10-Q 1 d407394d10q.htm FORM 10-Q Form 10-Q
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)

(Registrant’s 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 issuer’s 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

INDEX

 

PART I – FINANCIAL INFORMATION

     3  

ITEM 1.

  

FINANCIAL STATEMENTS (UNAUDITED)

     3  

CONSOLIDATED BALANCE SHEETS

     3  

CONSOLIDATED STATEMENTS OF INCOME

     4  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     5  

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

     6  

CONSOLIDATED STATEMENTS OF CASH FLOWS

     7  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     8  

ITEM 2.

  

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

     36  

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     53  

ITEM 4.

  

CONTROLS AND PROCEDURES

     57  

PART II – OTHER INFORMATION

     57  

ITEM 1.

  

LEGAL PROCEEDINGS

     57  

ITEM 1A.

  

RISK FACTORS

     57  

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     58  

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     58  

ITEM 4.

  

MINE SAFETY DISCLOSURES

     58  

ITEM 5.

  

OTHER INFORMATION

     58  

ITEM 6.

  

EXHIBITS

     59  

SIGNATURES

     60  

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(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  
  

 

 

   

 

 

 

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  
  

 

 

   

 

 

 

Total liabilities

     18,282,480       18,720,148  
  

 

 

   

 

 

 

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
  

 

 

   

 

 

 

Total shareholders’ equity

     2,071,119       1,962,384  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 20,353,599     $ 20,682,532  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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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  
  

 

 

   

 

 

    

 

 

   

 

 

 

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  
  

 

 

   

 

 

    

 

 

   

 

 

 

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  
  

 

 

   

 

 

    

 

 

   

 

 

 

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  
  

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income from discontinued operations

     (1,950     1,055        255       3,109  
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 42,821     $ 37,518      $ 87,002     $ 73,921  
  

 

 

   

 

 

    

 

 

   

 

 

 

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.

 

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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
  

 

 

   

 

 

   

 

 

   

 

 

 

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
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     20,534       22,827       33,917       59,013  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 63,355     $ 60,345     $ 120,919     $ 132,934  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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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  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2016

   $ 55,057      $ 1,024,083     $ 1,082,801     $ 55,295     $ (214,095   $ 2,003,141  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2017

   $ 55,057      $ 1,037,898     $ 1,204,436     $ (23,625   $ (202,647   $ 2,071,119  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

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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
  

 

 

   

 

 

 

Net cash provided by operating activities

     119,247       82,484  
  

 

 

   

 

 

 

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
  

 

 

   

 

 

 

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
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (464,643     493,504  
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (402,417     (193,263

Cash and cash equivalents at beginning of period

     1,063,967       819,112  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 661,550     $ 625,849  
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Income taxes paid

   $ 20,679     $ 19,295  

Total interest paid

     23,633       13,199  

See Notes to Consolidated Financial Statements.

 

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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. Management’s Discussion and Analysis of Financial Condition and Results of Operations” within this Quarterly Report on Form 10-Q (the Form 10-Q) and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 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 Company’s 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 Company’s Consolidated Statements of Income and its assets have been presented separately as Discontinued assets – goodwill and other intangibles, net in the Company’s 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 Company’s Consolidated Balance Sheets.

This table provides a summary of cash and cash equivalents as presented on the Consolidated Statements of Cash Flows as of 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  
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 661,550      $ 625,849  
  

 

 

    

 

 

 

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 Company’s 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 FASB’s 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 Company’s Consolidated Statement of Cash Flows. The impact to the Company’s 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 Company’s 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 company’s 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 Company’s policies and procedures.

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

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

Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires that an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner occupied real estate.

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 borrower’s loan-to-value percentage, collection remedies, and overall credit history.

 

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Consumer loans are underwritten based on the borrower’s 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 debtor’s financial capacity, and monitoring the client’s activities. Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics.

Loan Aging Analysis

This table provides a summary of loan classes and an aging of past due loans at 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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

                    

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:

                    

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 10,114      $ 3,365      $ 70,259      $ 83,738      $ 800      $ 10,455,845      $ 10,540,383  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. The loan 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 borrower’s industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk.

 

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

 

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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
 

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,618,718      $ 4,410,806      $ 277,930      $ 225,878      $ 160,664      $ 139,902  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Real estate – construction        Real estate – commercial        
    

June 30,

2017

 

 

    
December
31, 2016
 
 
    

June 30,

2017

 

 

    
December
31, 2016
 
 
     

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        
  

 

 

    

 

 

    

 

 

    

 

 

       

Total

   $ 724,938      $ 741,804      $ 3,246,540      $ 3,165,922        
  

 

 

    

 

 

    

 

 

    

 

 

       

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 151,552      $ 146,735      $ 597,744      $ 548,350      $ 674,659      $ 711,794  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 management’s judgment of inherent probable losses within the Company’s 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 Company’s 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 management’s 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 management’s 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 Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and changes in the regulatory environment.

The Company’s 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 obligor’s 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 borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk ranking of the loan and economic conditions affecting the borrower’s 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 Company’s 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 borrower’s 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 Company’s 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.

 

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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 borrower’s 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  

 

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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  

 

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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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the debtor short-term cash relief to allow them to improve their financial condition. The Company’s restructured loans are 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  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at 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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The unrealized losses in the Company’s 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 Company’s 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 Company’s Consolidated Balance Sheets.

 

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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 Company’s 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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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  

 

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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 Company’s 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 Company’s 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 segment’s operations as one of its business segments. The Company’s 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 Company’s 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  

 

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

 

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Table of Contents

The following table summarizes the Company’s 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 Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to 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 Company’s assets or liabilities. The Company has entered into an offsetting position for each of these derivative instruments with a matching instrument from another financial institution in order to minimize its net risk exposure resulting from such transactions.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The table below presents the fair value of the Company’s derivative financial instruments as of June 30, 2017 and December 31, 2016. The Company’s derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets.

This table provides a summary of the fair value of the Company’s 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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 Company’s 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 Company’s 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 Company’s derivatives. The Company does not expect to reclassify any amounts from AOCI to Interest expense during the next 12 months as the Company’s 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 Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of 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.

 

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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 Company’s 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 Company’s 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.

 

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Table of Contents
11. Fair Value Measurements

The following table presents information about the Company’s 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      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

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:

 

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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 Company’s property management group and the Company’s 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 Company’s 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 Company’s 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 Company’s 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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     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 Company’s 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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Other off-balance sheet instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair value at period-end are significant to the Company’s consolidated financial position.

 

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  
  

 

 

    

 

 

 

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations highlights the material changes in the results of operations and changes in financial condition of the Company for the three-month 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 Company’s 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 Company’s control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements include:

 

    local, regional, national, or international business, economic, or political conditions or events;

 

    changes in laws or the regulatory environment, including as a result of financial-services legislation or regulation;

 

    changes in monetary, fiscal, or trade laws or policies, including as a result of actions by central banks or supranational authorities;

 

    changes in accounting standards or policies;

 

    shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including changes in market liquidity or volatility or changes in interest or currency rates;

 

    changes in spending, borrowing, or saving by businesses or households;

 

    the Company’s ability to effectively manage capital or liquidity or to effectively attract or deploy deposits;

 

    changes in any credit rating assigned to the Company or its affiliates;

 

    adverse publicity or other reputational harm to the Company;

 

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Table of Contents
    changes in the Company’s corporate strategies, the composition of its assets, or the way in which it funds those assets;

 

    the Company’s ability to develop, maintain, or market products or services or to absorb unanticipated costs or liabilities associated with those products or services;

 

    the Company’s ability to innovate to anticipate the needs of current or future customers, to successfully compete in its chosen business lines, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;

 

    changes in the credit, liquidity, or other condition of the Company’s customers, counterparties, or competitors;

 

    the Company’s ability to effectively deal with economic, business, or market slowdowns or disruptions;

 

    judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for, or are adverse to, the Company or the financial-services industry;

 

    the Company’s ability to address stricter or heightened regulatory or other governmental supervision or requirements;

 

    the Company’s ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or facilities, including its capacity to withstand cyber-attacks;

 

    the adequacy of the Company’s corporate governance, risk-management framework, compliance programs, or internal controls, including its ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;

 

    the efficacy of the Company’s methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk;

 

    the Company’s ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors;

 

    mergers, acquisitions, or dispositions, including the Company’s ability to integrate acquisitions and divest assets;

 

    the adequacy of the Company’s succession planning for key executives or other personnel;

 

    the Company’s ability to grow revenue, control expenses, or attract and retain qualified employees;

 

    natural 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2) in this Form 10-Q, in the Risk Factors (Item 1A) in the Form 10-K, or in any of the Company’s quarterly or current reports.

Any forward-looking statement made by the Company or on its behalf speaks only as of the date that it was made. The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except 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.

 

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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 Company’s 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 Company’s ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, evaluating acquisition opportunities that complement the 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 Company’s 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.

 

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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 Company’s methodology for computing the allowance for loan losses. A significant driver of credit quality is nonperforming loans. The Company’s 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 Company’s 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 “Management’s 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 Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. Net interest income for the three and 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 Company’s 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 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    
  

 

 

     

 

 

   

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  
  

 

 

   

 

 

   

 

 

   

 

 

 

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    
  

 

 

     

 

 

   

Total liabilities and shareholders’ equity

   $ 20,314,917       $ 19,436,269    
  

 

 

     

 

 

   

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  
  

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

   

 

 

   

 

 

   

 

 

 

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    
  

 

 

     

 

 

   

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  
  

 

 

   

 

 

   

 

 

   

 

 

 

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 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  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Interest expense

     224       6,906        7,130       718       10,593        11,311  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income

   $ 9,469     $ 6,715      $ 16,184     $ 19,720     $ 12,887      $ 32,607  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-free funds

   $ 6,717,987     $ 6,516,219     $ 201,768     $ 6,760,790     $ 6,650,873     $ 109,917  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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       0.14       0.09       0.05  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin

     3.12     2.86     0.26     3.10     2.84     0.26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Provision and Allowance for Loan Losses

The allowance for loan losses (ALL) represents management’s judgment of the losses inherent in the Company’s loan portfolio as of the balance sheet date. An analysis is performed quarterly to determine the appropriate balance of the ALL. This analysis considers items such as historical loss trends, a review of individual loans, migration analysis, current economic conditions, loan growth and characteristics, industry or segment concentration and other factors. After the balance sheet analysis is performed for the ALL, the provision for loan losses is computed as the amount required to adjust the ALL to the appropriate level.

Based on the factors above, management of the Company recorded $14.5 million and $23.5 million as provision for loan losses for the three and six-month periods ended June 30, 2017, compared to $7.0 million and $12.0 million for the same periods in 2016, respectively. As illustrated in Table 3 below, the ALL increased to 0.90 percent of total loans as of June 30, 2017, compared to 0.84 percent of total loans as of the same period in 2016.

Table 3 presents a summary of the Company’s ALL for the six months ended June 30, 2017 and 2016, and for the year ended December 31, 2016. Net charge-offs were $17.4 million for the six months ended June 30, 2017, compared to $8.5 million for the same period in 2016. See “Credit Risk Management” under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.

Table 3

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (unaudited, dollars in thousands)

 

     Six Months Ended     Year Ended  
     June 30,     December 31,  
     2017     2016     2016  

Allowance-January 1

   $ 91,649     $ 81,143     $ 81,143  

Provision for loan losses

     23,500       12,000       32,500  
  

 

 

   

 

 

   

 

 

 

Charge-offs:

      

Commercial

     (15,583     (5,875     (12,788

Consumer:

      

Credit card

     (4,679     (4,285     (8,436

Other

     (482     (331     (843

Real estate

     (449     (2,796     (6,756
  

 

 

   

 

 

   

 

 

 

Total charge-offs

     (21,193     (13,287     (28,823
  

 

 

   

 

 

   

 

 

 

Recoveries:

      

Commercial

     2,329       3,348       3,596  

Consumer:

      

Credit card

     785       929       1,730  

Other

     308       202       518  

Real estate

     419       331       985  
  

 

 

   

 

 

   

 

 

 

Total recoveries

     3,841       4,810       6,829  
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (17,352     (8,477     (21,994
  

 

 

   

 

 

   

 

 

 

Allowance-end of period

   $ 97,797     $ 84,666     $ 91,649  
  

 

 

   

 

 

   

 

 

 

Average loans, net of unearned interest

   $ 10,684,651     $ 9,715,208     $ 9,986,151  

Loans at end of period, net of unearned interest

     10,848,578       10,083,266       10,540,383  

Allowance to loans at end of period

     0.90     0.84     0.87

Allowance as a multiple of net charge-offs

     2.79x       4.97x       4.17x  

Net charge-offs to:

      

Provision for loan losses

     73.84     70.64     67.67

Average loans

     0.33       0.18       0.22  

 

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Noninterest Income

A key objective of the Company is the growth of noninterest income to enhance profitability and provide steady income. This income is non-credit related and not generally affected by fluctuations in interest rates.

The Company’s noninterest income provides the opportunity to offer products and services, which management believes will more closely align the customer with the Company. The Company generates noninterest income from trust and securities processing, bankcard, brokerage, health care services, and treasury management. Management believes it can offer these products and services both efficiently and profitably, as most of these products and services share common platforms and support structures.

Table 4

SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)

 

     Three Months Ended
June 30,
     Dollar
Change
    Percent
Change
 
     2017     2016      17-16     17-16  

Trust and securities processing

   $ 44,811     $ 41,072      $ 3,739       9.1

Trading and investment banking

     6,173       5,638        535       9.5  

Service charges on deposits

     22,731       22,420        311       1.4  

Insurance fees and commissions

     513