Attached files
file | filename |
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EX-31.2 - EX-31.2 - UMB FINANCIAL CORP | d407394dex312.htm |
EX-32.2 - EX-32.2 - UMB FINANCIAL CORP | d407394dex322.htm |
EX-32.1 - EX-32.1 - UMB FINANCIAL CORP | d407394dex321.htm |
EX-31.1 - EX-31.1 - UMB FINANCIAL CORP | d407394dex311.htm |
Table of Contents
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 June 30, 2017
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 number 000-04887
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) |
(Registrants telephone number, including area code): (816) 860-7000
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non- accelerated filer | ☐ (Do not check if a smaller reporting company) | 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. Yes ☐ No ☐
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 issuers classes of common stock as of the latest practicable date.
As of July 28, 2017, UMB Financial Corporation had 50,010,600 shares of common stock outstanding.
Table of Contents
UMB FINANCIAL CORPORATION
FORM 10-Q
3 | ||||||
FINANCIAL STATEMENTS (UNAUDITED) |
3 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
36 | |||||
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
53 | |||||
CONTROLS AND PROCEDURES |
57 | |||||
57 | ||||||
LEGAL PROCEEDINGS |
57 | |||||
RISK FACTORS |
57 | |||||
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
58 | |||||
DEFAULTS UPON SENIOR SECURITIES |
58 | |||||
MINE SAFETY DISCLOSURES |
58 | |||||
OTHER INFORMATION |
58 | |||||
EXHIBITS |
59 | |||||
60 |
2
Table of Contents
PART I FINANCIAL INFORMATION
UMB FINANCIAL CORPORATION
(unaudited, dollars in thousands, except share and per share data)
June 30, 2017 |
December 31, 2016 |
|||||||
ASSETS |
||||||||
Loans: |
$ | 10,848,578 | $ | 10,540,383 | ||||
Allowance for loan losses |
(97,797 | ) | (91,649 | ) | ||||
|
|
|
|
|||||
Net loans |
10,750,781 | 10,448,734 | ||||||
|
|
|
|
|||||
Loans held for sale |
3,443 | 5,279 | ||||||
Investment securities: |
||||||||
Available for sale |
6,226,041 | 6,466,334 | ||||||
Held to maturity (fair value of $1,184,677 and $1,106,027, respectively) |
1,279,524 | 1,115,932 | ||||||
Trading securities |
61,833 | 39,536 | ||||||
Other securities |
65,039 | 68,306 | ||||||
|
|
|
|
|||||
Total investment securities |
7,632,437 | 7,690,108 | ||||||
|
|
|
|
|||||
Federal funds sold and securities purchased under agreements to resell |
184,521 | 324,327 | ||||||
Interest-bearing due from banks |
332,090 | 715,823 | ||||||
Cash and due from banks |
379,148 | 422,117 | ||||||
Premises and equipment, net |
276,412 | 289,007 | ||||||
Accrued income |
99,122 | 99,045 | ||||||
Goodwill |
180,867 | 180,867 | ||||||
Other intangibles, net |
24,614 | 26,630 | ||||||
Other assets |
436,421 | 425,205 | ||||||
Discontinued assets goodwill and other intangibles, net |
53,743 | 55,390 | ||||||
|
|
|
|
|||||
Total assets |
$ | 20,353,599 | $ | 20,682,532 | ||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 6,433,339 | $ | 6,654,584 | ||||
Interest-bearing demand and savings |
8,429,180 | 8,780,309 | ||||||
Time deposits under $250,000 |
569,281 | 613,589 | ||||||
Time deposits of $250,000 or more |
664,866 | 522,132 | ||||||
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|
|
|
|||||
Total deposits |
16,096,666 | 16,570,614 | ||||||
Federal funds purchased and repurchase agreements |
1,886,370 | 1,856,937 | ||||||
Long-term debt |
76,083 | 76,772 | ||||||
Accrued expenses and taxes |
161,470 | 172,967 | ||||||
Other liabilities |
61,891 | 42,858 | ||||||
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|
|
|
|||||
Total liabilities |
18,282,480 | 18,720,148 | ||||||
|
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|
|||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued; and 50,004,611 and 49,673,056 shares outstanding, respectively |
55,057 | 55,057 | ||||||
Capital surplus |
1,037,898 | 1,033,419 | ||||||
Retained earnings |
1,204,436 | 1,142,887 | ||||||
Accumulated other comprehensive loss, net |
(23,625 | ) | (57,542 | ) | ||||
Treasury stock, 5,052,119 and 5,383,674 shares, at cost, respectively |
(202,647 | ) | (211,437 | ) | ||||
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|
|
|
|||||
Total shareholders equity |
2,071,119 | 1,962,384 | ||||||
|
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|
|
|||||
Total liabilities and shareholders equity |
$ | 20,353,599 | $ | 20,682,532 | ||||
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|
|
See Notes to Consolidated Financial Statements.
3
Table of Contents
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands, except share and per share data)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans |
$ | 112,724 | $ | 93,949 | $ | 219,284 | $ | 184,493 | ||||||||
Securities: |
||||||||||||||||
Taxable interest |
18,441 | 18,852 | 37,631 | 38,209 | ||||||||||||
Tax-exempt interest |
18,296 | 13,845 | 35,479 | 26,580 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities income |
36,737 | 32,697 | 73,110 | 64,789 | ||||||||||||
Federal funds and resell agreements |
711 | 642 | 1,630 | 1,149 | ||||||||||||
Interest-bearing due from banks |
580 | 436 | 1,131 | 1,327 | ||||||||||||
Trading securities |
459 | 173 | 746 | 225 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest income |
151,211 | 127,897 | 295,901 | 251,983 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
7,835 | 4,136 | 13,801 | 8,191 | ||||||||||||
Federal funds and repurchase agreements |
4,994 | 1,626 | 8,463 | 2,856 | ||||||||||||
Other |
988 | 925 | 1,928 | 1,834 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
13,817 | 6,687 | 24,192 | 12,881 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
137,394 | 121,210 | 271,709 | 239,102 | ||||||||||||
Provision for loan losses |
14,500 | 7,000 | 23,500 | 12,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
122,894 | 114,210 | 248,209 | 227,102 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
NONINTEREST INCOME |
||||||||||||||||
Trust and securities processing |
44,811 | 41,072 | 87,352 | 82,172 | ||||||||||||
Trading and investment banking |
6,173 | 5,638 | 13,715 | 10,268 | ||||||||||||
Service charges on deposit accounts |
22,731 | 22,420 | 44,806 | 43,881 | ||||||||||||
Insurance fees and commissions |
513 | 1,160 | 1,159 | 2,657 | ||||||||||||
Brokerage fees |
5,889 | 4,262 | 11,266 | 8,447 | ||||||||||||
Bankcard fees |
20,234 | 17,534 | 37,986 | 35,550 | ||||||||||||
Gain on sales of securities available for sale, net |
1,280 | 2,598 | 1,748 | 5,531 | ||||||||||||
Equity (loss) earnings on alternative investments |
(195 | ) | 978 | (809 | ) | 597 | ||||||||||
Other |
8,870 | 7,112 | 16,000 | 11,636 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest income |
110,306 | 102,774 | 213,223 | 200,739 | ||||||||||||
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|
|||||||||
NONINTEREST EXPENSE |
||||||||||||||||
Salaries and employee benefits |
102,773 | 97,322 | 206,425 | 193,891 | ||||||||||||
Occupancy, net |
11,061 | 10,978 | 22,029 | 21,772 | ||||||||||||
Equipment |
17,956 | 16,714 | 35,438 | 32,778 | ||||||||||||
Supplies and services |
4,792 | 4,577 | 8,886 | 9,403 | ||||||||||||
Marketing and business development |
5,732 | 6,027 | 9,873 | 10,183 | ||||||||||||
Processing fees |
10,743 | 8,969 | 19,942 | 18,034 | ||||||||||||
Legal and consulting |
6,467 | 4,903 | 11,517 | 9,670 | ||||||||||||
Bankcard |
5,033 | 5,369 | 9,936 | 11,184 | ||||||||||||
Amortization of other intangible assets |
1,924 | 2,237 | 3,970 | 4,556 | ||||||||||||
Regulatory fees |
4,071 | 3,692 | 7,904 | 7,121 | ||||||||||||
Other |
6,387 | 7,631 | 14,829 | 15,095 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest expense |
176,939 | 168,419 | 350,749 | 333,687 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
56,261 | 48,565 | 110,683 | 94,154 | ||||||||||||
Income tax expense |
11,490 | 12,102 | 23,936 | 23,342 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
44,771 | 36,463 | 86,747 | 70,812 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Discontinued Operations |
||||||||||||||||
(Loss) income from discontinued operations before income taxes |
(2,599 | ) | 1,749 | 308 | 4,958 | |||||||||||
Income tax (benefit) expense |
(649 | ) | 694 | 53 | 1,849 | |||||||||||
|
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|
|
|
|
|
|
|||||||||
(Loss) income from discontinued operations |
(1,950 | ) | 1,055 | 255 | 3,109 | |||||||||||
|
|
|
|
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|
|
|
|||||||||
NET INCOME |
$ | 42,821 | $ | 37,518 | $ | 87,002 | $ | 73,921 | ||||||||
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|
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PER SHARE DATA |
||||||||||||||||
Basic: |
||||||||||||||||
Income from continuing operations |
$ | 0.91 | $ | 0.75 | $ | 1.76 | $ | 1.45 | ||||||||
(Loss) income from discontinued operations |
(0.04 | ) | 0.02 | 0.01 | 0.07 | |||||||||||
Net income basic |
0.87 | 0.77 | 1.77 | 1.52 | ||||||||||||
Diluted: |
||||||||||||||||
Income from continuing operations |
0.90 | 0.74 | 1.74 | 1.44 | ||||||||||||
(Loss) income from discontinued operations |
(0.04 | ) | 0.02 | 0.01 | 0.07 | |||||||||||
Net income diluted |
0.86 | 0.76 | 1.75 | 1.51 | ||||||||||||
Dividends |
0.255 | 0.245 | 0.510 | 0.490 | ||||||||||||
Weighted average shares outstanding basic |
49,269,786 | 48,770,948 | 49,190,271 | 48,763,690 | ||||||||||||
Weighted average shares outstanding diluted |
49,848,903 | 49,149,076 | 49,829,193 | 49,084,413 |
See Notes to Consolidated Financial Statements.
4
Table of Contents
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net Income |
$ | 42,821 | $ | 37,518 | $ | 87,002 | $ | 73,921 | ||||||||
Other comprehensive income, net of tax: |
||||||||||||||||
Unrealized gains on securities: |
||||||||||||||||
Change in unrealized holding gains, net |
35,311 | 42,273 | 57,582 | 107,585 | ||||||||||||
Less: Reclassification adjustment for gains included in net income |
(1,280 | ) | (2,598 | ) | (1,748 | ) | (5,531 | ) | ||||||||
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|||||||||
Change in unrealized gains on securities during the period |
34,031 | 39,675 | 55,834 | 102,054 | ||||||||||||
Change in unrealized losses on derivative hedges |
(1,157 | ) | (2,894 | ) | (911 | ) | (7,034 | ) | ||||||||
Income tax expense |
(12,340 | ) | (13,954 | ) | (21,006 | ) | (36,007 | ) | ||||||||
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|||||||||
Other comprehensive income |
20,534 | 22,827 | 33,917 | 59,013 | ||||||||||||
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|||||||||
Comprehensive income |
$ | 63,355 | $ | 60,345 | $ | 120,919 | $ | 132,934 | ||||||||
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|
|
|
See Notes to Consolidated Financial Statements.
5
Table of Contents
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(unaudited, dollars in thousands, except per share data)
Common Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Treasury Stock |
Total | |||||||||||||||||||
Balance January 1, 2016 |
$ | 55,057 | $ | 1,019,889 | $ | 1,033,990 | $ | (3,718 | ) | $ | (211,524 | ) | $ | 1,893,694 | ||||||||||
Total comprehensive income |
73,921 | 59,013 | 132,934 | |||||||||||||||||||||
Cash dividends ($0.49 per share) |
| | (24,254 | ) | | | (24,254 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (13,581 | ) | (13,581 | ) | ||||||||||||||||
Issuance of equity awards |
| (4,457 | ) | | | 4,887 | 430 | |||||||||||||||||
Recognition of equity-based compensation |
| 5,000 | | | | 5,000 | ||||||||||||||||||
Sale of treasury stock |
| 260 | | | 309 | 569 | ||||||||||||||||||
Exercise of stock options |
2,053 | | | 5,814 | 7,867 | |||||||||||||||||||
Cumulative effect adjustment (1) |
| 1,338 | (856 | ) | | | 482 | |||||||||||||||||
|
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|||||||||||||
Balance June 30, 2016 |
$ | 55,057 | $ | 1,024,083 | $ | 1,082,801 | $ | 55,295 | $ | (214,095 | ) | $ | 2,003,141 | |||||||||||
|
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|||||||||||||
Balance January 1, 2017 |
$ | 55,057 | $ | 1,033,419 | $ | 1,142,887 | $ | (57,542 | ) | $ | (211,437 | ) | $ | 1,962,384 | ||||||||||
Total comprehensive income |
87,002 | 33,917 | | 120,919 | ||||||||||||||||||||
Cash dividends ($0.51 per share) |
| | (25,453 | ) | | | (25,453 | ) | ||||||||||||||||
Purchase of treasury stock |
| | | | (4,279 | ) | (4,279 | ) | ||||||||||||||||
Issuance of equity awards |
| (3,929 | ) | | | 4,401 | 472 | |||||||||||||||||
Recognition of equity-based compensation |
| 6,243 | | | | 6,243 | ||||||||||||||||||
Sale of treasury stock |
| 321 | | | 244 | 565 | ||||||||||||||||||
Exercise of stock options |
| 1,844 | | | 8,424 | 10,268 | ||||||||||||||||||
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|||||||||||||
Balance June 30, 2017 |
$ | 55,057 | $ | 1,037,898 | $ | 1,204,436 | $ | (23,625 | ) | $ | (202,647 | ) | $ | 2,071,119 | ||||||||||
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(1) | See Note 3, New Accounting Pronouncements, for a discussion of the adoption of Accounting Standards Update (ASU) 2016-09. |
See Notes to Consolidated Financial Statements.
6
Table of Contents
UMB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
Six Months Ended June 30, |
||||||||
2017 | 2016 | |||||||
Operating Activities |
||||||||
Net income |
$ | 87,002 | $ | 73,921 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
23,500 | 12,000 | ||||||
Net accretion of premiums and discounts from acquisition |
(1,691 | ) | (935 | ) | ||||
Depreciation and amortization |
28,535 | 27,405 | ||||||
Deferred income tax (benefit) expense |
(1,737 | ) | 2,665 | |||||
Net increase in trading securities |
(19,209 | ) | (27,291 | ) | ||||
Gains on sales of securities available for sale, net |
(1,748 | ) | (5,531 | ) | ||||
Losses (gains) on sales of assets |
19 | (720 | ) | |||||
Amortization of securities premiums, net of discount accretion |
24,139 | 29,080 | ||||||
Originations of loans held for sale |
(32,809 | ) | (43,145 | ) | ||||
Net gains on sales of loans held for sale |
(745 | ) | (871 | ) | ||||
Proceeds from sales of loans held for sale |
35,390 | 34,110 | ||||||
Equity-based compensation |
6,715 | 5,430 | ||||||
Net tax benefit related to equity compensation plans |
3,100 | 250 | ||||||
Changes in: |
||||||||
Accrued income |
(77 | ) | (2,523 | ) | ||||
Accrued expenses and taxes |
(11,497 | ) | (12,079 | ) | ||||
Other assets and liabilities, net |
(19,640 | ) | (9,282 | ) | ||||
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|
|
|||||
Net cash provided by operating activities |
119,247 | 82,484 | ||||||
|
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|
|
|||||
Investing Activities |
||||||||
Proceeds from maturities of securities held to maturity |
32,812 | 22,539 | ||||||
Proceeds from sales of securities available for sale |
271,824 | 598,740 | ||||||
Proceeds from maturities of securities available for sale |
741,395 | 779,759 | ||||||
Purchases of securities held to maturity |
(197,425 | ) | (238,029 | ) | ||||
Purchases of securities available for sale |
(733,530 | ) | (1,281,401 | ) | ||||
Net increase in loans |
(322,944 | ) | (660,088 | ) | ||||
Net decrease (increase) in fed funds sold and resell agreements |
139,806 | (22,656 | ) | |||||
Net cash activity from acquisitions and branch sales |
(1,954 | ) | | |||||
Net increase in interest bearing balances due from other financial institutions |
24,285 | 52,488 | ||||||
Purchases of premises and equipment |
(11,323 | ) | (17,526 | ) | ||||
Proceeds from sales of premises and equipment |
33 | 1,623 | ||||||
Increase in COLI/BOLI cash surrender value |
| (4,700 | ) | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(57,021 | ) | (769,251 | ) | ||||
|
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|
|
|||||
Financing Activities |
||||||||
Net (decrease) increase in demand and savings deposits |
(572,374 | ) | 667,041 | |||||
Net increase (decrease) in time deposits |
98,426 | (110,349 | ) | |||||
Net increase (decrease) in fed funds purchased and repurchase agreements |
29,433 | (29,495 | ) | |||||
Repayment of long-term debt |
(1,226 | ) | (1,272 | ) | ||||
Payment of contingent consideration on acquisitions |
| (3,031 | ) | |||||
Cash dividends paid |
(25,456 | ) | (24,245 | ) | ||||
Proceeds from exercise of stock options and sales of treasury shares |
10,833 | 8,436 | ||||||
Purchases of treasury stock |
(4,279 | ) | (13,581 | ) | ||||
|
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|
|
|||||
Net cash (used in) provided by financing activities |
(464,643 | ) | 493,504 | |||||
|
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|
|
|||||
Decrease in cash and cash equivalents |
(402,417 | ) | (193,263 | ) | ||||
Cash and cash equivalents at beginning of period |
1,063,967 | 819,112 | ||||||
|
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|
|
|||||
Cash and cash equivalents at end of period |
$ | 661,550 | $ | 625,849 | ||||
|
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|
|||||
Supplemental Disclosures: |
||||||||
Income taxes paid |
$ | 20,679 | $ | 19,295 | ||||
Total interest paid |
23,633 | 13,199 |
See Notes to Consolidated Financial Statements.
7
Table of Contents
UMB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
1. | Financial Statement Presentation |
The Consolidated Financial Statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after 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, 2017. The financial statements should be read in conjunction with Item 2. Managements 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 Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission (SEC) on February 23, 2017 (the Form 10-K).
On April 20, 2017, the Company announced the execution of an agreement to sell all of the outstanding stock of Scout Investments, Inc. (Scout), its institutional investment management subsidiary, for $172.5 million in cash, subject to customary purchase price adjustments at closing. See Items 1.01 and 5.02 in the Companys Current Report on Form 8-K that was filed April 20, 2017. In accordance with Accounting Standards Codification (ASC) Topic 205-20, Discontinued Operations, the results of Scout have been presented separately as (Loss) income from discontinued operations in the Companys Consolidated Statements of Income and its assets have been presented separately as Discontinued assets goodwill and other intangibles, net in the Companys Consolidated Balance Sheets.
2. | Summary of Significant Accounting Policies |
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 in Missouri, Kansas, Colorado, Illinois, Oklahoma, Texas, Arizona, Nebraska, Pennsylvania, South Dakota, Indiana, Utah, Minnesota, California, and Wisconsin. 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 include Cash and due from banks and amounts due from the Federal Reserve Bank. 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 Federal Reserve Bank are interest-bearing for all periods presented and are included in the Interest-bearing due from banks line on the Companys Consolidated Balance Sheets.
This table provides a summary of cash and cash equivalents as presented on the Consolidated Statements of Cash Flows as of June 30, 2017 and June 30, 2016 (in thousands):
June 30, | ||||||||
2017 | 2016 | |||||||
Due from the Federal Reserve Bank |
$ | 282,402 | $ | 270,117 | ||||
Cash and due from banks |
379,148 | 355,732 | ||||||
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Cash and cash equivalents at end of period |
$ | 661,550 | $ | 625,849 | ||||
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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 $49.7 million and $109.5 million at June 30, 2017 and June 30, 2016, respectively.
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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 579,116 and 378,128 shares issuable upon the exercise of options granted by the Company and outstanding at June 30, 2017 and 2016, respectively. Diluted year-to-date net income per share includes the dilutive effect of 638,922 and 320,723 shares issuable upon the exercise of stock options granted by the Company and outstanding at June 30, 2017 and 2016, respectively.
Options issued under employee benefits plans to purchase 150,739 shares of common stock were outstanding at June 30, 2017, but were not included in the computation of quarter-to-date and year-to-date diluted EPS because the options were anti-dilutive. Options issued under employee benefits plans to purchase 637,331 shares of common stock were outstanding at June 30, 2016, but were not included in the computation of quarter-to-date and year-to-date diluted EPS because the options were anti-dilutive.
3. | New Accounting Pronouncements |
Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 to annual reporting periods that begin after December 15, 2017. In March, April, and May 2016, the FASB issued implementation amendments to the May 2014 ASU (collectively, the amended guidance). The amended guidance affects any entity that enters into contracts with customers to transfer goods and services, unless those contracts are within the scope of other standards. The amended guidance specifically excludes interest income, as well as other revenues associated with financial assets and liabilities, including loans, leases, securities, and derivatives. The amended guidance permits the use of either the full retrospective approach or a modified retrospective approach. The Company plans to adopt the amended guidance using the modified retrospective approach on January 1, 2018. The Company is progressing through in implementing the amended guidance. The Company has assessed its revenue streams to identify those contracts that are specifically excluded from the scope of the amended guidance and those that may be subject to the amended guidance. Subsequent to this initial scoping, the Company selected a representative sample of contracts from the in-scope revenue streams for review under the amended guidance (key contracts). The review of key contracts is in process. Upon completion of the review of the key contracts, the Company expects to group the remaining contracts based on the conclusions reached through the key contract review or to perform additional review of specific contracts that cannot be grouped. While progress has been made, the Company is still currently evaluating the impact that the amended guidance will have on its Consolidated Financial Statements and related disclosures and has not finalized any estimates of the quantitative impact at this time.
Financial Instruments In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment is intended to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update are effective for interim and annual periods beginning after December 15, 2017. The standard requires the use of the cumulative effect transition method as of the beginning of the year of adoption. Except for certain provisions, early adoption is not permitted. The Company is currently evaluating the impact that this standard will have on its Consolidated Financial Statements.
Leases In February 2016, the FASB issued ASU No. 2016-02, Leases. The amendment changes the accounting treatment of leases, in that lessees will recognize most leases on-balance sheet. This will increase reported assets and liabilities, as lessees will be required to recognize a right-of-use asset along with a lease liability, measured on a discounted basis. Lessees are allowed to account for short-term leases (those with a term of twelve months or less) off-balance sheet. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard requires the use of the modified retrospective transition method. Early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its Consolidated Financial Statements.
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Extinguishments of Liabilities In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendment is intended to reduce the diversity in practice related to the recognition of breakage. Breakage refers to the portion of a prepaid stored-value product, such as a gift card, that goes unused wholly or partially for an indefinite period of time. This amendment requires that breakage be accounted for consistent with the breakage guidance within ASU No. 2014-09, Revenue from Contracts with Customers. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The standard permits the use of either the modified retrospective or full retrospective transition method. Early adoption is permitted. The Company will adopt ASU No. 2016-04 in conjunction with its adoption of ASU No. 2014-09. The adoption of this accounting pronouncement is not expected to have a significant impact on the Companys Consolidated Financial Statements.
Equity-Based Compensation In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendment is part of the FASBs simplification initiative and is intended to simplify the accounting around share-based payment award transactions. The amendments include changing the recording of excess tax benefits from being recognized as a part of surplus capital to being charged directly to the income statement, changing the classification of excess tax benefits within the statement of cash flows, and allowing companies to account for forfeitures on an actual basis, as well as tax withholding changes. The amendment requires different transition methods for various components of the standard. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted.
In September 2016, the Company early adopted ASU No. 2016-09 with an effective date of January 1, 2016. As part of the adoption of this standard, the Company made an accounting policy election to account for forfeitures on an actual basis and discontinued the use of an estimated forfeiture approach. Additionally, the Company selected the retrospective transition method for the reclassification of the Net tax benefit related to equity compensation plans from the financing section to the operating section of the Companys Consolidated Statement of Cash Flows. The impact to the Companys Consolidated Statements of Income for adopting all provisions of the standard was an increase to net income of $158 thousand for the three-month period ended March 31, 2016 and an increase to net income of $220 thousand for the three-month period ended June 30, 2016. Upon adoption, the Company recorded a cumulative effect adjustment to the Companys Consolidated Balance Sheets of $482 thousand as an increase to total equity. Prior period financial statements as of and for the three-month and six-month periods ended June 30, 2016 have been recast throughout this document to give effect to the adoption of ASU No. 2016-09.
Credit Losses In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This update replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This amendment broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, the update amends the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a companys loan portfolio. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption in fiscal years beginning after December 15, 2018 is permitted. The amendment requires the use of the modified retrospective approach for adoption. The Company is currently evaluating the impact that this standard will have on its Consolidated Financial Statements.
Statement of Cash Flows In August 2016, the FASB issued ASU 2016-15, Classification of Certain Receipts and Cash Payments. This amendment adds to and clarifies existing guidance regarding the classification of certain cash receipts and payments in the statement of cash flows with the intent of reducing diversity in practice with respect to eight types of cash flows. The amendments in this update require full retrospective adoption and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its Consolidated Statements of Cash Flows.
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4. | Loans and Allowance for Loan 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 Companys policies and procedures.
Commercial loans are underwritten after evaluating and understanding the borrowers ability to operate profitably and prudently expand its business. Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans including an analysis of the borrowers cash flow, available business capital, and overall credit-worthiness of the borrower.
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 borrowers general financial condition. The Company utilizes pre-loan due diligence techniques, monitoring disciplines, and loan management practices common within the asset-based lending industry to underwrite loans to these borrowers.
Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires that an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner occupied real estate.
Construction loans 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.
Underwriting standards for residential real estate and home equity loans are based on the borrowers loan-to-value percentage, collection remedies, and overall credit history.
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Consumer loans are underwritten based on the borrowers repayment ability. The Company monitors delinquencies on all of its consumer loans and leases and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its credit card loans. 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 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 debtors financial capacity, and monitoring the clients activities. Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics.
Loan Aging Analysis
This table provides a summary of loan classes and an aging of past due loans at June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 | ||||||||||||||||||||||||
30-89 Days Past Due and Accruing |
Greater than 90 Days Past Due and Accruing |
Non-Accrual Loans |
Total Past Due |
Current | Total Loans | |||||||||||||||||||
Loans | ||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 14,095 | $ | 471 | $ | 35,426 | $ | 49,992 | $ | 4,568,726 | $ | 4,618,718 | ||||||||||||
Asset-based |
| | | | 277,930 | 277,930 | ||||||||||||||||||
Factoring |
| | | | 160,664 | 160,664 | ||||||||||||||||||
Commercial credit card |
302 | 187 | 3 | 492 | 151,060 | 151,552 | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
1,058 | | 93 | 1,151 | 723,787 | 724,938 | ||||||||||||||||||
Real estate commercial |
6,944 | | 11,775 | 18,719 | 3,227,821 | 3,246,540 | ||||||||||||||||||
Real estate residential |
1,554 | | 723 | 2,277 | 595,467 | 597,744 | ||||||||||||||||||
Real estate HELOC |
284 | | 2,995 | 3,279 | 671,380 | 674,659 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
1,926 | 1,964 | 342 | 4,232 | 244,191 | 248,423 | ||||||||||||||||||
Consumer other |
756 | 35 | 33 | 824 | 118,782 | 119,606 | ||||||||||||||||||
Leases |
| | | | 27,804 | 27,804 | ||||||||||||||||||
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Total loans |
$ | 26,919 | $ | 2,657 | $ | 51,390 | $ | 80,966 | $ | 10,767,612 | $ | 10,848,578 | ||||||||||||
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December 31, 2016 | ||||||||||||||||||||||||||||
30-89 Days Past Due and Accruing |
Greater than 90 Days Past Due and Accruing |
Non-Accrual Loans |
Total Past Due |
PCI Loans |
Current | Total Loans | ||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||
Commercial: |
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Commercial |
$ | 3,285 | $ | 49 | $ | 35,777 | $ | 39,111 | $ | | $ | 4,371,695 | $ | 4,410,806 | ||||||||||||||
Asset-based |
| | | | | 225,878 | 225,878 | |||||||||||||||||||||
Factoring |
| | | | | 139,902 | 139,902 | |||||||||||||||||||||
Commercial credit card |
612 | 10 | 8 | 630 | | 146,105 | 146,735 | |||||||||||||||||||||
Real estate: |
||||||||||||||||||||||||||||
Real estate construction |
3 | | 181 | 184 | | 741,620 | 741,804 | |||||||||||||||||||||
Real estate commercial |
1,303 | 1,004 | 16,423 | 18,730 | 3,147,192 | 3,165,922 | ||||||||||||||||||||||
Real estate residential |
1,034 | 6 | 1,344 | 2,384 | | 545,966 | 548,350 | |||||||||||||||||||||
Real estate HELOC |
588 | | 4,736 | 5,324 | | 706,470 | 711,794 | |||||||||||||||||||||
Consumer: |
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Consumer credit card |
2,228 | 2,115 | 475 | 4,818 | | 265,280 | 270,098 | |||||||||||||||||||||
Consumer other |
1,061 | 181 | 11,315 | 12,557 | 800 | 126,205 | 139,562 | |||||||||||||||||||||
Leases |
| | | | | 39,532 | 39,532 | |||||||||||||||||||||
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Total loans |
$ | 10,114 | $ | 3,365 | $ | 70,259 | $ | 83,738 | $ | 800 | $ | 10,455,845 | $ | 10,540,383 | ||||||||||||||
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The Company had total purchased credit impaired (PCI) loans from its acquisition of Marquette Financial Companies (Marquette) of $800 thousand as of December 31, 2016. The PCI loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Purchased with Deteriorated Credit Quality. All of the PCI loans were considered to be performing based on payment activity as of December 31, 2016. Of this amount, $713 thousand were current with their payment terms and $87 thousand were between 30-89 days past due.
The Company sold residential real estate loans with proceeds of $35.4 million and $34.1 million in the secondary market without recourse during the six months ended June 30, 2017 and June 30, 2016, respectively.
The Company has ceased the recognition of interest on loans with a carrying value of $51.4 million and $70.3 million at June 30, 2017 and December 31, 2016, respectively. Restructured loans totaled $50.9 million and $52.5 million at June 30, 2017 and December 31, 2016, respectively. Loans 90 days past due and still accruing interest amounted to $2.7 million and $3.4 million at June 30, 2017 and December 31, 2016, respectively. There was an insignificant amount of interest recognized on impaired loans during 2017 and 2016.
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of the Companys loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.
The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. The loan rankings are summarized into the following categories: Non-watch list, Watch, Special Mention, and Substandard. 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 ranking 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 borrowers industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk. |
| Special Mention This rating reflects a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the borrowers 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. |
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| 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 substandard. This category may include loans where the collection of full principal is doubtful or remote. |
All other classes of loans are generally evaluated and monitored based on payment activity. Non-performing loans include restructured loans on non-accrual and all other non-accrual loans.
This table provides an analysis of the credit risk profile of each loan class excluded from ASC 310-30 at June 30, 2017 and December 31, 2016 (in thousands):
Credit Exposure
Credit Risk Profile by Risk Rating
Commercial | Asset-based | Factoring | ||||||||||||||||||||||
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
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Non-watch list |
$ | 4,200,609 | $ | 4,043,704 | $ | 242,114 | $ | 198,695 | $ | 157,952 | $ | 139,358 | ||||||||||||
Watch |
88,176 | 99,815 | | | | | ||||||||||||||||||
Special Mention |
99,275 | 32,240 | 33,513 | 24,809 | 2,284 | 129 | ||||||||||||||||||
Substandard |
230,658 | 235,047 | 2,303 | 2,374 | 428 | 415 | ||||||||||||||||||
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Total |
$ | 4,618,718 | $ | 4,410,806 | $ | 277,930 | $ | 225,878 | $ | 160,664 | $ | 139,902 | ||||||||||||
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Real estate construction | Real estate commercial | |||||||||||||||||||||||
|
June 30, 2017 |
|
|
December 31, 2016 |
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
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Non-watch list |
$ | 718,676 | $ | 741,022 | $ | 3,159,939 | $ | 3,071,804 | ||||||||||||||||
Watch |
2,701 | 149 | 26,470 | 43,015 | ||||||||||||||||||||
Special Mention |
3,260 | | 16,444 | 5,140 | ||||||||||||||||||||
Substandard |
301 | 633 | 43,687 | 45,963 | ||||||||||||||||||||
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Total |
$ | 724,938 | $ | 741,804 | $ | 3,246,540 | $ | 3,165,922 | ||||||||||||||||
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Credit Exposure
Credit Risk Profile Based on Payment Activity
Commercial credit card | Real estate residential | Real estate HELOC | ||||||||||||||||||||||
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
|||||||||||||||||||
Performing |
$ | 151,549 | $ | 146,727 | $ | 597,021 | $ | 547,006 | $ | 671,664 | $ | 707,058 | ||||||||||||
Non-performing |
3 | 8 | 723 | 1,344 | 2,995 | 4,736 | ||||||||||||||||||
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|
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|
|
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|
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Total |
$ | 151,552 | $ | 146,735 | $ | 597,744 | $ | 548,350 | $ | 674,659 | $ | 711,794 | ||||||||||||
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Consumer credit card | Consumer other | Leases | ||||||||||||||||||||||
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
|||||||||||||||||||
Performing |
$ | 248,081 | $ | 269,623 | $ | 119,573 | $ | 127,447 | $ | 27,804 | $ | 39,532 | ||||||||||||
Non-performing |
342 | 475 | 33 | 11,315 | | | ||||||||||||||||||
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Total |
$ | 248,423 | $ | 270,098 | $ | 119,606 | $ | 138,762 | $ | 27,804 | $ | 39,532 | ||||||||||||
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Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents managements judgment of inherent probable losses within the Companys loan portfolio as of the balance sheet date. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Accordingly, the methodology is based on historical loss trends. The Companys process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for probable loan losses reflects loan quality trends, including the levels of, and trends related to, non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.
The level of the allowance reflects managements continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and estimated losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that, in managements judgment, should be charged off. While management utilizes its best judgment and information available at the time, the adequacy of the allowance is dependent upon a variety of factors beyond the Companys control, including, among other things, the performance of the Companys loan portfolio, the economy, changes in interest rates and changes in the regulatory environment.
The Companys allowance for loan losses consists of specific valuation allowances and general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, general economic conditions and other qualitative risk factors both internal and external to the Company.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of impaired loans. Loans are classified based on an internal risk grading process that evaluates the obligors ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. When a loan is considered impaired, the loan is analyzed to determine the need, if any, to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrowers ability to repay amounts owed, collateral deficiencies, the relative risk ranking of the loan and economic conditions affecting the borrowers industry.
General valuation allowances are calculated based on the historical loss experience of specific types of loans including an evaluation of the time span and volume of the actual charge-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated based on actual charge-off experience. A valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio, time span to charge-off, and the total dollar amount of the loans in the pool. The Companys pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, commercial credit card, home equity loans, consumer real estate loans and consumer and other loans. The Company also considers a loan migration analysis for criticized loans. This analysis includes an assessment of the probability that a loan will move to a loss position based on its risk rating. The consumer credit card pool is evaluated based on delinquencies and credit scores. In addition, a portion of the allowance is determined by a review of qualitative factors by management.
Generally, the unsecured portion of a commercial or commercial real estate loan is charged off when, after analyzing the borrowers financial condition, it is determined that the borrower is incapable of servicing the debt, little or no prospect for near term improvement exists, and no realistic and significant strengthening action is pending. For collateral dependent commercial or commercial real estate loans, an analysis is completed regarding the Companys collateral position to determine if the amounts due from the borrower are in excess of the calculated current fair value of the collateral. Specific allocations of the allowance for loan losses are made for any collateral deficiency. If a collateral deficiency is ultimately deemed to be uncollectible, the amount is charged off. Revolving commercial loans (such as commercial credit cards) which are past due 90 cumulative days are classified as a loss and charged off.
15
Table of Contents
Generally, a consumer loan, or a portion thereof, is charged off in accordance with regulatory guidelines which provide that such loans be charged off when the Company becomes aware of the loss, such as from a triggering event that may include, but is not limited to, new information about a borrowers intent and ability to repay the loan, bankruptcy, fraud, or death. However, the charge-off timeframe should not exceed the specified delinquency time frames, which state that closed-end retail loans (such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (such as home equity lines of credit and consumer credit cards) that become past due 180 cumulative days are classified as a loss and charged off.
ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS
This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2017 (in thousands):
Three Months Ended June 30, 2017 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 73,197 | $ | 10,512 | $ | 9,510 | $ | 104 | $ | 93,323 | ||||||||||
Charge-offs |
(9,602 | ) | (263 | ) | (2,624 | ) | | (12,489 | ) | |||||||||||
Recoveries |
1,631 | 358 | 474 | | 2,463 | |||||||||||||||
Provision |
11,632 | 1,298 | 1,601 | (31 | ) | 14,500 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 76,858 | $ | 11,905 | $ | 8,961 | $ | 73 | $ | 97,797 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 71,657 | $ | 10,569 | $ | 9,311 | $ | 112 | $ | 91,649 | ||||||||||
Charge-offs |
(15,583 | ) | (449 | ) | (5,161 | ) | | (21,193 | ) | |||||||||||
Recoveries |
2,329 | 419 | 1,093 | | 3,841 | |||||||||||||||
Provision |
18,455 | 1,366 | 3,718 | (39 | ) | 23,500 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 76,858 | $ | 11,905 | $ | 8,961 | $ | 73 | $ | 97,797 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 8,362 | $ | 74 | $ | | $ | | $ | 8,436 | ||||||||||
Ending balance: collectively evaluated for impairment |
68,496 | 11,831 | 8,961 | 73 | 89,361 | |||||||||||||||
Loans: |
||||||||||||||||||||
Ending balance: loans |
$ | 5,208,864 | $ | 5,243,881 | $ | 368,029 | $ | 27,804 | $ | 10,848,578 | ||||||||||
Ending balance: individually evaluated for impairment |
68,359 | 9,086 | | | 77,445 | |||||||||||||||
Ending balance: collectively evaluated for impairment |
5,140,505 | 5,234,795 | 368,029 | 27,804 | 10,771,133 |
16
Table of Contents
This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2016 (in thousands):
Three Months Ended June 30, 2016 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 61,308 | $ | 9,909 | $ | 9,060 | $ | 121 | $ | 80,398 | ||||||||||
Charge-offs |
(800 | ) | (1,351 | ) | (2,101 | ) | | (4,252 | ) | |||||||||||
Recoveries |
859 | 187 | 474 | | 1,520 | |||||||||||||||
Provision |
3,194 | 1,938 | 1,886 | (18 | ) | 7,000 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 64,561 | $ | 10,683 | $ | 9,319 | $ | 103 | $ | 84,666 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Six Months Ended June 30, 2016 | ||||||||||||||||||||
Commercial | Real estate | Consumer | Leases | Total | ||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 63,847 | $ | 8,220 | $ | 8,949 | $ | 127 | $ | 81,143 | ||||||||||
Charge-offs |
(5,875 | ) | (2,796 | ) | (4,616 | ) | | (13,287 | ) | |||||||||||
Recoveries |
3,348 | 331 | 1,131 | | 4,810 | |||||||||||||||
Provision |
3,241 | 4,928 | 3,855 | (24 | ) | 12,000 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 64,561 | $ | 10,683 | $ | 9,319 | $ | 103 | $ | 84,666 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance: individually evaluated for impairment |
$ | 4,714 | $ | 26 | $ | | $ | | $ | 4,740 | ||||||||||
Ending balance: collectively evaluated for impairment |
59,847 | 10,657 | 9,319 | 103 | 79,926 | |||||||||||||||
Loans: |
||||||||||||||||||||
Ending balance: loans |
$ | 4,914,162 | $ | 4,737,311 | $ | 395,216 | $ | 36,577 | $ | 10,083,266 | ||||||||||
Ending balance: individually evaluated for impairment |
58,270 | 6,338 | 2,578 | | 67,186 | |||||||||||||||
Ending balance: collectively evaluated for impairment |
4,855,892 | 4,729,981 | 391,408 | 36,577 | 10,013,858 | |||||||||||||||
Ending balance: PCI Loans |
| 992 | 1,230 | | 2,222 |
17
Table of Contents
Impaired Loans
This table provides an analysis of impaired loans by class at June 30, 2017 and December 31, 2016 (in thousands):
As of June 30, 2017 | ||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment with No Allowance |
Recorded Investment with Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 88,405 | $ | 46,302 | $ | 22,057 | $ | 68,359 | $ | 8,362 | $ | 70,674 | ||||||||||||
Asset-based |
| | | | | | ||||||||||||||||||
Factoring |
| | | | | | ||||||||||||||||||
Commercial credit card |
| | | | | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
235 | 93 | 110 | 203 | 65 | 234 | ||||||||||||||||||
Real estate commercial |
12,983 | 7,829 | 932 | 8,761 | 9 | 11,457 | ||||||||||||||||||
Real estate residential |
126 | 122 | | 122 | | 159 | ||||||||||||||||||
Real estate HELOC |
| | | | | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
| | | | | 11 | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 101,749 | $ | 54,346 | $ | 23,099 | $ | 77,445 | $ | 8,436 | $ | 82,535 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 | ||||||||||||||||||||||||
Unpaid Principal Balance |
Recorded Investment with No Allowance |
Recorded Investment with Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Commercial |
$ | 80,405 | $ | 43,260 | $ | 31,091 | $ | 74,351 | $ | 7,866 | $ | 69,776 | ||||||||||||
Asset-based |
| | | | | | ||||||||||||||||||
Factoring |
| | | | | | ||||||||||||||||||
Commercial credit card |
| | | | | | ||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Real estate construction |
510 | 181 | 113 | 294 | 68 | 405 | ||||||||||||||||||
Real estate commercial |
18,107 | 12,303 | 487 | 12,790 | | 8,956 | ||||||||||||||||||
Real estate residential |
231 | 230 | | 230 | | 520 | ||||||||||||||||||
Real estate HELOC |
| | | | | 79 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Consumer credit card |
| | | | | | ||||||||||||||||||
Consumer other |
| | | | | 1,981 | ||||||||||||||||||
Leases |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 99,253 | $ | 55,974 | $ | 31,691 | $ | 87,665 | $ | 7,934 | $ | 81,717 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
Troubled Debt Restructurings
A loan modification is considered a troubled debt restructuring (TDR) when a concession has been granted to a debtor experiencing financial difficulties. The Companys 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 Companys restructured loans are individually evaluated for impairment and evaluated as part of the allowance for loan loss as described above in the Allowance for Loan Losses section of this note.
The Company had $1.6 million and $18 thousand in commitments to lend to borrowers with loan modifications classified as TDRs as of June 30, 2017 and June 30, 2016, respectively. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term.
For the three month periods ended June 30, 2017 and June 30, 2016, the Company had no TDRs. For the six months ended June 30, 2017, the Company had one commercial TDR with a pre- and post-modification loan balance of $7.2 million. For the six months ended June 30, 2016, the Company had two commercial TDRs with a pre- and post-modification balance of $12.1 million.
5. | Securities |
Securities Available for Sale
This table provides detailed information about securities available for sale at June 30, 2017 and December 31, 2016 (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
June 30, 2017 |
Cost | Gains | Losses | Value | ||||||||||||
U.S. Treasury |
$ | 65,083 | $ | 24 | $ | (1,195 | ) | $ | 63,912 | |||||||
U.S. Agencies |
25,575 | 1 | (4 | ) | 25,572 | |||||||||||
Mortgage-backed |
3,638,555 | 6,097 | (50,604 | ) | 3,594,048 | |||||||||||
State and political subdivisions |
2,496,392 | 19,984 | (10,827 | ) | 2,505,549 | |||||||||||
Corporates |
36,988 | | (28 | ) | 36,960 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,262,593 | $ | 26,106 | $ | (62,658 | ) | $ | 6,226,041 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2016 |
Cost | Gains | Losses | Value | ||||||||||||
U.S. Treasury |
$ | 95,315 | $ | 37 | $ | (1,526 | ) | $ | 93,826 | |||||||
U.S. Agencies |
198,158 | 67 | (48 | ) | 198,177 | |||||||||||
Mortgage-backed |
3,773,090 | 7,069 | (68,460 | ) | 3,711,699 | |||||||||||
State and political subdivisions |
2,425,155 | 7,391 | (36,789 | ) | 2,395,757 | |||||||||||
Corporates |
66,997 | 5 | (127 | ) | 66,875 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,558,715 | $ | 14,569 | $ | (106,950 | ) | $ | 6,466,334 | |||||||
|
|
|
|
|
|
|
|
19
Table of Contents
The following table presents contractual maturity information for securities available for sale at June 30, 2017 (in thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in 1 year or less |
$ | 321,533 | $ | 321,720 | ||||
Due after 1 year through 5 years |
1,141,391 | 1,148,598 | ||||||
Due after 5 years through 10 years |
831,718 | 835,694 | ||||||
Due after 10 years |
329,396 | 325,981 | ||||||
|
|
|
|
|||||
Total |
2,624,038 | 2,631,993 | ||||||
Mortgage-backed securities |
3,638,555 | 3,594,048 | ||||||
|
|
|
|
|||||
Total securities available for sale |
$ | 6,262,593 | $ | 6,226,041 | ||||
|
|
|
|
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 six months ended June 30, 2017, proceeds from the sales of securities available for sale were $271.8 million compared to $598.7 million for the same period in 2016. Securities transactions resulted in gross realized gains of $1.7 million and $5.5 million for the six months ended June 30, 2017 and 2016, respectively. There were no gross realized losses for the six months ended June 30, 2017 and 2016.
Securities available for sale with a market value of $5.3 billion at June 30, 2017 and $5.7 billion at December 31, 2016 were pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements. Of this amount, securities with a market value of $1.8 billion at June 30, 2017 and $1.8 billion at December 31, 2016 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.
The following table shows the Companys 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 June 30, 2017 and December 31, 2016 (in thousands):
June 30, 2017 |
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Description of Securities |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
U.S. Treasury |
$ | 44,232 | $ | (912 | ) | $ | 9,761 | $ | (283 | ) | $ | 53,993 | $ | (1,195 | ) | |||||||||
U.S. Agencies |
21,998 | (4 | ) | | | 21,998 | (4 | ) | ||||||||||||||||
Mortgage-backed |
2,503,006 | (38,410 | ) | 323,178 | (12,194 | ) | 2,826,184 | (50,604 | ) | |||||||||||||||
State and political subdivisions |
863,072 | (9,057 | ) | 59,299 | (1,770 | ) | 922,371 | (10,827 | ) | |||||||||||||||
Corporates |
24,432 | (25 | ) | 10,999 | (3 | ) | 35,431 | (28 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,456,740 | $ | (48,408 | ) | $ | 403,237 | $ | (14,250 | ) | $ | 3,859,977 | $ | (62,658 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
Description of Securities |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
Fair Value | Unrealized Losses |
||||||||||||||||||
U.S. Treasury |
$ | 48,678 | $ | (1,526 | ) | $ | | $ | | $ | 48,678 | $ | (1,526 | ) | ||||||||||
U.S. Agencies |
103,979 | (34 | ) | 9,989 | (14 | ) | 113,968 | (48 | ) | |||||||||||||||
Mortgage-backed |
2,735,868 | (55,035 | ) | 269,637 | (13,425 | ) | 3,005,505 | (68,460 | ) | |||||||||||||||
State and political subdivisions |
1,748,922 | (36,639 | ) | 8,565 | (150 | ) | 1,757,487 | (36,789 | ) | |||||||||||||||
Corporates |
41,966 | (90 | ) | 17,982 | (37 | ) | 59,948 | (127 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 4,679,413 | $ | (93,324 | ) | $ | 306,173 | $ | (13,626 | ) | $ | 4,985,586 | $ | (106,950 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
The unrealized losses in the Companys investments in U.S. treasury obligations, U.S. government agencies, Government Sponsored Entity (GSE) mortgage-backed securities, municipal securities, and corporates were caused by changes in interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. The Company expects to recover its cost basis in the securities and does not consider these investments to be other-than-temporarily impaired at June 30, 2017.
Securities Held to Maturity
The following table shows the Companys held to maturity investments amortized cost, fair value, and gross unrealized gains and losses at June 30, 2017 and net unrealized gains, aggregated by maturity category, at December 31, 2016, respectively (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
June 30, 2017 |
Cost | Gains | Losses | Value | ||||||||||||
State and political subdivisions: | ||||||||||||||||
Due in 1 year or less |
$ | 5,389 | $ | | $ | (38 | ) | $ | 5,351 | |||||||
Due after 1 year through 5 years |
106,679 | 2,239 | (2,089 | ) | 106,829 | |||||||||||
Due after 5 years through 10 years |
368,156 | 5,334 | (19,340 | ) | 354,150 | |||||||||||
Due after 10 years |
799,300 | 7,226 | (88,179 | ) | 718,347 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total state and political subdivisions |
$ | 1,279,524 | $ | 14,799 | $ | (109,646 | ) | $ | 1,184,677 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2016 |
Cost | Gains | Losses | Value | ||||||||||||
State and political subdivisions: | ||||||||||||||||
Due in 1 year or less |
$ | 6,077 | $ | 5 | $ | (947 | ) | $ | 5,135 | |||||||
Due after 1 year through 5 years |
82,650 | 2,376 | (1,474 | ) | 83,552 | |||||||||||
Due after 5 years through 10 years |
341,741 | 8,854 | (3,021 | ) | 347,574 | |||||||||||
Due after 10 years |
685,464 | 15,717 | (31,415 | ) | 669,766 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total state and political subdivisions |
$ | 1,115,932 | $ | 26,952 | $ | (36,857 | ) | $ | 1,106,027 | |||||||
|
|
|
|
|
|
|
|
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 six months ended June 30, 2017 or 2016.
Trading Securities
The net unrealized losses on trading securities at June 30, 2017 were $67 thousand and the net unrealized gains on trading securities at June 30, 2016 were $93 thousand. These unrealized gains and losses were included in trading and investment banking income on the Consolidated Statements of Income. In order to offset interest rate risk exposure within the trading portfolio, the Company has begun short selling U.S. Treasury and Corporate securities in which the Company enters into agreements to sell securities at a fixed price on a fixed date prior to purchasing the related securities. Securities sold not yet purchased totaled $6.6 million at June 30, 2017 and is classified within the Other liabilities line of the Companys Consolidated Balance Sheets.
21
Table of Contents
Other Securities
The table below provides detailed information for Federal Reserve Bank (FRB) stock and Federal Home Loan Bank (FHLB) stock and other securities at June 30, 2017 and December 31, 2016 (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
June 30, 2017 |
Cost | Gains | Losses | Value | ||||||||||||
FRB and FHLB stock |
$ | 33,262 | $ | | $ | | $ | 33,262 | ||||||||
Other securities marketable |
3 | 6,002 | | 6,005 | ||||||||||||
Other securities non-marketable |
24,181 | 1,596 | (5 | ) | 25,772 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other securities |
$ | 57,446 | $ | 7,598 | $ | (5 | ) | $ | 65,039 | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2016 |
||||||||||||||||
FRB and FHLB stock |
$ | 33,262 | $ | | $ | | $ | 33,262 | ||||||||
Other securities marketable |
4 | 9,948 | | 9,952 | ||||||||||||
Other securities non-marketable |
24,272 | 820 | | 25,092 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other securities |
$ | 57,538 | $ | 10,768 | $ | | $ | 68,306 | ||||||||
|
|
|
|
|
|
|
|
Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Other marketable and non-marketable securities include Prairie Capital Management (PCM) alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. The fair value of other marketable securities includes alternative investment securities of $6.0 million at June 30, 2017 and $10.0 million at December 31, 2016. The fair value of other non-marketable securities includes alternative investment securities of $2.9 million at June 30, 2017 and $2.0 million at December 31, 2016. Unrealized gains or losses on alternative investments are recognized in the Equity earnings (loss) on alternative investments of the Companys Consolidated Statements of Income.
6. | Goodwill and Other Intangibles |
Changes in the carrying amount of goodwill for the periods ended June 30, 2017 and December 31, 2016 by reportable segment are as follows (in thousands):
Bank | Institutional Investment Management |
Asset Servicing |
Total | |||||||||||||
Balances as of January 1, 2017 |
$ | 161,391 | $ | 47,529 | $ | 19,476 | $ | 228,396 | ||||||||
Discontinued assets |
| (47,529 | ) | | (47,529 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of June 30, 2017 |
$ | 161,391 | $ | | $ | 19,476 | $ | 180,867 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of January 1, 2016 |
$ | 161,341 | $ | 47,529 | $ | 19,476 | $ | 228,346 | ||||||||
Acquisition of Marquette |
50 | | | 50 | ||||||||||||
Discontinued assets |
| (47,529 | ) | | (47,529 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balances as of December 31, 2016 |
$ | 161,391 | $ | | $ | 19,476 | $ | 180,867 | ||||||||
|
|
|
|
|
|
|
|
22
Table of Contents
The following table lists the finite-lived intangible assets that continue to be subject to amortization as of June 30, 2017 and December 31, 2016 (in thousands):
As of June 30, 2017 | ||||||||||||||||
Core Deposit Intangible Assets |
Customer Relationships |
Other Intangible Assets |
Total | |||||||||||||
Gross carrying amount |
$ | 49,481 | $ | 74,243 | $ | 3,254 | $ | 126,978 | ||||||||
Accumulated amortization |
40,632 | 58,484 | 3,248 | 102,364 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net carrying amount |
$ | 8,849 | $ | 15,759 | $ | 6 | $ | 24,614 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2016 | ||||||||||||||||
Core Deposit Intangible Assets |
Customer Relationships |
Other Intangible Assets |
Total | |||||||||||||
Gross carrying amount |
$ | 47,527 | $ | 74,243 | $ | 3,254 | $ | 125,024 | ||||||||
Accumulated amortization |
39,040 | 56,352 | 3,002 | 98,394 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net carrying amount |
$ | 8,487 | $ | 17,891 | $ | 252 | $ | 26,630 | ||||||||
|
|
|
|
|
|
|
|
The following table has the aggregate amortization expense recognized in each period (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Aggregate amortization expense |
$ | 1,924 | $ | 2,237 | $ | 3,970 | $ | 4,556 | ||||||||
|
|
|
|
|
|
|
|
The following table lists estimated amortization expense of intangible assets in future periods (in thousands):
For the six months ending December 31, 2017 |
$ | 3,354 | ||
For the year ending December 31, 2018 |
6,007 | |||
For the year ending December 31, 2019 |
4,944 | |||
For the year ending December 31, 2020 |
3,925 | |||
For the year ending December 31, 2021 |
2,855 | |||
For the year ending December 31, 2022 |
1,911 |
23
Table of Contents
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 Companys safekeeping agents.
The table below presents the remaining contractual maturities of repurchase agreements outstanding at June 30, 2017, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings (in thousands):
As of June 30, 2017 | ||||||||||||||||
Remaining Contractual Maturities of the Agreements | ||||||||||||||||
Repurchase agreements, secured by: |
On Demand | 2-29 Days | Over 90 Days | Total | ||||||||||||
U.S. Treasury |
$ | | $ | 27,674 | $ | | $ | 27,674 | ||||||||
U.S. Agencies |
1 | 1,147,341 | 3,100 | 1,150,442 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total repurchase agreements |
$ | 1 | $ | 1,175,015 | 3,100 | $ | 1,178,116 | |||||||||
|
|
|
|
|
|
|
|
8. | Business Segment Reporting |
The Company has strategically aligned its operations into the following two reportable segments (collectively, the Business Segments): Bank and Asset Servicing. Senior executive officers regularly evaluate business segment financial results produced by the Companys internal reporting system in deciding how to allocate resources and assess performance for individual Business Segments. Previously, the Company had the following three Business Segments: Bank, Institutional Investment Management, and Asset Servicing. On April 20, 2017, the Company announced the execution of an agreement to sell all of the outstanding stock of Scout, its institutional investment management subsidiary. As the operations of Scout are now included in discontinued operations, the Company no longer presents this segments operations as one of its business segments. The Companys reportable segments include certain corporate overhead, technology and service costs that are allocated based on methodologies that are applied consistently between periods. For comparability purposes, amounts in all periods are based on methodologies in effect at June 30, 2017. Previously reported results have been reclassified in this filing to conform to the current organizational structure.
The following summaries provide information about the activities of each segment:
The Bank provides a full range of banking services to commercial, retail, government and correspondent bank customers through the Companys branches, call center, internet banking, and ATM network. Services include traditional commercial and consumer banking, treasury management, leasing, foreign exchange, consumer and commercial credit and debit card, prepaid debit card solutions, healthcare services, institutional cash management, merchant bankcard, wealth management, brokerage, insurance, capital markets, investment banking, corporate trust, and correspondent banking.
Asset Servicing provides services to the asset management industry, supporting a range of investment products, including mutual funds, alternative investments and managed accounts. Services include fund administration, fund accounting, investor services, transfer agency, distribution, marketing, custody, alternative investment services, and collective and multiple-series trust services.
24
Table of Contents
Business Segment Information
Segment financial results were as follows (in thousands):
Three Months Ended June 30, 2017 | ||||||||||||
Bank | Asset Servicing |
Total | ||||||||||
Net interest income |
$ | 134,480 | $ | 2,914 | $ | 137,394 | ||||||
Provision for loan losses |
14,500 | | 14,500 | |||||||||
Noninterest income |
86,084 | 24,222 | 110,306 | |||||||||
Noninterest expense |
154,474 | 22,465 | 176,939 | |||||||||
|
|
|
|
|
|
|||||||
Income before taxes |
51,590 | 4,671 | 56,261 | |||||||||
Income tax expense |
10,560 | 930 | 11,490 | |||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 41,030 | $ | 3,741 | $ | 44,771 | ||||||
|
|
|
|
|
|
|||||||
Average assets |
$ | 19,560,000 | $ | 755,000 | $ | 20,315,000 | ||||||
Three Months Ended June 30, 2016 | ||||||||||||
Bank | Asset Servicing |
Total | ||||||||||
Net interest income |
$ | 118,613 | $ | 2,597 | $ | 121,210 | ||||||
Provision for loan losses |
7,000 | | 7,000 | |||||||||
Noninterest income |
79,565 | 23,209 | 102,774 | |||||||||
Noninterest expense |
146,950 | 21,469 | 168,419 | |||||||||
|
|
|
|
|
|
|||||||
Income before taxes |
44,228 | 4,337 | 48,565 | |||||||||
Income tax expense |
10,991 | 1,111 | 12,102 | |||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 33,237 | $ | 3,226 | $ | 36,463 | ||||||
|
|
|
|
|
|
|||||||
Average assets |
$ | 18,227,950 | $ | 1,208,050 | $ | 19,436,000 |
25
Table of Contents
Six Months Ended June 30, 2017 | ||||||||||||
Bank | Asset Servicing |
Total | ||||||||||
Net interest income |
$ | 266,119 | $ | 5,590 | $ | 271,709 | ||||||
Provision for loan losses |
23,500 | | 23,500 | |||||||||
Noninterest income |
165,822 | 47,401 | 213,223 | |||||||||
Noninterest expense |
306,689 | 44,060 | 350,749 | |||||||||
|
|
|
|
|
|
|||||||
Income before taxes |
101,752 | 8,931 | 110,683 | |||||||||
Income tax expense |
22,032 | 1,904 | 23,936 | |||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 79,720 | $ | 7,027 | $ | 86,747 | ||||||
|
|
|
|
|
|
|||||||
Average assets |
$ | 19,479,950 | $ | 795,050 | $ | 20,275,000 | ||||||
Six Months Ended June 30, 2016 | ||||||||||||
Bank | Asset Servicing |
Total | ||||||||||
Net interest income |
$ | 233,884 | $ | 5,218 | $ | 239,102 | ||||||
Provision for loan losses |
12,000 | | 12,000 | |||||||||
Noninterest income |
154,102 | 46,637 | 200,739 | |||||||||
Noninterest expense |
291,253 | 42,434 | 333,687 | |||||||||
|
|
|
|
|
|
|||||||
Income before taxes |
84,733 | 9,421 | 94,154 | |||||||||
Income tax expense |
20,919 | 2,423 | 23,342 | |||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 63,814 | $ | 6,998 | $ | 70,812 | ||||||
|
|
|
|
|
|
|||||||
Average assets |
$ | 18,086,900 | $ | 1,298,100 | $ | 19,385,000 |
9. | 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 Companys 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.
26
Table of Contents
The following table summarizes the Companys off-balance sheet financial instruments.
Contract or Notional Amount (in thousands):
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
Commitments to extend credit for loans (excluding credit card loans) |
$ | 6,363,663 | $ | 6,471,404 | ||||
Commitments to extend credit under credit card loans |
2,916,976 | 2,798,433 | ||||||
Commercial letters of credit |
7,170 | 1,098 | ||||||
Standby letters of credit |
321,287 | 376,617 | ||||||
Forward contracts |
48,139 | 49,352 | ||||||
Spot foreign exchange contracts |
1,887 | 3,725 |
10. | 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 Companys derivative financial instruments are used to manage differences in the amount, timing, and duration of the Companys known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate assets and liabilities. 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 Companys 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 Companys derivative financial instruments as of June 30, 2017 and December 31, 2016. The Companys derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Companys Consolidated Balance Sheets.
This table provides a summary of the fair value of the Companys derivative assets and liabilities as of June 30, 2017 and December 31, 2016 (in thousands):
Asset Derivatives | Liability Derivatives | |||||||||||||||
Fair Value |
June 30, 2017 |
December 31, 2016 |
June 30, 2017 |
December 31, 2016 |
||||||||||||
Interest Rate Products: |
||||||||||||||||
Derivatives not designated as hedging instruments |
$ | 11,598 | $ | 10,555 | $ | 6,722 | $ | 10,581 | ||||||||
Derivatives designated as hedging instruments |
171 | 318 | 1,439 | 748 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 11,769 | $ | 10,873 | $ | 8,161 | $ | 11,329 | ||||||||
|
|
|
|
|
|
|
|
27
Table of Contents
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, LIBOR. Interest rate swaps designated as fair value hedges involve either making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments, or making variable rate payments to a counterparty in exchange for the Company receiving fixed rate payments, over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2017, the Company had two interest rate swaps with a notional amount of $15.6 million that were designated as fair value hedges of interest rate risk associated with the Companys fixed rate loan assets and brokered time deposits.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives.
Cash Flow Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its variable-rate liabilities due to changes in the benchmark interest rate, LIBOR. 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 June 30, 2017, the Company had two interest rate swaps with a notional amount of $51.5 million that were designated as cash flow hedges of interest rate risk associated with the Companys variable rate subordinated debentures issued by Marquette Capital Trusts III and IV. For derivatives designated and that qualify as cash flow hedges, the effective portion of changes in fair value is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly into earnings for the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk. During the three and six months ended June 30, 2017, the Company recognized net losses of $1.2 million and $911 thousand, respectively, in AOCI for the effective portion of the change in fair value of these cash flow hedges. During the three and six months ended June 30, 2016, the Company recognized net losses of $2.9 million and $7.0 million, respectively, in AOCI for the effective portion of the change in fair value of these cash flow hedges. During the three and six months ended June 30, 2017 and June 30, 2016, the Company did not record any hedge ineffectiveness in earnings. Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are received or paid on the Companys derivatives. The Company does not expect to reclassify any amounts from AOCI to Interest expense during the next 12 months as the Companys derivatives are effective after December 2018. As of June 30, 2017, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 19.2 years.
Non-designated Hedges
The remainder of the Companys derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2017, the Company had 70 interest rate swaps with an aggregate notional amount of $852.0 million related to this program. During the three and six months ended June 30, 2017, the Company recognized $168 thousand and $516 thousand of net losses, respectively, related to changes in fair value of these swaps. During the three and six months ended June 30, 2016, the Company recognized $440 thousand and $792 thousand of net losses, respectively, related to changes in the fair value of these swaps.
28
Table of Contents
Effect of Derivative Instruments on the Consolidated Statements of Income
This table provides a summary of the amount of gain or loss recognized in other noninterest expense in the Consolidated Statements of Income related to the Companys derivative assets and liabilities for the three and six months ended June 30, 2017 and June 30, 2016 (in thousands):
Amount of Gain (Loss) Recognized | ||||||||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2017 | June 30, 2016 | June 30, 2017 | June 30, 2016 | |||||||||||||
Interest Rate Products |
||||||||||||||||
Derivatives not designated as hedging instruments |
$ | (168 | ) | $ | (440 | ) | $ | (516 | ) | $ | (792 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (168 | ) | $ | (440 | ) | $ | (516 | ) | $ | (792 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Interest Rate Products |
||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||
Fair value adjustments on derivatives |
$ | (86 | ) | $ | (138 | ) | $ | (132 | ) | $ | (331 | ) | ||||
Fair value adjustments on hedged items |
88 | 137 | 134 | 329 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (2 | ) | $ | (1 | ) | $ | 2 | $ | (2 | ) | |||||
|
|
|
|
|
|
|
|
This table provides a summary of the amount of gain or loss recognized in AOCI in the Consolidated Statements of Comprehensive Income related to the Companys derivative assets and liabilities as of June 30, 2017 and June 30, 2016 (in thousands):
Amount of Loss Recognized in Other Comprehensive Income on Derivatives (Effective Portion) |
||||||||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships |
June 30, 2017 | June 30, 2016 | June 30, 2017 | June 30, 2016 | ||||||||||||
Interest rate products |
||||||||||||||||
Derivatives designated as cash flow hedging instruments |
$ | (1,157 | ) | $ | (2,894 | ) | $ | (911 | ) | $ | (7,034 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (1,157 | ) | $ | (2,894 | ) | $ | (911 | ) | $ | (7,034 | ) | ||||
|
|
|
|
|
|
|
|
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 June 30, 2017, the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $10.6 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties but has not yet reached its minimum collateral posting threshold under these agreements. If the Company had breached any of these provisions at June 30, 2017, it could have been required to settle its obligations under the agreements at the termination value.
29
Table of Contents
11. | Fair Value Measurements |
The following table presents information about the Companys assets measured at fair value on a recurring basis as of June 30, 2017, 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 measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 (in thousands):
Fair Value Measurement at June 30, 2017 | ||||||||||||||||
Description |
June 30, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
U.S. Treasury |
$ | 250 | $ | 250 | $ | | $ | | ||||||||
U.S. Agencies |
6,731 | | 6,731 | | ||||||||||||
Mortgage-backed |
3,020 | | 3,020 | | ||||||||||||
State and political subdivisions |
33,116 | | 33,116 | | ||||||||||||
Corporates |
6,406 | 6,406 | | | ||||||||||||
Trading other |
12,310 | 12,149 | 161 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading securities |
61,833 | 18,805 | 43,028 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. Treasury |
63,912 | 63,912 | | | ||||||||||||
U.S. Agencies |
25,572 | | 25,572 | | ||||||||||||
Mortgage-backed |
3,594,048 | | 3,594,048 | | ||||||||||||
State and political subdivisions |
2,505,549 | | 2,505,549 | | ||||||||||||
Corporates |
36,960 | 36,960 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Available for sale securities |
6,226,041 | 100,872 | 6,125,169 | | ||||||||||||
Company-owned life insurance |
45,102 | | 45,102 | | ||||||||||||
Bank-owned life insurance |
212,799 | | 212,799 | | ||||||||||||
Derivatives |
11,769 | | 11,769 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,557,544 | $ | 119,677 | $ | 6,437,867 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Deferred compensation |
$ | 55,171 | $ | 55,171 | $ | | $ | | ||||||||
Derivatives |
8,161 | | 8,161 | | ||||||||||||
Securities sold not yet purchased |
6,556 | | 6,556 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 69,888 | $ | 55,171 | $ | 14,717 | $ | | ||||||||
|
|
|
|
|
|
|
|
30
Table of Contents
Fair Value Measurement as of December 31, 2016 | ||||||||||||||||
Description |
December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets |
||||||||||||||||
U.S. Treasury |
$ | | $ | | $ | | $ | | ||||||||
U.S. Agencies |
1,306 | | 1,306 | | ||||||||||||
Mortgage-backed |
313 | | 313 | | ||||||||||||
State and political subdivisions |
9,295 | | 9,295 | | ||||||||||||
Trading other |
28,622 | 28,495 | 127 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading securities |
39,536 | 28,495 | 11,041 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
U.S. Treasury |
93,826 | 93,826 | | | ||||||||||||
U.S. Agencies |
198,177 | | 198,177 | | ||||||||||||
Mortgage-backed |
3,711,699 | | 3,711,699 | | ||||||||||||
State and political subdivisions |
2,395,757 | | 2,395,757 | | ||||||||||||
Corporates |
66,875 | 66,875 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Available for sale securities |
6,466,334 | 160,701 | 6,305,633 | | ||||||||||||
Company-owned life insurance |
41,333 | | 41,333 | | ||||||||||||
Bank-owned life insurance |
209,686 | | 209,686 | | ||||||||||||
Derivatives |
10,873 | | 10,873 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6,767,762 | $ | 189,196 | $ | 6,578,566 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Deferred compensation |
$ | 42,797 | $ | 42,797 | $ | | $ | | ||||||||
Derivatives |
11,329 | | 11,329 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 54,126 | $ | 42,797 | $ | 11,329 | $ | | ||||||||
|
|
|
|
|
|
|
|
Valuation methods for instruments measured at fair value on a recurring basis
The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis:
Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.
Securities Available for Sale Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Prices are provided by third-party pricing services and are based on observable market inputs. On an annual basis, the Company compares a sample of these prices to other independent sources for the same securities. Additionally, throughout the year if securities are sold, comparisons are made between the pricing services prices and the market prices at which the securities were sold. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing services. Based on this research, the pricing services may affirm or revise their quoted price. No significant adjustments have been made to the prices provided by the pricing services. The pricing services also provide documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.
Company-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.
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Table of Contents
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 counterpartys 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.
Deferred Compensation Fair values are based on quoted market prices.
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 June 30, 2017 and December 31, 2016 (in thousands):
Fair Value Measurement at June 30, 2017 Using | ||||||||||||||||||||
Description |
June 30, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Gains (Losses) Recognized During the Six Months Ended June 30 |
|||||||||||||||
Impaired loans |
$ | 14,663 | $ | | $ | | $ | 14,663 | $ | (502 | ) | |||||||||
Other real estate owned |
377 | | | 377 | 27 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 15,040 | $ | | $ | | $ | 15,040 | $ | (475 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fair Value Measurement at December 31, 2016 Using | ||||||||||||||||||||
Description |
December 31, 2016 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Gains (Losses) Recognized During the Twelve Months Ended December 31 |
|||||||||||||||
Impaired loans |
$ | 23,757 | $ | | $ | | $ | 23,757 | $ | (2,070 | ) | |||||||||
Other real estate owned |
89 | | | 89 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 23,846 | $ | | $ | | $ | 23,846 | $ | (2,070 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
Valuation methods for instruments measured at fair value on a nonrecurring 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:
32
Table of Contents
Impaired loans While the overall loan portfolio is not carried at fair value, adjustments are recorded on certain loans 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 Companys property management group and the Companys credit department. The valuation of the impaired loans is 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 lower of the loan balance or fair value of the collateral. 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.
Goodwill Valuation of goodwill to determine impairment is performed annually, or more frequently if there is an event or circumstance that would indicate impairment may have occurred. The process involves calculations to determine the fair value of each reporting unit on a stand-alone basis. A combination of formulas using current market multiples, based on recent sales of financial institutions within the Companys geographic marketplace, is used to estimate the fair value of each reporting unit. That fair value is compared to the carrying amount of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the reporting unit is lower than the carrying amount of the reporting unit. The fair value of the Companys common stock relative to its computed book value per share is also considered as part of the overall evaluation. These 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 Companys financial instruments at June 30, 2017 and December 31, 2016 are as follows (in millions):
Fair Value Measurement at June 30, 2017 Using | ||||||||||||||||||||
Carrying Amount |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Estimated Fair Value |
||||||||||||||||
FINANCIAL ASSETS |
||||||||||||||||||||
Cash and short-term investments |
$ | 895,759 | $ | 715,060 | $ | 180,699 | $ | | $ | 895,759 | ||||||||||
Securities available for sale |
6,226,041 | 100,872 | 6,125,169 | | 6,226,041 | |||||||||||||||
Securities held to maturity |
1,279,524 | | 1,184,677 | | 1,184,677 | |||||||||||||||
Trading securities |
61,833 | 18,805 | 43,028 | | 61,833 | |||||||||||||||
Other securities |
65,039 | | 65,039 | | 65,039 | |||||||||||||||
Loans (exclusive of allowance for loan loss) |
10,852,021 | | 10,905,950 | | 10,905,950 | |||||||||||||||
Derivatives |
11,769 | | 11,769 | | 11,769 | |||||||||||||||
FINANCIAL LIABILITIES |
||||||||||||||||||||
Demand and savings deposits |
14,862,519 | 14,862,519 | | | 14,862,519 | |||||||||||||||
Time deposits |
1,234,147 | | 1,234,147 | | 1,234,147 | |||||||||||||||
Other borrowings |
1,886,370 | 708,254 | 1,178,116 | | 1,886,370 | |||||||||||||||
Long-term debt |
76,083 | | 76,316 | | 76,316 | |||||||||||||||
Derivatives |
8,161 | | 8,161 | | 8,161 | |||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS |
||||||||||||||||||||
Commitments to extend credit for loans |
3,414,510 | |||||||||||||||||||
Commercial letters of credit |
56,260 | |||||||||||||||||||
Standby letters of credit |
1,281,020 |
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Table of Contents
Fair Value Measurement at December 31, 2016 Using | ||||||||||||||||||||
Carrying Amount |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Estimated Fair Value |
||||||||||||||||
FINANCIAL ASSETS |
||||||||||||||||||||
Cash and short-term investments |
$ | 1,462,267 | $ | 1,138,850 | $ | 323,417 | $ | | $ | 1,462,267 | ||||||||||
Securities available for sale |
6,466,334 | 160,701 | 6,305,633 | | 6,466,334 | |||||||||||||||
Securities held to maturity |
1,115,932 | | 1,106,027 | | 1,106,027 | |||||||||||||||
Trading securities |
39,536 | 28,495 | 11,041 | | 39,536 | |||||||||||||||
Other securities |
68,306 | | 68,306 | | 68,306 | |||||||||||||||
Loans (exclusive of allowance for loan loss) |
10,545,662 | | 10,572,292 | | 10,572,292 | |||||||||||||||
Derivatives |
10,873 | | 10,873 | | 10,873 | |||||||||||||||
FINANCIAL LIABILITIES |
||||||||||||||||||||
Demand and savings deposits |
15,434,893 | 15,434,893 | | | 15,434,893 | |||||||||||||||
Time deposits |
1,135,721 | | 1,135,721 | | 1,135,721 | |||||||||||||||
Other borrowings |
1,856,937 | 419,843 | 1,437,094 | | 1,856,937 | |||||||||||||||
Long-term debt |
76,772 | | 77,025 | | 77,025 | |||||||||||||||
Derivatives |
11,329 | | 11,329 | | 11,329 | |||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS |
||||||||||||||||||||
Commitments to extend credit for loans |
5,603,807 | |||||||||||||||||||
Commercial letters of credit |
142,383 | |||||||||||||||||||
Standby letters of credit |
2,526,859 |
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 Fair value of held-to-maturity securities 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, PCM 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. The fair value of PCM marketable equity-method investments are based on quoted market prices used to estimate the value of the underlying investment. For non-marketable equity-method investments, the Companys proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investment(s).
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 is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Demand and savings deposits The fair value of demand deposits and savings accounts is the amount payable on demand at June 30, 2017 and December 31, 2016.
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.
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.
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Table of Contents
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 Companys consolidated financial position.
12. | Discontinued Operations |
On April 20, 2017, the Company announced the execution of an agreement to sell all of the outstanding stock of Scout, its institutional investment management subsidiary, for $172.5 million in cash, subject to customary purchase price adjustments at closing. The Company plans to use the proceeds from the transaction for general corporate purposes and to support its continued organic growth in the commercial, consumer, private wealth, institutional banking, healthcare, and asset servicing businesses.
This table summarizes the components of (loss) income from discontinued operations, net of taxes, for the three and six months ended June 30, 2017 and June 30, 2016 presented in the Consolidated Statements of Income are as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2017 | June 30, 2016 | June 30, 2017 | June 30, 2016 | |||||||||||||
Total noninterest income |
$ | 17,856 | $ | 18,673 | $ | 35,719 | $ | 37,058 | ||||||||
Total noninterest expense |
20,455 | 16,924 | 35,411 | 32,100 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income from discontinued operations |
(2,599 | ) | 1,749 | 308 | 4,958 | |||||||||||
Income tax (benefit) expense |
(649 | ) | 694 | 53 | 1,849 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income on discontinued operations |
$ | (1,950 | ) | $ | 1,055 | $ | 255 | $ | 3,109 | |||||||
|
|
|
|
|
|
|
|
The discontinued assets of Scout included on the Consolidated Balance Sheets are as follows (in thousands):
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
Goodwill |
$ | 47,529 | $ 47,529 | |||||
Other intangibles, net |
6,214 | 7,861 | ||||||
|
|
|
|
|||||
Discontinued assets goodwill and other intangibles, net |
$ | 53,743 | $ 55,390 | |||||
|
|
|
|
The components of net cash provided by operating activities of discontinued operations included in the Consolidated Statements of Cash Flows are as follows (in thousands):
Six Months | ||||||||
Ended June 30, | ||||||||
2017 | 2016 | |||||||
Income from discontinued operations |
$ | 255 | $ | 3,109 | ||||
Depreciation and amortization |
1,647 | 1,815 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities of discontinued operations |
$ | 1,902 | $ | 4,924 | ||||
|
|
|
|
35
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Managements 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 and six-month periods ended June 30, 2017. 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 Companys expectations, intentions, or forecasts about future events, circumstances, results, or aspirations.
This report, including any information incorporated by reference in this report, 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 (SEC). 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 Companys 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 Companys 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; |
36
Table of Contents
| changes in the Companys corporate strategies, the composition of its assets, or the way in which it funds those assets; |
| the Companys ability to develop, maintain, or market products or services or to absorb unanticipated costs or liabilities associated with those products or services; |
| the Companys 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 Companys customers, counterparties, or competitors; |
| the Companys 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 Companys ability to address stricter or heightened regulatory or other governmental supervision or requirements; |
| the Companys 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 Companys 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 Companys methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk; |
| the Companys ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors; |
| mergers, acquisitions, or dispositions, including the Companys ability to integrate acquisitions and divest assets; |
| the adequacy of the Companys succession planning for key executives or other personnel; |
| the Companys ability to grow revenue, control expenses, or attract and retain qualified employees; |
| natural or man-made disasters, calamities, or conflicts, including terrorist events; or |
| other assumptions, risks, or uncertainties described in the Notes to Consolidated Financial Statements (Item 1) and Managements 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 Companys 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 to the extent required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that the Company makes in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.
37
Table of Contents
Overview
The Company focuses on the following four core strategic objectives. Management believes these strategies will guide our efforts to achieve our vision to deliver the unparalleled customer experience, all while maintaining a focus to improve net income and strengthen the balance sheet.
The first strategic objective is a focus on improving 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 second quarter of 2017, total revenue increased 10.6 percent compared to the second quarter of 2016, while noninterest expense increased 5.1 percent. As part of this initiative, 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 strategic objective is a focus on net interest income through profitable loan and deposit growth and the optimization of the balance sheet. During the second quarter of 2017, the Company continued to make progress on this strategy as illustrated by an increase in net interest income of $16.2 million, or 13.4 percent, from the same period in 2016. The Company has shown increased net interest income through the effects of increased rates, volume and mix of average earning assets and a low cost of funds in its Consolidated Balance Sheets. Average loan balances increased $924.7 million, or 9.4 percent compared to the same period in 2016. The funding for these assets was driven primarily by a 5.5 percent increase in average interest-bearing liabilities, coupled with a 2.0 percent increase in noninterest-bearing demand deposits. Net interest margin, on a tax-equivalent basis, increased 26 basis points compared to the same period in 2016.
The third strategic objective is to grow the Companys revenue from noninterest sources. The Company has continued to emphasize its diverse operations throughout all economic cycles. This strategy has provided revenue diversity, helped to reduce the impact of sustained low interest rates and positioned the Company to benefit in periods of growth. Noninterest income increased $7.5 million, or 7.3 percent, to $110.3 million for the three months ended June 30, 2017, compared to the same period in 2016. This change is discussed in greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. At June 30, 2017, noninterest income represented 44.5 percent of total revenues, compared to 45.9 percent at June 30, 2016.
The fourth strategic objective is a focus on 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 Companys 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 strategies, increasing dividends over time, and properly utilizing a share repurchase program. At June 30, 2017, the Company had $2.1 billion in total shareholders equity. This is an increase of $68.0 million, or 3.4 percent, compared to total shareholders equity at June 30, 2016. At June 30, 2017, the Company had a total risk-based capital ratio of 13.32 percent. The Company repurchased 3,520 shares of common stock at an average price of $71.10 per share during the second quarter of 2017.
Earnings Summary
The following is a summary regarding the Companys earnings for the second quarter of 2017. The changes identified in the summary are explained in greater detail below. The Company recorded net income from continuing operations of $44.8 million for the three-month period ended June 30, 2017, compared to $36.5 million for the same period a year earlier. This represents a 22.8 percent increase over the three-month period ended June 30, 2016. Basic earnings per share from continuing operations for the second quarter of 2017 was $0.91 per share ($0.90 per share fully-diluted) compared to $0.75 per share ($0.74 per share fully-diluted) for the second quarter of 2016. Return on average assets and return on average common shareholders equity for the three-month period ended June 30, 2017 were 0.88 and 8.69 percent, respectively, compared to 0.75 and 7.41 percent, respectively, for the three-month period ended June 30, 2016.
38
Table of Contents
The Company recorded net income from continuing operations of $86.7 million for the six-month period ended June 30, 2017, compared to $70.8 million for the same period a year earlier. This represents a 22.5 percent increase over the six-month period ended June 30, 2016. Basic earnings per share for the six-month period ended June 30, 2017 were $1.76 per share ($1.74 per share fully-diluted) compared to $1.45 per share ($1.44 per share fully-diluted) for the same period in 2016. Return on average assets and return on average common shareholders equity for the six-month period ended June 30, 2017 were 0.86 and 8.64 percent, respectively, compared to 0.73 and 7.26 percent for the same period in 2016.
Net interest income for the three and six-month periods ended June 30, 2017 increased $16.2 million, or 13.4 percent, and $32.6 million, or 13.6 percent, respectively, compared to the same periods in 2016. For the three-month period ended June 30, 2017, average earning assets increased by $841.9 million, or 4.7 percent, and for the six-month period ended June 30, 2017, they increased by $846.0 million, or 4.7 percent, compared to the same periods in 2016. Net interest margin, on a tax-equivalent basis, increased to 3.12 percent and 3.10 percent for the three and six-month periods ended June 30, 2017, compared to 2.86 percent and 2.82 percent for the same periods in 2016.
The provision for loan losses increased by $7.5 million to $14.5 million for the three-month period ended June 30, 2017, and increased by $11.5 million to $23.5 million for the six-month period ended June 30, 2017, as compared to the same periods in 2016. This increase is a result of applying the Companys methodology for computing the allowance for loan losses. A significant driver of credit quality is nonperforming loans. The Companys nonperforming loans decreased $7.0 million to $51.4 million at June 30, 2017, compared to June 30, 2016, and decreased $18.9 million, compared to December 31, 2016. The allowance for loan losses as a percentage of total loans increased to 0.90 percent as of June 30, 2017, compared to 0.84 percent at June 30, 2016. For a description of the Companys methodology for computing the allowance for loan losses, please see the summary discussion of the Allowance for Loan Losses within the Critical Accounting Policies and Estimates subsection of the Managements Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.
Noninterest income increased by $7.5 million, or 7.3 percent, for the three-month period ended June 30, 2017, and increased by $12.5 million, or 6.2 percent, for the six-month period ended June 30, 2017, compared to the same periods in 2016. These changes are discussed in greater detail below under Noninterest Income.
Noninterest expense increased by $8.5 million, or 5.1 percent, for the three-month period ended June 30, 2017, and increased by $17.1 million, or 5.1 percent, for the six-month period ended June 30, 2017, compared to the same periods in 2016. These changes are discussed in greater detail below under Noninterest Expense.
Net Interest Income
Net interest income is a significant source of the Companys earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. Net interest income for the three and six-month periods ended June 30, 2017 increased $16.2 million, or 13.4 percent, and $32.6 million, or 13.6 percent, respectively, compared to the same periods in 2016.
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 and margin for the three months ended June 30, 2017 increased by 18 and 26 basis points, respectively, compared to the same period in 2016. Net interest spread and margin for the six months ended June 30, 2017 increased by 22 and 28 basis points, respectively, compared to the same period in 2016. These increases are primarily due to favorable interest rate and volume variances on loans. These interest rate variances have led to an increase in interest income partially offset by an increase in interest expense, resulting in an increase in the Companys net interest income during 2017 as compared to results for the same periods in 2016. 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 rates have resulted in an increase in net interest income.
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Table of Contents
Table 1
AVERAGE BALANCES/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 3.20 percent for the three-month period ended June 30, 2017 and 2.84 percent for the same period in 2016. The average yield on earning assets without the tax equivalent basis adjustment would have been 3.16 percent for the six-month period ended June 30, 2017 and 2.82 percent for the same period in 2016.
Three Months Ended June 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Average Balance |
Average Yield/Rate |
Average Balance |
Average Yield/Rate |
|||||||||||||
Assets |
||||||||||||||||
Loans, net of unearned interest |
$ | 10,812,058 | 4.18 | % | $ | 9,887,404 | 3.82 | % | ||||||||
Securities: |
||||||||||||||||
Taxable |
3,997,904 | 1.85 | 4,676,230 | 1.62 | ||||||||||||
Tax-exempt |
3,640,336 | 3.09 | 2,987,217 | 2.86 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities |
7,638,240 | 2.44 | 7,663,447 | 2.11 | ||||||||||||
Federal funds and resell agreements |
150,745 | 1.89 | 181,094 | 1.43 | ||||||||||||
Interest-bearing due from banks |
252,169 | 0.92 | 313,427 | 0.56 | ||||||||||||
Other earning assets |
75,075 | 2.96 | 40,996 | 2.09 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total earning assets |
18,928,287 | 3.41 | 18,086,368 | 3.01 | ||||||||||||
Allowance for loan losses |
(95,410 | ) | (81,699 | ) | ||||||||||||
Other assets |
1,482,040 | 1,431,600 | ||||||||||||||
|
|
|
|
|||||||||||||
Total assets |
$ | 20,314,917 | $ | 19,436,269 | ||||||||||||
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|
|
|
|||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Interest-bearing deposits |
$ | 9,734,166 | 0.32 | % | $ | 9,315,851 | 0.18 | % | ||||||||
Federal funds and repurchase agreements |
2,400,181 | 0.83 | 2,163,264 | 0.30 | ||||||||||||
Borrowed funds |
75,953 | 5.22 | 91,034 | 4.09 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total interest-bearing liabilities |
12,210,300 | 0.45 | 11,570,149 | 0.23 | ||||||||||||
Noninterest-bearing demand deposits |
5,837,602 | 5,723,840 | ||||||||||||||
Other liabilities |
199,386 | 162,390 | ||||||||||||||
Shareholders equity |
2,067,629 | 1,979,890 | ||||||||||||||
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|
|
|||||||||||||
Total liabilities and shareholders equity |
$ | 20,314,917 | $ | 19,436,269 | ||||||||||||
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|
|
|
|||||||||||||
Net interest spread |
2.96 | % | 2.78 | % | ||||||||||||
Net interest margin |
3.12 | 2.86 |
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Table of Contents
Six Months Ended June 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Average Balance |
Average Yield/Rate |
Average Balance |
Average Yield/Rate |
|||||||||||||
Assets |
||||||||||||||||
Loans, net of unearned interest |
$ | 10,686,792 | 4.14 | % | $ | 9,718,848 | 3.82 | % | ||||||||
Securities: |
||||||||||||||||
Taxable |
4,097,794 | 1.85 | 4,751,526 | 1.62 | ||||||||||||
Tax-exempt |
3,564,319 | 3.08 | 2,896,366 | 2.84 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total securities |
7,662,113 | 2.42 | 7,647,892 | 2.08 | ||||||||||||
Federal funds and resell agreements |
194,231 | 1.69 | 163,943 | 1.41 | ||||||||||||
Interest-bearing due from banks |
280,490 | 0.81 | 481,031 | 0.55 | ||||||||||||
Other earning assets |
67,809 | 2.73 | 33,677 | 1.67 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total earning assets |
18,891,435 | 3.36 | 18,045,391 | 2.97 | ||||||||||||
Allowance for loan losses |
(94,264 | ) | (81,259 | ) | ||||||||||||
Other assets |
1,477,685 | 1,420,465 | ||||||||||||||
|
|
|
|
|||||||||||||
Total assets |
$ | 20,274,856 | $ | 19,384,597 | ||||||||||||
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|
|
|
|||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Interest-bearing deposits |
$ | 9,689,335 | 0.29 | % | $ | 9,372,812 | 0.18 | % | ||||||||
Federal funds and repurchase agreements |
2,365,101 | 0.72 | 1,929,910 | 0.30 | ||||||||||||
Borrowed funds |
76,209 | 5.10 | 91,796 | 4.02 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total interest-bearing liabilities |
12,130,645 | 0.40 | 11,394,518 | 0.23 | ||||||||||||
Noninterest-bearing demand deposits |
5,917,826 | 5,869,330 | ||||||||||||||
Other liabilities |
200,809 | 160,173 | ||||||||||||||
Shareholders equity |
2,025,576 | 1,960,576 | ||||||||||||||
|
|
|
|
|||||||||||||
Total liabilities and shareholders equity |
$ | 20,274,856 | $ | 19,384,597 | ||||||||||||
|
|
|
|
|||||||||||||
Net interest spread |
2.96 | % | 2.74 | % | ||||||||||||
Net interest margin |
3.10 | 2.82 |
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. Although the average balance of interest-free funds (total earning assets less interest-bearing liabilities) increased $201.8 million for the three-month period and $109.9 million for the six-month period ended June 30, 2017 compared to the same periods in 2016, the benefit from interest free funds increased by eight basis points in the three-month and five basis points in the six-month periods due to increased yields on earning assets, offset by an increase in interest rates of interest-bearing liabilities.
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Table of Contents
Table 2
ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2017 and 2016 | June 30, 2017 and 2016 | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Change in interest earned on: |
||||||||||||||||||||||||
Loans |
$ | 9,352 | $ | 9,423 | $ | 18,775 | $ | 19,515 | $ | 15,276 | $ | 34,791 | ||||||||||||
Securities: |
||||||||||||||||||||||||
Taxable |
(2,912 | ) | 2,501 | (411 | ) | (5,584 | ) | 5,006 | (578 | ) | ||||||||||||||
Tax-exempt |
3,279 | 1,172 | 4,451 | 6,626 | 2,273 | 8,899 | ||||||||||||||||||
Federal funds sold and resell agreements |
(119 | ) | 188 | 69 | 234 | 247 | 481 | |||||||||||||||||
Interest-bearing due from banks |
(98 | ) | 242 | 144 | (674 | ) | 478 | (196 | ) | |||||||||||||||
Trading |
191 | 95 | 286 | 321 | 200 | 521 | ||||||||||||||||||
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|
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|
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Interest income |
9,693 | 13,621 | 23,314 | 20,438 | 23,480 | 43,918 | ||||||||||||||||||
Change in interest incurred on: |
||||||||||||||||||||||||
Interest-bearing deposits |
195 | 3,504 | 3,699 | 287 | 5,323 | 5,610 | ||||||||||||||||||
Federal funds purchased and repurchase agreements |
198 | 3,170 | 3,368 | 773 | 4,834 | 5,607 | ||||||||||||||||||
Other borrowed funds |
(169 | ) | 232 | 63 | (342 | ) | 436 | 94 | ||||||||||||||||
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Interest expense |
224 | 6,906 | 7,130 | 718 | 10,593 | 11,311 | ||||||||||||||||||
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|
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|
|||||||||||||
Net interest income |
$ | 9,469 | $ | 6,715 | $ | 16,184 | $ | 19,720 | $ | 12,887 | $ | 32,607 | ||||||||||||
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ANALYSIS OF NET INTEREST MARGIN
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
Average earning assets |
$ | 18,928,287 | $ | 18,086,368 | $ | 841,919 | $ | 18,891,435 | $ | 18,045,391 | $ | 846,044 | ||||||||||||
Interest-bearing liabilities |
12,210,300 | 11,570,149 | 640,151 | 12,130,645 | 11,394,518 | 736,127 | ||||||||||||||||||
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Interest-free funds |
$ | 6,717,987 | $ | 6,516,219 | $ | 201,768 | $ | 6,760,790 | $ | 6,650,873 | $ | 109,917 | ||||||||||||
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Free funds ratio (free funds to earning assets) |
35.49 | % | 36.03 | % | (0.54 | )% | 35.79 | % | 36.86 | % | (1.07 | )% | ||||||||||||
Tax-equivalent yield on earning assets |
3.41 | 3.01 | 0.40 | 3.36 | 2.98 | 0.38 | ||||||||||||||||||
Cost of interest-bearing liabilities |
0.45 | 0.23 | 0.22 | 0.40 | 0.23 | 0.17 | ||||||||||||||||||
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Net interest spread |
2.96 | 2.78 | 0.18 | 2.96 | 2.75 | 0.21 | ||||||||||||||||||
Benefit of interest-free funds |
0.16 | 0.08 | 0.08 |