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 September 30, 2024
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 October 28, 2024, UMB Financial Corporation had 48,798,443 shares of common stock outstanding.
INDEX
PART I – FINANCIAL INFORMATION
3
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
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
56
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
79
ITEM 4.
CONTROLS AND PROCEDURES
84
PART II - OTHER INFORMATION
85
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
87
SIGNATURES
88
2
ITEM 1. FINANCIAL STATEMENTS
(unaudited, dollars in thousands, except share and per share data)
September 30,
December 31,
2024
2023
ASSETS
Loans
$
24,990,791
23,172,484
Allowance for credit losses on loans
(248,907
)
(219,738
Net loans
24,741,884
22,952,746
Loans held for sale
5,176
4,420
Securities:
Available for sale (amortized cost of $7,465,379 and $7,692,860, respectively)
7,015,998
7,068,613
Held to maturity, net of allowance for credit losses of $2,762 and $3,258, respectively (fair value of $4,913,972 and $5,183,367, respectively)
5,474,710
5,688,610
Trading securities
35,839
18,093
Other securities
465,477
492,935
Total securities
12,992,024
13,268,251
Federal funds sold and securities purchased under agreements to resell
399,234
245,344
Interest-bearing due from banks
6,601,866
5,159,802
Cash and due from banks
778,069
447,201
Premises and equipment, net
222,056
241,700
Accrued income
218,651
220,306
Goodwill
207,385
Other intangibles, net
65,564
71,012
Other assets
1,264,519
1,193,507
Total assets
47,496,428
44,011,674
LIABILITIES
Deposits:
Noninterest-bearing demand
12,840,940
12,130,662
Interest-bearing demand and savings
24,798,869
20,588,606
Time deposits under $250,000
1,245,532
2,292,899
Time deposits of $250,000 or more
817,251
780,692
Total deposits
39,702,592
35,792,859
Federal funds purchased and repurchase agreements
2,023,297
2,119,644
Short-term debt
1,050,000
1,800,000
Long-term debt
384,758
383,247
Accrued expenses and taxes
387,223
389,860
Other liabilities
413,069
425,645
Total liabilities
43,960,939
40,911,255
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued, 48,797,672 and 48,554,127 shares outstanding, respectively
55,057
Capital surplus
1,138,350
1,134,363
Retained earnings
3,074,617
2,810,824
Accumulated other comprehensive loss, net
(395,856
(556,935
Treasury stock, 6,259,058 and 6,502,603 shares, at cost, respectively
(336,679
(342,890
Total shareholders' equity
3,535,489
3,100,419
Total liabilities and shareholders' equity
See Notes to Consolidated Financial Statements.
Three Months Ended
Nine Months Ended
INTEREST INCOME
416,400
367,485
1,202,317
1,018,920
Taxable interest
63,466
53,455
186,159
161,091
Tax-exempt interest
24,578
25,704
74,988
76,560
Total securities income
88,044
79,159
261,147
237,651
Federal funds and resell agreements
4,990
4,567
11,726
14,107
47,969
20,551
139,831
70,923
291
214
1,020
502
Total interest income
557,694
471,976
1,616,041
1,342,103
INTEREST EXPENSE
Deposits
262,599
191,919
726,999
490,368
Federal funds and repurchase agreements
27,070
23,076
82,813
71,123
Other
20,649
34,694
74,311
91,018
Total interest expense
310,318
249,689
884,123
652,509
Net interest income
247,376
222,287
731,918
689,594
Provision for credit losses
18,000
4,977
42,050
41,227
Net interest income after provision for credit losses
229,376
217,310
689,868
648,367
NONINTEREST INCOME
Trust and securities processing
74,222
66,668
213,710
190,616
Trading and investment banking
7,118
3,771
18,041
13,879
Service charges on deposit accounts
20,089
21,080
63,107
63,620
Insurance fees and commissions
282
272
832
771
Brokerage fees
15,749
13,400
42,929
40,680
Bankcard fees
22,394
19,296
66,708
56,047
Investment securities gains (losses), net
2,623
271
10,127
(4,153
16,266
8,559
47,452
40,139
Total noninterest income
158,743
133,317
462,906
401,599
NONINTEREST EXPENSE
Salaries and employee benefits
146,984
133,380
432,851
419,190
Occupancy, net
12,274
12,283
36,267
36,206
Equipment
15,988
17,204
48,094
52,139
Supplies and services
4,967
3,213
11,672
11,283
Marketing and business development
6,817
6,631
19,440
19,090
Processing fees
29,697
26,016
87,334
75,828
Legal and consulting
9,518
7,230
33,978
21,574
Bankcard
12,482
8,852
34,867
24,292
Amortization of other intangible assets
1,917
2,124
5,788
6,539
Regulatory fees
4,686
6,153
26,649
17,827
7,124
8,355
19,385
25,198
Total noninterest expense
252,454
231,441
756,325
709,166
Income before income taxes
135,665
119,186
396,449
340,800
Income tax expense
26,022
22,632
75,203
61,699
NET INCOME
109,643
96,554
321,246
279,101
PER SHARE DATA
Net income – basic
2.25
1.99
6.59
5.76
Net income – diluted
2.23
1.98
6.56
5.73
Dividends
0.39
0.38
1.17
1.14
Weighted average shares outstanding – basic
48,775,072
48,525,776
48,727,914
48,492,022
Weighted average shares outstanding – diluted
49,078,497
48,762,696
48,993,581
48,737,065
(unaudited, dollars in thousands)
Net income
Other comprehensive income (loss), before tax:
Unrealized gains and losses on debt securities:
Change in unrealized holding gains and losses, net
229,285
(151,753
175,005
(145,601
Less: Reclassification adjustment for net (gains) losses included in net income
—
(154
(139
279
Amortization of net unrealized loss on securities transferred from available-for-sale to held-to-maturity
9,618
10,268
27,345
30,563
Change in unrealized gains and losses on debt securities
238,903
(141,639
202,211
(114,759
Unrealized gains and losses on derivative hedges:
Change in unrealized gains and losses on derivative hedges, net
40,445
3,927
18,012
4,248
Less: Reclassification adjustment for net gains included in net income
(1,666
(2,844
(7,392
(8,065
Change in unrealized gains and losses on derivative hedges
38,779
1,083
10,620
(3,817
Other comprehensive income (loss), before tax
277,682
(140,556
212,831
(118,576
Income tax (expense) benefit
(67,904
34,016
(51,752
28,940
Other comprehensive income (loss)
209,778
(106,540
161,079
(89,636
Comprehensive income (loss)
319,421
(9,986
482,325
189,465
(unaudited, dollars in thousands, except per share data)
CommonStock
CapitalSurplus
RetainedEarnings
Accumulated Other Comprehensive (Loss) Income
TreasuryStock
Total
Balance – July 1, 2023
1,124,977
2,681,448
(685,831
(344,023
2,831,628
Total comprehensive income (loss)
Dividends ($0.38 per share)
(18,587
Purchase of treasury stock
(194
Issuances of equity awards, net of forfeitures
(351
351
Recognition of equity-based compensation
3,528
Sale of treasury stock
52
76
128
Exercise of stock options
33
109
142
Balance – September 30, 2023
1,128,239
2,759,415
(792,371
(343,681
2,806,659
Balance – July 1, 2024
1,132,301
2,984,152
(605,634
(338,529
3,227,347
Total comprehensive income
Dividends ($0.39 per share)
(19,178
(201
(256
256
4,846
112
77
189
1,379
1,718
3,097
Common stock issuance costs
(32
Balance – September 30, 2024
Balance – January 1, 2023
1,125,949
2,536,086
(702,735
(347,264
2,667,093
Dividends ($1.14 per share)
(55,772
(8,096
(10,115
10,834
719
11,983
167
216
383
255
629
884
Balance – January 1, 2024
Dividends ($1.17 per share)
(57,453
(7,738
(11,220
11,923
703
14,886
237
184
421
1,433
1,842
3,275
(1,349
For the Nine Months Ended
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums and discounts from acquisition
2,457
800
Depreciation and amortization
40,057
44,576
Amortization of debt issuance costs
657
Deferred income tax benefit
(6,798
(11,437
Net increase in trading securities and other earning assets
(17,746
(6,529
(Gains) losses on investment securities, net
(10,127
4,153
Gains on sales of assets
(3,210
(4,301
Amortization of securities premiums, net of discount accretion
20,666
32,516
Originations of loans held for sale
(60,019
(49,300
Gains on sales of loans held for sale, net
(1,516
(1,218
Proceeds from sales of loans held for sale
60,779
49,672
Equity-based compensation
15,589
12,702
Changes in:
2,852
(19,363
(1,687
77,577
Other assets and liabilities, net
(113,093
(63,208
Net cash provided by operating activities
292,157
387,625
INVESTING ACTIVITIES
Securities held to maturity:
Maturities, calls and principal repayments
329,830
336,216
Purchases
(97,027
(186,010
Securities available for sale:
Sales
19,154
22,193
7,104,618
1,005,538
(6,893,491
(522,134
Equity securities with readily determinable fair values:
(265
Equity securities without readily determinable fair values:
34,267
4,883
56,561
314,881
(43,488
(397,752
Payment of low-income housing tax credit (LIHTC) investment commitments
(29,456
(31,251
Net increase in loans
(1,727,556
(1,859,649
Net (increase) decrease in fed funds sold and resell agreements
(153,890
710,394
Net cash activity from acquisitions and divestitures
(109,046
(793
Net (increase) decrease in interest-bearing balances due from other financial institutions
(24,426
38,552
Purchases of premises and equipment
(14,026
(23,132
Proceeds from sales of premises and equipment
4,197
4,075
Net cash used in investing activities
(1,544,044
(584,183
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits
4,920,541
(1,633,496
Net (decrease) increase in time deposits
(1,010,808
2,426,115
Net decrease in fed funds purchased and repurchase agreements
(96,347
(464,565
Proceeds from short-term debt
500,000
32,856,000
Repayment of short-term debt
(1,250,000
(30,556,000
Cash dividends paid
(57,602
(55,312
Payment of common stock issuance costs
Proceeds from exercise of stock options and sales of treasury shares
3,696
1,267
Purchases of treasury stock
Net cash provided by financing activities
3,000,393
2,565,913
Increase in cash and cash equivalents
1,748,506
2,369,355
Cash and cash equivalents at beginning of period
5,528,258
1,557,874
Cash and cash equivalents at end of period
7,276,764
3,927,229
Supplemental disclosures:
Income tax payments
76,076
67,372
Total interest payments
879,867
577,907
Noncash disclosures:
Acquisition of low-income housing tax credit investments
24,316
56,922
Commitment to fund low-income housing tax credit investments
Transfer of loans to other real estate owned
828
8
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 (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, 2024. 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, 2023, filed with the Securities and Exchange Commission (SEC) on February 22, 2024 (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, Wisconsin, Iowa, Delaware, and New York.
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 September 30, 2024 and September 30, 2023 (in thousands):
Due from the FRB
6,498,695
3,472,524
454,705
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 $103.2 million and $82.0 million at September 30, 2024 and September 30, 2023, respectively.
Per Share Data
Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarter-to-date net income per share includes the dilutive effect of 303,425 and 236,920 shares issuable upon the exercise of stock options and nonvested restricted stock units granted by the Company and outstanding at September 30, 2024 and 2023, respectively. Diluted year-to-date net income per share includes the dilutive effect of 265,667 and 245,043 shares issuable upon the exercise of stock options and nonvested restricted stock units granted by the Company and outstanding at September 30, 2024 and 2023, respectively.
Certain options and restricted stock units issued under employee benefits plans were excluded from the computation of diluted earnings per share because they were anti-dilutive. For the three and nine months ended September 30, 2024, there were no outstanding stock options or restricted stock units excluded from the computation of diluted income per share. For the three and nine months ended September 30, 2023 there were 57,883 and 209,245, respectively, outstanding stock options and restricted stock units excluded from the computation of diluted income per share because their inclusion would have been anti-dilutive.
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, 13 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
Troubled Debt Restructurings In March 2022, the FASB issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments – Credit Losses: Troubled Debt Restructurings and Vintage Disclosures.” The ASU eliminated the accounting guidance for troubled debt restructurings (TDR) by creditors and enhanced disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments also added requirements to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases, disclosed by credit-quality indicator and class of financing receivable. The amendments in this update were adopted prospectively on January 1, 2023. The adoption of the amendments had no impact on the Consolidated Financial Statements aside from additional and revised financial statement disclosures. See Note 4, “Loans and Allowance for Credit Losses” for related disclosures.
Equity-Method Investments In March 2023, the FASB issued ASU No. 2023-02, "Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." The ASU allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. The Company adopted the amended guidance on January 1, 2024, upon which the Company elected to continue the use of the practical expedient under ASC 323-740-35-4 to account for low-income housing tax credit and historic tax credit investments. Under the practical expedient, the cost of a tax equity investment is amortized in proportion to income tax credits only and is recorded on a net basis within income tax expense. The adoption of this amendment did not have any impact on the Consolidated Financial Statements aside from annual disclosures which will be included in the Company's Annual Report on Form 10-K.
Income Taxes In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this update require additional disclosures primarily related to the rate
10
reconciliation and income taxes paid information. The amendments in this update are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The adoption of this accounting pronouncement will have no impact on the Consolidated Financial Statements aside from additional disclosures.
4. Loans and Allowance for Credit Losses
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 loans, which 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.
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, completion of the construction project, and the availability of long-term financing.
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
11
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 creditworthiness 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 credit scores relative to historical periods to monitor credit risk on its consumer credit card loans. During the first quarter of 2024, the Company purchased a co-branded credit card portfolio. The purchase included $109.4 million in credit card receivables.
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
The following tables provide a summary of loan classes and an aging of past due loans at September 30, 2024 and December 31, 2023 (in thousands):
September 30, 2024
30-89Days PastDue andAccruing
Greater than90 Days PastDue andAccruing
NonaccrualLoans
TotalPast Due
Current
Total Loans
Commercial and industrial
1,646
6,682
8,328
10,663,344
10,671,672
Specialty lending
473,267
Commercial real estate
598
2,515
9,778,484
9,780,999
Consumer real estate
921
11,575
12,572
3,098,507
3,111,079
Consumer
136
29
173
166,258
166,431
Credit cards
11,350
7,049
407
18,806
562,930
581,736
Leases and other
205,607
Total loans
15,970
7,133
19,291
42,394
24,948,397
December 31, 2023
2,851
7,033
9,884
9,920,045
9,929,929
498,786
1,848
737
2,585
8,891,341
8,893,926
1,137
5,058
6,195
2,954,437
2,960,632
104
55
28
187
163,104
163,291
5,343
3,056
285
8,684
415,272
423,956
71
301,893
301,964
3,111
13,212
27,606
23,144,878
12
The Company sold consumer real estate loans with proceeds of $60.8 million and $49.7 million in the secondary market without recourse during the nine months ended September 30, 2024 and 2023, respectively.
The Company has ceased the recognition of interest on loans with a carrying value of $19.3 million and $13.2 million at September 30, 2024 and December 31, 2023, respectively. Restructured loans totaled $200 thousand and $548 thousand at September 30, 2024 and December 31, 2023, respectively. Loans 90 days past due and still accruing interest amounted to $7.1 million and $3.1 million at September 30, 2024 and December 31, 2023, 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 2024 and 2023. Nonaccrual loans with no related allowance for credit losses totaled $19.3 million and $13.2 million at September 30, 2024 and December 31, 2023, respectively.
The following tables provide the amortized cost of nonaccrual loans with no related allowance for credit losses by loan class at September 30, 2024 and December 31, 2023 (in thousands):
Amortized Cost of Nonaccrual Loans with no related Allowance
Amortized Cost
The following tables provide a summary of the amortized cost balance of each of the Company’s loan classes disaggregated by collateral type and origination year as of September 30, 2024 and December 31, 2023, as well as the gross charge-offs by loan class and origination year for the nine months ended September 30, 2024 (in thousands):
13
Amortized Cost Basis by Origination Year - Term Loans
Loan Segment and Type
2022
2021
2020
Prior
Amortized Cost - Revolving Loans
Amortized Cost - Revolving Loans Converted to Term Loans
Commercial and industrial:
Equipment/Accounts Receivable/Inventory
1,662,078
1,421,119
1,061,876
842,182
317,214
203,349
4,989,858
2,371
10,500,047
Agriculture
12,739
5,889
3,605
2,697
462
246
135,047
400
161,085
Overdrafts
10,540
Total Commercial and industrial
1,674,817
1,427,008
1,065,481
844,879
317,676
203,595
5,135,445
2,771
Current period charge-offs
599
43
22
404
807
1,886
Specialty lending:
Asset-based lending
5,116
8,794
31,436
30,811
397,110
Total Specialty lending
Commercial real estate:
Owner-occupied
247,729
283,630
608,943
453,630
303,346
299,824
50,839
540
2,248,481
Non-owner-occupied
521,219
563,528
889,388
783,800
408,997
329,944
33,080
3,529,956
Farmland
44,144
47,678
58,890
36,959
187,088
26,481
102,243
324
503,807
5+ Multi-family
73,224
34,690
184,269
228,306
29,018
20,091
8,751
578,349
1-4 Family construction
28,607
12,076
55,920
3,113
99,716
General construction
286,145
679,619
1,429,098
349,096
4,093
563
70,972
1,104
2,820,690
Total Commercial real estate
1,201,068
1,621,221
3,226,508
1,851,791
932,542
676,903
268,998
1,968
236
14
250
Consumer real estate:
HELOC
90
460
202
284
4,868
366,946
1,271
374,121
First lien: 1-4 family
301,109
376,391
573,604
647,758
510,430
282,829
2,692,121
Junior lien: 1-4 family
11,346
10,839
10,490
6,025
3,220
2,842
75
44,837
Total Consumer real estate
312,545
387,230
584,554
653,985
513,934
290,539
367,021
49
57
27
175
308
Consumer:
Revolving line
35
84,132
316
84,483
Auto
7,559
8,378
4,077
2,362
976
392
23,744
4,984
3,155
14,303
25,743
372
8,815
58,204
Total Consumer
12,578
11,533
18,380
28,105
1,348
1,224
92,947
24
1
923
1,026
Credit cards:
314,163
Commercial
267,573
Total Credit cards
15,098
Leases and other:
Leases
1,510
18,596
61,169
58,484
13,690
13,268
11,280
27,610
204,097
Total Leases and other
12,790
3,224,720
3,508,161
4,962,201
3,423,886
1,809,579
1,185,051
6,870,867
6,326
2019
1,787,301
1,486,609
1,123,732
412,276
202,827
97,130
4,615,872
6,336
9,732,083
13,934
5,840
3,785
920
477
239
169,173
194,368
3,478
1,801,235
1,492,449
1,127,517
413,196
203,304
97,369
4,788,523
13,938
16,103
35,466
32,229
401,050
276,284
629,514
499,020
335,133
152,539
215,373
30,842
2,138,705
556,369
901,614
849,496
449,547
293,531
185,679
36,313
3,272,549
75,418
71,087
39,128
195,750
15,608
19,700
89,291
505,982
34,714
27,668
240,724
29,840
16,861
4,982
9,274
364,063
49,327
51,360
3,286
3,394
107,367
574,661
1,340,152
515,289
4,220
636
130
70,172
2,505,260
1,566,773
3,021,395
2,143,657
1,014,490
479,175
425,864
239,178
150
650
497
82
4,958
355,105
1,364
362,806
419,312
585,401
682,008
548,859
158,228
165,197
2,559,007
12,117
11,943
6,861
2,117
1,769
38,819
431,579
597,994
688,869
553,283
160,427
171,924
355,192
48
56,272
56,320
11,509
6,013
3,922
2,170
1,088
158
24,860
4,853
22,147
26,125
574
365
1,243
26,804
82,111
16,410
28,160
30,047
2,744
1,453
1,401
83,076
197,095
226,861
610
1,106
1,716
100,484
95,909
16,968
16,949
1,620
13,966
54,352
300,248
2,230
15,072
3,930,419
5,252,010
4,042,524
2,032,891
846,589
711,630
6,345,327
11,094
Accrued interest on loans totaled $120.4 million and $119.6 million as of September 30, 2024 and December 31, 2023, respectively, 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 receivable.
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.
15
The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. The loan ratings are summarized into the following categories: Pass, Special Mention, Substandard, and Doubtful. Any loan not classified in one of the categories described below is considered to be a Pass loan. A description of the general characteristics of the loan rating categories is as follows:
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 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 tables provide a summary of the amortized cost balance by collateral type and risk rating as of September 30, 2024 and December 31, 2023 (in thousands):
16
Risk by Collateral
Pass
1,611,855
1,395,688
995,069
820,239
316,176
198,413
4,781,179
875
10,119,494
Special Mention
2,453
22,583
10,773
9,845
62
88,962
134,678
Substandard
46,628
2,848
56,034
12,098
4,936
119,717
210
243,447
Doubtful
1,142
1,286
2,428
Total Equipment/Accounts Receivable/Inventory
4,575
132,801
150,675
8,164
2,246
10,410
Total Agriculture
1,767,383
1,462,714
1,115,205
411,441
194,181
94,606
4,473,085
6,243
9,524,858
3,000
17,857
5,186
39,059
65,316
15,708
6,038
3,341
621
8,646
2,524
103,728
93
140,699
1,210
5,122
839
159,565
183,961
66
1,236
1,302
652
81
8,372
9,105
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
17
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.
The following table provides a summary of the amortized cost balance by risk rating for asset-based loans as of September 30, 2024 and December 31, 2023 (in thousands):
Risk
In-margin
Out-of-margin
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
18
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.
212,334
283,561
606,230
451,594
298,553
293,345
2,196,996
30,803
1,046
1,993
4,787
38,629
4,592
69
1,667
6,479
12,856
Total Owner-occupied
520,732
550,501
864,388
3,491,442
487
13,027
25,000
38,514
Total Non-owner-occupied
25,330
45,345
46,487
186,094
19,999
101,243
461,457
999
12,403
1,000
14,402
17,815
2,333
994
6,482
27,948
Total Farmland
Total 5+ Multi-family
Total 1-4 Family construction
286,036
553
2,820,571
Total General construction
19
271,840
626,119
485,343
328,379
145,975
214,031
30,113
2,101,800
1,609
12,911
6,741
4,015
729
26,005
4,444
1,786
766
2,549
1,342
10,900
531,835
824,434
3,222,953
24,534
24,404
48,938
658
48,615
62,594
38,806
195,234
11,735
19,168
465,443
2,358
428
493
3,627
6,906
24,445
8,065
322
23
532
33,633
574,401
507,276
117
2,496,974
180
8,013
8,026
80
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.
20
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 first 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.
Performing
265
3,769
671
372,403
Non-performing
1,099
600
Total HELOC
300,778
374,444
568,721
646,282
510,281
281,847
2,682,353
331
1,947
1,476
149
982
9,768
Total First lien: 1-4 family
10,821
10,460
2,802
44,749
30
40
Total Junior lien: 1-4 family
21
579
466
3,737
355,047
1,308
361,369
31
1,221
58
1,437
418,766
583,711
681,921
548,736
158,037
164,315
2,555,488
546
1,690
123
191
882
3,519
12,094
11,911
1,722
38,717
32
47
102
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.
Total Revolving line
2,353
391
23,734
Total Auto
4,971
25,737
58,185
Total Other
3,908
24,846
22,133
82,097
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 which 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 one statement cycle to the next. These accounts incur monthly finance charges, and, sometimes, late fees. Revolvers are inherently higher risk and are tracked by credit 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 which 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.
The following table provides a summary of the amortized cost balance of consumer credit cards by risk rating as of September 30, 2024 and December 31, 2023 (in thousands):
Transactor accounts
90,627
74,330
Revolver accounts (by credit score):
Less than 600
16,299
7,140
600-619
8,588
3,572
620-639
14,044
640-659
20,142
9,536
660-679
20,147
9,642
680-699
23,960
11,220
700-719
25,532
13,489
720-739
22,461
12,896
740-759
18,927
12,434
760-779
18,570
12,955
780-799
17,353
11,822
800-819
10,984
7,808
820-839
5,503
4,054
840+
854
The following table provides a summary of the amortized cost balance of commercial credit cards by risk rating as of September 30, 2024 and December 31, 2023 (in thousands):
250,571
207,520
Past Due
17,002
19,341
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. All 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, accounts 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 a 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.
The following table provides a summary of the amortized cost balance by collateral type and risk rating as of September 30, 2024 and December 31, 2023 (in thousands):
204,072
300,152
25
96
Allowance for Credit Losses
The allowance for credit losses (ACL) is a valuation account that is deducted from loans’ and held-to-maturity (HTM) securities’ amortized cost bases to present the net amount expected to be collected on the instrument. Loans and HTM securities are charged off against the ACL when management believes the balance has become uncollectible. Expected recoveries are included in the allowance and 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 economic forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses and is tracked over an economic cycle to capture a ‘through the cycle’ loss history. 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 credit score changes, average prepayment rates, 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 quarters.
The ACL is measured on a collective (pool) basis when similar risk characteristics exists. The ACL also incorporates qualitative factors which represent adjustments to historical credit loss experience for items such as concentrations of credit and results of internal loan review. 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 ACL for Commercial and 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. The economic variables utilized are typically comprised of leading and lagging indicators. The ACL for Commercial and industrial loans is calculated by modeling probability of default (PD) over future periods multiplied by historical loss given default rates (LGD) multiplied by contractual exposure at default minus any estimated prepayments and charge offs.
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 ACL for specialty lending loans is calculated by using a bottom-up approach comparing collateral values to outstanding balances.
The ACL for the Commercial real estate segment is measured using a PD and LGD method. Primary risk characteristics within the segment are risk ratings of the individual loans, along with changes of macro-economic variables, such as interest rates, CRE price index, median household income, construction activity, farm income, and vacancy rates. The ACL for Commercial real estate loans is calculated by modeling PD over future periods based on peer bank data. The PD loss rate is then multiplied by historical LGD multiplied by contractual exposure at default minus any estimated prepayments and charge offs.
The ACL for the Consumer real estate and Consumer segments are measured using an origination vintage loss rate method applied to the loans’ amortized cost balance. 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. The ACL for Consumer credit cards is measured using a PD and LGD method for Revolvers and average historical loss rates across a defined lookback period for Transactors. The PD and LGD method used for Revolvers is similar in nature to the method used in the Commercial and industrial and Commercial real estate segments. Primary risk drivers within the segment are credit ratings of the individual card holders along with changes of macro-economic variables such as unemployment and retail sales. The ACL for Commercial credit cards is measured using roll-rate loss rate method based on days past due.
The ACL for the State and political 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. There is no ACL for the U.S. Agency and GSE mortgage-backed HTM securities portfolios as they are considered to be agency-backed securities with no risk of loss as they are either explicitly or implicitly guaranteed by the U.S. government. 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 credit scores will affect consumer credit cards,
26
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 prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a concessionary loan term has been granted to a borrower experiencing financial difficulty 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 include loans on nonaccrual, loans that include modifications deemed concessionary made to borrowers experiencing financial difficulty, or any loans specifically identified, and are excluded from the collective evaluation. When it is determined that payment of interest or recovery of all principal is questionable, 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 classified as collateral dependent if placed on non-accrual or include modifications made to borrowers experiencing financial difficulty.
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 and nine months ended September 30, 2024 and September 30, 2023 (in thousands):
Three Months Ended September 30, 2024
Total - Loans
HTM
Allowance for credit losses:
Beginning balance
150,526
68,862
3,567
632
13,936
1,644
239,167
2,956
242,123
Charge-offs
(892
(132
(357
(7,852
(4
(9,237
Recoveries
219
498
783
Provision
7,630
(1
3,238
287
188
7,106
(254
18,194
Ending balance - ACL
157,483
72,100
3,744
503
13,688
1,389
248,907
2,762
251,669
Allowance for credit losses on off-balance sheet credit exposures:
2,205
1,681
115
4,094
44
4,138
231
(235
(24
Ending balance - ACL on off-balance sheet
2,436
1,446
135
4,118
Three Months Ended September 30, 2023
163,810
42,192
6,527
417
7,231
1,984
222,161
2,828
224,989
(1,908
(762
(11
(2,511
(5,446
445
345
(4,129
762
3,524
304
303
2,651
504
3,919
3,977
158,218
45,716
6,826
7,716
2,488
221,462
2,886
224,348
3,079
186
430
119
177
4,003
4,088
1,013
(2
(3
(17
1,021
(21
4,092
160
5,024
64
5,088
Nine Months Ended September 30, 2024
155,658
45,507
6,941
1,089
7,935
2,608
219,738
3,258
222,996
(1,886
(250
(308
(1,026
(15,098
(18,572
1,837
138
1,632
4,245
1,874
26,843
(3,521
302
19,219
43,496
(496
43,000
(1,656
(186
986
(25
(906
(44
(950
Nine Months Ended September 30, 2023
136,737
39,370
6,148
494
6,866
2,221
191,836
2,407
194,243
(4,727
(1,153
(934
(6,181
(13,778
3,331
154
1,125
4,656
22,877
761
6,346
1,807
784
5,906
267
38,748
479
39,227
2,178
418
124
2,981
107
3,088
1,914
42
(7
98
2,043
(43
2,000
The allowance for credit losses on off-balance sheet credit exposures is recorded in the Accrued expenses and taxes line of the Company’s Consolidated Balance Sheets. See Note 10 “Commitments, Contingencies and Guarantees.”
Collateral Dependent Financial Assets
The following tables provide the amortized cost balance of financial assets considered collateral dependent as of September 30, 2024 and December 31, 2023 (in thousands):
Amortized Cost of Collateral Dependent Assets
Related Allowance for Credit Losses
Amortized Cost of Collateral Dependent Assets with no related Allowance
501
755
9,769
19,041
900
13,090
Modifications made to Borrowers Experiencing Financial Difficulty
In the normal course of business, the Company may execute loan modifications with borrowers. These modifications are analyzed to determine whether the modification is considered concessionary, long term and made to a borrower experiencing financial difficulty. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the borrower short-term cash relief to allow them to improve their financial condition. If a loan modification is determined to be made to a borrower experiencing financial difficulty, the loan is considered collateral dependent and evaluated as part of the ACL as described above in the Allowance for Credit Losses section of this note.
For the three months ended September 30, 2024, the Company had no new modifications. For the nine months ended September 30, 2024, the Company had two modifications on residential real estate loans made to borrowers experiencing financial difficulty with a total pre-modification loan balance of $291 thousand and a total
post-modification loan balance of $293 thousand. For the three and nine-months ended September 30, 2023, the Company had no new modifications.
The Company had no commitments to lend to borrowers experiencing financial difficulty for which the Company has modified an existing loan as of September 30, 2024 and 2023. 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 and nine months ended September 30, 2024 and 2023, the Company had no loan modifications made to borrowers experiencing financial difficulty for which there was a payment default within the 12 months following the modification date.
5. Securities
Securities Available for Sale
This table provides detailed information about securities available for sale at September 30, 2024 and December 31, 2023 (in thousands):
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
FairValue
U.S. Treasury
872,876
12,144
(2,480
882,540
U.S. Agencies
161,852
864
(895
161,821
Mortgage-backed
4,415,662
16,395
(394,116
4,037,941
State and political subdivisions
1,323,422
2,275
(66,451
1,259,246
Corporates
340,200
(17,820
322,402
Collateralized loan obligations
351,367
892
(211
352,048
7,465,379
32,592
(481,973
1,308,689
254
(10,201
1,298,742
162,406
252
(2,937
159,721
4,128,576
949
(508,740
3,620,785
1,359,744
2,218
(74,987
1,286,975
382,069
(30,794
351,275
351,376
811
(1,072
351,115
7,692,860
4,484
(628,731
The following table presents contractual maturity information for securities available for sale at September 30, 2024 (in thousands):
Amortized
Fair
Cost
Value
Due in 1 year or less
417,594
413,416
Due after 1 year through 5 years
1,502,487
1,501,582
Due after 5 years through 10 years
569,856
545,745
Due after 10 years
559,780
517,314
3,049,717
2,978,057
Mortgage-backed securities
Total securities available for sale
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 nine months ended September 30, 2024 and September 30, 2023, there were $19.2 million and $22.2 million, respectively, in proceeds from sales of securities available for sale. Securities transactions resulted in gross realized gains of $139 thousand for the nine months ended September 30, 2024. There were $154 thousand of gross realized gains and $2 thousand of gross realized losses for the nine months ended September 30, 2023.
There were $9.4 billion and $10.1 billion of securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at September 30, 2024 and December 31, 2023, respectively.
Accrued interest on securities available for sale totaled $31.0 million and $31.6 million as of September 30, 2024 and December 31, 2023, respectively, 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 September 30, 2024 and December 31, 2023 (in thousands):
Less than 12 months
12 months or more
Count
Fair Value
UnrealizedLosses
Description of Securities
77,337
(220
145,491
(2,260
222,828
88,736
116,390
(440
837
3,276,187
(393,676
850
3,392,577
70,861
(7,580
1,588
942,468
(58,871
1,678
1,013,329
243
320,380
111,998
(135
40,506
(76
152,504
126
376,586
(8,375
2,691
4,813,768
(473,598
2,817
5,190,354
509,946
(267
63
745,573
(9,934
1,255,519
116,324
(476
852
3,526,296
(508,264
866
3,545,450
388
200,835
(9,202
890,545
(65,785
1,864
1,091,380
4,246
210,872
(1,068
215,118
411
734,181
(9,949
2,706
5,840,885
(618,782
3,117
6,575,066
The unrealized losses in the Company’s investments 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 the State and political, Corporate, and Collateralized loan obligations 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.
During the nine months ended September 30, 2023, the Company recorded a $4.9 million impairment on one Corporate available-for-sale security.
As of September 30, 2024 and December 31, 2023, there was no ACL related to the Company’s available-for-sale securities as the decline in fair value did not result from credit issues.
Securities Held to Maturity
The following table provides detailed information about securities held to maturity at September 30, 2024 and December 31, 2023, respectively (in thousands):
Gross Unrealized Gains
Gross Unrealized Losses
Net Carrying Amount
116,301
115,233
2,574,440
50
(312,069
2,262,421
2,786,731
6,870
(257,283
2,536,318
(2,762
2,783,969
5,477,472
6,920
(570,420
4,913,972
123,210
(2,686
120,524
2,738,253
(356,657
2,381,614
2,830,405
21,021
(170,197
2,681,229
(3,258
2,827,147
5,691,868
21,039
(529,540
5,183,367
The following table presents contractual maturity information for securities held to maturity at September 30, 2024 (in thousands):
212,587
211,059
231,096
221,526
818,833
739,559
1,640,516
1,479,407
2,903,032
2,651,551
Total securities held to maturity
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 no sales of securities held to maturity during the nine months ended September 30, 2024 or 2023.
During the year ended December 31, 2022, securities with an amortized cost of $4.1 billion and a fair value of $3.8 billion were transferred from the available-for-sale classification to the held-to-maturity classification as the Company has the positive intent and ability to hold these securities to maturity. The transfers of securities were
made at fair value at the time of transfer. The unrealized holding loss at the time of transfer is retained in AOCI and will be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfers. The amortized cost balance of securities held to maturity in the tables above includes a net unamortized unrealized loss of $179.8 million and $207.2 million at September 30, 2024 and December 31, 2023, respectively.
Accrued interest on securities held to maturity totaled $23.2 million and $27.2 million as of September 30, 2024 and December 31, 2023, respectively, 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 held-to-maturity securities presented above. Further, the Company has elected not to measure an ACL for accrued interest receivable.
The following table shows the Company’s held-to-maturity 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 September 30, 2024 and December 31, 2023, respectively (in thousands):
Unrealized Losses
263
2,258,726
274,996
(20,419
1,422
1,928,875
(236,864
1,474
2,203,871
1,695
4,302,834
(550,001
1,747
4,577,830
U.S. Agency
1,469
(14
2,377,922
(356,643
2,379,391
146
570,950
(22,557
1,343
1,612,442
(147,640
1,489
2,183,392
148
572,419
(22,571
1,617
4,110,888
(506,969
1,765
4,683,307
The unrealized losses in the Company’s held-to-maturity portfolio were caused by changes in the interest rate environment. The U.S. Agency and GSE mortgage-backed securities are considered to be agency-backed securities with no risk of loss as they are either explicitly or implicitly guaranteed by the U.S. government. Therefore, the Company’s expected lifetime loss for these portfolios is zero and there is no ACL recorded for these portfolios. 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 Company’s holdings are in general obligation bonds as well as private placement bonds, which have very low historical default rates due to issuers generally having unlimited taxing authority to service the debt. 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. The underlying bonds are evaluated for credit losses in conjunction with management’s estimate of the ACL based on credit rating.
34
The following tables show the amortized cost basis by credit rating of the Company’s held-to-maturity investments at September 30, 2024 and December 31, 2023 (in thousands):
Amortized Cost Basis by Credit Rating - HTM Debt Securities
AAA
AA
A
BBB
BB
CCC-C
State and political subdivisions:
Competitive
433,791
655,355
26,259
22,062
1,137,467
Utilities
759,859
762,380
99,953
26,432
640
1,649,264
Total state and political subdivisions
533,744
681,787
26,899
B
7,704
464,349
641,743
30,734
15,326
2,649
1,162,505
757,381
795,448
87,736
26,720
615
1,667,900
803,152
552,085
668,463
31,349
Competitive held-to-maturity securities include not-for-profit enterprises that provide 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 and general obligation 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 September 30, 2024 and December 31, 2023.
Trading Securities
There were net unrealized gains on trading securities of $44 thousand and net unrealized losses of $248 thousand at September 30, 2024 and 2023, respectively. Net unrealized gains and losses are included in trading and investment banking income on the Company’s Consolidated Statements of Income. Securities sold not yet purchased totaled $11.3 million and $8.0 million at September 30, 2024 and December 31, 2023, respectively, and are classified within the Other liabilities line of the Company’s Consolidated Balance Sheets.
Other Securities
The table below provides detailed information for Other securities at September 30, 2024 and December 31, 2023 (in thousands):
FRB and FHLB stock
53,922
87,672
Equity securities with readily determinable fair values
11,783
11,228
Equity securities without readily determinable fair values
399,772
394,035
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. Equity securities with readily determinable fair values are generally traded on an exchange and market prices are readily available. Equity securities without readily determinable fair values include 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. Unrealized gains or losses on equity securities with and without readily determinable fair values are recognized in the Investment securities gains, net line of the Company’s Consolidated Statements of Income.
Investment Securities Gains, Net
The table below presents the components of Investments securities gains (losses), net for the three and nine months ended September 30, 2024 and September 30, 2023 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
Available-for-sale debt securities:
Gains realized on sales
139
Losses realized on sales
Impairment of AFS security
(4,925
Fair value adjustments, net
340
(223
(197
738
(2,277
817
1,545
11,974
Total investment securities gains (losses), net
6. Goodwill and Other Intangibles
Changes in the carrying amount of goodwill for the periods ended September 30, 2024 and December 31, 2023 by reportable segment are as follows (in thousands):
Commercial Banking
Institutional Banking
Personal Banking
Balances as of January 1, 2024
63,113
76,492
67,780
Balances as of September 30, 2024
Balances as of January 1, 2023
Balances as of December 31, 2023
The following table lists the finite-lived intangible assets that continue to be subject to amortization as of September 30, 2024 and December 31, 2023 (in thousands):
As of September 30, 2024
Core Deposit Intangible Assets
Customer Relationships
Gross carrying amount
2,345
86,800
89,145
Accumulated amortization
1,484
22,097
23,581
Net carrying amount
861
64,703
36
As of December 31, 2023
109,978
112,323
1,135
40,176
41,311
69,802
The following table has the aggregate amortization expense recognized in each period (in thousands):
Aggregate amortization expense
The following table lists estimated amortization expense of intangible assets in future periods (in thousands):
For the three months ending December 31, 2024
For the year ending December 31, 2025
7,510
For the year ending December 31, 2026
6,650
For the year ending December 31, 2027
4,678
For the year ending December 31, 2028
4,566
7. Borrowed Funds
The components of the Company's short-term and long-term debt are as follows (in thousands):
Short-term debt:
Federal Home Loan Bank 5.47% and 5.04%, respectively
250,000
1,000,000
Federal Reserve Discount Window 4.76% and 4.83%, respectively
800,000
Total short-term debt
Long-term debt:
Trust Preferred Securities:
Marquette Capital Trust I Subordinated Debentures 6.89%
18,840
18,607
Marquette Capital Trust II Subordinated Debentures 6.89%
19,348
19,132
Marquette Capital Trust III Subordinated Debentures 6.51%
7,600
7,517
Marquette Capital Trust IV Subordinated Debentures 6.81%
30,678
30,356
Subordinated notes 3.70%, net of issuance costs
199,569
199,232
Subordinated notes 6.25%, net of issuance costs
108,723
108,403
Total long-term debt
Total borrowed funds
1,434,758
2,183,247
The Company assumed long-term debt obligations from the acquisition of Marquette Financial Companies (Marquette) consisting of debt obligations payable to four unconsolidated trusts (Marquette Capital Trust I, Marquette Capital Trust II, Marquette Capital Trust III, and Marquette Capital Trust IV) that previously issued trust preferred securities. These long-term debt obligations had an aggregate contractual balance of $103.1 million and had a carrying value of $76.5 million and $75.6 million as of September 30, 2024 and December 31, 2023, respectively. Interest rates on trust preferred securities are tied to the three-month term Secured Overnight Financing Rate (SOFR) with spreads ranging from 133 basis points to 160 basis points and reset quarterly. The trust preferred securities have maturity dates ranging from January 2036 to September 2036.
37
In September 2020, the Company issued $200.0 million of 3.70% fixed-to-fixed rate subordinated notes that mature on September 17, 2030. The notes bear interest at the rate of 3.70% per annum, payable semi-annually on each March 17 and September 17. The Company may redeem the notes, in whole or in part, on September 17, 2025, or on any interest payment date thereafter. Unamortized debt issuance costs related to these notes totaled $0.4 million and $0.8 million as of September 30, 2024 and December 31, 2023, respectively. Proceeds from the issuance of the notes were used for general corporate purposes, including contributing Tier 1 capital into the Bank.
In September 2022, the Company issued $110.0 million of 6.25% fixed-to-fixed rate subordinated notes that mature on September 28, 2032. The notes bear interest at the rate of 6.25% per annum, payable semi-annually on each March 28 and September 28. The Company may redeem the notes, in whole or in part, on September 28, 2027, or on any interest payment date thereafter. Unamortized debt issuance costs related to these notes totaled $1.3 million and $1.6 million as of September 30, 2024 and December 31, 2023, respectively. Proceeds from the issuance of the notes were used for general corporate purposes, including contributing Tier 1 capital into the Bank.
The Company is a member bank of the FHLB of Des Moines. Through this relationship, the Company purchased $21.4 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company’s borrowing capacity is dependent upon the amount of collateral the Company places at the FHLB. The Company had one short-term advance for $250.0 million outstanding at FHLB of Des Moines as of September 30, 2024. This advance matured in October 2024. Additionally, during 2024, the FHLB of Des Moines issued a letter of credit for $150.0 million on behalf of the Company to secure deposits. This letter of credit expired in October 2024 and was subsequently renewed with an expiration date in January 2025. The Company’s borrowing capacity with the FHLB was $1.6 billion as of September 30, 2024.
The Company had an $800.0 million short-term borrowing outstanding with the Federal Reserve Bank's Bank Term Funding Program (BTFP) as of September 30, 2024. The BTFP borrowing was repaid in October 2024 in advance of its maturity. The Company’s remaining borrowing capacity with the BTFP was $18.0 million and its remaining borrowing capacity at the Federal Reserve Discount Window was $11.8 billion as of September 30, 2024.
The Company has a revolving line of credit with Wells Fargo Bank, N.A. which allows the Company to borrow up to $30.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company’s option either 1.40% above Term SOFR or 1.75% below the prime rate on the date of an advance. The Company pays a 0.4% unused commitment fee for unused portions of the line of credit. The Company currently has no outstanding balance on this line of credit.
The Company enters into sales of securities with simultaneous agreements to repurchase (repurchase agreements). 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 September 30, 2024 and December 31, 2023, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings (in thousands):
Remaining Contractual Maturities of the Agreements
Overnight
2-29 Days
30-90 Days
Over 90 Days
Repurchase agreements, secured by:
194,111
1,444,382
31,560
339,979
500
1,816,421
Total repurchase agreements
1,638,493
2,010,532
38
119,528
43,618
163,146
1,711,014
186,289
45,382
1,942,685
1,830,542
89,000
2,105,831
8. Business Segment Reporting
The Company has strategically aligned its operations into the following three 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. For comparability purposes, amounts in all periods are based on methodologies in effect at September 30, 2024. 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 Company’s 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, the Company’s specialty lending group offers a variety of business solutions including asset-based lending, 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, Inc., which provides fund administration and accounting, transfer agency services, and other services to mutual fund and alternative investment groups. 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, and residential mortgages. 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.
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Business Segment Information
Business Segment financial results for the three and nine months ended September 30, 2024 and September 30, 2023 were as follows (in thousands):
167,769
45,341
34,266
15,764
435
1,801
Noninterest income
30,223
100,687
27,833
Noninterest expense
85,198
102,565
64,691
Income (loss) before taxes
97,030
43,028
(4,393
Income tax expense (benefit)
18,527
8,147
(652
Net income (loss)
78,503
34,881
(3,741
Average assets
21,525,000
14,596,000
7,146,000
43,267,000
148,666
43,133
30,488
3,010
423
1,544
23,091
86,521
23,705
81,767
87,502
62,172
86,980
41,729
(9,523
16,181
7,797
(1,346
70,799
33,932
(8,177
20,838,000
12,232,000
6,454,000
39,524,000
485,503
146,703
99,712
34,763
1,760
5,527
100,908
288,495
73,503
263,397
298,472
194,456
288,251
134,966
(26,768
53,747
25,016
(3,560
234,504
109,950
(23,208
21,386,000
14,194,000
7,006,000
42,586,000
444,083
148,615
96,896
35,110
754
5,363
71,658
257,573
72,368
251,667
268,464
189,035
228,964
136,970
(25,134
40,727
24,405
(3,433
188,237
112,565
(21,701
20,425,000
12,476,000
6,571,000
39,472,000
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.
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.
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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 September 30, 2024 and September 30, 2023, the Company had $10.2 million and $9.6 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. For the nine months ended September 30, 2024 and September 30, 2023, the Company had $28.5 million and $30.3 million of expense, respectively, related to these rebates and rewards programs. All material performance obligations are satisfied as of the end of each accounting period.
Investment securities gains, net – In the regular course of business, the Company recognizes gains and losses on the sale of available-for-sale securities. Additionally, the Company recognizes gains and losses on equity securities with readily determinable fair values and equity securities without readily determinable fair values. These gains and losses are recognized in accordance with ASC 321, 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, 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.
The Company had no material contract assets, contract liabilities, or remaining performance obligations as of September 30, 2024. Total receivables from revenue recognized under the scope of ASC 606 were $88.1 million and $86.6 million as of September 30, 2024 and December 31, 2023, 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 noninterest income according to revenue stream and Business Segment for the three and nine months ended September 30, 2024 and September 30, 2023. As stated in Note 8, “Business Segment Reporting,” for comparability purposes, amounts in all periods are based on methodologies in effect at September 30, 2024 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):
Revenue (Expense) out of Scope of ASC 606
59,843
14,379
211
6,907
10,543
8,119
68
13,689
1,992
18,776
8,421
5,377
(10,180
Investment securities gains, net
1,169
674
740
13,683
Total Noninterest income
30,556
90,957
24,171
13,059
52,939
13,729
118
3,653
9,917
1,292
11,353
1,978
16,763
6,337
5,483
(9,287
223
653
6,844
26,900
81,503
23,407
1,507
170,394
43,316
757
17,284
31,386
27,638
4,002
201
37,091
5,637
54,099
25,077
15,978
(28,446
2,261
2,074
41,648
87,155
263,218
71,839
40,694
150,531
40,085
431
13,448
28,150
30,815
4,587
197
34,835
5,648
49,263
19,677
16,775
(29,668
Investment securities losses, net
613
1,817
1,971
35,738
78,223
238,106
69,837
15,433
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 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):
Contractual or Notional Amount
Commitments to extend credit for loans (excluding credit card loans)
12,875,899
12,831,831
Commitments to extend credit under credit card loans
5,439,782
4,286,604
Commercial letters of credit
647
Standby letters of credit
416,842
407,574
Forward contracts
78,086
26,471
Spot foreign exchange contracts
36,241
4,830
Commitments to extend credit for securities purchased under agreements to resell
60,000
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 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: includes 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.
The ACL for off-balance sheet credit exposures was $4.1 million and $5.1 million at September 30, 2024 and December 31, 2023, respectively, and was recorded in the Accrued expenses and taxes line of the Company’s Consolidated Balance Sheets. There was no provision for off-balance sheet credit exposures recorded for the three months ended September 30, 2024. For the nine months ended September 30, 2024, a reduction of $1.0 million of provision was recorded for off-balance sheet credit exposures. For the three and nine months ended September 30, 2023, provision of $1.0 million and $2.0 million, respectively, was recorded for off-balance sheet credit exposures. Provision for off-balance sheet credit exposure is recorded in the Provision for credit losses line of the Company’s Consolidated Statements of Income.
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 September 30, 2024 and December 31, 2023. The Company’s derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets.
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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 September 30, 2024 and December 31, 2023 (in thousands):
Derivative Assets
Derivative Liabilities
Interest Rate Products:
Derivatives not designated as hedging instruments
88,602
99,574
92,969
105,016
Derivatives designated as hedging instruments
169,912
61,922
67
258,514
161,496
93,078
105,083
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 interest rates. 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 both September 30, 2024 and December 31, 2023, the Company did not have any interest rate swaps that were designated as fair value hedges of interest rate risk.
During 2022 and 2023, the Company terminated 10 fair value hedges of interest rate risk associated with the Company's municipal bond securities. For the three months ended September 30, 2024 and 2023 the Company reclassified $1.2 million and $1.3 million, respectively, from AOCI to Interest income in connection with these terminated hedges. For the nine months ended September 30, 2024 and 2023 the Company reclassified $4.9 million and $3.5 million, respectively, from AOCI to Interest income in connection with these terminated hedges. The unrealized gain on the terminated fair value hedges remaining in AOCI was $51.2 million net of tax, and $55.0 million net of tax, as of September 30, 2024 and December 31, 2023, respectively. The hedging adjustments will be amortized through the contractual maturity date of each respective hedged item.
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 Interest income in the Consolidated Statements of Income.
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, floors, and floor spreads 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 September 30, 2024 and December 31, 2023, the Company had two 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 September 30, 2024 and December 31, 2023.
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. Interest
46
rate floor spreads designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the purchased floor rate on the contract in exchange for an upfront premium, and involve payment of variable-rate amounts to the counterparty if interest rates fall below the sold floor rate on the contract. As of September 30, 2024, the Company had 11 interest rate floors and floor spreads with an aggregate notional amount of $2.5 billion that were designated as cash flow hedges of interest rate risk. As of December 31, 2023, the Company had three interest rate floors and floor spreads with an aggregate notional amount of $1.0 billion that were designated as cash flow hedges of interest rate risk.
In 2020, the Company terminated an interest rate floor designated as a cash flow hedge. As of December 31, 2023, the gross unrealized gain on the terminated interest rate floor remaining in AOCI was $2.0 million net of tax. As of September 30, 2024 there was no gross unrealized gain on the terminated interest rate floor remaining in AOCI. The unrealized gain was reclassified into Interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions.
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 hedged items. Amounts reported in AOCI related to interest rate floor and floor spread derivatives will be reclassified to Interest income as interest payments are received or paid on the Company’s items. The Company expects to reclassify $0.7 million from AOCI as a reduction to Interest expense and $6.6 million from AOCI to Interest income during the next 12 months. As of September 30, 2024, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 12.0 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. The changes in the fair value of both the customer swaps and the offsetting swaps are recognized in Other noninterest expense in the Consolidated Statements of Income. As of September 30, 2024, the Company had 292 interest rate swaps with an aggregate notional amount of $5.1 billion related to this program. As of December 31, 2023, the Company had 258 interest rate swaps with an aggregate notional amount of $4.3 billion.
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 Interest income and Other noninterest expense in the Consolidated Statements of Income related to the Company’s derivative assets and liabilities for the three and nine months ended September 30, 2024 and September 30, 2023 (in thousands):
Amount of Gain (Loss) Recognized
For the Three Months Ended
Interest Rate Products
(94
(27
60
Derivatives designated as hedging instruments:
Fair value adjustments on derivatives
904
Fair value adjustments on hedged items
(55
(902
These tables provide 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 and nine months ended September 30, 2024 and September 30, 2023 (in thousands):
For the Three Months Ended September 30, 2024
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
Gain Reclassified from AOCI into Earnings
Gain Reclassified from AOCI into Earnings Included Component
Loss Reclassified from AOCI into Earnings Excluded Component
Interest rate floors and floor spreads
42,906
62,860
(19,954
116
958
(842
Interest rate swaps
(2,461
373
60,399
489
1,331
For the Three Months Ended September 30, 2023
Gain Recognized in OCI on Derivative
Gain Recognized in OCI Included Component
Gain Recognized in OCI Excluded Component
Interest rate floor
1,164
1,731
(567
371
1,535
2,102
For the Nine Months Ended September 30, 2024
17,748
25,147
(7,399
1,333
4,084
(2,751
264
1,124
25,411
5,208
For the Nine Months Ended September 30, 2023
3,600
5,283
(1,683
931
4,531
6,214
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.
The Company has minimum collateral posting thresholds with certain of its derivative counterparties. At September 30, 2024, the Company had not posted any collateral as there were no derivatives in a net liability position. If the Company had breached any of these provisions at September 30, 2024, 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 September 30, 2024, and December 31, 2023, 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 September 30, 2024 and December 31, 2023 (in thousands):
Fair Value Measurement at September 30, 2024
Description
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Assets
1,611
10,221
14,443
9,160
Trading – other
11,175
24,664
Available-for-sale securities
1,204,942
5,811,056
Company-owned life insurance
77,853
Bank-owned life insurance
536,131
7,936,118
1,227,900
6,708,218
Liabilities
Securities sold not yet purchased
11,293
104,371
Fair Value Measurement at December 31, 2023
881
1,738
13,482
1,974
2,873
15,220
Available for sale securities
1,650,017
5,418,596
69,727
523,960
7,853,117
1,664,118
6,188,999
8,018
113,101
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.
Available-for-Sale Securities 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.
Equity securities with readily determinable fair values Fair values are based on quoted market prices.
Company-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.
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Bank-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.
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 September 30, 2024 and December 31, 2023 (in thousands):
Fair Value Measurement at September 30, 2024 Using
Total (Losses) Gains Recognized During the Nine Months Ended September 30
Collateral dependent assets
2,399
Other real estate owned
227
2,626
(894
Fair Value Measurement at December 31, 2023 Using
Total Gains Recognized During the Twelve Months Ended December 31
2,796
141
4,534
207
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 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. 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 valuations of the collateral dependent assets are
reviewed on a quarterly basis. Because many of these inputs are not observable, the measurements are classified as Level 3.
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 collateral dependent assets 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 September 30, 2024 and December 31, 2023 are as follows (in thousands):
Carrying Amount
SignificantUnobservableInputs(Level 3)
TotalEstimatedFair Value
FINANCIAL ASSETS
Cash and short-term investments
7,779,169
7,379,935
Securities available for sale
Securities held to maturity (exclusive of allowance for credit losses)
453,694
Loans (exclusive of allowance for credit losses)
24,995,967
25,164,755
FINANCIAL LIABILITIES
Demand and savings deposits
37,639,809
Time deposits
2,062,783
2,070,381
Other borrowings
3,073,297
12,765
3,060,532
419,863
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans
8,672
Commitments to extend resell agreements
292
3,241
53
5,852,347
5,612,003
240,344
481,707
23,176,904
22,969,788
32,719,268
3,073,591
3,919,644
13,813
3,905,831
413,896
11,523
208
4,047
Cash and short-term investments The carrying amounts of cash and due from banks, federal funds sold and resell agreements are reasonable estimates of their fair values.
Securities held to maturity For U.S. Agency and mortgage-backed securities, as well as general obligation bonds in the State and political subdivision portfolio, 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. 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. For private placement bonds in the State and political subdivision portfolio, fair values are estimated by discounting the future cash flows using current market rates.
Other securities Amount consists of FRB and FHLB stock held by the Company, equity securities with readily determinable fair values, and equity securities without readily determinable fair values, including equity-method investments and other miscellaneous investments. The carrying amount of the FRB and FHLB stock equals its fair value because the shares can only be redeemed by the FRB and FHLB at their carrying amount. Equity securities with readily determinable fair values are measured at fair value using quoted market prices. Equity securities without readily determinable fair values are carried at cost, which approximates fair value.
Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans are estimated by discounting the future cash flows. The
54
discount rates used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.
Demand and savings deposits The fair value of demand deposits and savings accounts is the amount payable on demand at September 30, 2024 and December 31, 2023.
Time deposits The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.
Other borrowings The carrying amounts of federal funds purchased, repurchase agreements and other short-term debt are reasonable estimates of their fair value because of the short-term nature of their maturities. Federal funds purchased are classified as Level 1 based on availability of quoted market prices and repurchase agreements and other short-term debt are classified as Level 2.
Long-term debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Other off-balance sheet instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair value at period-end are significant to the Company’s consolidated financial position.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations highlights the material changes in the results of operations and changes in financial condition of the Company for the three and nine months ended September 30, 2024. It should be read in conjunction with the accompanying Consolidated Financial Statements, Notes to Consolidated Financial Statements and other financial information appearing elsewhere in this Form 10-Q and the Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
From time to time the Company has made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast,” “target,” “trend,” “plan,” “goal,” or other words of comparable meaning or future-tense or conditional verbs such as “may,” “will,” “should,” “would,” or “could.” Forward-looking statements convey the Company’s expectations, intentions, or forecasts about future events, circumstances, results, or aspirations, in each case as of the date such forward-looking statements are made.
This Form 10-Q, including any information incorporated by reference in this Form 10-Q, contains forward-looking statements. The Company also may make forward-looking statements in other documents that are filed or furnished with the Securities and Exchange Commission. In addition, the Company may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others.
All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond the Company’s control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements include:
Any forward-looking statement made by the Company or on its behalf speaks only as of the date that it was made. The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except as required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that the Company may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.
Overview
The Company focuses on the following four core financial objectives. Management believes these objectives will guide its efforts to achieve its vision, to deliver the Unparalleled Customer Experience, all while seeking to improve net income and strengthen the balance sheet while undertaking prudent risk management.
The first financial objective is to continuously improve operating efficiencies. The Company has focused on identifying efficiencies that simplify our organizational and reporting structures, streamline back-office functions, and take advantage of synergies and newer technologies among various platforms and distribution networks. The Company has identified and expects to continue identifying ongoing efficiencies through the normal course of business that, when combined with increased revenue, will contribute to improved operating leverage. During the third quarter of 2024, total revenue increased $50.5 million, or 14.2%, as compared to the third quarter of 2023, while noninterest expense increased $21.0 million, or 9.1%, for the same period. As part of the initiative to improve operating efficiencies, the Company continues to invest in technological advances that it believes will help management drive operating leverage in the future through improved data analysis and automation. The Company also continues to evaluate core systems and will invest in enhancements that it believes will yield operating efficiencies.
The second financial objective is to increase net interest income through profitable loan and deposit growth and the optimization of the balance sheet. During the third quarter of 2024, the Company had an increase in net interest income of $25.1 million, or 11.3%, from the same period in 2023. The change in net interest income was driven by increased average loan growth and higher rates, partially offset by higher interest expense due to an unfavorable mix shift in the composition of liabilities. These changes are driven by the higher interest rate environment compared to the third quarter of 2023. The increase in interest income was driven by a $1.6 billion, or 7.2%, increase in average loans, driven by organic loan growth, coupled with the impact of higher short-term and long-term interest rates. The funding for these assets was driven primarily by a $4.5 billion, or 21.0%, increase in average interest-bearing deposits, offset by a decrease in average borrowed funds of $1.1 billion, or 43.8%, compared to the same period in 2023. Net interest margin, on a tax-equivalent basis, increased three basis points compared to the same period in 2023, primarily due to increased loan yields and earning asset mix, partially offset by the cost and mix of interest-bearing liabilities. Net interest spread increased by three basis points during the same period. The Company expects to see continued volatility in the economic markets resulting from governmental responses to inflation and reversionary signs in the economy. These changing conditions could have impacts on the balance sheet and income statement of the Company for the remainder of the year.
The third financial objective is to grow the Company’s revenue from noninterest sources. The Company seeks to grow noninterest revenues throughout all economic and interest rate cycles, while positioning itself to benefit in periods of economic growth. Noninterest income increased $25.4 million, or 19.1%, to $158.7 million for the three months ended September 30, 2024, compared to the same period in 2023. See greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. For the three months ended September 30, 2024, noninterest income represented 39.1% of total revenue, compared to 37.5% for the same period in 2023. The recent economic changes have impacted fee income, especially those with assets tied to market values and interest rates.
The fourth financial objective is effective capital management. The Company places a significant emphasis on maintaining a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, evaluating acquisition opportunities that complement the Company’s strategies, increasing
dividends over time, and appropriately utilizing a share repurchase program. At September 30, 2024, the Company had $3.5 billion in total shareholders’ equity. This is an increase of $728.8 million, or 26.0%, compared to total shareholders’ equity at September 30, 2023. At September 30, 2024, the Company had a total risk-based capital ratio of 13.14%. The Company did not repurchase shares of common stock during the third quarter of 2024, except for shares acquired pursuant to the Company's share-based incentive programs.
On April 28, 2024, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with HTLF, a Delaware corporation, and Blue Sky Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of the Company. The Merger Agreement and the merger were unanimously approved by the boards of directors of the Company and HTLF. Pending regulatory approval and approval by the shareholders of the Company and HTLF, the merger is expected to close in the first quarter of 2025. Under the terms of the Merger Agreement, HTLF stockholders will receive a fixed exchange ratio of 0.55 shares of the Company’s common stock for each share of HTLF stock, with a total market value of approximately $2.0 billion.
Additionally, on April 29, 2024, the Company also announced that in connection with the execution of the Merger Agreement, it entered into a forward sale agreement with BofA Securities, Inc. or its affiliate to issue 2,800,000 shares of its common stock for approximate proceeds of $201.6 million. The underwriters were granted an option to purchase up to an additional 420,000 shares of the Company's common stock exercisable within 30 days of April 28, 2024. The underwriters exercised this option in full on April 30, 2024, upon which the Company entered into an additional forward sale agreement relating to the 420,000 shares of the Company's common stock. The forward purchase agreement is classified as an equity instrument under ASC 815-40, Contracts in Entity’s Own Equity.
The rapid rise in interest rates during 2022 and 2023, the resulting industry-wide reduction in the fair value of securities portfolios, and the bank runs that led to the failures of some financial institutions in March of 2023, among other events, have resulted in significant volatility in the U.S. banking sector and heightened focus on liquidity, uninsured deposits, deposit composition, unrecognized investment losses, and capital.
During November 2023, the Federal Deposit Insurance Corporation (the FDIC) approved a final rule to implement a special assessment to recover the losses to the Deposit Insurance Fund (the DIF) associated with protecting uninsured depositors following the closures of certain financial institutions in March of 2023. The assessment base for the special assessment is equal to an insured depository institution’s uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion, and will be collected at an annual rate of 13.4 basis points for eight quarterly assessment periods. The Company’s portion of this special assessment was $52.8 million and was recognized in noninterest expense during the fourth quarter of 2023. During 2024, the FDIC increased the estimated loss attributable to the 2023 bank failures, which in turn increased the special assessment the FDIC will charge to insured depository institutions. The FDIC also announced that the special assessment will be collected for an additional two quarters beyond the initial eight-quarter collection period, at an estimated quarterly rate of 1.9 basis points. The projected number of additional quarters and the estimated rate applicable to those quarters is subject to change based on future adjustments to estimated losses or amendments to the assessment base. The Company recorded $7.5 million of expense related to the updated special assessment during the nine months ended September 30, 2024 and its impacts are discussed below.
Earnings Summary
The following is a summary regarding the Company’s earnings for the third quarter of 2024. The changes identified in the summary are explained in greater detail below. The Company recorded net income of $109.6 million for the three-month period ended September 30, 2024, compared to net income of $96.6 million for the same period a year earlier. Basic earnings per share for the third quarter of 2024 were $2.25 per share ($2.23 per share fully-diluted) compared to $1.99 per share ($1.98 per share fully-diluted) for the third quarter of 2023. Return on average assets and return on average common shareholders’ equity for the three-month period ended September 30, 2024 were 1.01% and 12.63%, respectively, compared to 0.97% and 13.25%, respectively, for the three-month period ended September 30, 2023.
The Company recorded net income of $321.2 million for the nine-month period ended September 30, 2024, compared to net income of $279.1 million for the same period a year earlier. Basic earnings per share for the
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nine-month period ended September 30, 2024 were $6.59 per share ($6.56 per share fully-diluted) compared to $5.76 per share ($5.73 per share fully-diluted) for the same period in 2023. Return on average assets and return on average common shareholders’ equity for the nine-month period ended September 30, 2024 were 1.01% and 13.13%, respectively, compared to 0.95% and 13.18%, respectively, for the nine-month period ended September 30, 2023.
Net interest income for the three and nine-month periods ended September 30, 2024 increased $25.1 million, or 11.3%, and increased $42.3 million, or 6.1%, respectively, compared to the same periods in 2023. For the three-month period ended September 30, 2024, average earning assets increased by $3.7 billion, or 9.8%, and for the nine-month period ended September 30, 2024, they increased by $3.0 billion, or 8.1%, compared to the same periods in 2023. Net interest margin, on a tax-equivalent basis, increased to 2.46% and decreased to 2.49% for the three and nine-month periods ended September 30, 2024, respectively, compared to 2.43% and 2.54% for the same periods in 2023.
The provision for credit losses increased by $13.0 million for the three-month period ended September 30, 2024 and increased by $0.8 million for the nine-month period ended September 30, 2024, as compared to the same periods in 2023. These changes were driven by loan growth, portfolio credit metric changes, and changes in macro-economic metrics in the current period as compared to the prior periods. The Company’s nonperforming loans increased $2.2 million to $19.3 million at September 30, 2024, compared to September 30, 2023. The ACL on loans as a percentage of total loans increased three basis points to 1.00% as of September 30, 2024, compared to September 30, 2023. For a description of the Company’s methodology for computing the ACL, please see the summary discussion in the “Provision and Allowance for Credit Losses” section included below.
Noninterest income increased by $25.4 million, or 19.1%, for the three-month period ended September 30, 2024, and increased by $61.3 million, or 15.3%, for the nine-month period ended September 30, 2024, compared to the same periods in 2023. These changes are discussed in greater detail below under Noninterest Income.
Noninterest expense increased by $21.0 million, or 9.1%, for the three-month period ended September 30, 2024, and increased by $47.2 million, or 6.6%, for the nine-month period ended September 30, 2024, compared to the same periods in 2023. These changes are discussed in greater detail below under Noninterest Expense.
Net Interest Income
Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. Net interest income for the three and nine-month periods ended September 30, 2024 increased $25.1 million, or 11.3%, and increased $42.3 million, or 6.1%, compared to the same periods in 2023.
Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. As illustrated in this table, net interest spread for the three months ended September 30, 2024 increased three basis points as compared to the same period in 2023. Net interest margin for the three months ended September 30, 2024 increased three basis points compared to the same period in 2023. Net interest spread for the nine-month period ended September 30, 2024 decreased by 12 basis points as compared to the same period in 2023. Net interest margin for the nine-month period ended September 30, 2024 decreased by five basis points compared to the same period in 2023. The changes for three-month period ended September 30, 2024 are primarily due to increased average loan balances and rates, partially offset by higher interest costs due to unfavorable mix shift in the composition of liabilities. The changes for the nine-month period ended September 30, 2024 were related to the cost and mix of interest-bearing liabilities, partially offset by increased loan volumes, repricing of earning assets, and the benefit of interest free funds. The impact of the increased cost and mix of interest-bearing liabilities had a significant impact in the third quarter of 2024. The cost of interest-bearing liabilities increased 36 basis points from the third quarter of 2023 while the yield on earning assets increased 39 basis points compared to the same period. The cost of interest-bearing liabilities increased 66 basis points for the nine-month period ended September 30, 2024 as compared to the same period in 2023 while the yield on earning assets increased 54 basis points compared to the same period. Earning asset balance increases have been primarily driven by higher average loans and increased interest-bearing due from banks balances. The Company expects to see continued volatility in the economic markets and governmental responses to changes in the economy. These changing conditions could have impacts on the
balance sheet and income statement of the Company for the remainder of the year. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and interest rates have resulted in an increase in net interest income.
Table 1
AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)
The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax-equivalent basis adjustment would have been 5.41% for the three-month period ended September 30, 2024, and 5.01% for the same period in 2023. The average yield on earning assets without the tax-equivalent basis adjustment would have been 5.35% for the nine-month period ended September 30, 2024, and 4.80% for the same period in 2023.
Average
Balance
Yield/Rate
Loans, net of unearned interest
24,387,163
6.79
%
22,751,467
6.41
Taxable
9,122,386
2.77
8,964,467
2.37
Tax-exempt
3,601,976
3.43
3,783,890
3.37
12,724,362
2.96
12,748,357
2.66
328,240
6.05
303,864
5.96
3,562,746
5.36
1,548,867
5.26
Other earning assets
19,743
6.37
17,327
5.31
Total earning assets
41,022,254
5.47
37,369,882
5.08
Allowance for credit losses
(239,950
(227,878
2,484,538
2,381,496
43,266,842
39,523,500
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
25,789,850
4.05
21,315,761
3.57
2,298,240
4.69
2,027,382
4.52
Borrowed funds
1,464,393
5.61
2,605,897
5.28
Total interest-bearing liabilities
29,552,483
4.18
25,949,040
3.82
Noninterest-bearing demand deposits
9,502,106
10,014,686
757,379
667,920
Shareholders' equity
3,454,874
2,891,854
Net interest spread
1.29
1.26
Net interest margin
2.46
2.43
61
23,850,976
6.73
22,076,977
6.17
9,140,270
2.72
9,179,230
2.35
3,657,837
3.44
3,816,122
3.36
12,798,107
2.93
12,995,352
2.64
260,520
6.01
343,297
5.49
3,451,537
5.41
1,935,029
4.90
21,333
6.88
13,071
5.56
40,382,473
37,363,726
4.87
(230,181
(213,744
2,433,597
2,322,171
42,585,889
39,472,153
24,500,489
3.96
20,638,982
3.18
2,367,985
4.67
2,273,826
1,796,230
5.53
2,319,652
5.25
28,664,704
4.12
25,232,460
3.46
9,889,099
10,816,120
764,733
591,919
3,267,353
2,831,654
1.41
2.49
2.54
Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. The average balance of interest-free funds (total earning assets less interest-bearing liabilities) increased $48.9 million and decreased $413.5 million for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. The benefit from interest-free funds was flat and increased seven basis points in the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023, primarily due to increased short-term interest rates.
Table 2
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
September 30, 2024 and 2023
Volume
Rate
Change in interest earned on:
26,670
22,245
48,915
85,908
97,489
183,397
940
9,071
10,011
(683
25,751
25,068
530
(1,126
(3,858
2,286
(1,572
Federal funds sold and resell agreements
359
(3,626
1,245
(2,381
27,054
364
27,418
60,814
8,094
68,908
Trading
378
140
518
Interest income
53,399
32,319
85,718
138,933
135,005
273,938
Change in interest incurred on:
43,139
27,541
70,680
101,814
134,817
236,631
3,116
878
3,994
3,055
8,635
11,690
Other borrowed funds
(16,063
2,018
(14,045
(21,376
4,669
(16,707
Interest expense
30,192
30,437
60,629
83,493
148,121
231,614
23,207
1,882
25,089
55,440
(13,116
42,324
ANALYSIS OF NET INTEREST MARGIN
Change
Average earning assets
3,652,372
3,018,747
Interest-bearing liabilities
3,603,443
3,432,244
Interest-free funds
11,469,771
11,420,842
48,929
11,717,769
12,131,266
(413,497
Free funds ratio (interest-free funds to average earning assets)
27.96
30.56
(2.60
)%
29.02
32.47
(3.45
Tax-equivalent yield on earning assets
0.54
Cost of interest-bearing liabilities
0.36
0.66
0.03
(0.12
Benefit of interest-free funds
1.20
1.13
0.07
(0.05
Provision and Allowance for Credit Losses
The ACL represents management’s judgment of the total expected losses included in the Company’s loan portfolio as of the balance sheet date. The Company’s process for recording the ACL is based on the evaluation of the Company’s lifetime historical loss experience, management’s understanding of the credit quality inherent in the loan portfolio, and the impact of the current economic environment, coupled with reasonable and supportable economic forecasts.
A mathematical calculation of an estimate is made to assist in determining the adequacy and reasonableness of management’s recorded ACL. To develop the estimate, the Company follows the guidelines in ASC 326, Financial Instruments – Credit Losses. The estimate reserves for assets held at amortized cost and any related credit
deterioration in the Company’s available-for-sale debt security portfolio. Assets held at amortized cost include the Company’s loan book and held-to-maturity security portfolio.
The process involves the consideration of quantitative and qualitative factors relevant to the specific segmentation of loans. These factors have been established over decades of financial institution experience and include economic observation and loan loss characteristics. This process is designed to produce a lifetime estimate of the losses, at a reporting date, that includes evaluation of historical loss experience, current economic conditions, reasonable and supportable forecasts, and the qualitative framework outlined by the Office of the Comptroller of the Currency in the published 2020 Interagency Policy Statement. This process allows management to take a holistic view of the recorded ACL reserve and ensure that all significant and pertinent information is considered.
The Company considers a variety of factors to ensure the safety and soundness of its estimate including a strong internal control framework, extensive methodology documentation, credit underwriting standards which encompass the Company’s desired risk profile, model validation, and ratio analysis. If the Company’s total ACL estimate, as determined in accordance with the approved ACL methodology, is either outside a reasonable range based on review of economic indicators or by comparison of historical ratio analysis, the ACL estimate is an outlier and management will investigate the underlying reason(s). Based on that investigation, issues or factors that previously had not been considered may be identified in the estimation process, which may warrant adjustments to estimated credit losses.
The ending result of this process is a recorded consolidated ACL that represents management’s best estimate of the total expected losses included in the loan portfolio, held-to-maturity securities, and credit deterioration in available-for-sale securities.
Based on the factors above, management of the Company recorded $18.0 million as provision for credit losses for the three-month period ended September 30, 2024, as compared to $5.0 million for the same period in 2023. For the nine-month period ended September 30, 2024, management of the Company recorded $42.1 million as provision for credit losses, as compared to $41.2 million for the same period in 2023. These changes are the result of applying the methodology for computing the ACL, coupled with the impacts of the current and forecasted economic environment. As illustrated in Table 3 below, the ACL on loans increased three basis points to 1.00% of total loans as of September 30, 2024, compared to September 30, 2023.
Table 3 presents a summary of the Company’s ACL for the nine-month periods ended September 30, 2024 and 2023, and for the year ended December 31, 2023. Net charge-offs were $14.3 million for the nine-month period ended September 30, 2024, compared to $9.1 million for the same period in 2023. See “Credit Risk Management” under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.
Table 3
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES (unaudited, dollars in thousands)
Year Ended
Allowance – January 1
Charge-offs:
(5,047
(266
(1,185
(1,232
(9,181
Total charge-offs
(17,673
Recoveries:
5,295
111
1,536
Total recoveries
7,199
Net charge-offs
(14,327
(9,122
(10,474
Allowance for credit losses – end of period
Allowance for credit losses on held-to-maturity securities
Loans at end of period, net of unearned interest
22,881,689
Held-to-maturity securities at end of period
5,732,583
Total assets at amortized cost
30,468,263
28,614,272
28,864,352
Average loans, net of unearned interest
23,848,264
22,074,844
22,334,942
Allowance for credit losses on loans to loans at end of period
1.00
0.97
0.95
Allowance for credit losses – end of period to total assets at amortized cost
0.83
0.78
0.77
Allowance as a multiple of net charge-offs
13.15x
18.40x
21.29x
Net charge-offs to average loans
0.08
0.06
0.05
Noninterest Income
A key objective of the Company is the growth of noninterest income to provide a diverse source of revenue not directly tied to interest rates. Fee-based services are typically non-credit related and are not generally affected by fluctuations in interest rates.
The Company offers multiple fee-based products and services, which management believes will more closely align with customer demands. The Company is currently emphasizing fee-based products and services including trust and securities processing, bankcard, securities trading and brokerage, and cash and treasury management. Management believes that it can offer these products and services both efficiently and profitably, as most have common platforms and support structures.
65
Table 4
SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)
Dollar
Percent
24-23
7,554
11.3
3,347
88.8
Service charges on deposits
(991
(4.7
3.7
2,349
17.5
3,098
16.1
2,352
867.9
7,707
90.0
25,426
19.1
23,094
12.1
4,162
30.0
(513
(0.8
7.9
2,249
5.5
10,661
19.0
14,280
343.8
7,313
18.2
61,307
15.3
Noninterest income increased by $25.4 million, or 19.1%, during the three-month period ended September 30, 2024, and increased $61.3 million, or 15.3%, during the nine-month period ended September 30, 2024, compared to the same periods in 2023. Table 4 above summarizes the components of noninterest income and the respective year-over-year comparison for each category.
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, mutual fund assets, and alternative asset servicing. The increase in these fees for the three and nine-month periods ended September 30, 2024, compared to the same periods in 2023, was primarily due to an increase in fund services and corporate trust revenues. For the three-month period ended September 30, 2024, fund services revenue increased $5.2 million, or 13.6%, corporate trust revenue increased $1.8 million, or 12.4%, and trust income increased $0.6 million, or 4.2%, compared to the same period in 2023. For the nine-month period ended September 30, 2024, fund services revenue increased $15.8 million, or 14.7%, corporate trust revenue increased $4.3 million, or 10.2%, and trust services revenue increased $3.1 million, or 7.4%, compared to the same period in 2023. The recent volatile markets have impacted the income in this category. Since trust and securities processing fees are primarily asset-based, which are highly correlated to the change in market value of the assets, the related income for the remainder of the year will be affected by changes in the securities markets. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels.
Trading and investment banking fees for the three-month period ended September 30, 2024 increased $3.3 million, or 88.8%, and increased $4.2 million, or 30.0%, for the nine-month period ended September 30, 2024 compared to the same periods in 2023. These changes were primarily driven by the volatile market’s impact on trading volume. The income in this category is market driven and impacted by general increases or decreases in trading volume.
Service charges on deposit accounts for the three-month period ended September 30, 2024 decreased $1.0 million, or 4.7%, and decreased $0.5 million, or 0.8%, for the nine-month period ended September 30, 2024. The decrease for the three-month and nine-month period were driven by decreased healthcare income.
Brokerage fees for the three-month period ended September 30, 2024 increased $2.3 million, or 17.5%, and increased $2.2 million, or 5.5%, for the nine-month period ended September 30, 2024, compared to the same periods in 2023. The changes in the three-month and nine-month periods were driven by 12b-1 fees and money market income.
Bankcard fees for the three and nine-month periods ended September 30, 2024 increased $3.1 million, or 16.1%, and increased $10.7 million, or 19.0%, respectively, as compared to the same periods in 2023. The increase was driven by increased interchange income for the three-month period and increased interchange coupled with lower rebate costs in the nine-month period.
Investment securities gains, net for the three and nine-month periods ended September 30, 2024 increased $2.4 million, or 867.9%, and increased $14.3 million, or 343.8%, respectively, compared to the same periods in 2023. The increase for the three-month period ended September 30, 2024, was primarily driven by net gains on dispositions of, and increased valuations in the Company's securities without readily determinable fair values during the third quarter of 2024. The increase for the nine-month period was driven by a net gain of $12.0 million on dispositions of securities without readily determinable fair values during 2024, coupled with a $4.9 million impairment loss on one Corporate available-for-sale security during the same period in 2023. The income in this category is highly correlated to the change in market value of the assets, and the related income for the remainder of the year will be affected by changes in the securities markets. The Company’s investment portfolio is continually evaluated for opportunities to improve its performance and risk profile relative to market conditions and the Company’s interest rate expectations. This can result in differences from quarter to quarter in the amount of realized gains or losses on this portfolio.
Other noninterest income for the three-month period ended September 30, 2024, increased $7.7 million, or 90.0%, compared to the same period in 2023, driven by a $4.0 million increase in company-owned life insurance income, a $1.1 million gain on the sale of a building, a $0.9 million increase in syndication fees, and a $0.7 million increase in bank-owned life insurance income. For the nine-month period, other noninterest income increased $7.3 million, or 18.2%, compared to the same period in 2023, primarily driven by a $2.1 million increase in bank-owned life insurance income, a $1.5 million increase in company-owned life insurance income, a gain on sale of land of $1.8 million during the first quarter, a gain of $1.1 million on the sale of a building in the third quarter, and increases of $0.9 million in both syndication fees and foreign currency valuation. These increases are offset by a decrease in derivative income of $1.9 million.
Table 5
SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)
13,604
10.2
(9
(0.1
(1,216
(7.1
1,754
54.6
2.8
3,681
14.1
2,288
31.6
3,630
41.0
(207
(9.7
(1,467
(23.8
(1,231
(14.7
21,013
9.1
13,661
3.3
0.2
(4,045
(7.8
389
3.4
350
1.8
11,506
15.2
12,404
57.5
10,575
43.5
(751
(11.5
8,822
49.5
(5,813
(23.1
47,159
6.6
Noninterest expense increased $21.0 million, or 9.1%, and increased $47.2 million, or 6.6%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. Table 5 above summarizes the components of noninterest expense and the respective year-over-year comparison for each category.
Salaries and employee benefits increased by $13.6 million, or 10.2%, and increased $13.7 million, or 3.3%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. Salaries and wages expense increased $5.4 million, or 6.5%, and increased $7.9 million, or 3.1%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. Bonus and commission expense increased $3.6 million, or 12.4%, and increased $3.5 million, or 4.1%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023, driven by increased company performance. Employee benefits expense increased $4.6 million, or 22.7%, and increased $2.3 million, or 2.9%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023, driven by changes in deferred compensation expense and medical benefit expense.
Equipment expense decreased $1.2 million, or 7.1%, and $4.0 million, or 7.8%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023, primarily due to decreased software expense.
Processing fees increased $3.7 million, or 14.1%, and $11.5 million, or 15.2%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023, primarily due to increased software subscription costs.
Legal and consulting expense increased $2.3 million, or 31.6%, and $12.4 million, or 57.5%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023, primarily due to expense related to the recently announced acquisition of HTLF.
Bankcard expense increased $3.6 million, or 41.0%, and $10.6 million, or 43.5%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023 primarily driven by higher administrative expense.
Regulatory fees decreased $1.5 million, or 23.8%, and increased $8.8 million, or 49.5%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023 primarily driven by adjustments to the FDIC special assessment liability.
Other expense decreased $1.2 million, or 14.7%, and $5.8 million, or 23.1%, for the three and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. For both periods, the decrease was driven by lower operational losses.
Income Tax Expense
The Company’s effective tax rate was 19.0% for the nine months ended September 30, 2024, compared to 18.1% for the same period in 2023. The increase in the effective tax rate in 2024 is primarily attributable to a smaller portion of income being earned from tax-exempt municipal securities and higher non-deductible acquisition costs in 2024.
Strategic Lines of Business
The Company has strategically aligned its operations into the following three reportable Business Segments: Commercial Banking, Institutional Banking, and Personal Banking. The Company’s senior executive officers regularly evaluate Business Segment financial results produced by the Company’s internal reporting system in deciding how to allocate resources and assess performance for individual Business Segments. For comparability purposes, amounts in all periods are based on methodologies in effect at September 30, 2024. Previously reported results have been reclassified in this Form 10-Q to conform to the Company’s current organizational structure.
Table 6
Commercial Banking Operating Results (unaudited, dollars in thousands)
19,103
12.8
12,754
423.7
7,132
30.9
3,431
4.2
Income before taxes
10,050
11.6
2,346
14.5
10.9
41,420
9.3
(347
(1.0
29,250
40.8
11,730
4.7
59,287
25.9
13,020
32.0
46,267
24.6
For the nine-month period ended September 30, 2024, Commercial Banking net income increased $46.3 million, or 24.6%, to $234.5 million, as compared to the same period in 2023. Net interest income increased $41.4 million, or 9.3%, for the nine-month period ended September 30, 2024, compared to the same period in 2023, driven by strong loan growth, earning asset mix changes, and the increase in short-term interest rates. Provision for credit losses decreased $0.3 million for the period, driven by portfolio metric changes and changes in macro-economic metrics in 2024 as compared to 2023. Noninterest income increased $29.3 million, or 40.8%, compared to the same period in 2023, primarily due to increases of $13.1 million in investment security gains, $6.4 million in bankcard income, $4.9 million in other income driven by a legal settlement in the first quarter of 2024 and increased life insurance income, and $3.2 million in service charges on deposit accounts. Noninterest expense increased $11.7 million, or 4.7%, to $263.4 million for the nine-month period ended September 30, 2024, compared to the same period in 2023. This increase was driven by an increase of $5.6 million in technology, service, and overhead expenses, an increase $2.0 million in salary and employee benefit expense, an increase of $2.0 million in bankcard expense, an increase of $1.2 million in processing fees, and a $0.9 million increase in marketing and business
development. These increases were partially offset by a decrease of $0.8 million in other expense driven by lower operational losses in the current period.
Table 7
Institutional Banking Operating Results (unaudited, dollars in thousands)
2,208
5.1
14,166
16.4
15,063
17.2
1,299
3.1
4.5
(1,912
(1.3
1,006
133.4
30,922
12.0
30,008
11.2
(2,004
(1.5
611
2.5
(2,615
(2.3
For the nine-month period ended September 30, 2024, Institutional Banking net income decreased $2.6 million, or 2.3%, to $110.0 million, as compared to the same period last year. Net interest income decreased $1.9 million, or 1.3%, compared to the same period last year, driven by higher deposit interest expense due to the increase in short-term interest rates. Provision for credit losses increased $1.0 million for the period, driven by portfolio metric changes and changes in macro-economic metrics in 2024 as compared to 2023. Noninterest income increased $30.9 million, or 12.0%, primarily due to increases of $19.9 million in trust and securities processing income driven by higher fund services and corporate trust revenue, an increase of $4.9 million in bankcard income, an increase of $4.2 million in bond trading income, an increase of $2.3 million in brokerage income, and an increase of $1.4 million in other income. These increases were partially offset by a decrease of $3.2 million in service charges on deposit accounts. Noninterest expense increased $30.0 million, or 11.2%, primarily driven by increases of $9.8 million in technology, service, and overhead expenses, $9.2 million in salaries and employee benefits expense, $7.4 million in bankcard expense, $4.7 million in processing fees, $1.1 million in legal and consulting expense, and $1.1 million in equipment expense. These increases were partially offset by a decrease of $3.1 million in operational losses.
70
Table 8
Personal Banking Operating Results (unaudited, dollars in thousands)
3,778
12.4
257
16.6
4,128
17.4
2,519
4.1
Loss before taxes
5,130
53.9
Income tax benefit
694
51.6
Net loss
4,436
54.2
2,816
2.9
164
1.6
5,421
(1,634
(6.5
(127
(3.7
(1,507
(6.9
For the nine-month period ended September 30, 2024, Personal Banking net income decreased $1.5 million, or 6.9%, to a net loss of $23.2 million, as compared to the same period in 2023. Net interest income increased $2.8 million, or 2.9%, compared to the same period last year due to loan growth and the increase in short-term interest rates. Provision for credit losses increased $0.1 million for the period, driven by portfolio metric changes and changes in macro-economic metrics in 2024 as compared to 2023. Noninterest income increased $1.1 million, or 1.6%, for the same period primarily driven by an increase of $3.2 million in trust and securities processing income, partially offset by a decrease of $2.0 million in investment securities gains. Noninterest expense increased $5.4 million, or 2.9%, primarily due to increases of $5.0 million in technology, service, and overhead expenses, $1.5 million in salaries and employee benefits, and $1.0 million in bankcard expense, partially offset by a decrease of $1.6 million in operational losses.
Balance Sheet Analysis
Total assets of the Company increased $3.5 billion, or 7.9%, as of September 30, 2024, compared to December 31, 2023, primarily due to an increase of $1.8 billion, or 7.8%, in loan balances and an increase of $1.4 billion, or 27.9%, in interest-bearing due from banks.
Total assets of the Company increased $6.0 billion, or 14.5%, as of September 30, 2024, compared to September 30, 2023, primarily due to an increase in interest-bearing due from banks of $3.0 billion, or 85.7%, an increase of $2.1 billion, or 9.2%, in loan balances, and an increase of $433.7 million, or 3.5% in total securities.
Table 9
SELECTED FINANCIAL INFORMATION (unaudited, dollars in thousands)
41,464,682
22,884,513
12,994,786
12,561,046
13,271,509
3,556,076
44,991,853
39,249,838
41,853,559
33,431,752
3,458,055
4,440,370
4,302,891
Loans represent the Company’s largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services and generate additional noninterest income for the Company.
Actual loan balances totaled $25.0 billion as of September 30, 2024, and increased $1.8 billion, or 7.8%, compared to December 31, 2023, and increased $2.1 billion, or 9.2%, compared to September 30, 2023. Compared to December 31, 2023, commercial real estate loans increased $887.1 million, or 10.0%, commercial and industrial loans increased $741.7 million, or 7.5%, and credit card loans increased $157.8 million, or 37.2%. Compared to September 30, 2023, commercial real estate loans increased $1.0 billion, or 11.4%, commercial and industrial loans increased $882.0 million, or 9.0%, consumer real estate loans increased $186.6 million, or 6.4%, and credit card loans increased $131.2 million, or 29.1%. The increase in credit card loans in both periods is related to the purchase of $109.4 million in co-branded credit card receivables during the first quarter of 2024. See further information in Note 4, “Loans and Allowance for Credit Losses” in the Notes to Consolidated Financial Statements.
As of September 30, 2024 and December 31, 2023, commercial real estate loans comprised approximately 39.1% and 38.4%, respectively, of the Company's loan portfolio. Commercial real estate loans generally involve a greater degree of credit risk than consumer real estate loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulations. In recent years, commercial real estate markets have been particularly impacted by the economic disruption resulting from the COVID-19 pandemic. The COVID-19 pandemic has also been a catalyst for the evolution of various remote work options, which could impact the long-term performance of some types of office properties within our commercial real estate portfolio. Due to these risks, the Company is actively monitoring its exposure to commercial real estate.
Generally, these loans are made for investment and real estate development or working capital and business expansion purposes and are primarily secured by real estate with a maximum loan-to-value of 80%. Most of these properties are non-owner occupied and have guarantees as additional security. The Company's investment CRE portfolio (which includes non-owner occupied and construction loans) totaled 27.7% and 26.5% of total Company loans as of September 30, 2024 and December 31, 2023, respectively. The average investment CRE loan was approximately $6.9 million and $5.8 million, as of September 30, 2024 and December 31, 2023, respectively, and 90% are recourse loans as of both September 30, 2024 and December 31, 2023. These loans have an average loan-to-value of 57% as of both September 30, 2024 and December 31, 2023.
The properties securing the commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce exposure to adverse economic events that affect any single market or industry. Notwithstanding, commercial real estate loans, in general, may be more adversely impacted by conditions in the real estate market or the economy.
72
The following table presents the Company's investment CRE (which includes non-owner occupied and construction loans) by industry. The table separately discloses the top five industries as a percentage of the Company's loan portfolio as of either period presented, while the remainder are included in "Other."
Table 10
Investment CRE loans by industry as a percentage of total Company Loans
Industrial
8.1
8.0
Multifamily
6.8
5.0
Office building
Hotel
2.0
Retail
1.9
2.2
4.8
Total Investment CRE
27.7
26.5
The following table presents the Company's investment CRE (which includes non-owner occupied and construction loans) by state. The table separately discloses all states that represent at least 5.0% of the Company's investment CRE portfolio as of either period presented, while the remainder are included in "All Others."
Table 11
Investment CRE loans by State
14.9
Arizona
11.7
11.9
Texas
11.4
Colorado
9.8
Utah
7.0
6.3
Florida
6.0
All others
40.1
40.0
100.0
The shift to work-from-home and hybrid work environments has caused a decreased utilization of, and demand for, office space. The Company is actively monitoring its exposure to office space in its non-owner occupied commercial real estate portfolio. The average loan size in the Company's office portfolio was approximately $9.3 million and $9.2 million as of September 30, 2024 and December 31, 2023, respectively. The average loan-to-value of the office portfolio was 64% as of both September 30, 2024 and December 31, 2023, and 84% are recourse loans as of the end of both periods. Further, only 23% and 30% of the Company's office portfolio as of September 30, 2024 and December 31, 2023, respectively, is in central business districts, which have been more heavily impacted by the shift to remote work. The remainder of the Company's office portfolio is in suburban or medical properties.
The table below presents the Company's portfolio of office commercial real estate by the metropolitan statistical area (MSAs) in which the loan collateral is located. The table separately discloses all MSAs that represent at least 5.0% of the Company's office commercial real estate portfolio as of either period presented, while the remainder are included in "All Others."
73
Table 12
Office CRE loans by MSA
Dallas-Fort Worth-Arlington, TX
22.1
22.7
Jacksonville, FL
9.0
Kansas City, MO-KS
8.4
7.8
Tampa-St. Petersburg-Clearwater, FL
St. Louis, MO-IL
6.7
Raleigh-Cary, NC
5.8
5.9
Cincinnati-Middletown, OH-KY-IN
Milwaukee-Waukesha-West Allis, WI
5.2
Phoenix-Mesa-Scottsdale, AZ
25.2
26.2
Total Office CRE
Nonaccrual, past due and restructured loans are discussed under “Credit Risk Management” within “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report.
Investment Securities
The Company’s investment portfolio contains trading, AFS, and HTM securities, as well as FRB stock, FHLB stock, and other miscellaneous investments. Investment securities totaled $13.0 billion as of September 30, 2024, and $13.3 billion as of December 31, 2023, and comprised 28.9% and 31.9% of the Company’s earning assets, respectively, as of those dates.
The Company’s AFS securities portfolio comprised 54.0% of the Company’s total securities portfolio at September 30, 2024 and 53.3% at December 31, 2023. The Company’s AFS securities portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. The average life of the AFS securities portfolio was 55.4 months at September 30, 2024, compared to 52.6 months at December 31, 2023, and 61.7 months at September 30, 2023. In addition to providing a potential source of liquidity, the AFS securities portfolio can be used as a tool to manage interest rate sensitivity. The Company’s goal in the management of its AFS securities portfolio is to maximize return within the Company’s parameters of liquidity goals, interest rate risk, and credit risk.
Management expects collateral pledging requirements for public funds, loan demand, and deposit funding to be the primary factors impacting changes in the level of AFS securities. There were $9.4 billion and $10.1 billion of securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at September 30, 2024 and December 31, 2023, respectively.
The Company’s HTM securities portfolio consists of U.S. agency-backed securities, mortgage-backed securities, general obligation bonds, and private placement bonds. The HTM portfolio, net of the ACL, totaled $5.5 billion and $5.7 billion at September 30, 2024 and December 31, 2023, respectively. The average life of the HTM portfolio was 8.7 years at September 30, 2024, compared to 8.4 years at December 31, 2023, and 9.5 years at September 30, 2023.
The securities portfolio generates the Company’s second largest component of interest income. The securities portfolio achieved an average yield on a tax-equivalent basis of 2.93% for the nine-month period ended September 30, 2024, compared to 2.64% for the same period in 2023.
At September 30, 2024, the unrealized pre-tax net loss on the AFS securities portfolio was $449.4 million, or 6.0% of the $7.5 billion amortized cost value, a decrease of $174.9 million as compared to December 31, 2023. At September 30, 2024, the unrealized pre-tax net loss on the securities designated as HTM was $563.5 million, or 10.3% of amortized cost value, compared to $508.5 million at December 31, 2023. During 2022, the Company transferred securities with an amortized cost balance of $4.1 billion and a fair value of $3.8 billion from the AFS category to the HTM category. The transfer of securities was made at fair value at the time of transfer. The
74
remaining balance of unrealized pre-tax losses related to transferred securities was $179.8 million as of September 30, 2024, and $207.2 million as of December 31, 2023, and was included in the amortized cost balance of HTM securities. See further information in Note 5, “Securities” in the Notes to Consolidated Financial Statements.
Deposits and Borrowed Funds
Deposits increased $3.9 billion, or 10.9%, from December 31, 2023 to September 30, 2024 and increased $6.3 billion, or 18.8%, from September 30, 2023 to September 30, 2024. Total interest-bearing balances increased $3.2 billion and noninterest-bearing deposits increased $710.3 million from December 31, 2023 to September 30, 2024. Total interest-bearing deposits increased $4.7 billion and noninterest-bearing deposits increased $1.6 billion from September 30, 2023 to September 30, 2024. Noninterest-bearing deposits were 32.3%, 33.9%, and 33.7% of total deposits at September 30, 2024, December 31, 2023, and September 30, 2023, respectively.
Deposits represent the Company’s primary funding source for its asset base. In addition to the core deposits garnered by the Company’s retail branch structure, the Company continues to focus on its cash management services, as well as its trust and investment company servicing businesses, in order to attract and retain additional deposits. Management believes a strong core deposit composition is one of the Company’s key strengths given its competitive product mix.
As of September 30, 2024, there were an estimated $28.6 billion of uninsured deposits, an increase of $4.2 billion as compared to December 31, 2023, and an increase of $7.9 billion as compared to September 30, 2023. Estimated uninsured deposits comprised approximately 72.2%, 68.2%, and 62.0% of total deposits as of September 30, 2024, December 31, 2023, and September 30, 2023, respectively. A portion of these uninsured deposits represent affiliate deposits and collateralized deposits. Affiliate deposits represent deposit accounts owned by the wholly owned subsidiaries of UMB Financial Corporation that are on deposit at UMB Bank, n.a. Collateralized deposits are public fund deposits or corporate trust deposits that are collateralized by high quality securities within the investment portfolio. Excluding affiliate deposits of $2.6 billion and collateralized deposits of $5.4 billion, the adjusted estimated uninsured deposits were $20.7 billion as of September 30, 2024. The adjusted ratio of estimated uninsured deposits, excluding affiliate and collateralized deposits, as a percentage of total deposits was approximately 52.2% as of September 30, 2024. The adjusted ratio of estimated uninsured deposits, excluding affiliate and collateralized deposits, as a percentage of total deposits was approximately 45.3% as of December 31, 2023, and 42.6% as of September 30, 2023.
The Company participates in the IntraFi Cash Service program, which allows its customers to place deposits into the program to receive reciprocal FDIC insurance coverage. The Company had $1.2 billion, $1.2 billion, and $1.3 billion of deposits in the program as of September 30, 2024, December 31, 2023, and September 30, 2023, respectively.
Long-term debt totaled $384.8 million as of September 30, 2024, compared to $383.2 million as of December 31, 2023, and $382.8 million as of September 30, 2023.
In September 2022, the Company issued $110.0 million in aggregate subordinated notes due in September 2032. The Company received $107.9 million, after deducting underwriting discounts and commissions and offering expenses, and used the proceeds from the offering for general corporate purposes, including, among other uses, contributing Tier 1 capital into the Bank. The subordinated notes were issued with a fixed-to-fixed rate of 6.25% and an effective rate of 6.64%, due to issuance costs, with an interest rate reset date of September 2027.
In September 2020, the Company issued $200.0 million in aggregate subordinated notes due in September 2030. The Company received $197.7 million, after deducting underwriting discounts and commissions and offering expenses, and used the proceeds from the offering for general corporate purposes, including, among other uses, contributing Tier 1 capital into the Bank. The subordinated notes were issued with a fixed-to-fixed rate of 3.70% and an effective rate of 3.93%, due to issuance costs, with an interest rate reset date of September 2025.
The remainder of the Company’s long-term debt was assumed from the acquisition of Marquette Financial Companies (Marquette) and consists of debt obligations payable to four unconsolidated trusts (Marquette Capital
Trust I, Marquette Capital Trust II, Marquette Capital Trust III, and Marquette Capital Trust IV) that previously issued trust preferred securities. These long-term debt obligations have an aggregate contractual balance of $103.1 million. Interest rates on trust preferred securities are tied to the three-month term SOFR with spreads ranging from 133 basis points to 160 basis points and reset quarterly. The trust preferred securities have maturity dates ranging from January 2036 to September 2036.
The Company has a revolving line of credit with Wells Fargo Bank, N.A. which allows the Company to borrow up to $30.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company’s option either 1.40% above SOFR or 1.75% below the prime rate on the date of an advance. The Company pays a 0.4% unused commitment fee for unused portions of the revolving line of credit. As of September 30, 2024, the Company had no advances outstanding on this revolving line of credit.
Short-term debt totaled $1.1 billion as September 30, 2024 and consisted of a short-term borrowing with the FHLB of Des Moines for $250.0 million and an $800.0 million borrowing with the BTFP. The FHLB borrowing had an interest rate of 5.47% and matured in October 2024. The BTFP borrowing had a rate of 4.76% and was repaid in advance of its maturity in October 2024. See further information in Note 7, “Borrowed Funds” in the Notes to Consolidated Financial Statements.
Federal funds purchased and securities sold under agreements to repurchase totaled $2.0 billion as of September 30, 2024, $2.1 billion at December 31, 2023, and $1.8 billion at September 30, 2023. Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company under an agreement to repurchase the same or similar issues at an agreed-upon price and date.
Capital and Liquidity
The Company places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiary’s respective risks and growth opportunities as well as regulatory requirements.
Total shareholders’ equity was $3.5 billion at September 30, 2024, a $435.1 million increase as compared to December 31, 2023, and a $728.8 million increase compared to September 30, 2023.
The Company’s Board of Directors authorized, at its April 30, 2024 and April 26, 2022 meetings, the repurchase of up to one million shares and two million shares, respectively, of the Company’s common stock during the twelve months following each meeting (each a Repurchase Authorization). On July 25, 2023, the Company's Board of Directors approved the repurchase of up to one million shares of the Company's common stock, which terminated on April 30, 2024. During the nine-month periods ended September 30, 2024 and September 30, 2023, the Company did not repurchase shares of common stock pursuant to any of its announced Repurchase Authorizations, but did acquire shares pursuant to the Company's share-based incentive programs.
At the Company’s quarterly board meeting, the Board of Directors declared a $0.40 per share quarterly cash dividend payable on January 2, 2025, to shareholders of record at the close of business on December 10, 2024.
On April 28, 2024, the Company entered into the Merger Agreement with HTLF, a Delaware corporation and Blue Sky Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of the Company. The Merger Agreement and the merger were unanimously approved by the boards of directors of the Company and HTLF. Pending regulatory approval and approval by the shareholders of the Company and HTLF, the merger is expected to close in the first quarter of 2025. Under the terms of the Merger Agreement, HTLF stockholders will receive a fixed exchange ratio of 0.55 shares of the Company’s common stock for each share of HTLF stock, with a total market value of approximately $2.0 billion.
Through the Company’s relationship with the FHLB of Des Moines, the Company owns $21.4 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company’s borrowing capacity is dependent upon the amount of collateral the Company places at the FHLB. The Company had a short-term advance for $250.0 million outstanding at the FHLB of Des Moines as of September 30, 2024. This borrowing matured in October 2024. Additionally, during 2024, the FHLB of Des Moines issued a letter of credit for $150.0 million on behalf of the Company to secure deposits. This letter of credit expired in October 2024, was renewed, and will expire in January 2025. The Company’s remaining borrowing capacity with the FHLB was $1.6 billion as of September 30, 2024.
The Company had an $800.0 million short-term borrowing outstanding with the Federal Reserve Bank's BTFP as of September 30, 2024. This borrowing was repaid in October 2024 in advance of its maturity. As of September 30, 2024, the Company’s remaining borrowing capacity with the BTFP was $18.0 million and its remaining borrowing capacity at the Federal Reserve Discount Window was $11.8 billion.
In addition to borrowing capacity with the FHLB and at the Federal Reserve Discount Window as described above, the Company had additional liquidity of $11.4 billion available via cash, unpledged bond collateral, the federal funds market, and the IntraFi Cash Service program as of September 30, 2024.
Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institution’s assets. The Company has implemented the Basel III regulatory capital rules adopted by the FRB. Basel III capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a minimum tier 1 risk-based capital ratio of 6%. A financial institution’s total capital is also required to equal at least 8% of risk-weighted assets.
The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. The Company is also required to maintain a leverage ratio equal to or greater than 4%. The leverage ratio is calculated as the ratio of tier 1 core capital to total average assets, less goodwill and intangibles.
U.S. banking agencies in December 2018 approved a final rule to address the impact of CECL on regulatory capital by allowing banking organizations the option to phase in the day-one impact of CECL until the first quarter of 2023. In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The Company elected this alternative option instead of the one described in the December 2018 rule.
The Company's capital position as of September 30, 2024 is summarized in the table below and exceeded regulatory requirements.
Table 13
RATIOS
Common equity tier 1 capital ratio
11.22
10.77
Tier 1 risk-based capital ratio
Total risk-based capital ratio
13.14
12.68
Leverage ratio
8.58
8.55
Return on average assets
1.01
Return on average equity
12.63
13.25
13.13
13.18
Average equity to assets
7.99
7.32
7.67
7.17
The Company's per share data is summarized in the table below.
Earnings – basic
Earnings – diluted
Cash dividends
Dividend payout ratio
17.3
17.8
19.8
Book value
72.45
57.83
Off-balance Sheet Arrangements
The Company’s main off-balance sheet arrangements are loan commitments, commercial and standby letters of credit, futures contracts and forward exchange contracts, which have maturity dates rather than payment due dates. See Note 10, “Commitments, Contingencies and Guarantees” in the Notes to Consolidated Financial Statements for detailed information on these arrangements. The level of the outstanding commitments could be impacted by volatility in the economic markets and governmental responses to inflation, geopolitical tensions, and supply chain constraints. These changing conditions could have impacts on the consolidated balance sheets of the Company for the remainder of the year
Critical Accounting Policies and Estimates
The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to customers and suppliers, allowance for credit losses, bad debts, investments, financing operations, long-lived assets, taxes, other contingencies, and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from the recorded estimates.
A summary of critical accounting policies is listed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices, or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading.
The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The following discussion of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial.
Interest Rate Risk
In the banking industry, a major risk exposure is changing interest rates. To minimize the effect of interest rate changes to net interest income and exposure levels to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management within guidelines established by its Asset Liability Committee (ALCO) and approved by the Board. The ALCO is responsible for approving and ensuring compliance with asset/liability management policies, including interest rate exposure. The Company’s primary method for measuring and analyzing consolidated interest rate risk is the Net Interest Income Simulation Analysis. The Company also uses a Net Portfolio Value model to measure market value risk under various rate change scenarios and a gap analysis to measure maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time. On a limited basis, the Company uses hedges such as swaps, rate floors, floor spreads, and futures contracts to manage interest rate risk on certain loans, securities, and trust preferred securities. See further information in Note 11 “Derivatives and Hedging Activities” in the Notes to the Consolidated Financial Statements.
Overall, the Company manages interest rate risk by positioning the balance sheet to maximize net interest income while maintaining an acceptable level of interest rate and credit risk, remaining mindful of the relationship among profitability, liquidity, interest rate risk, and credit risk.
Net Interest Income Modeling
The Company’s primary interest rate risk tool, the Net Interest Income Simulation Analysis, measures interest rate risk and the effect of interest rate changes on net interest income and net interest margin. This analysis incorporates all of the Company’s assets and liabilities together with assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on net interest income of a 200-basis-point upward or a 300-basis-point downward gradual change (e.g. ramp) and immediate change (e.g. shock) of market interest rates over a two year period. In ramp scenarios, rates change gradually for a one-year period and remain constant in year two. In shock scenarios, rates change immediately and the change is sustained for the remainder of the two-year scenario horizon. Assumptions are made to project rates for new loans and deposits based on historical analysis, management outlook and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. The results of these simulations can be significantly influenced by assumptions utilized and management evaluates the sensitivity of the simulation results on a regular basis.
Table 14 shows the net interest income increase or decrease over the next two years as of September 30, 2024 and 2023 based on hypothetical changes in interest rates and a constant sized balance sheet with runoff being replaced.
Table 14
MARKET RISK (unaudited)
Hypothetical change in interest rate – Rate Ramp
Year One
Year Two
September 30, 2023
Change in basis points
Percentagechange
200
(3.3
(2.1
2.4
100
(1.7
0.8
1.2
Static
(100)
1.1
1.4
(200)
2.6
(2.2
(300)
9.9
n/a
Hypothetical change in interest rate – Rate Shock
(2.0
5.6
(1.1
0.6
1.7
3.2
(0.6
(2.9
(0.7
(0.0
(5.7
The Company is liability sensitive to changes in interest rates in the next year. Net interest income is predicted to decrease in all upward rate scenarios and increase in all downward rate scenarios. In year two, net interest income is predicted to increase in all upward rate scenarios. In down rate scenarios net interest income is predicted to increase in rate ramp scenarios and decrease in rate shock scenarios except for the down 100bps shock scenario. The Company’s ability to price deposits consistent with its historical approach is a key assumption in these scenarios.
Trading Account
The Company carries securities in a trading account that is maintained according to Board-approved policy and procedures. The policy limits the amount and type of securities that can be carried in the trading account, requires compliance with any limits under applicable law and regulations, and mandates the use of a value-at-risk methodology to manage price volatility risks within financial parameters. The risk associated with the carrying of trading securities is offset by utilizing financial instruments including exchange-traded financial futures as well as short sales of U.S. Treasury and Corporate securities. The trading securities and related hedging instruments are marked-to-market daily. The trading account had a balance of $35.8 million as of September 30, 2024, $18.1 million as of December 31, 2023, and $24.5 million as of September 30, 2023. Securities sold not yet purchased (i.e., short positions) totaled $11.3 million at September 30, 2024, $8.0 million as of December 31, 2023, and $9.7 million at September 30, 2023 and are classified within the Other liabilities line of the Company’s Consolidated Balance Sheets.
The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The discussion in Table 14 above of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading, because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial.
Other Market Risk
The Company has minimal foreign currency risk as a result of foreign exchange contracts. See Note 10 “Commitments, Contingencies and Guarantees” in the notes to the Consolidated Financial Statements.
Credit Risk Management
Credit risk represents the risk that a customer or counterparty may not perform in accordance with contractual terms. The Company utilizes a centralized credit administration function, which provides information on the Bank’s risk levels, delinquencies, an internal ranking system and overall credit exposure. Loan requests are centrally reviewed to ensure the consistent application of the loan policy and standards. In addition, the Company has an internal loan review staff that operates independently of the Bank. This review team performs periodic examinations of the Bank’s loans for credit quality, documentation and loan administration. The respective regulatory authorities governing the Bank also review loan portfolios.
A primary indicator of credit quality and risk management is the level of nonperforming loans. Nonperforming loans include both nonaccrual loans and restructured loans on nonaccrual. The Company’s nonperforming loans increased $2.2 million to $19.3 million at September 30, 2024, compared to September 30, 2023, and increased $6.1 million, compared to December 31, 2023.
The Company had $1.9 million and $1.7 million of other real estate owned as of September 30, 2024 and December 31, 2023, respectively. Loans past due more than 90 days and still accruing interest totaled $7.1 million as of September 30, 2024, compared to $3.0 million at September 30, 2023 and $3.1 million as of December 31, 2023.
A loan is generally placed on nonaccrual status when payments are past due 90 days or more and/or when management has considerable doubt about the borrower’s ability to repay on the terms originally contracted. The accrual of interest is discontinued and recorded thereafter only when received in cash.
Certain loans are restructured to provide a reduction or deferral of interest or principal due to deterioration in the financial condition of the respective borrowers. The Company had $200 thousand of restructured loans at September 30, 2024, $3.2 million at September 30, 2023, and $548 thousand at December 31, 2023.
Table 15
LOAN QUALITY (unaudited, dollars in thousands)
Nonaccrual loans
19,248
14,519
12,828
Restructured loans on nonaccrual
2,523
384
Total nonperforming loans
17,042
1,851
Total nonperforming assets
21,142
14,950
Loans past due 90 days or more
3,044
Restructured loans accruing
157
665
Ratios:
Nonperforming loans as a percent of loans
Nonperforming assets as a percent of loans plus other real estate owned
Nonperforming assets as a percent of total assets
0.04
Loans past due 90 days or more as a percent of loans
0.01
Allowance for credit losses on loans as a percent of loans
Allowance for credit losses on loans as a multiple of nonperforming loans
12.90x
13.00x
16.63x
Liquidity Risk
Liquidity represents the Company’s ability to meet financial commitments through the maturity and sale of existing assets or availability of additional funds. The Company believes that the most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, the Company believes public confidence is generated through profitable operations, sound credit quality and a strong capital position. The primary source of liquidity for the Company is regularly scheduled payments on and maturity of assets, which include $7.0 billion of high-quality securities available for sale as of September 30, 2024. The liquidity of the Company and the Bank is also enhanced by its activity in the federal funds market and by its core deposits. Additionally, management believes it can raise debt or equity capital in the future, should the need arise.
Another factor affecting liquidity is the amount of deposits and customer repurchase agreements that have pledging requirements. All customer repurchase agreements require collateral in the form of a security. The U.S. Government, other public entities, and certain trust depositors require the Company to pledge securities if their deposit balances are greater than the FDIC-insured deposit limitations. These pledging requirements affect liquidity risk in that the related security cannot otherwise be disposed of due to the pledging restriction. There were $9.4 billion and $10.1 billion of securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at September 30, 2024 and December 31, 2023, respectively.
The Company also has other commercial commitments that may impact liquidity. These commitments include unused commitments to extend credit, standby letters of credit and financial guarantees, and commercial letters of credit. The total amount of these commercial commitments at September 30, 2024 was $18.8 billion. Since many of these commitments expire without being drawn upon, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Company.
The Company’s cash requirements consist primarily of dividends to shareholders, debt service, operating expenses, and treasury stock purchases. Management fees and dividends received from bank and non-bank subsidiaries traditionally have been sufficient to satisfy these requirements and are expected to be sufficient in the future. The Bank is subject to various rules regarding payment of dividends to the Company. For the most part, the Bank can pay dividends at least equal to its current year’s earnings without seeking prior regulatory approval. The
Company also uses cash to inject capital into its bank and non-bank subsidiaries to maintain adequate capital as well as fund strategic initiatives.
To enhance general working capital needs, the Company has a revolving line of credit with Wells Fargo Bank, N.A., which allows the Company to borrow up to $30.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company’s option, either 1.4% above SOFR or 1.75% below the prime rate on the date of an advance. The Company pays a 0.4% unused commitment fee for unused portions of the line of credit. The Company had no advances outstanding as of September 30, 2024.
The Company is a member bank of the FHLB. The Company owns $21.4 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company’s borrowing capacity is dependent upon the amount of collateral the Company places at the FHLB. The Company had a $250.0 million short-term advance outstanding at FHLB of Des Moines as of September 30, 2024, at an interest rate of 5.47%. This borrowing matured in October 2024. Additionally, during 2024, the FHLB of Des Moines issued a letter of credit for $150.0 million on behalf of the Company to secure deposits. This letter of credit expired in October 2024, was renewed, and will expire in January 2025. The Company’s remaining borrowing capacity with the FHLB was $1.6 billion as of September 30, 2024.
The Company had an $800.0 million short-term borrowing outstanding with the Federal Reserve Bank's BTFP as of September 30, 2024 at an interest rate of 4.76%. This borrowing was repaid in October 2024 in advance of its maturity. As of September 30, 2024, the Company’s remaining borrowing capacity with the BTFP was $18.0 million and its remaining borrowing capacity at the Federal Reserve Discount Window was $11.8 billion.
Operational Risk
Operational risk generally refers to the risk of loss resulting from the Company’s operations, including those operations performed for the Company by third parties. This would include but is not limited to the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees or others, errors relating to transaction processing, breaches of the internal control system and compliance requirements, and unplanned interruptions in service. This risk of loss also includes the potential legal or regulatory actions that could arise as a result of an operational deficiency, or as a result of noncompliance with applicable regulatory standards. The Company must comply with a number of legal and regulatory requirements.
The Company operates in many markets and relies on the ability of its employees and systems to properly process a high number of transactions. In the event of a breakdown in internal control systems, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation. In order to address this risk, management maintains a system of internal controls with the objective of providing proper transaction authorization and execution, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data.
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The Company maintains systems of internal controls that provide management with timely and accurate information about the Company’s operations. These systems have been designed to manage operational risk at appropriate levels given the Company’s financial strength, the environment in which it operates, and considering factors such as competition and regulation. The Company has also established procedures that are designed to ensure that policies relating to conduct, ethics, and business practices are followed on a uniform basis. In certain cases, the Company has experienced losses from operational risk. Such losses have included the effects of operational errors that the Company has discovered and included as expense in the statement of income. While there can be no assurance that the Company will not suffer such losses in the future, management continually monitors and works to improve its internal controls, systems, and corporate-wide processes and procedures.
ITEM 4. CONTROLS AND PROCEDURES
The Sarbanes-Oxley Act of 2002, as amended, requires the Chief Executive Officer and the Chief Financial Officer to make certain certifications under this Form 10-Q with respect to the Company’s disclosure controls and procedures and internal control over financial reporting. The Company has a Code of Ethics that expresses the values that drive employee behavior and maintains the Company’s commitment to the highest standards of ethics.
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, the Company’s disclosure controls and procedures were effective for ensuring that the Company’s SEC filings are recorded, processed, summarized, and reported within the time period required and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the nine-month period ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Company and its subsidiaries are named defendants in various legal proceedings. In the opinion of management, after consultation with legal counsel, none of these lawsuits are expected to have a materially adverse effect on the financial position, results of operations, or cash flows of the Company.
ITEM 1A. RISK FACTORS
There were no material changes to the risk factors as previously disclosed in response to Item 1A to Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, or in response to Item 1A to Part II of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth the information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three-month period ended September 30, 2024.
ISSUER PURCHASE OF EQUITY SECURITIES
Period
Total Number of Shares (or Units) Purchased (1)
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1 - July 31, 2024
2,051
98.03
August 1 - August 31, 2024
September 1 - September 30, 2024
(1) Includes shares acquired pursuant to the Company's share-based incentive programs. Under the terms of the Company's share-based incentive programs, the Company accepts previously owned shares of common stock surrendered to satisfy tax withholding obligations associated with equity compensation. These purchases do not count against the maximum value of shares remaining available for purchase under Repurchase Authorizations.
(2) Includes shares acquired under the Board of Directors approved Repurchase Authorization(s).
On July 25, 2023, the Company announced a plan to repurchase up to one million shares of common stock, which terminated April 30, 2024. On April 30, 2024, the Company announced a plan to repurchase up to one million shares of common stock, which will terminate on April 29, 2025. The Company has not made any repurchases other than through the Repurchase Authorizations, but did acquire share pursuant to the Company's share-based incentive programs. The Company is not currently engaging in repurchases. In the future, it may determine to resume repurchases. All share purchases pursuant to the Repurchase Authorizations are intended to be within the scope of Rule 10b-18 promulgated under the Exchange Act. Rule 10b-18 provides a safe harbor for purchases in a given day if the Company satisfies the manner, timing and volume conditions of the rule when purchasing its own shares of common stock.
ITEM 5. OTHER INFORMATION
On September 13, 2024, three foundations and trusts that are related interests of Chairman and Chief Executive Officer J. Mariner Kemper adopted a single, pre-arranged stock sale plan in accordance with Rule 10b5-1(c) (Rule 10b5-1) under the Exchange Act for the sale of shares of the Company’s common stock (the “2025
Plan”). The 2025 Plan was entered into during an open trading window in accordance with the Company’s requirements regarding transactions in the Company’s securities and is intended to satisfy the affirmative defense conditions of Rule 10b5-1. The 2025 Plan provides for the monthly sale of an initial number of shares of the Company’s common stock once the market price of the Company’s common stock meets or exceeds certain minimum threshold prices as specified in the 2025 Plan. Should the market price of the Company’s shares meet or exceed secondary and tertiary pricing thresholds as specified in the 2025 Plan, up to double and triple the initial number of shares in the aggregate may be sold in that month, respectively. Sales under the 2025 Plan may occur beginning in January of 2025 (after conclusion of the applicable cooling off period following adoption of the 2025 Plan) and end no later than December 31, 2025. The aggregate number of shares of common stock of the Company that will be available for sale under the 2025 Plan will vary depending on the market price achieved but will not exceed a maximum of 105,024 shares in aggregate.
86
ITEM 6. EXHIBITS
2.1
Agreement and Plan of Merger, dated as of April 28, 2024, by and among Heartland Financial USA, Inc., UMB Financial Corporation and Blue Sky Merger Sub Inc. (incorporated by reference to Annex A to the join proxy statement/prospectus forming a part of the registration statement on Form S-4 and filed with the Commission on July 2, 2024).
Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and filed with the Commission on May 9, 2006).
Bylaws, amended as of April 13, 2023 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated April 13, 2023 and filed with the Commission on April 13, 2023).
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act filed herewith.
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act filed herewith.
32.1
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act filed herewith.
32.2
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act filed herewith.
101.INS
XBRL Instance Document – The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document filed herewith.
The cover page of our Form 10-Q for the quarter ended September 30, 2024, formatted in iXBRL.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
/s/ David C. Odgers
David C. Odgers
Chief Accounting Officer
Date: October 31, 2024