UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number001-38481
UMB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Missouri
43-0903811
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
1010 Grand Boulevard, Kansas City, Missouri
64106
(Address of principal executive offices)
(Zip Code)
(Registrant's telephone number, including area code): (816) 860-7000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 Par Value
UMBF
The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non- accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 22, 2022, UMB Financial Corporation had 48,404,130 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
55
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
72
ITEM 4.
CONTROLS AND PROCEDURES
77
PART II - OTHER INFORMATION
78
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 6.
EXHIBITS
79
SIGNATURES
80
2
ITEM 1. FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
March 31,
December 31,
2022
2021
(unaudited)
(audited)
ASSETS
Loans
$
17,731,700
17,170,871
Allowance for credit losses on loans
(179,288
)
(194,771
Net loans
17,552,412
16,976,100
Loans held for sale
384
1,277
Securities:
Available for sale (amortized cost of $8,898,849 and $11,822,584, respectively)
8,550,093
11,976,514
Held to maturity, net of allowance for credit losses of $2,045 and $1,940, respectively (fair value of $4,393,455 and $1,442,391, respectively)
4,600,187
1,478,476
Trading securities
17,059
31,875
Other securities
332,123
327,098
Total securities
13,499,462
13,813,963
Federal funds sold and securities purchased under agreements to resell
1,319,809
1,216,357
Interest-bearing due from banks
6,355,941
8,841,906
Cash and due from banks
357,772
413,821
Premises and equipment, net
264,519
270,933
Accrued income
127,139
131,102
Goodwill
182,225
174,518
Other intangibles, net
15,690
14,416
Other assets
930,389
839,091
Total assets
40,605,742
42,693,484
LIABILITIES
Deposits:
Noninterest-bearing demand
15,946,738
16,342,642
Interest-bearing demand and savings
17,828,794
18,405,644
Time deposits under $250,000
399,467
403,660
Time deposits of $250,000 or more
187,566
447,981
Total deposits
34,362,565
35,599,927
Federal funds purchased and repurchase agreements
2,840,535
3,238,435
Long-term debt
272,036
271,544
Accrued expenses and taxes
178,130
249,492
Other liabilities
204,071
188,662
Total liabilities
37,857,337
39,548,060
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued, 48,403,262 and 48,430,805 shares outstanding, respectively
55,057
Capital surplus
1,109,585
1,110,520
Retained earnings
2,265,129
2,176,998
Accumulated other comprehensive (loss) income, net
(343,128
126,314
Treasury stock, 6,653,468 and 6,625,925 shares, at cost, respectively
(338,238
(323,465
Total shareholders' equity
2,748,405
3,145,424
Total liabilities and shareholders' equity
See Notes to Consolidated Financial Statements.
(unaudited, dollars in thousands, except share and per share data)
Three Months Ended
INTEREST INCOME
149,470
150,170
Taxable interest
43,382
27,162
Tax-exempt interest
23,855
24,964
Total securities income
67,237
52,126
Federal funds and resell agreements
2,450
2,821
2,457
703
185
159
Total interest income
221,799
205,979
INTEREST EXPENSE
Deposits
6,173
6,798
Federal funds and repurchase agreements
2,148
1,886
Other
3,123
3,180
Total interest expense
11,444
11,864
Net interest income
210,355
194,115
Provision for credit losses
(6,500
(7,500
Net interest income after provision for credit losses
216,855
201,615
NONINTEREST INCOME
Trust and securities processing
59,528
54,834
Trading and investment banking
5,440
9,356
Service charges on deposit accounts
24,642
21,976
Insurance fees and commissions
259
420
Brokerage fees
3,456
3,334
Bankcard fees
16,635
14,673
Investment securities losses, net
(522
(8,336
14,240
12,640
Total noninterest income
123,678
108,897
NONINTEREST EXPENSE
Salaries and employee benefits
130,634
127,681
Occupancy, net
12,232
11,935
Equipment
18,164
19,615
Supplies and services
3,262
3,492
Marketing and business development
4,932
2,345
Processing fees
18,443
15,417
Legal and consulting
6,911
5,755
Bankcard
6,567
4,956
Amortization of other intangible assets
1,071
1,380
Regulatory fees
3,482
2,546
9,080
5,824
Total noninterest expense
214,778
200,946
Income before income taxes
125,755
109,566
Income tax expense
19,792
16,923
NET INCOME
105,963
92,643
PER SHARE DATA
Net income – basic
2.19
1.93
Net income – diluted
2.17
1.91
Dividends
0.37
0.32
Weighted average shares outstanding – basic
48,406,840
48,096,643
Weighted average shares outstanding – diluted
48,832,177
48,520,752
(unaudited, dollars in thousands)
Net income
Other comprehensive loss, before tax:
Unrealized gains and losses on debt securities:
Change in unrealized holding gains and losses, net
(622,910
(199,038
Less: Reclassification adjustment for gains included in net income
—
(2,720
Amortization of net unrealized loss on securities transferred from available-for-sale to held-to-maturity
582
Change in unrealized gains and losses on debt securities during the period
(622,328
(201,758
Unrealized gains and losses on derivative hedges:
Change in unrealized gains and losses on derivative hedges
4,680
6,503
(851
(842
3,829
5,661
Other comprehensive loss, before tax
(618,499
(196,097
Income tax benefit
149,057
46,954
Other comprehensive loss
(469,442
(149,143
Comprehensive loss
(363,479
(56,500
(unaudited, dollars in thousands, except per share data)
Common
Stock
Capital
Surplus
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury
Total
Balance – January 1, 2021
1,090,450
1,891,246
318,340
(338,145
3,016,948
Total comprehensive income (loss)
Dividends ($0.32 per share)
(15,571
Purchase of treasury stock
(4,027
Issuances of equity awards, net of forfeitures
(4,043
4,738
695
Recognition of equity-based compensation
4,457
Sale of treasury stock
65
86
151
Exercise of stock options
2,738
9,348
12,086
Balance – March 31, 2021
1,093,667
1,968,318
169,197
(328,000
2,958,239
Balance – January 1, 2022
Dividends ($0.37 per share)
(17,832
(22,487
(6,630
7,309
679
5,485
84
54
138
126
351
477
Balance – March 31, 2022
For the Three Months Ended
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums and discounts from acquisition
379
117
Depreciation and amortization
13,152
14,042
Amortization of debt issuance costs
113
Deferred income tax (benefit) expense
(1,023
10,246
Net decrease (increase) in trading securities and other earning assets
14,816
(9,350
Losses on investment securities, net
522
8,336
Gains on sales of assets
(2,354
(4,298
Amortization of securities premiums, net of discount accretion
11,180
14,876
Originations of loans held for sale
(8,330
(45,128
Gains on sales of loans held for sale, net
(270
(1,602
Proceeds from sales of loans held for sale
9,493
43,163
Equity-based compensation
6,164
5,152
Net tax benefit related to equity compensation plans
2,369
1,079
Changes in:
3,860
4,156
(72,489
(88,201
Other assets and liabilities, net
119,007
78,096
Net cash provided by operating activities
196,052
115,940
INVESTING ACTIVITIES
Securities held to maturity:
Maturities, calls and principal repayments
70,091
49,520
Purchases
(334,546
(77,576
Securities available for sale:
Sales
129,128
439,293
520,441
(540,925
(1,322,855
Equity securities with readily determinable fair values:
9,725
(353
(226
Equity securities without readily determinable fair values:
2,177
(11,323
(7,144
Payment on low-income housing tax credit investment commitments
(8,395
(1,173
Net increase in loans
(608,888
(398,795
Net (increase) decrease in fed funds sold and resell agreements
(103,452
20,522
Net cash activity from acquisitions and divestitures
265,639
16,623
Net decrease (increase) in interest-bearing balances due from other financial institutions
14,368
(11,347
Purchases of premises and equipment
(8,643
(5,958
Proceeds from sales of premises and equipment
2,968
73
Net cash used in investing activities
(814,435
(1,086,590
FINANCING ACTIVITIES
Net (decrease) increase in demand and savings deposits
(1,207,226
1,441,071
Net decrease in time deposits
(264,608
(211,530
Net (decrease) increase in fed funds purchased and repurchase agreements
(397,900
444,321
Cash dividends paid
(17,917
(15,456
Proceeds from exercise of stock options and sales of treasury shares
615
12,237
Purchases of treasury stock
Net cash (used in) provided by financing activities
(1,909,523
1,666,616
(Decrease) increase in cash and cash equivalents
(2,527,906
695,966
Cash and cash equivalents at beginning of period
9,214,564
3,497,566
Cash and cash equivalents at end of period
6,686,658
4,193,532
Supplemental disclosures:
Income tax payments
795
622
Total interest payments
13,043
14,337
Noncash disclosures:
Acquisition of low-income housing tax credit investments
6,398
Commitment to fund low-income housing tax credit investments
Transfer of securities from available-for-sale to held-to-maturity
2,857,187
8
FOR THE THREE MONTHS ENDED MARCH 31, 2022 (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, 2022. 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, 2021, filed with the Securities and Exchange Commission (SEC) on February 24, 2022 (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, 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 March 31, 2022 and March 31, 2021 (in thousands):
Due from the FRB
6,328,886
3,806,302
387,230
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 $27.1 million and $54.5 million at March 31, 2022 and March 31, 2021, 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 425,337 and 424,109 shares issuable upon the exercise of stock options, nonvested restricted shares, and nonvested restricted stock units granted by the Company and outstanding at March 31, 2022 and 2021.
Certain options, restricted stock 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 months ended March 31, 2022 and March 31, 2021, there were no outstanding stock options, restricted stock and restricted stock units excluded from the computation of diluted income per share.
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, 12 of the Company’s derivatives are designated in qualifying hedging relationships. 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 eliminates the accounting guidance for troubled debt restructurings (TDR) by creditors and enhances disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments also add requirements to disclose current-period gross writeoffs 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 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period. The adoption of this accounting pronouncement will have no impact on the Consolidated Financial Statements aside from additional and revised 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
10
loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers.
Specialty lending loans include Asset-based and Factoring loans. Asset-based loans are offered primarily in the form of revolving lines of credit to commercial borrowers that do not generally qualify for traditional bank financing. Asset-based loans are underwritten based primarily upon the value of the collateral pledged to secure the loan, rather than on the borrower’s general financial condition. The Company utilizes pre-loan due diligence techniques, monitoring disciplines, and loan management practices common within the asset-based lending industry to underwrite loans to these borrowers. Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing. During the first quarter of 2022, the Company sold its factoring loan portfolio to an alternative financing company. The sale included $82.6 million of loans, resulting in a gain of $2.4 million.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires that an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner-occupied real estate. Also included in Commercial real estate are Construction loans that are underwritten using feasibility studies, independent appraisal reviews, sensitivity analysis or absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions, and the availability of long-term financing.
Consumer real estate loans, including residential real estate and home equity loans, are underwritten based on the borrower’s loan-to-value percentage, collection remedies, and overall credit history.
Consumer loans are underwritten based on the borrower’s repayment ability. The Company monitors delinquencies on all of its consumer loans and leases. The underwriting and review practices combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Consumer loans and leases that are 90 days past due or more are considered non-performing.
Credit cards include both commercial and consumer credit cards. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans, including an analysis of the borrower’s cash flow, available business capital, and overall 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 FICO scores relative to historical periods to monitor credit risk on its consumer credit card loans.
Credit risk is a potential loss resulting from nonpayment of either the primary or secondary exposure. Credit risk is mitigated with formal risk management practices and a thorough initial credit-granting process including consistent underwriting standards and approval process. Control factors or techniques to minimize credit risk include knowing the client, understanding total exposure, analyzing the client and debtor’s financial capacity, and monitoring the client’s activities. Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics.
11
Loan Aging Analysis
This table provides a summary of loan classes and an aging of past due loans at March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022
30-89
Days Past
Due and
Accruing
Greater than
90 Days Past
Nonaccrual
Past Due
Current
Total Loans
Commercial and industrial
4,564
1,375
91,053
96,992
7,516,907
7,613,899
Specialty lending
11,797
494,063
505,860
Commercial real estate
9,470
463
2,651
12,584
6,406,926
6,419,510
Consumer real estate
1,397
3,892
5,289
2,388,025
2,393,314
Consumer
49
1
572
132,193
132,815
Credit cards
1,679
1,761
366
3,806
393,294
397,100
Leases and other
25
269,177
269,202
Total loans
17,159
3,600
110,356
131,115
17,600,585
December 31, 2021
2,827
896
82,845
86,568
7,171,552
7,258,120
522,362
962
4,688
5,650
6,261,894
6,267,544
246
489
4,210
4,945
2,315,088
2,320,033
105
75
182
128,953
129,135
1,246
457
4,072
387,317
391,389
282,263
282,288
6,509
2,633
92,300
101,442
17,069,429
The Company sold consumer real estate loans with proceeds of $9.5 million and $43.2 million in the secondary market without recourse during the three months ended March 31, 2022 and 2021, respectively.
The Company has ceased the recognition of interest on loans with a carrying value of $110.4 million and $92.3 million at March 31, 2022 and December 31, 2021, respectively. Restructured loans totaled $7.1 million and $7.3 million at March 31, 2022 and December 31, 2021, respectively. Loans 90 days past due and still accruing interest amounted to $3.6 million and $2.6 million at March 31, 2022 and December 31, 2021, 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 2022 and 2021. Nonaccrual loans with no related allowance for credit losses totaled $101.0 million and $85.9 million at March 31, 2022 and December 31, 2021, respectively.
12
The following tables provide the amortized cost of nonaccrual loans with no related allowance for credit losses by loan class at March 31, 2022 and December 31, 2021 (in thousands):
Amortized Cost of Nonaccrual Loans with no related Allowance
81,686
100,989
76,493
85,948
13
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 March 31, 2022 and December 31, 2021 (in thousands):
Amortized Cost - Revolving Loans
Amortized Cost - Revolving Loans Converted to Term Loans
Loan Segment
and Type
Amortized Cost Basis by Origination Year - Term Loans
2020
2019
2018
Prior
Commercial and industrial:
Equipment/Accounts Receivable/Inventory
469,143
2,163,848
814,546
327,868
129,190
167,029
3,362,138
31,816
7,465,578
Agriculture
2,134
10,521
5,608
2,846
857
1,022
119,042
142,030
Overdrafts
6,291
Total Commercial and industrial
471,277
2,174,369
820,154
330,714
130,047
168,051
3,487,471
Specialty lending:
Asset-based lending
381
41,195
46,958
417,326
Total Specialty lending
Commercial real estate:
Owner-occupied
222,719
655,646
463,030
205,136
157,972
237,072
30,383
1,971,958
Non-owner-occupied
299,175
980,164
628,839
490,943
117,452
339,899
9,973
2,866,445
Farmland
16,236
65,635
261,388
28,963
17,528
53,334
32,177
475,261
5+ Multi-family
32,049
30,783
98,196
19,354
1,687
7,255
4,485
193,809
1-4 Family construction
16,137
45,105
741
6,753
2,412
71,148
General construction
54,487
541,587
168,536
61,272
62
444
14,501
840,889
Total Commercial real estate
640,803
2,318,920
1,620,730
812,421
294,701
638,004
93,931
Consumer real estate:
HELOC
195
514
344
567
6,529
302,902
1,692
312,743
First lien: 1-4 family
182,247
803,684
675,494
188,428
55,015
153,632
19
2,058,519
Junior lien: 1-4 family
1,689
8,371
5,699
3,046
1,241
1,959
47
22,052
Total Consumer real estate
183,936
812,250
681,707
191,818
56,823
162,120
302,968
Consumer:
Revolving line
179
971
58,028
1,270
60,448
Auto
2,666
9,014
6,794
4,577
810
486
24,347
6,983
29,744
1,691
1,635
1,419
2,311
4,237
48,020
Total Consumer
9,828
39,729
8,485
6,212
2,229
2,797
62,265
Credit cards:
171,735
Commercial
225,365
Total Credit cards
Leases and other:
Leases
814
1,323
2,137
536
98,148
45,585
59,213
21,641
5,585
36,357
267,065
Total Leases and other
60,027
6,908
1,306,761
5,484,611
3,223,619
1,401,192
505,441
977,880
4,797,418
34,778
14
2017
2,400,110
945,383
356,348
150,892
115,571
131,900
2,984,740
247
7,085,191
12,077
5,884
3,308
640
1,143
130,946
154,342
18,587
2,412,187
951,267
359,656
151,532
115,915
133,043
3,134,273
34,552
49,373
331,282
415,207
Factoring
107,155
438,437
680,135
519,448
226,631
177,576
91,539
159,482
11,727
1,866,538
1,058,025
689,167
591,886
162,491
135,100
258,541
10,969
2,906,179
61,505
273,624
34,145
16,969
19,929
34,858
38,239
999
480,268
58,268
95,024
41,426
1,206
511
6,820
2,057
205,312
53,004
4,933
17,333
985
76,255
439,973
160,553
64,283
38,505
203
256
29,219
732,992
2,350,910
1,742,749
975,704
396,747
247,282
459,957
93,196
248
547
327
574
646
6,363
320,410
2,523
331,638
830,513
712,264
200,167
58,734
61,641
102,997
1,966,335
9,114
6,299
3,361
1,150
820
1,299
17
22,060
839,875
719,110
203,855
60,458
63,107
110,659
320,446
974
60,049
120
61,143
9,886
7,775
5,462
1,107
479
220
24,929
31,391
2,041
1,949
1,543
2,542
708
2,889
43,063
42,251
9,816
7,411
2,650
3,021
928
62,938
180,296
211,093
739
614
2,167
99,952
44,113
58,164
22,344
5,631
779
49,138
280,121
58,978
6,370
1,393
5,779,727
3,516,428
1,605,604
633,731
435,695
705,980
4,489,817
3,889
Accrued interest on loans totaled $47.6 million and $45.2 million as of March 31, 2022 and December 31, 2021, 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.
15
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.
The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. 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: Non-watch list, Watch, Special Mention, Substandard, and Doubtful. Any loan not classified in one of the categories described below is considered to be a Non-watch list loan. A description of the general characteristics of the loan rating categories is as follows:
•
Watch – This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the borrower’s industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk. These loans are considered pass-rated credits.
Special Mention – This rating reflects a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the borrower’s credit position at some future date. The rating is not adversely classified and does not expose an institution to sufficient risk to warrant adverse classification.
Substandard – This rating represents an asset inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.
Doubtful – This rating represents an asset that has all the weaknesses inherent in an asset classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage of strengthening the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, or perfecting liens.
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.
16
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 March 31, 2022 and December 31, 2021 (in thousands):
Risk by Collateral
Non-watch list – Pass
443,997
2,048,497
745,218
298,758
120,445
157,038
3,138,826
31,698
6,984,477
Watch – Pass
15,779
103,276
32,486
22,977
4,771
2,150
103,130
284,569
Special Mention
2,984
2,386
2,600
570
2,654
38,673
49,867
Substandard
9,367
8,812
3,533
3,404
660
44,779
118
71,879
Doubtful
279
33,250
4,527
36,730
74,786
Total Equipment/Accounts Receivable/Inventory
1,934
10,167
5,401
101,422
123,191
354
304
154
3,632
4,444
200
207
13,988
14,195
Total Agriculture
2,299,784
874,786
325,630
141,667
106,141
130,153
2,750,764
6,629,172
68,322
34,324
25,572
5,056
1,794
698
106,177
241,943
5,886
592
1,742
997
41,209
53,026
25,466
3,023
3,577
1,202
52
45,053
80,919
652
4,692
41,537
80,131
11,512
5,394
2,608
212
100,630
121,843
500
222
328
428
6,532
8,010
372
1,361
1,733
268
22,423
22,756
A discussion of the credit quality indicators that impact each type of collateral securing Specialty loans is included below:
Asset-based lending General asset-based loans are secured by accounts receivable, inventory, equipment, and real estate. The purpose of these loans is for financing current operations for commercial customers. The repayment of debt is reliant upon collection of the accounts receivable within 30 to 90 days or converting assets into cash or through goods and services being sold and collected. The Company tracks each individual borrower credit risk based on their loan to collateral position. Any borrower position where the underlying value of collateral is below the fair value of the loan is considered out-of-margin and inherently higher risk.
Factoring During the first quarter of 2022, the Company sold its factoring loan portfolio to an alternative financing company. Prior to the sale of this portfolio, factoring loans were secured by accounts receivable. The purpose of these loans was for financing current operations for trucking or other commercial customers. The repayment of debt was reliant upon collection of the accounts receivable within 30 to 90 days. The Company tracked each individual borrower’s credit risk based on their loan to collateral position. To assess credit risk, the portfolio was separated into two tiers and a specifically impaired category. Tier 1 were loans that had not experienced collateral coverage rates falling below an internally tracked threshold at any time during their relationship history. The internal threshold was lower than each customers’ actual contractual collateral coverage ratio. Tier 2 were loans that had experienced collateral coverage rates falling below the same internally tracked threshold during their relationship history. Loans individually evaluated were loans that had either experienced collateral coverage rates falling below an internally tracked threshold during their relationship history or had balances that were greater than an internally tracked threshold. Individually evaluated loans utilized a practical expedient for the purpose of determining the expected credit loss. Collateral dependent assets were loans placed on non-accrual and loans considered to be TDRs. The combination of these categories created an associated allowance to this portfolio of $1.0 million as of December 31, 2021.
18
The following table provides a summary of the amortized cost balance by risk rating for asset-based loans as of March 31, 2022 and December 31, 2021 (in thousands):
Risk
In-margin
495,318
409,844
Out-of-margin
10,542
5,363
The following table provides a summary of the amortized cost balance by risk rating for factoring loans as of December 31, 2021 (in thousands):
Tier 1
9,433
Tier 2
65,149
Individually evaluated
32,573
Collateral dependent assets
A discussion of the credit quality indicators that impact each type of collateral securing Commercial real estate loans is included below:
Owner-occupied Owner-occupied loans are secured by commercial real estate. These loans are often longer tenured and susceptible to multiple economic cycles. The loans rely on the owner-occupied operations to service debt which cover a broad spectrum of industries. Real estate debt can carry a significant amount of leverage for a borrower to maintain.
Non-owner-occupied Non-owner-occupied loans are secured by commercial real estate. These loans are often longer tenured and susceptible to multiple economic cycles. The key element of risk in this type of lending is the cyclical nature of real estate markets. Although national conditions affect the overall real estate industry, the effect of national conditions on local markets is equally important. Factors such as unemployment rates, consumer demand, household formation, and the level of economic activity can vary widely from state to state and among metropolitan areas. In addition to geographic considerations, markets can be defined by property type. While all sectors are influenced by economic conditions, some sectors are more sensitive to certain economic factors than others.
Farmland Farmland loans are secured by real estate used for agricultural purposes such as crop and livestock production. Assets used as collateral are long-term assets that carry the ability to have longer amortizations and maturities. Longer terms carry the risk of added susceptibility to market conditions. The limited purpose of some Agriculture-related collateral affects credit risk because such collateral may have limited or no other uses to support values when loan repayment problems emerge.
5+ Multi-family 5+ multi-family loans are secured by a multi-family residential property. The primary risks associated with this type of collateral are largely driven by economic conditions. The national and local market conditions can change with unemployment rates or competing supply of multi-family housing. Tenants may not be able to afford their housing or have better options and this can result in increased vacancy. Rents may need to be lowered to fill apartment units. Increased vacancy and lower rental rates not only drive the borrower’s ability to repay debt but also contribute to how the collateral is valued.
1-4 Family construction 1-4 family construction loans are secured by 1-4 family residential real estate and are in the process of construction or improvements being made. The predominant risk inherent to this portfolio is the risk associated with a borrower’s ability to successfully complete a project on time and within budget. Market
conditions also play an important role in understanding the risk profile. Risk from adverse changes in market conditions from the start of development to completion can result in deflated collateral values
General construction General construction loans are secured by commercial real estate in process of construction or improvements being made and their repayment is dependent on the collateral’s completion. Construction lending presents unique risks not encountered in term financing of existing real estate. The predominant risk inherent to this portfolio is the risk associated with a borrower’s ability to successfully complete a project on time and within budget. Commercial properties under construction are susceptible to market and economic conditions. Demand from prospective customers may erode after construction begins because of a general economic slowdown or an increase in the supply of competing properties.
20
220,777
654,551
451,647
175,858
156,402
230,287
30,283
1,919,805
1,942
10,090
9,843
1,048
3,466
27,209
90
1,263
17,091
18,444
30
2,344
3,319
100
6,500
Total Owner-occupied
270,118
934,677
620,352
452,911
94,777
298,577
2,681,385
29,057
45,487
38,032
22,675
5,228
140,479
8,487
36,069
44,556
Total Non-owner-occupied
12,236
44,152
234,926
21,444
3,302
51,476
23,939
391,475
2,241
11,214
227
1,055
14,737
4,000
3,800
6,583
13,983
7,274
35,640
15,442
15,248
936
803
964
33,409
Total Farmland
Total 5+ Multi-family
Total 1-4 Family construction
521,028
61,186
427
820,227
4,114
16,445
Total General construction
21
679,662
507,220
208,376
174,352
89,588
154,920
11,627
1,825,745
191
10,891
16,493
1,572
31,345
93
1,304
189
33
1,762
2,169
808
2,990
8,051
976,097
679,313
536,084
143,243
129,820
219,701
2,695,227
57,052
55,802
19,248
5,280
2,587
141,246
24,876
8,577
36,223
69,676
40,526
246,955
26,332
2,147
19,199
29,136
28,276
392,571
2,263
10,177
823
213
4,889
18,365
6,875
517
8,999
34,174
14,916
16,492
938
833
35,158
436,696
62,675
239
728,090
3,277
1,522
1,539
22
A discussion of the credit quality indicators that impact each type of collateral securing Consumer real estate loans is included below:
HELOC HELOC loans are revolving lines of credit secured by 1-4 family residential property. The primary risk is the borrower’s inability to repay debt. Revolving notes are often associated with HELOCs that can be secured by real estate without a 1st lien priority. Collateral is susceptible to market volatility impacting home values or economic downturns.
First lien: 1-4 family First lien 1-4 family loans are secured by a first lien on 1-4 family residential property. These term loans carry longer maturities and amortizations. The longer tenure exposes the borrower to multiple economic cycles, coupled with longer amortizations that result in smaller principal reduction early in the life of the loan. Collateral is susceptible to market volatility impacting home values.
Junior lien: 1-4 family Junior lien 1-4 family loans are secured by a junior lien on 1-4 family residential property. The Company’s primary risk is the borrower’s inability to repay debt and not being in a 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
206
164
4,873
302,804
1,538
310,294
Non-performing
403
1,656
98
2,449
Total HELOC
675,440
188,225
54,978
152,556
2,057,149
37
1,076
1,370
Total First lien: 1-4 family
1,234
1,893
21,979
66
Total Junior lien: 1-4 family
23
531
188
165
320,241
2,440
329,150
139
409
265
1,407
169
83
2,488
712,194
199,949
58,585
61,233
102,194
1,964,687
70
218
149
408
1,648
800
1,251
21,985
48
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.
24
57,532
59,952
496
Total Revolving line
8,990
4,543
24,289
34
58
Total Auto
1,676
2,309
48,003
Total Other
5,424
24,891
38
2,025
1,525
704
43,025
A discussion of the credit quality indicators that impact Credit card loans is included below:
Consumer Consumer credit card loans are revolving loans made to individuals. The primary risk associated with this collateral class is credit card debt is generally unsecured; therefore, repayment depends primarily on a borrower’s willingness and capacity to repay. The highly competitive environment for credit card lending provides consumers with ample opportunity to hold several credit cards from different issuers and to pay only minimum monthly payments on outstanding balances. In such an environment, borrowers may become over-extended and unable to repay, particularly in times of an economic downturn or a personal catastrophic event.
The consumer credit card portfolio is segmented by borrower payment activity. Transactors are defined as accounts that pay off their balance by the end of each statement cycle. Revolvers are defined as an account that carries a balance from statement cycle to the next. These accounts incur monthly finance charges, and, sometimes, late fees. Revolvers are inherently higher risk and are tracked by FICO score.
Commercial Commercial credit card loans are revolving loans made to small and commercial businesses. The primary risk associated with this collateral class is credit card debt is generally unsecured; therefore, repayment depends primarily on a borrower’s willingness and capacity to repay. Borrowers may become over-extended and unable to repay, particularly in times of an economic downturn or a catastrophic event.
The commercial credit card portfolio is segmented by current and past due payment status. A borrower is past due after 30 days. In general, commercial credit card customers do not have incentive to hold a balance resulting in paying interest on credit card debt as commercial customers will typically have other debt obligations with lower interest rates in which they can utilize for capital.
The following table provides a summary of the amortized cost balance of consumer credit cards by risk rating as of March 31, 2022 and December 31, 2021 (in thousands):
Transactor accounts
54,503
57,777
Revolver accounts (by FICO score):
Less than 600
4,395
6,065
600-619
2,534
2,416
620-639
4,361
4,158
640-659
7,723
7,854
660-679
9,251
13,185
680-699
11,881
15,365
700-719
14,462
16,308
720-739
13,811
14,753
740-759
12,573
12,734
760-779
12,806
8,879
780-799
11,629
7,048
800-819
7,598
5,787
820-839
3,441
5,026
840+
767
2,941
26
The following table provides a summary of the amortized cost balance of commercial credit cards by risk rating as of March 31, 2022 and December 31, 2021 (in thousands):
214,300
200,402
11,065
10,691
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 March 31, 2022 and December 31, 2021 (in thousands):
266,334
279,401
706
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,
27
risk rating and FICO 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 & industrial and Leases and other segments are measured using a probability of default and loss given default method. Primary risk drivers within the segment are risk ratings of the individual loans along with changes of macro-economic variables such as interest rates and farm income. The ACL for commercial & 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 & industrial and Commercial real estate segments. Primary risk drivers within the segment are FICO ratings of the individual card holders along with changes of macro-economic variables such as unemployment and retail sales. The ACL for Commercial credit cards is measured using roll-rate loss rate method based on days past due.
The ACL for 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 FICO scores will affect consumer credit cards,
28
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 TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by the Company.
Credit card receivables do not have stated maturities. In determining the estimated life of a credit card receivable, management first estimates the future cash flows expected to be received and then applies those expected future cash flows to the credit card balance. Expected credit losses for credit cards are determined by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting period until the expected payments have been fully allocated. The ACL is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually include loans on nonaccrual, loans classified as TDRs, 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 are considered to be a TDR.
A loan modification is considered a TDR when a concession has been granted to a debtor experiencing financial difficulties. The allowance for credit loss on a TDR is measured using the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows, including contractual payments and value of collateral at termination, at the original effective interest rate of the loan.
ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS
This table provides a rollforward of the allowance for credit losses by portfolio segment for the three months ended March 31, 2022 and March 31, 2021 (in thousands):
Three Months Ended March 31, 2022
Total - Loans
HTM
Allowance for credit losses:
Beginning balance
123,732
1,738
56,265
3,921
845
6,075
2,195
194,771
1,940
196,711
Charge-offs
(8,202
(32
(158
(1,465
(9,857
Recoveries
661
362
29
399
1,479
Provision
2,477
(877
(9,317
(298
(20
(7,105
(7,000
Ending balance - ACL
118,668
861
47,310
4,037
418
5,819
2,175
179,288
2,045
181,333
Allowance for credit losses on off-balance sheet credit exposures:
1,739
160
480
106
2,500
88
2,588
439
(62
481
Ending balance - ACL on off-balance sheet
2,178
186
124
2,981
107
3,088
Three Months Ended March 31, 2021
122,700
5,219
61,931
6,586
1,480
15,786
2,271
215,973
2,610
218,583
(4,717
(76
(109
(1,692
(8
(6,602
115
509
59
442
1,292
1,459
(661
(2,397
(2,386
(791
(2,392
(681
(7,849
349
119,568
4,673
60,043
4,183
603
12,144
1,600
202,814
2,959
205,773
3,859
287
447
145
414
5,533
5,588
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 March 31, 2022 and December 31, 2021 (in thousands):
Loan Segment and Type
Amortized Cost of Collateral Dependent Assets
Related Allowance for Credit Losses
Amortized Cost of Collateral Dependent Assets with no related Allowance
2,293
440
103
2,836
110,175
100,808
31
2,421
2,764
487
1,626
4,877
1,647
92,032
85,680
Troubled Debt Restructurings
A loan modification is considered a TDR when a concession has been granted to a debtor experiencing financial difficulties. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the debtor short-term cash relief to allow them to improve their financial condition. The Company’s restructured loans are considered collateral dependent and evaluated as part of the allowance for credit loss as described above in the Allowance for Credit Losses section of this note.
The Company had no commitments to lend to borrowers with loan modifications classified as TDRs as of March 31, 2022 and March 31, 2021. The Company monitors loan payments on an on-going basis to determine if a
32
loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term.
For the three-month periods ended March 31, 2022 and March 31, 2021, the Company had no new TDRs. For the three-month periods ended March 31, 2022 and March 31, 2021, the Company had no TDRs for which there was a payment default within the 12 months following the restructure date.
5. Securities
Securities Available for Sale
This table provides detailed information about securities available for sale at March 31, 2022 and December 31, 2021 (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Losses
Fair
Value
U.S. Treasury
388,866
(6,789
382,135
U.S. Agencies
153,489
554
(1,265
152,778
Mortgage-backed
5,679,853
15,184
(286,815
5,408,222
State and political subdivisions
2,101,114
18,327
(72,930
2,046,511
Corporates
381,163
252
(15,330
366,085
Collateralized loan obligations
194,364
(14
194,362
8,898,849
34,387
(383,143
69,551
374
(751
69,174
121,681
3,252
(1
124,932
7,967,537
93,390
(95,872
7,965,055
3,270,160
161,674
(9,146
3,422,688
316,840
2,504
(1,498
317,846
76,815
76,819
11,822,584
261,198
(107,268
The following table presents contractual maturity information for securities available for sale at March 31, 2022 (in thousands):
Due in 1 year or less
123,219
123,499
Due after 1 year through 5 years
1,141,112
1,121,962
Due after 5 years through 10 years
699,721
686,107
Due after 10 years
1,254,944
1,210,303
3,218,996
3,141,871
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 three months ended March 31, 2022, there were no sales of securities available for sale. For the three months ended March 31, 2021 there were $129.1 million in proceeds from sales of securities available for sale.
There were no gross realized gains for the three months ended March 31, 2022. Securities transactions resulted in gross realized gains of $2.7 million for the three months ended March 31, 2021. There were no gross realized losses for either the three months ended March 31, 2022 or 2021.
There were $9.3 billion and $10.2 billion of securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at March 31, 2022 and December 31, 2021, respectively. Of these amounts, $148.7 million and $171.2 million of securities at March 31, 2022 and December 31, 2021, respectively, were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.
Accrued interest on securities available for sale totaled $27.1 million and $45.8 million as of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021 (in thousands):
Less than 12 months
12 months or more
Count
Fair Value
Description of Securities
35
364,450
63,274
659
4,316,175
(269,158
207,738
(17,657
671
4,523,913
1,302
1,043,982
(62,299
60
65,444
(10,631
1,362
1,109,426
241
327,050
(15,230
4,044
(100
243
331,094
31,220
2,248
6,146,151
(354,755
74
277,226
(28,388
2,322
6,423,377
58,867
11,149
5,404,968
(87,301
233,295
(8,571
357
5,638,263
329,042
(6,969
44,939
(2,177
388
373,981
152
193,899
858
5,997,925
(96,520
44
278,234
(10,748
902
6,276,159
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.
As of March 31, 2022 and December 31, 2021, 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 shows the Company’s held-to-maturity investments’ amortized cost, fair value, and gross unrealized gains and losses at March 31, 2022 and December 31, 2021, respectively (in thousands):
Gross Unrealized Gains
Gross Unrealized Losses
Net Carrying Amount
6,000
6,004
2,490,693
(66,501
2,424,202
2,105,539
363
(142,653
1,963,249
(2,045
2,103,494
4,602,232
377
(209,154
4,393,455
396,134
(2,431
393,717
1,084,282
3,346
(38,954
1,048,674
(1,940
1,082,342
1,480,416
3,360
(41,385
1,442,391
The following table presents contractual maturity information for securities held to maturity at March 31, 2022 (in thousands):
13,819
13,784
151,022
144,816
616,835
579,542
1,329,863
1,231,111
2,111,539
1,969,253
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 three months ended March 30, 2022 or 2021.
During the first quarter of 2022, securities with an amortized cost of $3.0 billion and a fair value of $2.9 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 transfer of securities was 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 transfer. The amortized cost balance of securities held to maturity in the tables above includes a net unamortized unrealized loss of $155.7 million at March 31, 2022.
Accrued interest on securities held to maturity totaled $17.0 million and $5.3 million as March 31, 2022 and December 31, 2021, 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 length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2022 and December 31, 2021, respectively (in thousands):
Unrealized Losses
194
2,404,509
1,205
1,625,062
(96,594
41
332,118
(46,059
1,957,180
1,399
4,029,571
(163,095
1,440
4,361,689
317,887
585,153
(12,494
217,579
(26,460
802,732
903,040
(14,925
1,120,619
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 this portfolio. 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.
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The following tables show the amortized cost basis by credit rating of the Company’s held-to-maturity investments at March 31, 2022 and December 31, 2021 (in thousands):
Amortized Cost Basis by Credit Rating - HTM Debt Securities
AAA
AA
A
BBB
BB
CCC-C
State and political subdivisions:
Competitive
379,924
560,001
20,219
830
960,974
Utilities
342,489
690,649
81,855
29,572
1,144,565
Total state and political subdivisions
461,779
589,573
372,696
605,104
20,678
870
999,348
55,096
29,838
84,934
427,792
634,942
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 are public enterprises providing essential services with a monopoly or near-monopoly over the service area. This includes environmental utilities (water, sewer, solid waste), power utilities (electric distribution and generation, gas), and transportation utilities (airports, parking, toll roads, mass transit, ports).
All held-to-maturity securities were current and not past due at March 31, 2022.
The following table presents the aging of past due held-to-maturity securities at December 31, 2021 (in thousands):
Non-
Accrual
7,795
991,553
1,076,487
Trading Securities
There were net unrealized losses on trading securities of $280 thousand and net unrealized losses of $40 thousand at March 31, 2022 and 2021, 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 $1.6 million and $3.2 million at March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021 (in thousands):
FRB and FHLB stock
36,222
Equity securities with readily determinable fair values
53,056
64,149
Equity securities without readily determinable fair values
242,845
226,727
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 determine fair values are recognized in the Investment securities losses, net line of the Company’s Consolidated Statements of Income.
Investment Securities Losses, Net
The table below presents the components of Investments securities losses, net for the three months ended March 31, 2022 and March 31, 2021 (in thousands):
Three Months Ended March 31,
Available-for-sale debt securities:
Gains realized on sales
2,720
Fair value adjustments, net
(1,722
(13,918
1,200
2,862
Total investment securities losses, net
6. Goodwill and Other Intangibles
Changes in the carrying amount of goodwill for the periods ended March 31, 2022 and December 31, 2021 by reportable segment are as follows (in thousands):
Commercial Banking
Institutional Banking
Personal Banking
Balances as of January 1, 2022
59,419
51,332
63,767
Branch acquisition
3,694
4,013
7,707
Balances as of March 31, 2022
63,113
67,780
Balances as of January 1, 2021
70,116
180,867
Sale of component of business segment
(6,349
Balances as of December 31, 2021
The following table lists the finite-lived intangible assets that continue to be subject to amortization as of March 31, 2022 and December 31, 2021 (in thousands):
As of March 31, 2022
Core Deposit
Intangible
Assets
Customer Relationships
Gross carrying amount
50,059
73,512
123,571
Accumulated amortization
49,781
58,100
107,881
Net carrying amount
278
15,412
As of December 31, 2021
71,167
121,226
49,623
57,187
106,810
436
13,980
On March 28, 2022, the Company acquired a bank branch. Included in the branch acquisition were $42.9 million in loans and $234.5 million of deposits. The purchase resulted in recognition of $7.7 million of goodwill and a $2.3 million core deposit intangible asset.
On March 31, 2021, the Company sold its membership interests in its Prairie Capital Management, LLC and UMB Merchant Banc, LLC subsidiaries, a component of its Personal Banking segment. The sale included disposition of $6.3 million of goodwill and $1.9 million of net unamortized customer relationship intangibles.
The following table has the aggregate amortization expense recognized in each period (in thousands):
Aggregate amortization expense
39
The following table lists estimated amortization expense of intangible assets in future periods (in thousands):
For the nine months ending December 31, 2022
3,408
For the year ending December 31, 2023
3,899
For the year ending December 31, 2024
3,169
For the year ending December 31, 2025
2,962
For the year ending December 31, 2026
2,103
7. Securities Sold Under Agreements to Repurchase
The Company utilizes repurchase agreements to facilitate the needs of customers and to facilitate secured short-term funding needs. Repurchase agreements are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with the Company’s safekeeping agents.
The table below presents the remaining contractual maturities of repurchase agreements outstanding at March 31, 2022 and December 31, 2021, 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:
74,523
2,210,192
171,106
298,422
2,680,220
Total repurchase agreements
2,284,715
2,754,743
2,820,788
404,800
250
3,225,838
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 March 31, 2022. 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, accounts receivable financing, mezzanine debt and minority equity investments. Treasury management services include depository services, account reconciliation and cash management tools such as, accounts payable and receivable solutions, electronic funds transfer and automated payments, controlled disbursements, lockbox services and remote deposit capture services.
40
Institutional Banking is a combination of banking services, fund services, asset management services and healthcare services provided to institutional clients. This segment also provides fixed income sales, trading and underwriting, corporate trust and escrow services, as well as institutional custody. Institutional Banking includes UMB Fund Services, which provides fund administration and accounting, investor services and transfer agency, marketing and distribution, custody, and alternative investment services. Healthcare services provides healthcare payment solutions including custodial services for health savings accounts (HSAs) and private label, multipurpose debit cards to insurance carriers, third-party administrators, software companies, employers, and financial institutions.
Personal Banking combines consumer banking and wealth management services offered to clients and delivered through personal relationships and the Company’s bank branches, ATM network and internet banking. Products offered include deposit accounts, retail credit cards, installment loans, home equity lines of credit, residential mortgages, and small business loans. The range of client services extends from a basic checking account to estate planning and trust services and includes private banking, brokerage services, and insurance services in addition to a full spectrum of investment advisory, trust, and custody services.
Business Segment Information
Business Segment financial results for the three months ended March 31, 2022 and March 31, 2021 were as follows (in thousands):
145,002
26,253
39,100
(7,040
389
Noninterest income
26,707
73,262
23,709
Noninterest expense
79,596
75,592
59,590
Income before taxes
99,153
23,772
2,830
15,606
3,741
445
83,547
20,031
2,385
Average assets
16,827,000
14,677,000
7,650,000
39,154,000
136,410
22,138
35,567
(8,178
458
8,176
68,421
32,300
69,725
71,282
59,939
83,039
19,057
7,470
12,826
2,943
1,154
70,213
16,114
6,316
14,204,000
11,603,000
7,245,000
33,052,000
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. The performance obligation for interchange revenue is the processing of each transaction through the Company’s access to the banking system. This performance obligation is completed for each individual transaction and income is recognized per transaction in accordance with interchange rates established by MasterCard and Visa. The performance obligations for various referral and incentive programs include either referring customers to certain card products or issuing exclusively branded cards for certain customer segments. The pricing of these incentive and referral programs are in accordance with the agreement with the individual card partner. These performance obligations are completed as the referrals are made or over a period of time when the Company is exclusively issuing branded cards. For the three months ended March 31, 2022 and March 31, 2021, the Company had $8.1 million and $7.8 million of expense, respectively, recorded within the Bankcard fees line on the Company’s Consolidated Income Statements related to rebates and rewards programs that are outside of the scope of ASC 606. All material performance obligations are satisfied as of the end of each accounting period.
42
Investment securities losses, net – In the regular course of business, the Company recognizes gains 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 March 31, 2022. Total receivables from revenue recognized under the scope of ASC 606 were $81.5 million and $73.6 million as of March 31, 2022 and December 31, 2021, 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 months ended March 31, 2022 and March 31, 2021. As stated in Note 8, “Business Segment Reporting,” for comparability purposes, amounts in all periods are based on methodologies in effect at March 31, 2022 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
45,485
14,043
155
5,285
8,945
13,890
1,737
1,484
1,939
13,974
5,331
5,220
(7,890
424
686
12,966
Total Noninterest income
23,116
66,769
23,884
9,909
43
37,485
17,349
301
9,055
7,905
12,577
1,424
64
1,319
1,951
12,535
4,813
4,941
(7,616
231
404
669
11,336
20,735
56,899
26,754
4,509
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):
Contract or Notional Amount
Commitments to extend credit for loans (excluding credit card loans)
10,214,525
10,122,617
Commitments to extend credit under credit card loans
3,809,495
3,743,165
Commercial letters of credit
4,501
2,754
Standby letters of credit
414,036
365,030
Forward contracts
8,127
9,729
Spot foreign exchange contracts
12,148
2,946
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 $3.1 million and $2.6 million as of March 31, 2022 and December 31, 2021, respectively, and was recorded in the Accrued expenses and taxes line of the Company’s Consolidated Balance Sheets. Provision for off-balance sheet credit exposures of $500 thousand was recorded for the three months ended March 31, 2022. No provision for off-balance sheet credit exposures was recorded for the three months ended March 31, 2021.
11. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk of the Company’s assets or liabilities. The Company has entered into an offsetting position for each of these derivative instruments with a matching instrument from another financial institution in order to minimize its net risk exposure resulting from such transactions.
Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The table below presents the fair value of the Company’s derivative financial instruments as of March 31, 2022 and December 31, 2021. The Company’s derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets.
Derivative fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value
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measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of March 31, 2022 and December 31, 2021 (in thousands):
Derivative Assets
Derivative Liabilities
Interest Rate Products:
Derivatives not designated as hedging instruments
19,113
57,134
43,016
13,944
Derivatives designated as hedging instruments
860
546
19,973
57,680
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its fixed-rate assets and liabilities due to changes in the benchmark interest rate, London Interbank Offered Rate (LIBOR). Interest rate swaps designated as fair value hedges involve making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments over the life of the agreements without the exchange of the underlying notional amount. As of both March 31, 2022 and December 31, 2021, the Company had 10 interest rate swaps that were designated as fair value hedges of interest rate risk associated with the Company’s municipal bond securities. These swaps had an aggregate notional amount of $1.0 billion at both March 31, 2022 and December 31, 2021.
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 and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021. 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. On August 28, 2020, the Company terminated an interest rate floor with a notional amount of $750.0 million. At the date of termination, the interest rate floor had a net asset fair value of $34.1 million. The gross unrealized gain on the terminated interest rate floor remaining in AOCI was $11.2 million, or $8.4 million net of tax, and $12.3 million, or $9.4 million net of tax, as of March 31, 2022 and December 31, 2021, respectively. The unrealized gain will be reclassified into Interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The total remaining term over which the unrealized gain will be reclassified into earnings is 2.4 years.
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 derivatives will be reclassified to Interest income as interest payments are received or paid on the Company’s hedged items. The Company expects to reclassify $442 thousand from AOCI to Interest expense and $5.1 million from AOCI to Interest income during the
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next 12 months. As of March 31, 2022, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 14.5 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 March 31, 2022, the Company had 204 interest rate swaps with an aggregate notional amount of $3.3 billion related to this program. As of December 31, 2021, the Company had 188 interest rate swaps with an aggregate notional amount of $2.9 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 months ended March 31, 2022 and March 31, 2021 (in thousands):
Amount of Gain (Loss) Recognized
Interest Rate Products
183
Derivatives designated as hedging instruments:
Fair value adjustments on derivatives
36,676
9,328
Fair value adjustments on hedged items
(36,058
(9,251
618
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 months ended March 31, 2022 and March 31, 2021 (in thousands):
For the Three Months Ended March 31, 2022
Derivatives in Cash Flow Hedging Relationships
Gain Recognized in OCI on Derivative
Gain Recognized in OCI Included Component
Gain Recognized in OCI Excluded Component
Gain (Loss) Reclassified from AOCI into Earnings
Gain (Loss) Reclassified from AOCI into Earnings Included Component
Loss Reclassified from AOCI into Earnings Excluded Component
Interest rate floor
1,163
1,718
(555
Interest rate swaps
(312
851
1,406
For the Three Months Ended March 31, 2021
1,166
1,721
(324
842
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.
As of March 31, 2022, the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $2.9 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. At March 31, 2022, the Company had posted $11.3 million of collateral. If the Company had breached any of these provisions at March 31, 2022, it could have been required to settle its obligations under the agreements at the termination value.
12. Fair Value Measurements
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2022, and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):
Fair Value Measurement at March 31, 2022
Description
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
602
15,474
Trading – other
1,585
Available-for-sale securities
748,220
7,801,873
Company-owned life insurance
65,094
Bank-owned life insurance
501,308
9,206,583
802,861
8,403,722
Liabilities
Securities sold not yet purchased
1,621
44,637
Fair Value Measurement at December 31, 2021
1,625
2,159
2,060
21,671
360
5,985
25,890
Available for sale securities
387,020
11,589,494
65,245
498,373
12,693,836
457,154
12,236,682
3,197
17,141
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 March 31, 2022 and December 31, 2021 (in thousands):
Fair Value Measurement at March 31, 2022 Using
Total Losses Recognized During the Three Months Ended March 31
10,916
(6,278
Other real estate owned
Fair Value Measurement at December 31, 2021 Using
Total Gains Recognized During the Twelve Months Ended December 31
46,979
1,521
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
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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 impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods and those measurements are classified as Level 3.
Fair value disclosures require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.
The estimated fair value of the Company’s financial instruments at March 31, 2022 and December 31, 2021 are as follows (in thousands):
Carrying Amount
Significant
Unobservable
Inputs
(Level 3)
Estimated
FINANCIAL ASSETS
Cash and short-term investments
8,033,522
6,715,213
1,318,309
Securities available for sale
Securities held to maturity (exclusive of allowance for credit losses)
279,067
Loans (exclusive of allowance for credit losses)
17,732,083
17,820,959
FINANCIAL LIABILITIES
Demand and savings deposits
33,775,532
Time deposits
587,033
Other borrowings
85,791
2,754,744
278,844
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans
924
10,472,084
9,255,727
262,949
17,172,148
17,506,662
34,748,286
851,641
12,597
285,961
7,841
3,553
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
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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 March 31, 2022 and December 31, 2021.
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-month period ended March 31, 2022. 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:
local, regional, national, or international business, economic, or political conditions or events;
changes in laws or the regulatory environment, including as a result of financial-services legislation or regulation;
changes in monetary, fiscal, or trade laws or policies, including as a result of actions by central banks or supranational authorities;
changes in accounting standards or policies;
shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including changes in market liquidity or volatility or changes in interest or currency rates;
changes in spending, borrowing, or saving by businesses or households;
the Company’s ability to effectively manage capital or liquidity or to effectively attract or deploy deposits;
changes in any credit rating assigned to the Company or its affiliates;
adverse publicity or other reputational harm to the Company;
changes in the Company’s corporate strategies, the composition of its assets, or the way in which it funds those assets;
the Company’s ability to develop, maintain, or market products or services or to absorb unanticipated costs or liabilities associated with those products or services;
the Company’s ability to innovate to anticipate the needs of current or future customers, to successfully compete in its chosen business lines, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;
changes in the credit, liquidity, or other condition of the Company’s customers, counterparties, or competitors;
the Company’s ability to effectively deal with economic, business, or market slowdowns or disruptions;
judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for, or are adverse to, the Company or the financial-services industry;
the Company’s ability to address changing or stricter regulatory or other governmental supervision or requirements;
the Company’s ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or facilities, including its capacity to withstand cyber-attacks;
the adequacy of the Company’s corporate governance, risk-management framework, compliance programs, or internal controls, including its ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;
the efficacy of the Company’s methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk;
the Company’s ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors;
mergers, acquisitions, or dispositions, including the Company’s ability to integrate acquisitions and divest assets;
the adequacy of the Company’s succession planning for key executives or other personnel;
the Company’s ability to grow revenue, control expenses, or attract and retain qualified employees;
natural disasters, war, terrorist activities, pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which the Company operates;
adverse effects due to COVID-19 on the Company and its customers, counterparties, employees, and third-party service providers, and the adverse impacts to the Company’s business, financial position, results of operations, and prospects;
impacts related to or resulting from Russia’s military action in Ukraine, such as the broader impacts to financial markets and the global macroeconomic and geopolitical environments; or
other assumptions, risks, or uncertainties described in the Notes to Consolidated Financial Statements (Item 1) and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2) in this Form 10-Q, in the Risk Factors (Item 1A) in the Form 10-K, or in any of the Company’s quarterly or current reports.
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
Over the past two years, the Company has experienced the impacts of the COVID-19 global pandemic (the COVID-19 pandemic, or the pandemic). Such impacts have included significant volatility in the global stock and
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fixed income markets, reductions in the target federal funds rate, the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan Act of 2021, both including the Paycheck Protection Program (PPP) administered by the Small Business Administration, and a variety of rulings from the Company’s banking regulators.
The Company continues to actively monitor developments related to COVID-19 and its impact to its business, customers, employees, counterparties, vendors, and service providers. During the first quarter of 2022, the Company’s results of operations included continued maintenance of the ACL at a level appropriate given the state of key macroeconomic variables utilized in the econometric models at March 31, 2022. Additionally, the Company continued to see impacts of the volatile equity and debt markets and low interest rate environment in its fee-based businesses.
The COVID-19 pandemic has necessitated certain actions related to the way the Company operates its business. The Company is carefully monitoring the activities of its vendors and other third-party service providers to mitigate the risks associated with any potential service disruptions. The length of time it may be required to operate under such circumstances and future degrees of disruption remain uncertain. While the Company has not experienced material adverse disruptions to its internal operations due to the pandemic, it continues to review evolving risks and developments.
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 first quarter of 2022, total revenue increased $31.0 million, or 10.2%, as compared to the first quarter of 2021, while noninterest expense increased $13.8 million, or 6.9%, 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 first quarter of 2022, the Company had an increase in net interest income of $16.2 million, or 8.4%, from the same period in 2021. The Company has shown increased net interest income through the effects of increased volume and mix of average earning assets, partially offset by a decrease in rates compared to the first quarter of 2021. The increase in interest income was driven by an increase of $2.3 billion in average non-PPP loans. This increase was offset by reduced interest rates and decreased income from the PPP for the three months ended March 31, 2022, as compared to the same period in 2021. Loan interest income related to loans recorded under the PPP decreased $11.5 million in the first quarter of 2022 as compared to the prior year, primarily due to a decline in average PPP balances of $1.2 billion. Average loan balances increased $1.1 billion, or 6.9%, for the first quarter of 2022, compared to the same period in 2021. The funding for these assets was driven primarily by a 9.8% increase in average interest-bearing liabilities and a 43.8% increase in noninterest-bearing deposits. Net interest margin, on a tax-equivalent basis, decreased 24 basis points compared to the same period in 2021, in large part due to excess liquidity buildup, and repricing of earning assets in the low interest rate environment. These declines were partially offset by a three-basis-point decrease in cost of interest-bearing deposits. Net interest spread contracted by 24 basis points during the same period. The Company expects to see continued volatility in the economic markets and governmental responses to the COVID-19 pandemic. 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
57
benefit in periods of economic growth. Noninterest income increased $14.8 million, or 13.6%, to $123.7 million for the three months ended March 31, 2022, compared to the same period in 2021. This change is primarily due to an increase in the value of the company’s investment in Tattooed Chef, Inc. (TTCF), trust and securities processing, and service charges on deposits, offset by a decrease in trading and investment banking income. See greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. At March 31, 2022, noninterest income represented 37.0% of total revenues, compared to 35.9% at March 31, 2021. 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 March 31, 2022, the Company had $2.7 billion in total shareholders’ equity. This is a decrease of $209.8 million, or 7.1%, compared to total shareholders’ equity at March 31, 2021. At March 31, 2022, the Company had a total risk-based capital ratio of 13.55%. The Company repurchased 226,706 shares of common stock at an average price of $99.19 per share during the first quarter of 2022.
Earnings Summary
The following is a summary regarding the Company’s earnings for the first quarter of 2022. The changes identified in the summary are explained in greater detail below. The Company recorded net income of $106.0 million for the three-month period ended March 31, 2022, compared to net income of $92.6 million for the same period a year earlier. Basic earnings per share for the first quarter of 2022 was $2.19 per share ($2.17 per share fully-diluted) compared to basic earnings per share of $1.93 per share ($1.91 per share fully-diluted) for the first quarter of 2021. Return on average assets and return on average common shareholders’ equity for the three-month period ended March 31, 2022 were 1.10% and 14.65%, respectively, compared to 1.14% and 12.56%, respectively, for the three-month period ended March 31, 2021.
Net interest income for the three-month period ended March 31, 2022 increased $16.2 million, or 8.4%, compared to the same period in 2021. For the three-month period ended March 31, 2022, average earning assets increased by $6.0 billion, or 19.2%, compared to the same period in 2021. Net interest margin, on a tax-equivalent basis, decreased to 2.35% for the three-month period ended March 31, 2022, compared to 2.59% for the same period in 2021.
The provision for credit losses increased by $1.0 million for the three-month period ended March 31, 2022, as compared to the same period in 2021. Provision expense for both periods represents a release of ACL for each period based on positive macro-economic data and portfolio credit metrics. The Company’s nonperforming loans increased $33.7 million to $110.4 million at March 31, 2022, compared to March 31, 2021. The ACL on loans as a percentage of total loans decreased to 1.01% as of March 31, 2022, compared to 1.23% at March 31, 2021. 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 $14.8 million, or 13.6%, for the three-month period ended March 31, 2022, compared to the same period in 2021. These changes are discussed in greater detail below under Noninterest Income.
Noninterest expense increased by $13.8 million, or 6.9%, for the three-month period ended March 31, 2022, compared to the same period in 2021. 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-month period ended March 31, 2022 increased $16.2 million, or 8.4%, compared to the same period in 2021.
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 March 31, 2022 decreased 24 basis points as compared to the same period in 2021. Net interest margin for the three months ended March 31, 2022 decreased 24 basis points compared to the same period in 2021. The changes are primarily due to unfavorable rate variances on loans, partially offset by favorable volume variance on loans and securities and favorable rate variances on interest-bearing deposits. These variances have led to an increase in the Company’s net interest income during 2022, as compared to results for the same period in 2021. The changes compared to last year have been impacted by loan growth and increased liquidity, offset by lower loan rates. 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 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 2.40% for the three-month period ended March 31, 2022, and 2.66% for the same period in 2021.
Average
Balance
Yield/Rate
Loans, net of unearned interest
17,361,077
3.49
%
16,246,093
3.75
Taxable
9,461,567
1.86
6,398,188
1.72
Tax-exempt
4,039,739
3.03
4,301,256
2.98
13,501,306
2.21
10,699,444
2.23
1,265,776
0.78
1,643,894
0.70
5,320,360
0.19
2,823,771
0.10
Other earning assets
20,836
4.38
17,540
4.30
Total earning assets
37,469,355
2.47
31,430,742
2.74
Allowance for credit losses
(198,217
(219,672
1,882,376
1,841,224
39,153,514
33,052,294
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
18,554,694
0.13
17,072,344
0.16
2,973,785
0.29
2,519,373
0.30
Borrowed funds
271,731
4.66
269,576
4.78
Total interest-bearing liabilities
21,800,210
0.21
19,861,293
0.24
Noninterest-bearing demand deposits
14,025,585
9,753,680
394,714
445,777
Shareholders' equity
2,933,005
2,991,544
Net interest spread
2.26
2.50
Net interest margin
2.35
2.59
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 $4.1 billion for the three-month period ended March 31, 2022, compared to the same period in 2021. The benefit from interest-free funds remained flat compared to the same period in 2021.
Table 2
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
March 31, 2022 and 2021
Volume
Rate
Change in interest earned on:
9,954
(10,654
(700
13,897
2,323
16,220
613
(1,109
Federal funds sold and resell agreements
(702
331
(371
892
862
1,754
Trading
Interest income
22,343
(6,523
15,820
Change in interest incurred on:
556
(1,181
(625
330
(68
262
Other borrowed funds
(82
(57
Interest expense
911
(1,331
(420
21,432
(5,192
16,240
ANALYSIS OF NET INTEREST MARGIN
Change
Average earning assets
6,038,613
Interest-bearing liabilities
1,938,917
Interest-free funds
15,669,145
11,569,449
4,099,696
Free funds ratio (interest free funds to average earning assets)
41.82
36.81
5.01
Tax-equivalent yield on earning assets
(0.27
Cost of interest-bearing liabilities
(0.03
(0.24
Benefit of interest-free funds
0.09
)%
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 Topic 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.
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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 a reduction of $6.5 million as provision for credit losses for the three-month period ended March 31, 2022, compared to a reduction of $7.5 million for the same period in 2021. This change is the result of applying the methodology for computing the allowance for credit losses, coupled with the impacts of the current and forecasted economic environment. As illustrated in Table 3 below, the ACL on loans decreased to 1.01% of total loans as of March 31, 2022, compared to 1.23% of total loans as of March 31, 2021.
Table 3 presents a summary of the Company’s ACL for the three-month periods ended March 31, 2022 and 2021, and for the year ended December 31, 2021. Net charge-offs were $8.4 million for the three-month period ended March 31, 2022, compared to $5.3 million for the same period in 2021. 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
23,000
Charge-offs:
(13,981
(31,945
(1,198
(96
(2,424
(6,011
Total charge-offs
(55,663
Recoveries:
6,694
187
1,560
142
223
1,967
Total recoveries
10,791
Net charge-offs
(8,378
(5,310
(44,872
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
16,497,385
Held-to-maturity securities at end of period
1,042,670
Total assets at amortized cost
22,333,932
17,540,055
18,651,287
Average loans, net of unearned interest
17,360,071
16,230,886
16,618,350
Allowance for credit losses on loans to loans at end of period
1.01
1.23
1.13
Allowance for credit losses – end of period to total assets at amortized cost
0.81
1.17
1.05
Allowance as a multiple of net charge-offs
5.34x
9.56x
4.38x
Net charge-offs to average loans
0.20
0.27
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.
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Table 4
SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)
Dollar
Percent
22-21
4,694
8.6
(3,916
(41.9
Service charges on deposits
12.1
(161
(38.3
122
3.7
1,962
13.4
7,814
(93.7
12.7
14,781
13.6
Noninterest income increased by $14.8 million, or 13.6%, during the three-month period ended March 31, 2022, compared to the same period in 2021. 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-month period ended March 31, 2022, compared to the same period in 2021, was primarily due to an increase in fund services and corporate trust revenues. For the three-month period ended March 31, 2022, fund services revenue increased $6.4 million, or 23.8%, corporate trust revenue increased $1.7 million, or 17.2%, offset by a decrease in trust services revenue of $3.4 million, or 19.2%. 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 March 31, 2022 decreased $3.9 million, or 41.9%, compared to the same period in 2021. This decrease was primarily driven by decreased 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 March 31, 2022 increased by $2.7 million, or 12.1%, compared to the same period last year, driven by higher healthcare income related to customer termination fees.
Bankcard fees for the three-month period ended March 31, 2022 increased $2.0 million, or 13.4%, compared to the same period in 2021. This increase was driven by higher interchange income.
Investment securities losses, net for the three-month period ended March 31, 2022 increased by $7.8 million, or 93.7%, compared to the same period in 2021. This increase was driven by the $13.9 million increased valuation on the company’s investment in TTCF, during the first quarter of 2022, partially offset by decreased gains on sales of available-for-sale securities and equity earnings on alternative investments. 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 March 31, 2022, increased $1.6 million, or 12.7%, driven by an increase of $5.0 million in derivative income, offset by decreased gains on sale of other assets of $2.1 million and a decrease of $1.3 million in mortgage loan gains.
Table 5
SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)
2,953
2.3
297
2.5
(1,451
(7.4
(230
(6.6
110.3
3,026
19.6
1,156
20.1
1,611
32.5
(309
(22.4
36.8
3,256
55.9
13,832
6.9
Noninterest expense increased by $13.8 million, or 6.9%, for the three-month period ended March 31, 2022, compared to the same period in 2021. 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 $3.0 million, or 2.3%, for the three-month period ended March 31, 2022, compared to the same period in 2021. Bonus and commission expense increased $1.5 million, or 5.5%, for the three-month period ended March 31, 2022, compared to the same period in 2021. Salaries and wages expense increased $0.8 million, or 1.2%, for the three-month period ended March 31, 2022, compared to the same period in 2021. Employee benefits expense increased $0.6 million, or 2.2%, for the three-month period ended March 31, 2022, compared to the same period in 2021.
Equipment expense decreased $1.5 million, or 7.4%, for the three-month period ended March 31, 2022, compared to the same period in 2021, primarily due to lower software and equipment maintenance expense.
Marketing and business development expense increased $2.6 million, or 110.3%, for the three-month period ended March 31, 2022, compared to the same period in 2021, primarily due to higher advertising expense and travel and entertainment expense.
Processing fees increased $3.0 million, or 19.6%, for the three-month period ended March 31, 2022, compared to the same period in 2021, primarily due to increased software subscription cost.
Bankcard expense increased $1.6 million, or 32.5%, for the three-month period ended March 31, 2022, compared to the same period in 2021, primarily due to increased administrative expense and fraud losses.
Other expense increased $3.3 million, or 55.9%, for the three-month period ended March 31, 2022, compared to the same period in 2021, primarily due to increased operational losses and derivative-related expense.
Income Tax Expense
The Company’s effective tax rate was 15.7% for the three months ended March 31, 2022, compared to 15.4% for the same period in 2021.
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 March 31, 2022. 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)
8,592
6.3
1,138
13.9
18,531
226.7
9,871
14.2
19.4
2,780
21.7
13,334
19.0
For the three-month period ended March 31, 2022, Commercial Banking net income increased $13.3 million to $83.5 million, as compared to the same period in 2021. Net interest income increased $8.6 million, or 6.3%, for the three-month period ended March 31, 2022, compared to the same period in 2021, primarily driven by strong loan growth and earning asset mix changes. Provision for credit losses increased by $1.1 million for the period. Provision expense for both periods represents a release of ACL based on positive macro-economic data and portfolio credit metrics. Noninterest income increased $18.5 million, or 226.7%, over the same period in 2021 primarily due to an increase of $15.0 million in investment securities gains and $5.0 million in derivative income. Noninterest expense increased $9.9 million, or 14.2%, to $79.6 million for the three-month period ended March 31, 2022, compared to the same period in 2021. This increase was driven by a $3.2 million increase in technology, service, and overhead expenses, an increase of $2.6 million in other noninterest expense driven by higher operational losses, derivative expense and loan expense in the first quarter of 2022, an increase of $1.1 million in marketing and business development expense due to increased travel and entertainment expense and advertising expense, and an increase of $1.3 million in salary and employee benefits expense driven by increased company performance during the first quarter of 2022.
Table 7
Institutional Banking Operating Results (unaudited, dollars in thousands)
4,115
18.6
(69
(31.4
4,841
7.1
4,310
6.0
4,715
24.7
798
27.1
3,917
24.3
For the three-month period ended March 31, 2022, Institutional Banking net income increased $3.9 million, or 24.3%, compared to the same period last year. Net interest income increased $4.1 million, or 18.6%, compared to the same period last year, driven by an increase in funds transfer pricing due to an increase in deposit balances. Noninterest income increased $4.8 million, or 7.1%, primarily due to increases of $6.4 million in fund services income and $1.7 million in corporate trust income, both recorded in trust and securities processing revenue, and $1.3 million in service charges on deposit accounts due to healthcare customer transfer and conversion fees. These increases were partially offset by a decrease of $3.9 million in bond trading income driven by lower trading volume. Noninterest expense increased $4.3 million, or 6.0%, primarily driven by an increase of $3.3 million in salary and employee benefits expense, an increase of $0.7 million in bankcard expense and an increase of $0.7 million in marketing and business development expense.
Table 8
Personal Banking Operating Results (unaudited, dollars in thousands)
9.9
(15.1
(8,591
(26.6
(349
(0.6
(4,640
(62.1
(709
(61.4
(3,931
(62.2
For the three-month period ended March 31, 2022, Personal Banking net income decreased by $3.9 million to $2.4 million, as compared to the same period in 2021. Net interest income increased $3.5 million, or 9.9%, compared to the same period last year due to increased loan balances. Noninterest income decreased $8.6 million, or 26.6%, for the same period driven by a decrease of $3.4 million in trust and securities processing income, a decrease of $2.3 million in equity earnings on alternative investments, and a decrease of $1.3 million in gains on sale of mortgage originations. Noninterest expense decreased $0.3 million, or 0.6%, primarily due to a decrease of $4.1 million in salaries and employee benefits expense, partially offset by increases of $1.8 million in technology, service, and overhead expenses and $1.3 million in processing fees expense.
Balance Sheet Analysis
Total assets of the Company decreased by $2.1 billion, or 4.9%, as of March 31, 2022, compared to December 31, 2021, primarily due to a decrease of $2.5 billion, or 28.1% in interest-bearing due from banks, partially offset by an increase of $560.8 million, or 3.3%, in loan balances.
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Total assets of the Company increased $5.9 billion, or 17.1%, as of March 31, 2022, compared to March 31, 2021, primarily due to an increase in interest-bearing due from banks of $2.5 billion, or 64.6%, an increase in investment securities of $2.4 billion, or 21.4%, and an increase in loan balances of $1.2 billion, or 7.5%. Total assets, including interest-bearing due from banks, are being impacted by excess liquidity in the market due to PPP.
Table 9
SELECTED FINANCIAL INFORMATION (unaudited, dollars in thousands)
34,669,389
17,732,084
16,507,660
13,501,507
11,123,370
13,815,903
3,860,763
38,728,008
32,915,833
40,849,603
28,280,792
Total borrowed funds
3,112,571
3,029,892
3,509,979
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 $17.7 billion as of March 31, 2022, and increased $560.8 million, or 3.3%, compared to December 31, 2021, and increased $1.2 billion, or 7.5%, compared to March 31, 2021. Compared to December 31, 2021, commercial and industrial loans increased $355.8 million, or 4.9%, commercial real estate loans increased $152.0 million, or 2.4%, and consumer real estate loans increased $73.3 million, or 3.2%. Compared to March 31, 2021, commercial and industrial loans increased $444.5 million, or 6.2%, consumer real estate loans increased $393.6 million, or 19.7%, commercial real estate loans increased $269.2 million, or 4.4%, and leases and other loans increased $89.1 million, or 49.5%. During the first quarter of 2022, the Company sold its factoring loan portfolio to an alternative financing company. These loans had actual balances of $107.2 million and $152.4 million as of December 31, 2021 and March 31, 2021, respectively, and had been included in the specialty lending loan segment. See further information in Note 4, “Loans and Allowance for Credit Losses” in the Notes to Consolidated Financial Statements.
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 $13.5 billion as of March 31, 2022, and $13.8 billion as of December 31, 2021, and comprised 34.9% and 33.8% of the Company’s earning assets, respectively, as of those dates.
During the first quarter of 2022, securities with an amortized cost of $3.0 billion and a fair value of $2.9 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 transfer of securities was made at fair value at the time of transfer. See further information in Note 5, “Securities” in the Notes to Consolidated Financial Statements.
The Company’s AFS securities portfolio comprised 63.3% of the Company’s investment securities portfolio at March 31, 2022 and 86.7% at December 31, 2021. 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 74.1 months at March 31, 2022, compared to 67.6 months at December 31, 2021, and 83.9 months at March 31,
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2021. 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 $9.3 billion and $10.2 billion of securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at March 31, 2022 and December 31, 2021, respectively. Of these amounts, $148.7 million and $171.2 million of securities at March 31, 2022 and December 31, 2021, respectively, were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.
The Company’s HTM securities portfolio consists of U.S. agency-backed securities, mortgage-backed securities, and private placement bonds, which are issued primarily to refinance existing revenue bonds in the healthcare and education sectors. The HTM portfolio, net of the ACL, totaled $4.6 billion at March 31, 2022 and $1.5 billion at December 31, 2021. The average life of the HTM portfolio was 8.6 years at March 31, 2022, compared to 5.2 years at December 31, 2021, and 6.1 years at March 31, 2021.
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 2.21% for the three-month period ended March 31, 2022, compared to 2.23% for the same period in 2021.
Deposits and Borrowed Funds
Deposits decreased $1.2 billion, or 3.5%, from December 31, 2021 to March 31, 2022 and increased $6.1 billion, or 21.5%, from March 31, 2021 to March 31, 2022. Total interest-bearing deposits decreased $841.5 million and total noninterest-bearing deposits decreased $395.9 million from December 31, 2021 to March 31, 2022. Total noninterest-bearing deposits increased $4.3 billion, and interest-bearing deposits increased $1.7 billion from March 31, 2021 to March 31, 2022. The increase in deposits as compared to prior periods is related to the excess liquidity in the market created by the PPP and customer behavior changes related to the COVID-19 pandemic.
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 mutual fund 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.
Long-term debt totaled $272.0 million at March 31, 2022, compared to $271.5 million as of December 31, 2021, and $270.1 million as of March 31, 2021. 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 LIBOR rate 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 1.25% above LIBOR 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 March 31, 2022, the Company had no advances outstanding on this revolving line of credit. This borrowing is included in the Short-term debt line on the Company’s Consolidated Balance Sheets.
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Federal funds purchased and securities sold under agreements to repurchase totaled $2.8 billion as of March 31, 2022, $3.2 billion at December 31, 2021, and $2.8 billion at March 31, 2021. 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. The level of borrowings could be impacted by earning asset mix changes in the Company’s balance sheet from the impacts of the COVID-19 pandemic.
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 $2.7 billion at March 31, 2022, a $397.0 million decrease compared to December 31, 2021, and a $209.8 million decrease compared to March 31, 2021.
The Company’s Board of Directors authorized, at its April 26, 2022, April 27, 2021, and April 28, 2020 meetings, the repurchase of up to two million shares of the Company’s common stock during the twelve months following each meeting (each a Repurchase Authorization). During the three-month periods ended March 31, 2022 and 2021, the Company acquired 226,706 shares and 52,658 shares, respectively, of its common stock pursuant to the applicable Repurchase Authorization.
At the Company’s quarterly board meeting, the Board of Directors declared a $0.37 per share quarterly cash dividend payable on July 1, 2022, to shareholders of record at the close of business on June 10, 2022.
Through the Company’s relationship with the FHLB of Des Moines, the Company owns $10.0 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’s borrowing capacity with the FHLB was $1.6 billion as of March 31, 2022. The Company had no outstanding FHLB advances at FHLB of Des Moines as of March 31, 2022.
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 is electing this alternative option instead of the one described in the December 2018 rule.
The Company's capital position as of March 31, 2022 is summarized in the table below and exceeded regulatory requirements.
Table 10
RATIOS
Common equity tier 1 capital ratio
11.81
12.25
Tier 1 risk-based capital ratio
Total risk-based capital ratio
13.55
14.28
Leverage ratio
7.53
8.08
Return on average assets
1.10
1.14
Return on average equity
14.65
12.56
Average equity to assets
7.49
9.05
The Company's per share data is summarized in the table below.
Earnings - basic
Earnings - diluted
Cash dividends
Dividend payout ratio
16.9
16.6
Book value
56.78
61.24
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 will be impacted by financial impacts related to the COVID-19 pandemic.
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, and futures contracts to manage interest rate risk on certain loans, trading 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 300 basis-point upward or a 100 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 11 shows the net interest income increase or decrease over the next two years as of March 31, 2022 and 2021 based on hypothetical changes in interest rates and a constant sized balance sheet with runoff being replaced.
Table 11
MARKET RISK (unaudited)
Hypothetical change in interest rate – Rate Ramp
Year One
Year Two
March 31, 2021
Change in basis points
Percentage
change
300
6.1
3.0
23.3
16.1
3.9
1.8
15.4
10.9
1.7
0.6
7.5
5.4
Static
(100)
(3.4
(2.3
(9.7
(7.9
Hypothetical change in interest rate – Rate Shock
11.6
23.7
17.1
3.8
15.7
11.7
3.4
1.5
7.6
5.9
(6.0
(4.9
(10.9
The Company is positioned slightly asset sensitive to changes in interest rates in the next year. Net interest income is predicted to increase in all upward rate ramp and shock scenarios. In down rate scenarios, income is predicted to decrease in all scenarios. The increase in net interest income in rising rate scenarios is due to the projections of yields on earning assets increasing more than the cost of paying liabilities. In year two, net interest income is predicted to rise in all increasing rate scenarios and decrease in falling rate scenarios. The Company’s ability to price deposits in a rising rate environment consistent with our history 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 $17.1 million as of March 31, 2022, $31.9 million as of December 31, 2021, and $29.1 million as of March 31, 2021. Securities sold not yet purchased (i.e. short positions) totaled $1.6 million at March 31, 2022, $3.2 million as of December 31, 2021, and $2.0 million at March 31, 2021 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 11 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 $33.7 million to $110.4 million at March 31, 2022, compared to March 31, 2021, and increased $18.1 million, compared to December 31, 2021. The increase in nonperforming loans as compared to March 31, 2021 is primarily related to two credits in the commercial and industrial loan segment. The increase in nonperforming loans as compared to December 31, 2021 is primarily related to one credit in the specialty lending segment.
The Company had $4.7 million of other real estate owned as of March 31, 2021. Loans past due more than 90 days and still accruing interest totaled $3.6 million as of March 31, 2022, compared to $1.8 million at March 31, 2021 and $2.6 million as of December 31, 2021.
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 $7.1 million of restructured loans at March 31, 2022, $7.9 million at March 31, 2021, and $7.3 million at December 31, 2021.
Table 12
LOAN QUALITY (unaudited, dollars in thousands)
Nonaccrual loans
103,429
69,098
85,207
Restructured loans on nonaccrual
6,927
7,608
7,093
Total nonperforming loans
76,706
4,740
Total nonperforming assets
81,446
Loans past due 90 days or more
1,773
Restructured loans accruing
280
Ratios:
Nonperforming loans as a percent of loans
0.62
0.46
0.54
Nonperforming assets as a percent of loans plus other real estate owned
0.49
Nonperforming assets as a percent of total assets
0.23
0.22
Loans past due 90 days or more as a percent of loans
0.02
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
1.62x
2.64x
2.11x
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 $8.6 billion of high-quality securities available for sale as of March 31, 2022. 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 on favorable terms 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 $9.3 billion and $10.2 billion of securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at March 31, 2022 and December 31, 2021, respectively. Of these amounts, $148.7 million and $171.2 million of securities at March 31, 2022 and December 31, 2021, respectively, were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.
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 March 31, 2022 was $14.4 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.
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.
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 1.25% above LIBOR 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 March 31, 2022.
The Company is a member bank of the FHLB. The Company owns $10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. Additionally, the Company has access to borrow up to $1.6 billion through advances at the FHLB of Des Moines, but had no outstanding FHLB Des Moines advances as of March 31, 2022.
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.
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.
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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 three-month period ended March 31, 2022 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, 2021.
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 March 31, 2022.
ISSUER PURCHASE OF EQUITY SECURITIES
Period
(a)
Total Number of Shares (or Units) Purchased
(b)
Average Price Paid per Share (or Unit)
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 - January 31, 2022
25,227
103.24
1,960,128
February 1 - February 28, 2022
185,459
98.78
1,774,669
March 1 - March 31, 2022
16,020
97.56
1,758,649
226,706
99.19
On April 27, 2021, the Company announced a plan to repurchase up to two million shares of common stock, which terminated on April 26, 2022. On April 26, 2022, the Company announced a plan to repurchase up to two million shares of common stock, which will terminate on April 25, 2023. The Company has not made any repurchases other than through these Repurchase Authorizations. 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 6. EXHIBITS
3.1
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).
3.2
Bylaws, amended as of October 28, 2014 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 and filed with the Commission on August 2, 2016).
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.
101.CAL
Inline XBRL Taxonomy Extension Calculation Document filed herewith.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document filed herewith.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document filed herewith.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document filed herewith.
104
The cover page of our Form 10-Q for the quarter ended March 31, 2022, 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: April 28, 2022