized upon transaction execution according to established fee schedules with the customers.  

 

36


 

The Company had no material contract assets, contract liabilities, or remaining performance obligations as of March 31, 2020.  Total receivables from revenue recognized under the scope of ASC 606 were $55.6 million and $58.0 million as of March 31, 2020 and December 31, 2019, respectively.  These receivables are included as part of the Other assets line on the Company’s Consolidated Balance Sheets.

The following table depicts the disaggregation of revenue according to revenue stream and Business Segment for the three months ended March 31, 2020 and March 31, 2019.  As stated in Note 8, “Business Segment Reporting,” for comparability purposes, amounts in all periods are based on methodologies in effect at March 31, 2020 and previously reported results have been reclassified in this Form 10-Q to conform to the Company’s current organizational structure.  Disaggregated revenue is as follows (in thousands):

 

 

 

Three Months Ended March 31, 2020

 

NONINTEREST INCOME

 

Commercial Banking

 

 

Institutional Banking

 

 

Personal Banking

 

 

Revenue (Expense) out of Scope of ASC 606

 

 

Total

 

Trust and securities processing

 

$

 

 

$

31,262

 

 

$

15,738

 

 

$

 

 

$

47,000

 

Trading and investment banking

 

 

 

 

 

656

 

 

 

 

 

 

1,067

 

 

 

1,723

 

Service charges on deposit accounts

 

 

6,892

 

 

 

15,607

 

 

 

2,539

 

 

 

43

 

 

 

25,081

 

Insurance fees and commissions

 

 

 

 

 

 

 

 

259

 

 

 

 

 

 

259

 

Brokerage fees

 

 

59

 

 

 

7,590

 

 

 

2,211

 

 

 

 

 

 

9,860

 

Bankcard fees

 

 

14,988

 

 

 

4,724

 

 

 

4,990

 

 

 

(8,157

)

 

 

16,545

 

Gains on sales of securities available for sale, net

 

 

 

 

 

 

 

 

 

 

 

1,227

 

 

 

1,227

 

Other

 

 

400

 

 

 

438

 

 

 

713

 

 

 

(4,822

)

 

 

(3,271

)

Total Noninterest income

 

$

22,339

 

 

$

60,277

 

 

$

26,450

 

 

$

(10,642

)

 

$

98,424

 

 

 

 

Three Months Ended March 31, 2019

 

NONINTEREST INCOME

 

Commercial Banking

 

 

Institutional Banking

 

 

Personal Banking

 

 

Revenue (Expense) out of Scope of ASC 606

 

 

Total

 

Trust and securities processing

 

$

 

 

$

26,689

 

 

$

15,268

 

 

$

 

 

$

41,957

 

Trading and investment banking

 

 

 

 

 

128

 

 

 

 

 

 

5,453

 

 

 

5,581

 

Service charges on deposit accounts

 

 

7,461

 

 

 

11,077

 

 

 

2,708

 

 

 

35

 

 

 

21,281

 

Insurance fees and commissions

 

 

 

 

 

 

 

 

338

 

 

 

 

 

 

338

 

Brokerage fees

 

 

48

 

 

 

5,422

 

 

 

1,773

 

 

 

 

 

 

7,243

 

Bankcard fees

 

 

14,488

 

 

 

5,525

 

 

 

5,115

 

 

 

(8,061

)

 

 

17,067

 

Gains on sales of securities available for sale, net

 

 

 

 

 

 

 

 

 

 

 

809

 

 

 

809

 

Other

 

 

339

 

 

 

339

 

 

 

871

 

 

 

11,557

 

 

 

13,106

 

Total Noninterest income

 

$

22,336

 

 

$

49,180

 

 

$

26,073

 

 

$

9,793

 

 

$

107,382

 

 

10.  Commitments, Contingencies and Guarantees

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.  These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, forward foreign exchange contracts and spot foreign exchange contracts.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets.  The contractual or notional amount of those instruments reflects the extent of involvement the

37


 

Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon; therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The following table summarizes the Company’s off-balance sheet financial instruments (in thousands):

 

 

 

Contract or Notional Amount

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Commitments to extend credit for loans (excluding credit card loans)

 

$

7,254,024

 

 

$

7,409,338

 

Commitments to extend credit under credit card loans

 

 

3,285,687

 

 

 

3,188,905

 

Commercial letters of credit

 

 

5,320

 

 

 

4,460

 

Standby letters of credit

 

 

301,416

 

 

 

299,933

 

Forward contracts

 

 

218,750

 

 

 

58,287

 

Spot foreign exchange contracts

 

 

4,375

 

 

 

1,980

 

 

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the Company.  The ACL on off-balance sheet credit exposures is adjusted as a provision for off-balance sheet reserve located in Other expense within Noninterest expense in the Company’s Consolidated Statements of Income.  The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.  The estimate is based on expected utilization rates by portfolio segment.  Utilization rates are influenced by historical trends and current conditions.   The expected utilization rates are applied to the total commitment to determine the expected amount to be funded.  The allowance for off-balance sheet credit exposure is calculated by applying portfolio segment expected credit loss rates to the expected amount to be funded.

The following categories of off-balance sheet credit exposures have been identified:

Revolving Lines of Credit: includes commercial, construction, agriculture, personal, and home-equity. Risks inherent to revolving lines of credit often are related to the susceptibility of an individual or business experiencing unpredictable cash flow or financial troubles, thus leading to payment default. During these financial troubles, the borrower could have less than desirable assets collateralizing the revolving line of credit.  The financial strain the borrower is experiencing could lead to drawing against the line without the ability to pay the line down.

Non-Revolving Lines of Credit: includes commercial and personal.  Lines that do not carry a revolving feature are generally associated with a specific expenditure or project, such as to purchase equipment or the construction of real estate. The predominate risk associated with non-revolving lines is the diversion of funds for other expenditures.  If funds get diverted, the contributory value to collateral suffers.    

Letters of Credit: incudes standby letters of credit.  Generally, a standby letter of credit is established to provide assurance to the beneficiary that the applicant will perform certain obligations arising out of a separate transaction between the beneficiary and applicant. These obligations might be the performance of a service or delivery of a product.  If the obligations are not met, it gives the beneficiary, the right to draw on the letter of credit.

As of March 31, 2020, the ACL for off-balance sheet credit exposures was $3.0 million and was recorded in the Other liabilities line of the Company’s Consolidated Balance Sheets.

 

38


 

11.  Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings.  The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk of the Company’s assets or liabilities. The Company has entered into an offsetting position for each of these derivative instruments with a matching instrument from another financial institution in order to minimize its net risk exposure resulting from such transactions.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The table below presents the fair value of the Company’s derivative financial instruments as of March 31, 2020 and December 31, 2019.  The Company’s derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets.

Derivative fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

Derivative Assets

 

 

Derivative Liabilities

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

Fair Value

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest Rate Products:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

$

112,603

 

 

$

47,458

 

 

$

10,435

 

 

$

5,997

 

Derivatives designated as hedging instruments

 

 

32,744

 

 

 

7,818

 

 

 

2

 

 

 

 

Total

 

$

145,347

 

 

$

55,276

 

 

$

10,437

 

 

$

5,997

 

 

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate assets and liabilities due to changes in the benchmark interest rate, London Interbank Offered Rate (LIBOR).  Interest rate swaps designated as fair value hedges involve making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments over the life of the agreements without the exchange of the underlying notional amount.  As of March 31, 2020 and December 31, 2019, the Company had 1 interest rate swap that was designated as a fair value hedge of interest rate risk associated with the Company’s fixed rate loan assets.  This swap had a notional amount of $5.2 million and $5.3 million as of March 31, 2020 and December 31, 2019, respectively.  

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings.

39


 

Cash Flow Hedges of Interest Rate Risk

The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements.  To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  As of March 31, 2020 and December 31, 2019, the Company had 2 interest rate swaps that were designated as cash flow hedges of interest rate risk associated with the Company’s variable-rate subordinated debentures issued by Marquette Capital Trusts III and IV. These swaps had an aggregate notional amount of $51.5 million at both March 31, 2020 and December 31, 2019.  Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an upfront premium.  As of March 31, 2020 and December 31, 2019, the Company had 1 interest rate floor with a notional amount of $750.0 million that was designated as a cash flow hedge of interest rate risk.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and is subsequently reclassified into interest expense and interest income in the period during which the hedged forecasted transaction affects earnings.  Amounts reported in AOCI related to interest rate swap derivatives will be reclassified to Interest expense as interest payments are received or paid on the Company’s derivatives.  Amounts reported in AOCI related to interest rate floor derivatives will be reclassified to Interest income as interest payments are received or paid on the Company’s derivatives. The Company expects to reclassify $1.2 million from AOCI to Interest expense and $4.0 million from AOCI to Interest income during the next 12 months.  As of March 31, 2020, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 16.47 years.

Non-designated Hedges

The remainder of the Company’s derivatives are not designated in qualifying hedging relationships.  Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers.  The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions.  As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.  As of March 31, 2020, the Company had 146 interest rate swaps with an aggregate notional amount of $2.0 billion related to this program.  As of December 31, 2019, the Company had 142 interest rate swaps with an aggregate notional amount of $1.9 billion.    

40


 

Effect of Derivative Instruments on the Consolidated Statements of Income and Accumulated Other Comprehensive Income

This table provides a summary of the amount of gain or loss recognized in Other noninterest expense in the Consolidated Statements of Income related to the Company’s derivative assets and liabilities for the three months ended March 31, 2020 and March 31, 2019 (in thousands):

 

 

 

Amount of Gain (Loss) Recognized

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Interest Rate Products

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

$

(259

)

 

$

(873

)

Total

 

$

(259

)

 

$

(873

)

Interest Rate Products

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

Fair value adjustments on derivatives

 

$

(203

)

 

$

(58

)

Fair value adjustments on hedged items

 

 

202

 

 

 

59

 

Total

 

$

(1

)

 

$

1

 

 

This table provides a summary of the effect of hedges on AOCI in the Consolidated Statements of Comprehensive Income related to the Company’s derivative assets and liabilities for the three months ended March 31, 2020 and March 31, 2019 (in thousands):

 

 

 

For the Three Months Ended March 31, 2020

 

Derivatives in Cash Flow Hedging Relationships

 

Gain (Loss) Recognized in OCI on Derivative

 

 

Gain (Loss) Recognized in OCI Included Component

 

 

Loss Recognized in OCI Excluded Component

 

 

Loss Reclassified from AOCI into Earnings

 

 

Loss Reclassified from AOCI into Earnings Included Component

 

 

Loss Reclassified from AOCI into Earnings Excluded Component

 

Interest rate floor

 

$

24,934

 

 

$

29,296

 

 

$

(4,362

)

 

$

(636

)

 

$

 

 

$

(636

)

Interest rate swaps

 

 

(10,409

)

 

 

(10,409

)

 

 

 

 

 

(132

)

 

 

(132

)

 

 

 

Total

 

$

14,525

 

 

$

18,887

 

 

$

(4,362

)

 

$

(768

)

 

$

(132

)

 

$

(636

)

 

 

 

For the Three Months Ended March 31, 2019

 

Derivatives in Cash Flow Hedging Relationships

 

Loss Recognized in OCI on Derivative

 

 

Loss Recognized in OCI Included Component

 

 

Loss Recognized in OCI Excluded Component

 

 

Gain Reclassified from AOCI into Earnings

 

 

Gain Reclassified from AOCI into Earnings Included Component

 

 

Gain Reclassified from AOCI into Earnings Excluded Component

 

Interest rate swaps

 

$

(2,088

)

 

$

(2,088

)

 

$

 

 

$

5

 

 

$

5

 

 

$

 

Total

 

$

(2,088

)

 

$

(2,088

)

 

$

 

 

$

5

 

 

$

5

 

 

$

 

 

 

 

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

41


 

As of March 31, 2020, the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $257 thousand. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. At March 31, 2020, the Company had posted $373 thousand of collateral. If the Company had breached any of these provisions at March 31, 2020, it could have been required to settle its obligations under the agreements at the termination value.

12.  Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2020, and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access.  Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy.  In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

Fair Value Measurement at March 31, 2020

 

Description

 

March 31, 2020

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agencies

 

$

3,477

 

 

$

 

 

$

3,477

 

 

$

 

Mortgage-backed

 

 

5

 

 

 

 

 

 

5

 

 

 

 

State and political subdivisions

 

 

35,259

 

 

 

 

 

 

35,259

 

 

 

 

Corporates

 

 

5,243

 

 

 

5,243

 

 

 

 

 

 

 

Trading – other

 

 

17,193

 

 

 

17,193

 

 

 

 

 

 

 

Trading securities

 

 

61,177

 

 

 

22,436

 

 

 

38,741

 

 

 

 

U.S. Treasury

 

 

31,605

 

 

 

31,605

 

 

 

 

 

 

 

U.S. Agencies

 

 

100,616

 

 

 

 

 

 

100,616

 

 

 

 

Mortgage-backed

 

 

4,234,649

 

 

 

 

 

 

4,234,649

 

 

 

 

State and political subdivisions

 

 

3,093,692

 

 

 

 

 

 

3,093,692

 

 

 

 

Corporates

 

 

178,889

 

 

 

178,889

 

 

 

 

 

 

 

Available for sale securities

 

 

7,639,451

 

 

 

210,494

 

 

 

7,428,957

 

 

 

 

Company-owned life insurance

 

 

47,726

 

 

 

 

 

 

47,726

 

 

 

 

Bank-owned life insurance

 

 

282,562

 

 

 

 

 

 

282,562

 

 

 

 

Derivatives

 

 

145,347

 

 

 

 

 

 

145,347

 

 

 

 

Total

 

$

8,176,263

 

 

$

232,930

 

 

$

7,943,333

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

10,437

 

 

$

 

 

$

10,437

 

 

$

 

Securities sold not yet purchased

 

 

17,631

 

 

 

 

 

 

17,631

 

 

 

 

Total

 

$

28,068

 

 

$

 

 

$

28,068

 

 

$

 

42


 

 

 

 

Fair Value Measurement at December 31, 2019

 

Description

 

December 31, 2019

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agencies

 

$

1,246

 

 

$

 

 

$

1,246

 

 

$

 

Mortgage-backed

 

 

392

 

 

 

 

 

 

392

 

 

 

 

State and political subdivisions

 

 

21,764

 

 

 

 

 

 

21,764

 

 

 

 

Corporates

 

 

5,649

 

 

 

5,649

 

 

 

 

 

 

 

Trading – other

 

 

16,567

 

 

 

16,567

 

 

 

 

 

 

 

Trading securities

 

 

45,618

 

 

 

22,216

 

 

 

23,402

 

 

 

 

U.S. Treasury

 

 

64,078

 

 

 

64,078

 

 

 

 

 

 

 

U.S. Agencies

 

 

93,021

 

 

 

 

 

 

93,021

 

 

 

 

Mortgage-backed

 

 

4,071,794

 

 

 

 

 

 

4,071,794

 

 

 

 

State and political subdivisions

 

 

3,029,917

 

 

 

 

 

 

3,029,917

 

 

 

 

Corporates

 

 

188,552

 

 

 

188,552

 

 

 

 

 

 

 

Available for sale securities

 

 

7,447,362

 

 

 

252,630

 

 

 

7,194,732

 

 

 

 

Company-owned life insurance

 

 

63,900

 

 

 

 

 

 

63,900

 

 

 

 

Bank-owned life insurance

 

 

280,709

 

 

 

 

 

 

280,709

 

 

 

 

Derivatives

 

 

55,276

 

 

 

 

 

 

55,276

 

 

 

 

Total

 

$

7,892,865

 

 

$

274,846

 

 

$

7,618,019

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

5,997

 

 

$

 

 

$

5,997

 

 

$

 

Securities sold not yet purchased

 

 

14,599

 

 

 

 

 

 

14,599

 

 

 

 

Total

 

$

20,596

 

 

$

 

 

$

20,596

 

 

$

 

 

Valuation methods for instruments measured at fair value on a recurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis:

Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available.  If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

Securities Available for Sale Fair values are based on quoted market prices or dealer quotes, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.  Prices are provided by third-party pricing services and are based on observable market inputs. On an annual basis, the Company compares a sample of these prices to other independent sources for the same securities. Additionally, throughout the year, if securities are sold, comparisons are made between the pricing services prices and the market prices at which the securities were sold.  Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing services. Based on this research, the pricing services may affirm or revise their quoted price. No significant adjustments have been made to the prices provided by the pricing services. The pricing services also provide documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.

Company-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

Bank-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

43


 

Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Securities sold not yet purchased Fair values are based on quoted market prices or dealer quotes, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.  Prices are provided by third-party pricing services and are based on observable market inputs.

Assets measured at fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

Fair Value Measurement at March 31, 2020 Using

 

Description

 

March 31, 2020

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

 

Total Losses Recognized During the Three Months Ended March 31

 

Collateral dependent assets

 

$

21,587

 

 

$

 

 

$

 

 

$

21,587

 

 

$

(6,607

)

Other real estate owned

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

 

Total

 

$

21,590

 

 

$

 

 

$

 

 

$

21,590

 

 

$

(6,607

)

 

 

 

Fair Value Measurement at December 31, 2019 Using

 

Description

 

December 31, 2019

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant Unobservable Inputs (Level 3)

 

 

Total Gains Recognized During the Twelve Months Ended December 31

 

Impaired loans

 

$

5,139

 

 

$

 

 

$

 

 

$

5,139

 

 

$

3,973

 

Other real estate owned

 

 

55

 

 

 

 

 

 

 

 

 

55

 

 

 

7

 

Total

 

$

5,194

 

 

$

 

 

$

 

 

$

5,194

 

 

$

3,980

 

 

Valuation methods for instruments measured at fair value on a non-recurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a non-recurring basis:

 

Collateral Dependent Assets/Impaired loans With the adoption of CECL, collateral dependent assets are assets evaluated as part of the ACL on an individual basis.  Those assets for which there is an associated allowance are considered financial assets measured at fair value on a non-recurring basis.  Prior to the adoption of CECL, loans identified as impaired were considered financial assets measured at fair value on a non-recurring basis.  The valuation method for collateral dependent assets and impaired loans is the same.  Adjustments are recorded on certain assets to reflect write-downs that are based on the external appraised value of the underlying collateral.  The external appraisals are generally based on recent sales of comparable properties which are then adjusted for the unique characteristics of the property being valued.  In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists within the Company’s property management group and the Company’s credit department. The valuation of the collateral dependent assets and impaired loans are reviewed on a quarterly basis.  Because many of these inputs are not observable, the measurements are classified as Level 3.

44


 

Other real estate owned Other real estate owned consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Other real estate owned is recorded as held for sale initially at the fair value of the collateral less estimated selling costs.  The initial valuation of the foreclosed property is obtained through an appraisal process similar to the process described in the impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods and those measurements are classified as Level 3.

Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.  The estimated fair value of the Company’s financial instruments at March 31, 2020 and December 31, 2019 are as follows (in thousands):

 

 

 

Fair Value Measurement at March 31, 2020 Using

 

 

 

Carrying Amount

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

 

Significant Other Observable Inputs (Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Total

Estimated

Fair Value

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

2,234,557

 

 

$

1,449,807

 

 

$

784,750

 

 

 

 

$

2,234,557

 

Securities available for sale

 

 

7,639,451

 

 

 

210,494

 

 

 

7,428,957

 

 

 

 

 

7,639,451

 

Securities held to maturity (exclusive of allowance for credit losses)

 

 

1,114,160

 

 

 

 

 

 

1,146,909

 

 

 

 

 

1,146,909

 

Trading securities

 

 

61,177

 

 

 

22,436

 

 

 

38,741

 

 

 

 

 

61,177

 

Other securities

 

 

135,194

 

 

 

 

 

 

135,194