NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1
.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
– The accompanying unaudited condensed consolidated interim financial statements ("consolidated financial statements") of First Midwest Bancorp, Inc. (the "
Company
"), a Delaware corporation, were prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("
SEC
") for quarterly reports on Form 10-Q and reflect all adjustments that management deems necessary for the fair presentation of the financial position and results of operations for the periods presented. The results of operations for the
quarter and nine months
ended
September 30, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
.
The accounting and reporting policies of the
Company
and its subsidiaries conform to U.S. generally accepted accounting principles ("
GAAP
") and general practices within the banking industry. The accompanying consolidated financial statements do not include certain information and note disclosures required by
GAAP
for complete annual financial statements. Therefore, these financial statements should be read in conjunction with the
Company
's
2016
Annual Report on Form 10-K ("
2016
10-K"). The
Company
uses the accrual basis of accounting for financial reporting purposes. Certain reclassifications were made to prior year amounts to conform to the current year presentation.
Use of Estimates
– The preparation of the consolidated financial statements in conformity with
GAAP
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates and assumptions are based on the best available information, actual results could differ from those estimates.
Principles of Consolidation
– The accompanying consolidated financial statements include the financial position and results of operations of the
Company
and its subsidiaries after elimination of all significant intercompany accounts and transactions. Assets held in a fiduciary or agency capacity are not assets of the
Company
or its subsidiaries and are not included in the consolidated financial statements.
The accounting policies related to business combinations, loans, the allowance for credit losses, and derivative financial instruments are presented below. For a summary of all other significant accounting policies, see Note 1, "Summary of Significant Accounting Policies," in the
Company
's
2016
10-K.
Business Combinations
– Business combinations are accounted for under the acquisition method of accounting. Assets acquired and liabilities assumed are recorded at their estimated fair values as of the date of acquisition, with any excess of the purchase price of the acquisition over the fair value of the identifiable net tangible and intangible assets acquired recorded as goodwill. Alternatively, a gain is recorded if the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid. The results of operations of the acquired business are included in the Condensed Consolidated Statements of Income from the effective date of the acquisition.
Loans
– Loans held-for-investment are loans that the
Company
intends to hold until they are paid in full and are carried at the principal amount outstanding, including certain net deferred loan origination fees. Loan origination fees, commitment fees, and certain direct loan origination costs are deferred, and the net amount is amortized as a yield adjustment over the contractual life of the related loans or commitments and included in interest income. Fees related to letters of credit are amortized into fee income over the contractual life of the commitment. Other credit-related fees are recognized as fee income when earned. The
Company
's net investment in direct financing leases is included in loans and consists of future minimum lease payments and estimated residual values, net of unearned income. Interest income on loans is accrued based on principal amounts outstanding. Loans held-for-sale are carried at the lower of aggregate cost or fair value and included in other assets in the Consolidated Statements of Financial Condition.
Acquired and Covered Loans
– Covered loans consists of loans acquired by the
Company
in Federal Deposit Insurance Corporation ("
FDIC
")-assisted transactions, which are covered by loss share agreements with the
FDIC
(the "
FDIC Agreements
"), under which the
FDIC
reimburses the
Company
for the majority of the losses and eligible expenses related to these assets during the coverage period. Acquired loans consist of all other loans that were acquired in business combinations that are not covered by the FDIC Agreements. Certain loans that were previously classified as covered loans are no longer covered under the FDIC Agreements, and are included in acquired loans. Covered loans and acquired loans are included within loans held-for-investment.
Acquired and covered loans are separated into (i) non-purchased credit impaired ("
non-PCI
") and (ii) purchased credit impaired ("
PCI
") loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date.
PCI
loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the
Company
would not collect all contractually required principal and interest payments. Evidence of credit deterioration
was evaluated using various indicators, such as past due and non-accrual status. Leases and revolving loans do not qualify to be accounted for as
PCI
loans and are accounted for as
non-PCI
loans.
The acquisition adjustment related to
non-PCI
loans is amortized into interest income over the contractual life of the related loans. If an acquired
non-PCI
loan is renewed subsequent to the acquisition date, any remaining acquisition adjustment is accreted into interest income and the loan is considered a new loan that is no longer classified as an acquired loan.
PCI
loans are accounted for based on estimates of expected future cash flows. To estimate the fair value, the
Company
generally aggregates purchased consumer loans and commercial loans into pools of loans with common risk characteristics, such as delinquency status, credit score, and internal risk ratings. The fair values of larger balance commercial loans are estimated on an individual basis. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. Subsequent increases in expected future cash flows are offset against the allowance for credit losses to the extent an allowance has been established or otherwise recognized as interest income prospectively. The present value of any decreases in expected future cash flows is recognized by recording a charge-off through the allowance for loan losses or providing an allowance for loan losses.
90-Days Past Due Loans
–The
Company
's accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is sufficiently collateralized and in the process of renewal or collection.
Non-accrual Loans
–
Generally, corporate loans are placed on non-accrual status (i) when either principal or interest payments become 90 days or more past due unless the credit is sufficiently collateralized and in the process of renewal or collection, or (ii) when an individual analysis of a borrower's creditworthiness warrants a downgrade to non-accrual regardless of past due status. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged against the allowance for loan losses. After the loan is placed on non-accrual status, all debt service payments are applied to the principal on the loan. Future interest income may only be recorded on a cash basis after recovery of principal is reasonably assured. Non-accrual loans are returned to accrual status when the financial position of the borrower and other relevant factors indicate that the
Company
will collect all principal and interest.
Commercial loans and loans secured by real estate are charged-off when deemed uncollectible. A loss is recorded if the net realizable value of the underlying collateral is less than the outstanding principal and interest. Consumer loans that are not secured by real estate are subject to mandatory charge-off at a specified delinquency date and are usually not classified as non-accrual prior to being charged-off. Closed-end consumer loans, which include installment, automobile, and single payment loans, are usually charged-off no later than the end of the month in which the loan becomes 120 days past due.
PCI
loans are generally considered accruing loans unless reasonable estimates of the timing and amount of expected future cash flows cannot be determined. Loans without reasonable future cash flow estimates are classified as non-accrual loans, and interest income is not recognized on those loans until the timing and amount of the expected future cash flows can be reasonably determined.
Troubled Debt Restructurings (
"
TDR
s"
)
– A restructuring is considered a
TDR
when (i) the borrower is experiencing financial difficulties, and (ii) the creditor grants a concession, such as forgiveness of principal, reduction of the interest rate, changes in payments, or extension of the maturity date. Loans are not classified as
TDR
s when the modification is short-term or results in an insignificant delay in payments. The
Company
's
TDR
s are determined on a case-by-case basis.
The
Company
does not accrue interest on a
TDR
unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a
TDR
to begin accruing interest, the borrower must demonstrate some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a
TDR
is returned to accrual status. However, the period could vary depending on the individual facts and circumstances of the loan. An evaluation of the borrower's current creditworthiness is used to assess the borrower's capacity to repay the loan under the modified terms. This evaluation includes an estimate of expected future cash flows, evidence of strong financial position, and estimates of the value of collateral, if applicable. For
TDR
s to be removed from
TDR
status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. If the loan was restructured at below market rates and terms, it continues to be separately reported as restructured until it is paid in full or charged-off.
Impaired Loans
– Impaired loans consist of corporate non-accrual loans and
TDR
s. A loan is considered impaired when it is probable that the
Company
will not collect all contractual principal and interest. With the exception of accruing
TDR
s, impaired loans are classified as non-accrual and are exclusive of smaller homogeneous loans, such as home equity, 1-4 family mortgages, and installment loans. Impaired loans with balances under a specified threshold are not individually evaluated for impairment. For all other impaired loans, impairment is measured by comparing the estimated value of the loan to the recorded book value.
The value of collateral-dependent loans is based on the fair value of the underlying collateral, less costs to sell. The value of other loans is measured using the present value of expected future cash flows discounted at the loan's initial effective interest rate.
Allowance for Credit Losses
– The allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments, and is maintained by management at a level believed adequate to absorb estimated losses inherent in the existing loan portfolio. Determination of the allowance for credit losses is subjective since it requires significant estimates and management judgment, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans, consideration of current economic trends, and other factors.
Loans deemed to be uncollectible are charged-off against the allowance for loan losses, while recoveries of amounts previously charged-off are credited to the allowance for loan losses. Additions to the allowance for loan losses are charged to expense through the provision for loan losses. The amount of provision depends on a number of factors, including net charge-off levels, loan growth, changes in the composition of the loan portfolio, and the
Company
's assessment of the allowance for loan losses based on the methodology discussed below.
Allowance for Loan Losses
–
The allowance for loan losses consists of (i) specific reserves for individual loans where the recorded investment exceeds the value, (ii) an allowance based on a loss migration analysis that uses historical credit loss experience for each loan category, and (iii) an allowance based on other internal and external qualitative factors.
The specific reserves component of the allowance for loan losses is based on a periodic analysis of impaired loans exceeding a fixed dollar amount. If the value of an impaired loan is less than the recorded book value, the
Company
either establishes a valuation allowance (i.e., a specific reserve) equal to the excess of the book value over the collateral value of the loan as a component of the allowance for loan losses or charges off the amount if it is a confirmed loss.
The general reserve component is based on a loss migration analysis, which examines actual loss experience by loan category for a rolling 8-quarter period and the related internal risk rating for corporate loans. The loss migration analysis is updated quarterly primarily using actual loss experience. This component is then adjusted based on management's consideration of many internal and external qualitative factors, including:
|
|
•
|
Changes in the composition of the loan portfolio, trends in the volume of loans, and trends in delinquent and non-accrual loans that could indicate that historical trends do not reflect current conditions.
|
|
|
•
|
Changes in credit policies and procedures, such as underwriting standards and collection, charge-off, and recovery practices.
|
|
|
•
|
Changes in the experience, ability, and depth of credit management and other relevant staff.
|
|
|
•
|
Changes in the quality of the
Company
's loan review system and Board of Directors oversight.
|
|
|
•
|
The effect of any concentration of credit and changes in the level of concentrations, such as loan type or risk rating.
|
|
|
•
|
Changes in the value of the underlying collateral for collateral-dependent loans.
|
|
|
•
|
Changes in the national and local economy that affect the collectability of various segments of the portfolio.
|
|
|
•
|
The effect of other external factors, such as competition and legal and regulatory requirements, on the
Company
's loan portfolio.
|
The allowance for loan losses also consists of an allowance on acquired and covered
non-PCI
and
PCI
loans. No allowance for loan losses is recorded on acquired loans at the acquisition date. Subsequent to the acquisition date, an allowance for credit losses is established as necessary to reflect credit deterioration. The acquired
non-PCI
allowance is based on management's evaluation of the acquired
non-PCI
loan portfolio giving consideration to the current portfolio balance including the remaining acquisition adjustments, maturity dates, and overall credit quality. The allowance for covered
non-PCI
loans is calculated in the same manner as the general reserve component based on a loss migration analysis as discussed above. The acquired and covered
PCI
allowance reflects the difference between the carrying value and the discounted expected future cash flows of the acquired and covered
PCI
loans. On a periodic basis, the adequacy of this allowance is determined through a re-estimation of expected future cash flows on all of the outstanding acquired and covered
PCI
loans using either a probability of default/loss given default ("
PD/LGD
") methodology or a specific review methodology. The
PD/LGD
model is a loss model that estimates expected future cash flows using a probability of default curve and loss given default estimates. Acquired
non-PCI
loans that have renewed subsequent to the respective acquisition dates are no longer classified as acquired loans. Instead, they are included in the general loan population and allocated an allowance based on a loss migration analysis.
Reserve for Unfunded Commitments
–
The
Company
also maintains a reserve for unfunded commitments, including letters of credit, for the risk of loss inherent in these arrangements. The reserve for unfunded commitments is estimated using the loss migration analysis from the allowance for loan losses, adjusted for probabilities of future funding requirements. The reserve for unfunded commitments is included in other liabilities in the Consolidated Statements of Financial Condition.
The establishment of the allowance for credit losses involves a high degree of judgment given the difficulty of assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and
information available, the adequacy of the allowance for credit losses depends on a variety of factors beyond the
Company
's control, including the performance of its loan portfolio, the economy, changes in interest rates and property values, and the interpretation of loan risk classifications by regulatory authorities.
Derivative Financial Instruments
– To provide derivative products to customers and in the ordinary course of business, the
Company
enters into derivative transactions as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and expected future cash flows caused by interest rate volatility. All derivative instruments are recorded at fair value as either other assets or other liabilities in the Consolidated Statements of Financial Condition. Subsequent changes in a derivative's fair value are recognized in earnings unless specific hedge accounting criteria are met.
On the date the
Company
enters into a derivative contract, the derivative is designated as a fair value hedge, a cash flow hedge, or a non-hedge derivative instrument. Fair value hedges are designed to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk. Cash flow hedges are designed to mitigate exposure to variability in expected future cash flows to be received or paid related to an asset, liability, or other type of forecasted transaction. The
Company
formally documents all relationships between hedging instruments and hedged items, including its risk management objective and strategy at inception.
At the hedge's inception and quarterly thereafter, a formal assessment is performed to determine the effectiveness of the derivative in offsetting changes in the fair values or expected future cash flows of the hedged items in the current period and prospectively. If a derivative instrument designated as a hedge is terminated or ceases to be highly effective, hedge accounting is discontinued prospectively, and the gain or loss is amortized into earnings. For fair value hedges, the gain or loss is amortized over the remaining life of the hedged asset or liability. For cash flow hedges, the gain or loss is amortized over the same period that the forecasted hedged transactions impact earnings. If the hedged item is disposed of, any fair value adjustments are included in the gain or loss from the disposition of the hedged item. If the forecasted transaction is no longer probable, the gain or loss is included in earnings immediately.
For fair value hedges, changes in the fair value of the derivative instruments, as well as changes in the fair value of the hedged item, are recognized in earnings. For cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive loss and is reclassified to earnings when the hedged transaction is reflected in earnings.
Ineffectiveness is calculated based on the change in fair value of the hedged item compared with the change in fair value of the hedging instrument. For all types of hedges, any ineffectiveness in the hedging relationship is recognized in earnings during the period the ineffectiveness occurs.
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
Contingent Put and Call Options in Debt Instruments:
In March of 2016, the Financial Accounting Standards Board ("FASB") issued final guidance clarifying the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Entities are required to apply the guidance to existing debt instruments (or hybrid financial instruments that are determined to have a debt host) using a modified retrospective transition method as of the period of adoption. The adoption of this guidance on January 1, 2017 did not impact the
Company
's financial condition, results of operations, or liquidity.
Equity Method Accounting:
In March of 2016, the FASB issued final guidance to simplify the equity method of accounting. The guidance eliminates the requirement to retrospectively apply equity method accounting in previous periods when an investor initially obtains significant influence over an investee. This guidance is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance on January 1, 2017 did not impact the
Company
's financial condition, results of operations, or liquidity.
Accounting for Employee Share-based Payments:
In March of 2016, the FASB issued guidance to simplify the accounting for employee share-based payment transactions. The guidance requires entities to recognize the income tax effects of awards in the income statement when the awards vest or are settled. In addition, the guidance allows entities to repurchase more of an employee's shares than it can under current guidance for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The adoption of this guidance on January 1, 2017 resulted in a
$638,000
tax benefit to the provision for income tax expense for the
nine
months ended
September 30, 2017
, recorded in the Company's results of operations. The Company elected to estimate forfeitures, which is consistent with the Company's practice before the adoption of this guidance.
Accounting Pronouncements Pending Adoption
Revenue from Contracts with Customers:
In May of 2014, the FASB issued guidance that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March of 2016, the FASB issued an amendment to this guidance to clarify the implementation of guidance on principal versus agent consideration. Additional amendments to clarify the implementation guidance on the identification of performance obligations and licensing were issued in April of 2016 and narrow-scope improvements and practical expedients were issued in May of 2016. The guidance was initially effective for annual and interim reporting periods beginning on or after December 15, 2016 but was deferred to December 15, 2017, and must be applied either retrospectively or using the modified retrospective approach. Early adoption is permitted, but not before the original effective date.
The Company's revenue is comprised of net interest income on financial assets and liabilities, which is excluded from the scope of this guidance, and noninterest income. The primary sources of revenue within noninterest income are service charges on deposit accounts, wealth management fees, card-based fees, and merchant servicing fees. Based upon the Company's initial assessment, this guidance is expected to affect how the Company currently presents certain contract costs on a gross basis versus a net basis against the related noninterest income and will result in the expansion of the qualitative disclosures regarding noninterest income. The Company will adopt this guidance on January 1, 2018 using the modified retrospective approach and does not expect the changes in presentation of certain contract costs or the expanded disclosures to have a significant impact on the Company's financial condition, results of operations, or liquidity. The Company is in the process of completing its review of contracts to validate this initial assessment.
Amendments to Guidance on Classifying and Measuring Financial Instruments:
In January of 2016, the FASB issued guidance that will require entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value. Any changes in fair value will be recognized in net income unless the investments qualify for a new practicability exception. This guidance also requires entities to adjust the fair value disclosures for financial instruments carried at amortized cost from an entry price to an exit price. No changes were made to the guidance for classifying and measuring investments in debt securities and loans. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the
Company
's financial condition, results of operations, or liquidity.
Leases:
In February of 2016, the FASB issued guidance to increase transparency and comparability across entities for leasing arrangements. This guidance requires lessees to recognize assets and liabilities for most leases. For lessors, this guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. In addition, this guidance clarifies criteria for the determination of whether a contract is or contains a lease. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted.
During 2016, First Midwest Bank (the "Bank") entered into a sale-leaseback transaction that resulted in a deferred gain of
$82.5 million
, with
$76.1 million
remaining as of
September 30, 2017
. Upon adoption of this guidance, the remaining deferred gain will be recognized immediately as a cumulative-effect adjustment to equity. For additional discussion of the sale-leaseback transaction, see Note
8
"
Premises, Furniture, and Equipment
." Management is evaluating the new guidance and the additional impact to the
Company
's financial condition, results of operations, or liquidity.
Measurement of Credit Losses on Financial Instruments:
In June of 2016, the FASB issued guidance that will require entities to present financial assets measured at amortized cost at the net amount expected to be collected, considering an entity's current estimate of all expected credit losses. In addition, credit losses relating to available-for-sale debt securities will be required to be recorded through an allowance for credit losses, with changes in credit loss estimates recognized through current earnings. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, but not for periods beginning before December 15, 2018. Management is evaluating the new guidance and the impact to the
Company
's financial condition, results of operations, and liquidity.
Classification of Certain Cash Receipts and Cash Payments:
In August of 2016, the FASB issued guidance clarifying certain cash flow presentation and classification issues to reduce diversity in practice. This guidance is effective for annual and interim reporting periods beginning on or after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the
Company
's Consolidated Statement of Cash Flows.
Income Taxes:
In October of 2016, the FASB issued guidance that requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Clarifying the Definition of a Business:
In January of 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Accounting for Goodwill Impairment:
In January of 2017, the FASB issued guidance that simplifies the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill using the second step of the quantitative two-step goodwill impairment model prescribed under current accounting guidance. Under the new guidance, if a reporting unit's carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. This guidance is effective for annual and interim goodwill impairment testing dates beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Presentation of Defined Benefit Retirement Plan Costs:
In March of 2017, the FASB issued guidance that changes how employers that sponsor defined pension and or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Premium Amortization on Purchased Callable Debt Securities:
In March of 2017, the FASB issued guidance that shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Share-based Payment Award Modifications:
In May of 2017, the FASB issued guidance to reduce diversity in practice by clarifying when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Management does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
Derivatives and Hedging:
In August of 2017, the FASB issued guidance to better align the financial reporting related to hedging activities with the economic objectives of those activities and to simplify the application of current hedge accounting guidance. Entities are required to apply the guidance using a modified retrospective method as of the period of adoption. This guidance is effective for annual and interim periods beginning after December 31, 2018. Early adoption is permitted. Management is evaluating
the new guidance, but does not expect the adoption of this guidance will materially impact the Company's financial condition, results of operations, or liquidity.
3
.
ACQUISITIONS
Completed Acquisitions
Standard Bancshares, Inc.
On January 6, 2017, the Company completed its acquisition of Standard Bancshares, Inc. ("
Standard
"), the holding company for Standard Bank and Trust Company. Pursuant to the terms of the merger agreement, on January 6, 2017, each outstanding share of Standard common stock was canceled and converted into the right to receive
0.4350
of a share of Company common stock. Based on the closing price of shares of Company common stock of
$25.34
on that date, as reported by NASDAQ, the value of the merger consideration per share of Standard common stock was
$11.02
. Each outstanding Standard stock settled right was redeemed for cash, and each outstanding Standard stock option and each share of Standard phantom stock was canceled and terminated in exchange for the right to receive cash, in each case, pursuant to the terms of the merger agreement. This resulted in an overall transaction value of approximately
$580.7 million
, which consisted of
21,057,085
shares of Company common stock and
$47.1 million
in cash. Goodwill of
$339.2 million
associated with the acquisition was recorded by the Company. All operating systems were converted during the first quarter of 2017.
During the
third
quarter of 2017, the Company updated the fair value adjustments associated with the Standard transaction. The adjustments were recognized in the current period in accordance with accounting guidance applicable to business combinations. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
Premier Asset Management LLC
On February 28, 2017, the Company completed its acquisition of Premier Asset Management LLC ("Premier"), a registered investment advisor based in Chicago, Illinois. At the close of the acquisition, the Company acquired approximately
$550.0 million
of trust assets under management. The fair value adjustments, including goodwill, associated with this transaction remain preliminary and may change as the Company continues to finalize the fair value of the assets and liabilities acquired.
NI Bancshares Corporation
On March 8, 2016, the Company completed its acquisition of NI Bancshares Corporation ("
NI Bancshares
"), the holding company for The National Bank & Trust Company of Sycamore, which included
ten
banking offices in northern Illinois and over
$700.0 million
in trust assets under management. The merger consideration was a combination of Company common stock and cash, at a purchase price of
$70.1 million
. Goodwill of
$22.2 million
associated with the acquisition was recorded by the Company. The fair value adjustments associated with this transaction were finalized during the first quarter of 2017.
The following table presents the assets acquired and liabilities assumed, net of the fair value adjustments, in the
Standard
and
NI Bancshares
transactions as of the acquisition date. The assets acquired and liabilities assumed, both intangible and tangible, were recorded at their estimated fair values as of the acquisition date and have been accounted for under the acquisition method of accounting.
Acquisition Activity
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
Standard
|
|
NI Bancshares
|
|
January 6, 2017
|
|
March 8, 2016
|
Assets
|
|
|
|
Cash and due from banks and interest-bearing deposits in other banks
|
$
|
102,149
|
|
|
$
|
72,533
|
|
Securities available-for-sale
|
214,107
|
|
|
125,843
|
|
Securities held-to-maturity
|
—
|
|
|
1,864
|
|
FHLB and FRB stock
|
3,247
|
|
|
1,549
|
|
Loans
|
1,769,655
|
|
|
396,181
|
|
OREO
|
8,424
|
|
|
2,863
|
|
Investment in BOLI
|
55,629
|
|
|
8,384
|
|
Goodwill
|
339,207
|
|
|
22,174
|
|
Other intangible assets
|
31,072
|
|
|
10,408
|
|
Premises, furniture, and equipment
|
60,286
|
|
|
19,636
|
|
Accrued interest receivable and other assets
|
56,003
|
|
|
16,453
|
|
Total assets
|
$
|
2,639,779
|
|
|
$
|
677,888
|
|
Liabilities
|
|
|
|
Noninterest-bearing deposits
|
$
|
675,354
|
|
|
$
|
130,909
|
|
Interest-bearing deposits
|
1,348,520
|
|
|
464,012
|
|
Total deposits
|
2,023,874
|
|
|
594,921
|
|
Borrowed funds
|
—
|
|
|
2,416
|
|
Intangible liabilities
|
—
|
|
|
230
|
|
Accrued interest payable and other liabilities
|
35,190
|
|
|
10,239
|
|
Total liabilities
|
2,059,064
|
|
|
607,806
|
|
Consideration Paid
|
|
|
|
Common stock (2017 - 21,057,085 shares issued at $25.34 per share,
2016 - 3,042,494 shares issued at $18.059 per share), net of issuance costs
|
533,590
|
|
|
54,896
|
|
Cash paid
|
47,125
|
|
|
15,186
|
|
Total consideration paid
|
580,715
|
|
|
70,082
|
|
|
$
|
2,639,779
|
|
|
$
|
677,888
|
|
Expenses related to the acquisition and integration of the transactions above totaled
$384,000
and
$20.1 million
during the
quarter and nine months
ended
September 30, 2017
, respectively, and are reported as a separate component within noninterest expense in the Condensed Consolidated Statements of Income. Expenses related to the acquisition and integration of the transactions above totaled
$1.2 million
and
$6.8 million
during the
quarter and nine months
ended
September 30, 2016
, respectively. The acquisition of Standard was considered material to the Company's financial statements; therefore, pro forma financial data and related disclosures are included in the following tables.
The unaudited pro forma combined results of operations for the quarters and nine months ended September 30, 2017 and 2016 are presented as if the Standard acquisition had occurred on January 1, 2016, the first day of the Company's 2016 fiscal year. The unaudited pro forma combined results of operations are presented for illustrative purposes only and do not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the period presented. Fair value adjustments included in the following table are preliminary and may be revised. The unaudited pro forma combined results of operations also do not consider any potential impacts of potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors. Acquisition and integration related expenses directly attributable to the Standard acquisition have been excluded from the following table and are estimated to total
$27.0 million
, of which
$384,000
and
$19.1 million
was expensed during the
quarter and nine months
ended
September 30, 2017
, respectively.
Unaudited Pro Forma Combined Results of Operations
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total revenues
(1)
|
|
$
|
163,241
|
|
|
$
|
164,786
|
|
|
$
|
482,526
|
|
|
$
|
462,962
|
|
Net income
|
|
38,462
|
|
|
32,589
|
|
|
106,848
|
|
|
85,054
|
|
|
|
(1)
|
Includes net interest income and total noninterest income.
|
Acquired loans are recorded at fair value, which incorporates credit risk, at the date of acquisition. No allowance for credit losses is recorded on the acquisition date. Acquired loans are separated into (i)
non-PCI
and (ii)
PCI
loans. Non-PCI loans include loans that did not have evidence of credit deterioration since origination at the acquisition date.
PCI
loans include loans that had evidence of credit deterioration since origination and for which it was probable at acquisition that the
Company
would not collect all contractually required principal and interest payments.
PCI
loans are accounted for based on estimates of expected future cash flows. Expected future cash flows in excess of the fair value of loans at the purchase date ("accretable yield") are recorded as interest income over the life of the loans if the timing and amount of the expected future cash flows can be reasonably estimated. The non-accretable yield represents the difference between contractually required payments and the expected future cash flows determined at acquisition. For additional discussion regarding significant accounting policies on acquired loans see Note
1
, "
Summary of Significant Accounting Policies
."
The following table presents additional detail for loans acquired in the Standard transaction at the acquisition date.
Standard Acquired Loans
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
January 6, 2017
|
|
|
PCI Loans
|
|
Non-PCI Loans
|
Fair value
|
|
$
|
126,469
|
|
|
$
|
1,643,186
|
|
Contractually required principal and interest payments
|
|
211,931
|
|
|
1,937,060
|
|
Best estimate of contractual cash flows not expected to be collected
(1)
|
|
57,783
|
|
|
100,762
|
|
Best estimate of contractual cash flows expected to be collected
|
|
154,148
|
|
|
1,836,298
|
|
|
|
(1)
|
Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer default.
|
4
.
SECURITIES
The significant accounting policies related to securities are presented in Note
1
, "
Summary of Significant Accounting Policies
" to the Consolidated Financial Statements in the
Company
's
2016
10-K.
A summary of the Company's securities portfolio by category and maturity is presented in the following tables.
Securities Portfolio
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
|
Amortized Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Amortized Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
|
|
Gains
|
|
Losses
|
|
|
|
Gains
|
|
Losses
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
42,567
|
|
|
$
|
14
|
|
|
$
|
(77
|
)
|
|
$
|
42,504
|
|
|
$
|
48,581
|
|
|
$
|
26
|
|
|
$
|
(66
|
)
|
|
$
|
48,541
|
|
U.S. agency securities
|
|
154,666
|
|
|
303
|
|
|
(362
|
)
|
|
154,607
|
|
|
183,528
|
|
|
519
|
|
|
(410
|
)
|
|
183,637
|
|
Collateralized mortgage
obligations ("CMOs")
|
|
949,762
|
|
|
459
|
|
|
(12,999
|
)
|
|
937,222
|
|
|
1,064,130
|
|
|
969
|
|
|
(17,653
|
)
|
|
1,047,446
|
|
Other mortgage-backed
securities ("MBSs")
|
|
358,746
|
|
|
307
|
|
|
(3,580
|
)
|
|
355,473
|
|
|
337,139
|
|
|
1,395
|
|
|
(5,879
|
)
|
|
332,655
|
|
Municipal securities
|
|
204,571
|
|
|
1,294
|
|
|
(841
|
)
|
|
205,024
|
|
|
273,319
|
|
|
1,245
|
|
|
(3,718
|
)
|
|
270,846
|
|
Trust-preferred
collateralized debt
obligations ("CDOs")
|
|
45,851
|
|
|
275
|
|
|
(15,300
|
)
|
|
30,826
|
|
|
47,681
|
|
|
261
|
|
|
(14,682
|
)
|
|
33,260
|
|
Equity securities
|
|
7,358
|
|
|
185
|
|
|
(215
|
)
|
|
7,328
|
|
|
3,206
|
|
|
147
|
|
|
(288
|
)
|
|
3,065
|
|
Total securities
available-for-sale
|
|
$
|
1,763,521
|
|
|
$
|
2,837
|
|
|
$
|
(33,374
|
)
|
|
$
|
1,732,984
|
|
|
$
|
1,957,584
|
|
|
$
|
4,562
|
|
|
$
|
(42,696
|
)
|
|
$
|
1,919,450
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
14,638
|
|
|
$
|
—
|
|
|
$
|
(1,717
|
)
|
|
$
|
12,921
|
|
|
$
|
22,291
|
|
|
$
|
—
|
|
|
$
|
(4,079
|
)
|
|
$
|
18,212
|
|
Trading Securities
|
|
|
|
|
|
|
|
$
|
20,425
|
|
|
|
|
|
|
|
|
$
|
17,920
|
|
Remaining Contractual Maturity of Securities
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
One year or less
|
|
$
|
97,905
|
|
|
$
|
94,691
|
|
|
$
|
1,947
|
|
|
$
|
1,718
|
|
After one year to five years
|
|
303,899
|
|
|
293,924
|
|
|
6,065
|
|
|
5,354
|
|
After five years to ten years
|
|
—
|
|
|
—
|
|
|
2,243
|
|
|
1,980
|
|
After ten years
|
|
45,851
|
|
|
44,346
|
|
|
4,383
|
|
|
3,869
|
|
Securities that do not have a single contractual maturity date
|
|
1,315,866
|
|
|
1,300,023
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,763,521
|
|
|
$
|
1,732,984
|
|
|
$
|
14,638
|
|
|
$
|
12,921
|
|
The carrying value of securities available-for-sale that were pledged to secure deposits or for other purposes as permitted or required by law totaled
$1.3 billion
for
September 30, 2017
and
$1.1 billion
for
December 31, 2016
.
No
securities held-to-maturity were pledged as of
September 30, 2017
or
December 31, 2016
.
During the
quarters and nine months
ended
September 30, 2017
and
2016
there were no material gross trading gains (losses). The following table presents net realized gains on securities available-for-sale for the
quarters and nine months
ended
September 30, 2017
and
2016
.
Securities Available-for-Sale Gains
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Gains on sales of securities:
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
3,197
|
|
|
$
|
187
|
|
|
$
|
3,481
|
|
|
$
|
1,266
|
|
Gross realized losses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(169
|
)
|
Net realized gains on sales of securities
|
|
3,197
|
|
|
187
|
|
|
3,481
|
|
|
1,097
|
|
Non-cash impairment charges:
|
|
|
|
|
|
|
|
|
Other-than-temporary securities impairment ("OTTI")
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net realized gains
|
|
$
|
3,197
|
|
|
$
|
187
|
|
|
$
|
3,481
|
|
|
$
|
1,097
|
|
Securities acquired in the Standard transaction in the first quarter of 2017 were sold shortly after the acquisition date for
$210.2 million
, resulting in no gains or losses as the securities were recorded at fair value upon acquisition.
Accounting guidance requires that the credit portion of an
OTTI
charge be recognized through income. If a decline in fair value below carrying value is not attributable to credit deterioration and the
Company
does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the
Company
records the non-credit related portion of the decline in fair value in other comprehensive income.
The outstanding balance of OTTI previously recognized on securities available-for-sale was
$23.3 million
for both
September 30, 2017
and
December 31, 2016
. During the
quarters and nine months
ended
September 30, 2017
and
2016
there were no additions or reductions to the balance of OTTI related to securities available-for-sale.
The following table presents the aggregate amount of unrealized losses and the aggregate related fair values of securities with unrealized losses as of
September 30, 2017
and
December 31, 2016
.
Securities in an Unrealized Loss Position
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Number of
Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
16
|
|
|
$
|
30,469
|
|
|
$
|
51
|
|
|
$
|
5,998
|
|
|
$
|
26
|
|
|
$
|
36,467
|
|
|
$
|
77
|
|
U.S. agency securities
|
|
33
|
|
|
71,538
|
|
|
291
|
|
|
8,241
|
|
|
71
|
|
|
79,779
|
|
|
362
|
|
CMOs
|
|
195
|
|
|
607,645
|
|
|
7,680
|
|
|
241,930
|
|
|
5,319
|
|
|
849,575
|
|
|
12,999
|
|
MBSs
|
|
72
|
|
|
262,080
|
|
|
2,851
|
|
|
41,994
|
|
|
729
|
|
|
304,074
|
|
|
3,580
|
|
Municipal securities
|
|
138
|
|
|
42,951
|
|
|
461
|
|
|
17,045
|
|
|
380
|
|
|
59,996
|
|
|
841
|
|
CDOs
|
|
7
|
|
|
—
|
|
|
—
|
|
|
30,015
|
|
|
15,300
|
|
|
30,015
|
|
|
15,300
|
|
Equity securities
|
|
2
|
|
|
—
|
|
|
—
|
|
|
6,833
|
|
|
215
|
|
|
6,833
|
|
|
215
|
|
Total
|
|
463
|
|
|
$
|
1,014,683
|
|
|
$
|
11,334
|
|
|
$
|
352,056
|
|
|
$
|
22,040
|
|
|
$
|
1,366,739
|
|
|
$
|
33,374
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,921
|
|
|
$
|
1,717
|
|
|
$
|
12,921
|
|
|
$
|
1,717
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
16
|
|
|
$
|
33,505
|
|
|
$
|
61
|
|
|
$
|
3,995
|
|
|
$
|
5
|
|
|
$
|
37,500
|
|
|
$
|
66
|
|
U.S. agency securities
|
|
28
|
|
|
62,064
|
|
|
364
|
|
|
11,814
|
|
|
46
|
|
|
73,878
|
|
|
410
|
|
CMOs
|
|
194
|
|
|
523,233
|
|
|
10,309
|
|
|
411,758
|
|
|
7,344
|
|
|
934,991
|
|
|
17,653
|
|
MBSs
|
|
68
|
|
|
221,174
|
|
|
4,726
|
|
|
77,780
|
|
|
1,154
|
|
|
298,954
|
|
|
5,880
|
|
Municipal securities
|
|
380
|
|
|
133,957
|
|
|
3,059
|
|
|
29,280
|
|
|
659
|
|
|
163,237
|
|
|
3,718
|
|
CDOs
|
|
7
|
|
|
—
|
|
|
—
|
|
|
30,592
|
|
|
14,682
|
|
|
30,592
|
|
|
14,682
|
|
Equity securities
|
|
2
|
|
|
404
|
|
|
201
|
|
|
2,319
|
|
|
86
|
|
|
2,723
|
|
|
287
|
|
Total
|
|
695
|
|
|
$
|
974,337
|
|
|
$
|
18,720
|
|
|
$
|
567,538
|
|
|
$
|
23,976
|
|
|
$
|
1,541,875
|
|
|
$
|
42,696
|
|
Securities Held-to-Maturity
|
|
|
|
|
Municipal securities
|
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,212
|
|
|
$
|
4,079
|
|
|
$
|
18,212
|
|
|
$
|
4,079
|
|
Substantially all of the
Company
's
CMO
s and other
MBSs
are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority are supported by third party insurance or some other form of credit enhancement. Management does not believe any of these securities with unrealized losses as of
September 30, 2017
represent
OTTI
related to credit deterioration. These unrealized losses are attributed to changes in interest rates and temporary market movements. The
Company
does not intend to sell these securities and it is not more likely than not that the
Company
will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
The unrealized losses on
CDOs
as of
September 30, 2017
reflect changes in market activity for these securities. Management does not believe these unrealized losses represent OTTI related to credit deterioration. In addition, the
Company
does not intend to sell the
CDOs
with unrealized losses and the
Company
does not believe it is more likely than not that it will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Significant judgment is required to calculate the fair value of the
CDOs
. For a detailed discussion of the
CDO
valuation methodology, see Note
16
, "
Fair Value
."
5
.
LOANS
Loans Held-for-Investment
The following table presents the
Company
's loans held-for-investment by class.
Loan Portfolio
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Commercial and industrial
|
|
$
|
3,462,612
|
|
|
$
|
2,827,658
|
|
Agricultural
|
|
437,721
|
|
|
389,496
|
|
Commercial real estate:
|
|
|
|
|
Office, retail, and industrial
|
|
1,960,367
|
|
|
1,581,967
|
|
Multi-family
|
|
711,101
|
|
|
614,052
|
|
Construction
|
|
545,666
|
|
|
451,540
|
|
Other commercial real estate
|
|
1,391,241
|
|
|
979,528
|
|
Total commercial real estate
|
|
4,608,375
|
|
|
3,627,087
|
|
Total corporate loans
|
|
8,508,708
|
|
|
6,844,241
|
|
Home equity
|
|
847,209
|
|
|
747,983
|
|
1-4 family mortgages
|
|
711,607
|
|
|
423,922
|
|
Installment
|
|
322,768
|
|
|
237,999
|
|
Total consumer loans
|
|
1,881,584
|
|
|
1,409,904
|
|
Total loans
|
|
$
|
10,390,292
|
|
|
$
|
8,254,145
|
|
Deferred loan fees included in total loans
|
|
$
|
5,189
|
|
|
$
|
3,838
|
|
Overdrawn demand deposits included in total loans
|
|
6,616
|
|
|
7,836
|
|
The increase in total loans for the quarter ended
September 30, 2017
includes loans acquired in the Standard acquisition. For additional disclosure related to the Standard transaction, see Note
3
, "
Acquisitions
."
The
Company
primarily lends to community-based and mid-sized businesses, commercial real estate customers, and consumers in its markets. Within these areas, the
Company
diversifies its loan portfolio by loan type, industry, and borrower.
It is the
Company
's policy to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the
Company
seeks recovery in compliance with state lending laws, the
Company
's lending standards, and credit monitoring and remediation procedures. A discussion of risk characteristics relevant to each portfolio segment is presented in Note
5
, "Loans" to the Consolidated Financial Statements in the
Company
's
2016
10-K.
Loan Sales
The following table presents loan sales for the
quarters and nine months
ended
September 30, 2017
and
2016
.
Loan Sales
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Corporate loan sales
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
11,833
|
|
|
$
|
12,223
|
|
|
$
|
46,770
|
|
|
$
|
36,082
|
|
Less book value of loans sold
|
|
11,512
|
|
|
11,828
|
|
|
45,752
|
|
|
34,718
|
|
Net gains on corporate loan sales
(1)
|
|
321
|
|
|
395
|
|
|
1,018
|
|
|
1,364
|
|
1-4 family mortgage loan sales
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
73,889
|
|
|
$
|
110,167
|
|
|
190,544
|
|
|
202,932
|
|
Less book value of loans sold
|
|
72,149
|
|
|
107,255
|
|
|
186,208
|
|
|
198,024
|
|
Net gains on 1-4 family mortgage loan sales
(2)
|
|
1,740
|
|
|
2,912
|
|
|
4,336
|
|
|
4,908
|
|
Total net gains on loan sales
|
|
$
|
2,061
|
|
|
$
|
3,307
|
|
|
$
|
5,354
|
|
|
$
|
6,272
|
|
|
|
(1)
|
Net gains on corporate loan sales are included in other service charges, commissions, and fees in the Condensed Consolidated Statements of Income.
|
|
|
(2)
|
Net gains on 1-4 family mortgage loan sales are included in mortgage banking income in the Condensed Consolidated Statements of Income.
|
The
Company
retained servicing responsibilities for a portion of the 1-4 family mortgage loans sold and collects servicing fees equal to a percentage of the outstanding principal balance. For additional disclosure related to the Company's obligations resulting from the sale of certain 1-4 family mortgage loans, see Note
15
, "
Commitments, Guarantees, and Contingent Liabilities
."
6
.
ACQUIRED AND COVERED LOANS
The significant accounting policies related to acquired and covered loans, which are classified as
PCI
and
non-PCI
, are presented in Note
1
, "
Summary of Significant Accounting Policies
."
The following table presents the carrying amount of acquired and covered
PCI
and
non-PCI
loans as of
September 30, 2017
and
December 31, 2016
.
Acquired and Covered Loans
(1)
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
|
PCI
|
|
Non-PCI
|
|
Total
|
|
PCI
|
|
Non-PCI
|
|
Total
|
Acquired loans
|
|
$
|
150,405
|
|
|
$
|
1,694,032
|
|
|
$
|
1,844,437
|
|
|
$
|
53,772
|
|
|
$
|
613,339
|
|
|
$
|
667,111
|
|
Covered loans
|
|
6,871
|
|
|
12,474
|
|
|
19,345
|
|
|
7,895
|
|
|
15,379
|
|
|
23,274
|
|
Total acquired and covered loans
|
|
$
|
157,276
|
|
|
$
|
1,706,506
|
|
|
$
|
1,863,782
|
|
|
$
|
61,667
|
|
|
$
|
628,718
|
|
|
$
|
690,385
|
|
|
|
(1)
|
Included in loans in the Consolidated Statements of Condition.
|
The outstanding balance of PCI loans was
$229.1 million
and
$84.8 million
as of
September 30, 2017
and
December 31, 2016
, respectively.
The increase in acquired loans compared to December 31, 2016 includes loans acquired in the Standard acquisition. For additional disclosure related to the Standard transaction, see Note
3
, "
Acquisitions
."
Acquired
non-PCI
loans that are renewed are no longer classified as acquired loans. These loans totaled
$304.0 million
and
$117.6 million
as of
September 30, 2017
and
December 31, 2016
, respectively.
In connection with the
FDIC Agreements
, the
Company
recorded an indemnification asset. To maintain eligibility for the loss share reimbursement, the
Company
is required to follow certain servicing procedures as specified in the
FDIC Agreements
. The
Company
was in compliance with those requirements as of
September 30, 2017
and
December 31, 2016
.
Rollforwards of the carrying value of the
FDIC
indemnification asset for the
quarters and nine months
ended
September 30, 2017
and
2016
are presented in the following table.
Changes in the FDIC Indemnification Asset
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
3,918
|
|
|
$
|
5,171
|
|
|
$
|
4,522
|
|
|
$
|
3,903
|
|
Amortization
|
|
(302
|
)
|
|
(302
|
)
|
|
(906
|
)
|
|
(884
|
)
|
Change in expected reimbursements from the FDIC for
changes in expected credit losses
|
|
(123
|
)
|
|
(228
|
)
|
|
(653
|
)
|
|
(487
|
)
|
Net payments to the FDIC
|
|
123
|
|
|
191
|
|
|
653
|
|
|
2,300
|
|
Ending balance
|
|
$
|
3,616
|
|
|
$
|
4,832
|
|
|
$
|
3,616
|
|
|
$
|
4,832
|
|
Changes in the accretable yield for acquired and covered
PCI
loans were as follows.
Changes in Accretable Yield
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balances
|
|
$
|
39,870
|
|
|
$
|
25,082
|
|
|
$
|
19,385
|
|
|
$
|
24,912
|
|
Additions
|
|
—
|
|
|
—
|
|
|
27,316
|
|
|
3,981
|
|
Accretion
|
|
(4,263
|
)
|
|
(2,763
|
)
|
|
(12,106
|
)
|
|
(6,612
|
)
|
Other
(1)
|
|
478
|
|
|
(1,012
|
)
|
|
1,490
|
|
|
(974
|
)
|
Ending balance
|
|
$
|
36,085
|
|
|
$
|
21,307
|
|
|
$
|
36,085
|
|
|
$
|
21,307
|
|
|
|
(1)
|
Increases represent a rise in the expected future cash flows to be collected over the remaining estimated life of the underlying portfolio while decreases result from the resolution of certain loans occurring earlier than anticipated.
|
Total accretion on acquired and covered PCI and non-PCI loans for the
quarter and nine months
ended
September 30, 2017
was
$7.6 million
and
$27.7 million
, respectively, and
$4.6 million
and
$11.9 million
for the same periods in
2016
.
7
.
PAST DUE LOANS, ALLOWANCE FOR CREDIT LOSSES, IMPAIRED LOANS, AND TDRS
Past Due and Non-accrual Loans
The following table presents an aging analysis of the
Company
's past due loans as of
September 30, 2017
and
December 31, 2016
. The aging is determined without regard to accrual status. The table also presents non-performing loans, consisting of non-accrual loans (the majority of which are past due) and loans 90 days or more past due and still accruing interest, as of each balance sheet date.
Aging Analysis of Past Due Loans and Non-performing Loans by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging Analysis (Accruing and Non-accrual)
|
|
|
Non-performing Loans
|
|
|
Current
(1)
|
|
30-89 Days
Past Due
|
|
90 Days or
More Past
Due
|
|
Total
Past Due
|
|
Total
Loans
|
|
|
Non-
accrual
(2)
|
|
90 Days or More Past Due, Still Accruing Interest
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,444,056
|
|
|
$
|
14,536
|
|
|
$
|
4,020
|
|
|
$
|
18,556
|
|
|
$
|
3,462,612
|
|
|
|
$
|
41,504
|
|
|
$
|
1,166
|
|
Agricultural
|
|
436,693
|
|
|
325
|
|
|
703
|
|
|
1,028
|
|
|
437,721
|
|
|
|
380
|
|
|
335
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1,950,010
|
|
|
4,411
|
|
|
5,946
|
|
|
10,357
|
|
|
1,960,367
|
|
|
|
12,221
|
|
|
—
|
|
Multi-family
|
|
707,959
|
|
|
3,013
|
|
|
129
|
|
|
3,142
|
|
|
711,101
|
|
|
|
153
|
|
|
129
|
|
Construction
|
|
545,119
|
|
|
29
|
|
|
518
|
|
|
547
|
|
|
545,666
|
|
|
|
146
|
|
|
374
|
|
Other commercial real estate
|
|
1,387,969
|
|
|
1,356
|
|
|
1,916
|
|
|
3,272
|
|
|
1,391,241
|
|
|
|
2,239
|
|
|
349
|
|
Total commercial real
estate
|
|
4,591,057
|
|
|
8,809
|
|
|
8,509
|
|
|
17,318
|
|
|
4,608,375
|
|
|
|
14,759
|
|
|
852
|
|
Total corporate loans
|
|
8,471,806
|
|
|
23,670
|
|
|
13,232
|
|
|
36,902
|
|
|
8,508,708
|
|
|
|
56,643
|
|
|
2,353
|
|
Home equity
|
|
840,966
|
|
|
3,729
|
|
|
2,514
|
|
|
6,243
|
|
|
847,209
|
|
|
|
5,529
|
|
|
44
|
|
1-4 family mortgages
|
|
707,498
|
|
|
3,714
|
|
|
395
|
|
|
4,109
|
|
|
711,607
|
|
|
|
3,004
|
|
|
—
|
|
Installment
|
|
320,210
|
|
|
2,116
|
|
|
442
|
|
|
2,558
|
|
|
322,768
|
|
|
|
—
|
|
|
442
|
|
Total consumer loans
|
|
1,868,674
|
|
|
9,559
|
|
|
3,351
|
|
|
12,910
|
|
|
1,881,584
|
|
|
|
8,533
|
|
|
486
|
|
Total loans
|
|
$
|
10,340,480
|
|
|
$
|
33,229
|
|
|
$
|
16,583
|
|
|
$
|
49,812
|
|
|
$
|
10,390,292
|
|
|
|
$
|
65,176
|
|
|
$
|
2,839
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,816,442
|
|
|
$
|
6,426
|
|
|
$
|
4,790
|
|
|
$
|
11,216
|
|
|
$
|
2,827,658
|
|
|
|
$
|
29,938
|
|
|
$
|
374
|
|
Agricultural
|
|
388,596
|
|
|
—
|
|
|
900
|
|
|
900
|
|
|
389,496
|
|
|
|
181
|
|
|
736
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1,564,007
|
|
|
5,327
|
|
|
12,633
|
|
|
17,960
|
|
|
1,581,967
|
|
|
|
17,277
|
|
|
1,129
|
|
Multi-family
|
|
612,446
|
|
|
858
|
|
|
748
|
|
|
1,606
|
|
|
614,052
|
|
|
|
311
|
|
|
604
|
|
Construction
|
|
450,927
|
|
|
332
|
|
|
281
|
|
|
613
|
|
|
451,540
|
|
|
|
286
|
|
|
—
|
|
Other commercial real estate
|
|
974,575
|
|
|
1,307
|
|
|
3,646
|
|
|
4,953
|
|
|
979,528
|
|
|
|
2,892
|
|
|
1,526
|
|
Total commercial real
estate
|
|
3,601,955
|
|
|
7,824
|
|
|
17,308
|
|
|
25,132
|
|
|
3,627,087
|
|
|
|
20,766
|
|
|
3,259
|
|
Total corporate loans
|
|
6,806,993
|
|
|
14,250
|
|
|
22,998
|
|
|
37,248
|
|
|
6,844,241
|
|
|
|
50,885
|
|
|
4,369
|
|
Home equity
|
|
740,919
|
|
|
4,545
|
|
|
2,519
|
|
|
7,064
|
|
|
747,983
|
|
|
|
5,465
|
|
|
109
|
|
1-4 family mortgages
|
|
420,264
|
|
|
2,652
|
|
|
1,006
|
|
|
3,658
|
|
|
423,922
|
|
|
|
2,939
|
|
|
272
|
|
Installment
|
|
236,264
|
|
|
1,476
|
|
|
259
|
|
|
1,735
|
|
|
237,999
|
|
|
|
—
|
|
|
259
|
|
Total consumer loans
|
|
1,397,447
|
|
|
8,673
|
|
|
3,784
|
|
|
12,457
|
|
|
1,409,904
|
|
|
|
8,404
|
|
|
640
|
|
Total loans
|
|
$
|
8,204,440
|
|
|
$
|
22,923
|
|
|
$
|
26,782
|
|
|
$
|
49,705
|
|
|
$
|
8,254,145
|
|
|
|
$
|
59,289
|
|
|
$
|
5,009
|
|
|
|
(1)
|
PCI loans with an accretable yield are considered current.
|
|
|
(2)
|
Includes PCI loans of
$239,000
and
$681,000
as of
September 30, 2017
and
December 31, 2016
, respectively, which no longer have an accretable yield as estimates of expected future cash flows have decreased since the acquisition due to credit deterioration.
|
Allowance for Credit Losses
The
Company
maintains an allowance for credit losses at a level deemed adequate by management to absorb estimated losses inherent in the existing loan portfolio. See Note
1
, "
Summary of Significant Accounting Policies
," for the accounting policy for the allowance for credit losses. A rollforward of the allowance for credit losses by portfolio segment for the
quarters and nine months
ended
September 30, 2017
and
2016
is presented in the table below.
Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
Industrial,
and
Agricultural
|
|
Office,
Retail, and
Industrial
|
|
Multi-
family
|
|
Construction
|
|
Other
Commercial
Real Estate
|
|
Consumer
|
|
Reserve for
Unfunded
Commitments
|
|
Total
Allowance for Credit Losses
|
Quarter ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
46,271
|
|
|
$
|
15,008
|
|
|
$
|
2,919
|
|
|
$
|
4,094
|
|
|
$
|
7,479
|
|
|
$
|
16,600
|
|
|
$
|
1,000
|
|
|
$
|
93,371
|
|
Charge-offs
|
|
(8,935
|
)
|
|
(14
|
)
|
|
—
|
|
|
6
|
|
|
(6
|
)
|
|
(1,617
|
)
|
|
—
|
|
|
(10,566
|
)
|
Recoveries
|
|
698
|
|
|
1,825
|
|
|
2
|
|
|
19
|
|
|
25
|
|
|
331
|
|
|
—
|
|
|
2,900
|
|
Net charge-offs
|
|
(8,237
|
)
|
|
1,811
|
|
|
2
|
|
|
25
|
|
|
19
|
|
|
(1,286
|
)
|
|
—
|
|
|
(7,666
|
)
|
Provision for loan
losses and other
|
|
13,994
|
|
|
(5,129
|
)
|
|
(296
|
)
|
|
161
|
|
|
(257
|
)
|
|
1,636
|
|
|
—
|
|
|
10,109
|
|
Ending balance
|
|
$
|
52,028
|
|
|
$
|
11,690
|
|
|
$
|
2,625
|
|
|
$
|
4,280
|
|
|
$
|
7,241
|
|
|
$
|
16,950
|
|
|
$
|
1,000
|
|
|
$
|
95,814
|
|
Quarter ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
40,084
|
|
|
$
|
12,985
|
|
|
$
|
2,933
|
|
|
$
|
2,239
|
|
|
$
|
7,492
|
|
|
$
|
14,372
|
|
|
$
|
1,400
|
|
|
$
|
81,505
|
|
Charge-offs
|
|
(1,760
|
)
|
|
(2,193
|
)
|
|
—
|
|
|
—
|
|
|
(509
|
)
|
|
(1,488
|
)
|
|
—
|
|
|
(5,950
|
)
|
Recoveries
|
|
615
|
|
|
42
|
|
|
69
|
|
|
9
|
|
|
94
|
|
|
326
|
|
|
—
|
|
|
1,155
|
|
Net charge-offs
|
|
(1,145
|
)
|
|
(2,151
|
)
|
|
69
|
|
|
9
|
|
|
(415
|
)
|
|
(1,162
|
)
|
|
—
|
|
|
(4,795
|
)
|
Provision for loan
losses and other
|
|
3,579
|
|
|
3,019
|
|
|
1,048
|
|
|
916
|
|
|
1,490
|
|
|
(54
|
)
|
|
(400
|
)
|
|
9,598
|
|
Ending balance
|
|
$
|
42,518
|
|
|
$
|
13,853
|
|
|
$
|
4,050
|
|
|
$
|
3,164
|
|
|
$
|
8,567
|
|
|
$
|
13,156
|
|
|
$
|
1,000
|
|
|
$
|
86,308
|
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
40,709
|
|
|
$
|
17,595
|
|
|
$
|
3,261
|
|
|
$
|
3,444
|
|
|
$
|
7,739
|
|
|
$
|
13,335
|
|
|
$
|
1,000
|
|
|
$
|
87,083
|
|
Charge-offs
|
|
(15,966
|
)
|
|
(141
|
)
|
|
—
|
|
|
(38
|
)
|
|
(721
|
)
|
|
(4,837
|
)
|
|
—
|
|
|
(21,703
|
)
|
Recoveries
|
|
2,764
|
|
|
2,808
|
|
|
36
|
|
|
258
|
|
|
205
|
|
|
1,097
|
|
|
—
|
|
|
7,168
|
|
Net charge-offs
|
|
(13,202
|
)
|
|
2,667
|
|
|
36
|
|
|
220
|
|
|
(516
|
)
|
|
(3,740
|
)
|
|
—
|
|
|
(14,535
|
)
|
Provision for loan
losses and other
|
|
24,521
|
|
|
(8,572
|
)
|
|
(672
|
)
|
|
616
|
|
|
18
|
|
|
7,355
|
|
|
—
|
|
|
23,266
|
|
Ending balance
|
|
$
|
52,028
|
|
|
$
|
11,690
|
|
|
$
|
2,625
|
|
|
$
|
4,280
|
|
|
$
|
7,241
|
|
|
$
|
16,950
|
|
|
$
|
1,000
|
|
|
$
|
95,814
|
|
Nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
37,074
|
|
|
$
|
13,124
|
|
|
$
|
2,469
|
|
|
$
|
1,440
|
|
|
$
|
6,109
|
|
|
$
|
13,414
|
|
|
$
|
1,225
|
|
|
$
|
74,855
|
|
Charge-offs
|
|
(5,684
|
)
|
|
(4,358
|
)
|
|
(288
|
)
|
|
(134
|
)
|
|
(2,833
|
)
|
|
(3,975
|
)
|
|
—
|
|
|
(17,272
|
)
|
Recoveries
|
|
1,693
|
|
|
153
|
|
|
95
|
|
|
44
|
|
|
314
|
|
|
975
|
|
|
—
|
|
|
3,274
|
|
Net charge-offs
|
|
(3,991
|
)
|
|
(4,205
|
)
|
|
(193
|
)
|
|
(90
|
)
|
|
(2,519
|
)
|
|
(3,000
|
)
|
|
—
|
|
|
(13,998
|
)
|
Provision for loan
losses and other
|
|
9,435
|
|
|
4,934
|
|
|
1,774
|
|
|
1,814
|
|
|
4,977
|
|
|
2,742
|
|
|
(225
|
)
|
|
25,451
|
|
Ending balance
|
|
$
|
42,518
|
|
|
$
|
13,853
|
|
|
$
|
4,050
|
|
|
$
|
3,164
|
|
|
$
|
8,567
|
|
|
$
|
13,156
|
|
|
$
|
1,000
|
|
|
$
|
86,308
|
|
The table below provides a breakdown of loans and the related allowance for credit losses by portfolio segment as of
September 30, 2017
and
December 31, 2016
.
Loans and Related Allowance for Credit Losses by Portfolio Segment
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Allowance for Credit Losses
|
|
|
Individually
Evaluated
for
Impairment
|
|
Collectively
Evaluated
for
Impairment
|
|
PCI
|
|
Total
|
|
Individually
Evaluated
for
Impairment
|
|
Collectively
Evaluated
for
Impairment
|
|
PCI
|
|
Total
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, and
agricultural
|
|
$
|
39,121
|
|
|
$
|
3,835,995
|
|
|
$
|
25,217
|
|
|
$
|
3,900,333
|
|
|
$
|
3,408
|
|
|
$
|
48,107
|
|
|
$
|
513
|
|
|
$
|
52,028
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
11,211
|
|
|
1,932,332
|
|
|
16,824
|
|
|
1,960,367
|
|
|
9
|
|
|
10,291
|
|
|
1,390
|
|
|
11,690
|
|
Multi-family
|
|
395
|
|
|
696,490
|
|
|
14,216
|
|
|
711,101
|
|
|
—
|
|
|
2,524
|
|
|
101
|
|
|
2,625
|
|
Construction
|
|
—
|
|
|
532,016
|
|
|
13,650
|
|
|
545,666
|
|
|
—
|
|
|
4,060
|
|
|
220
|
|
|
4,280
|
|
Other commercial real estate
|
|
656
|
|
|
1,325,280
|
|
|
65,305
|
|
|
1,391,241
|
|
|
—
|
|
|
6,126
|
|
|
1,115
|
|
|
7,241
|
|
Total commercial real estate
|
|
12,262
|
|
|
4,486,118
|
|
|
109,995
|
|
|
4,608,375
|
|
|
9
|
|
|
23,001
|
|
|
2,826
|
|
|
25,836
|
|
Total corporate loans
|
|
51,383
|
|
|
8,322,113
|
|
|
135,212
|
|
|
8,508,708
|
|
|
3,417
|
|
|
71,108
|
|
|
3,339
|
|
|
77,864
|
|
Consumer
|
|
—
|
|
|
1,859,520
|
|
|
22,064
|
|
|
1,881,584
|
|
|
—
|
|
|
15,684
|
|
|
1,266
|
|
|
16,950
|
|
Reserve for unfunded
commitments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
1,000
|
|
Total loans
|
|
$
|
51,383
|
|
|
$
|
10,181,633
|
|
|
$
|
157,276
|
|
|
$
|
10,390,292
|
|
|
$
|
3,417
|
|
|
$
|
87,792
|
|
|
$
|
4,605
|
|
|
$
|
95,814
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial, and
agricultural
|
|
$
|
24,645
|
|
|
$
|
3,189,327
|
|
|
$
|
3,182
|
|
|
$
|
3,217,154
|
|
|
$
|
507
|
|
|
$
|
39,554
|
|
|
$
|
648
|
|
|
$
|
40,709
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
16,287
|
|
|
1,553,234
|
|
|
12,446
|
|
|
1,581,967
|
|
|
—
|
|
|
16,148
|
|
|
1,447
|
|
|
17,595
|
|
Multi-family
|
|
398
|
|
|
601,429
|
|
|
12,225
|
|
|
614,052
|
|
|
—
|
|
|
3,059
|
|
|
202
|
|
|
3,261
|
|
Construction
|
|
34
|
|
|
447,058
|
|
|
4,448
|
|
|
451,540
|
|
|
—
|
|
|
3,280
|
|
|
164
|
|
|
3,444
|
|
Other commercial real estate
|
|
1,286
|
|
|
965,900
|
|
|
12,342
|
|
|
979,528
|
|
|
18
|
|
|
6,613
|
|
|
1,108
|
|
|
7,739
|
|
Total commercial real estate
|
|
18,005
|
|
|
3,567,621
|
|
|
41,461
|
|
|
3,627,087
|
|
|
18
|
|
|
29,100
|
|
|
2,921
|
|
|
32,039
|
|
Total corporate loans
|
|
42,650
|
|
|
6,756,948
|
|
|
44,643
|
|
|
6,844,241
|
|
|
525
|
|
|
68,654
|
|
|
3,569
|
|
|
72,748
|
|
Consumer
|
|
—
|
|
|
1,392,880
|
|
|
17,024
|
|
|
1,409,904
|
|
|
—
|
|
|
12,210
|
|
|
1,125
|
|
|
13,335
|
|
Reserve for unfunded
commitments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
1,000
|
|
Total loans
|
|
$
|
42,650
|
|
|
$
|
8,149,828
|
|
|
$
|
61,667
|
|
|
$
|
8,254,145
|
|
|
$
|
525
|
|
|
$
|
81,864
|
|
|
$
|
4,694
|
|
|
$
|
87,083
|
|
Loans Individually Evaluated for Impairment
The following table presents loans individually evaluated for impairment by class of loan as of
September 30, 2017
and
December 31, 2016
.
PCI
loans are excluded from this disclosure.
Impaired Loans Individually Evaluated by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
As of December 31, 2016
|
|
|
Recorded Investment In
|
|
|
|
|
Recorded Investment In
|
|
|
|
|
Loans with
No Specific
Reserve
|
|
Loans with
a Specific
Reserve
|
|
Unpaid
Principal
Balance
|
|
Specific
Reserve
|
|
|
Loans with
No Specific
Reserve
|
|
Loans with
a Specific
Reserve
|
|
Unpaid
Principal
Balance
|
|
Specific
Reserve
|
Commercial and industrial
|
|
$
|
24,688
|
|
|
$
|
14,433
|
|
|
$
|
47,700
|
|
|
$
|
3,408
|
|
|
|
$
|
11,579
|
|
|
$
|
13,066
|
|
|
$
|
29,514
|
|
|
$
|
507
|
|
Agricultural
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
7,146
|
|
|
4,065
|
|
|
14,480
|
|
|
9
|
|
|
|
16,287
|
|
|
—
|
|
|
21,057
|
|
|
—
|
|
Multi-family
|
|
395
|
|
|
—
|
|
|
395
|
|
|
—
|
|
|
|
398
|
|
|
—
|
|
|
398
|
|
|
—
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
34
|
|
|
—
|
|
|
34
|
|
|
—
|
|
Other commercial real estate
|
|
656
|
|
|
—
|
|
|
754
|
|
|
—
|
|
|
|
1,016
|
|
|
270
|
|
|
2,141
|
|
|
18
|
|
Total commercial real estate
|
|
8,197
|
|
|
4,065
|
|
|
15,629
|
|
|
9
|
|
|
|
17,735
|
|
|
270
|
|
|
23,630
|
|
|
18
|
|
Total impaired loans
individually evaluated
for impairment
|
|
$
|
32,885
|
|
|
$
|
18,498
|
|
|
$
|
63,329
|
|
|
$
|
3,417
|
|
|
|
$
|
29,314
|
|
|
$
|
13,336
|
|
|
$
|
53,144
|
|
|
$
|
525
|
|
The following table presents the average recorded investment and interest income recognized on impaired loans by class for the
quarters and nine months
ended
September 30, 2017
and
2016
.
PCI
loans are excluded from this disclosure.
Average Recorded Investment and Interest Income Recognized on Impaired Loans by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
(1)
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
(1)
|
Commercial and industrial
|
|
$
|
44,682
|
|
|
$
|
368
|
|
|
$
|
7,829
|
|
|
$
|
57
|
|
Agricultural
|
|
140
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
12,496
|
|
|
—
|
|
|
16,101
|
|
|
3
|
|
Multi-family
|
|
396
|
|
|
—
|
|
|
399
|
|
|
11
|
|
Construction
|
|
—
|
|
|
—
|
|
|
34
|
|
|
—
|
|
Other commercial real estate
|
|
1,415
|
|
|
—
|
|
|
2,561
|
|
|
—
|
|
Total commercial real estate
|
|
14,307
|
|
|
—
|
|
|
19,095
|
|
|
14
|
|
Total impaired loans
|
|
$
|
59,129
|
|
|
$
|
368
|
|
|
$
|
26,924
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
(1)
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
(1)
|
Commercial and industrial
|
|
$
|
32,765
|
|
|
$
|
924
|
|
|
$
|
5,312
|
|
|
$
|
107
|
|
Agricultural
|
|
348
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
13,680
|
|
|
262
|
|
|
12,012
|
|
|
80
|
|
Multi-family
|
|
396
|
|
|
28
|
|
|
500
|
|
|
12
|
|
Construction
|
|
9
|
|
|
136
|
|
|
70
|
|
|
—
|
|
Other commercial real estate
|
|
1,652
|
|
|
20
|
|
|
3,190
|
|
|
72
|
|
Total commercial real estate
|
|
15,737
|
|
|
446
|
|
|
15,772
|
|
|
164
|
|
Total impaired loans
|
|
$
|
48,850
|
|
|
$
|
1,370
|
|
|
$
|
21,084
|
|
|
$
|
271
|
|
|
|
(1)
|
Recorded using the cash basis of accounting.
|
Credit Quality Indicators
Corporate loans and commitments are assessed for credit risk and assigned ratings based on various characteristics, such as the borrower's cash flow, leverage, and collateral. Ratings for commercial credits are reviewed periodically. The following tables present credit quality indicators by class for corporate and consumer loans, as of
September 30, 2017
and
December 31, 2016
.
Corporate Credit Quality Indicators by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special
Mention
(1) (4)
|
|
Substandard
(2) (4)
|
|
Non-accrual
(3)
|
|
Total
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,286,087
|
|
|
$
|
72,491
|
|
|
$
|
62,530
|
|
|
$
|
41,504
|
|
|
$
|
3,462,612
|
|
Agricultural
|
|
417,612
|
|
|
13,310
|
|
|
6,419
|
|
|
380
|
|
|
437,721
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1,877,165
|
|
|
25,919
|
|
|
45,062
|
|
|
12,221
|
|
|
1,960,367
|
|
Multi-family
|
|
703,659
|
|
|
5,433
|
|
|
1,856
|
|
|
153
|
|
|
711,101
|
|
Construction
|
|
525,097
|
|
|
9,113
|
|
|
11,310
|
|
|
146
|
|
|
545,666
|
|
Other commercial real estate
|
|
1,334,385
|
|
|
32,693
|
|
|
21,924
|
|
|
2,239
|
|
|
1,391,241
|
|
Total commercial real estate
|
|
4,440,306
|
|
|
73,158
|
|
|
80,152
|
|
|
14,759
|
|
|
4,608,375
|
|
Total corporate loans
|
|
$
|
8,144,005
|
|
|
$
|
158,959
|
|
|
$
|
149,101
|
|
|
$
|
56,643
|
|
|
$
|
8,508,708
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,638,833
|
|
|
$
|
92,340
|
|
|
$
|
66,547
|
|
|
$
|
29,938
|
|
|
$
|
2,827,658
|
|
Agricultural
|
|
366,382
|
|
|
17,039
|
|
|
5,894
|
|
|
181
|
|
|
389,496
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
1,491,170
|
|
|
34,007
|
|
|
39,513
|
|
|
17,277
|
|
|
1,581,967
|
|
Multi-family
|
|
607,342
|
|
|
4,370
|
|
|
2,029
|
|
|
311
|
|
|
614,052
|
|
Construction
|
|
438,946
|
|
|
111
|
|
|
12,197
|
|
|
286
|
|
|
451,540
|
|
Other commercial real estate
|
|
951,284
|
|
|
11,808
|
|
|
13,544
|
|
|
2,892
|
|
|
979,528
|
|
Total commercial real estate
|
|
3,488,742
|
|
|
50,296
|
|
|
67,283
|
|
|
20,766
|
|
|
3,627,087
|
|
Total corporate loans
|
|
$
|
6,493,957
|
|
|
$
|
159,675
|
|
|
$
|
139,724
|
|
|
$
|
50,885
|
|
|
$
|
6,844,241
|
|
|
|
(1)
|
Loans categorized as special mention exhibit potential weaknesses that require the close attention of management since these potential weaknesses may result in the deterioration of repayment prospects in the future.
|
|
|
(2)
|
Loans categorized as substandard exhibit well-defined weaknesses that may jeopardize the liquidation of the debt. These loans continue to accrue interest because they are well-secured and collection of principal and interest is expected within a reasonable time.
|
|
|
(3)
|
Loans categorized as non-accrual exhibit well-defined weaknesses that may jeopardize the liquidation of the debt or result in a loss if the deficiencies are not corrected.
|
|
|
(4)
|
Total special mention and substandard loans includes accruing
TDR
s of
$664,000
as of
September 30, 2017
and
$834,000
as of
December 31, 2016
.
|
Consumer Credit Quality Indicators by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
Non-accrual
|
|
Total
|
As of September 30, 2017
|
|
|
|
|
|
|
Home equity
|
|
$
|
841,680
|
|
|
$
|
5,529
|
|
|
$
|
847,209
|
|
1-4 family mortgages
|
|
708,603
|
|
|
3,004
|
|
|
711,607
|
|
Installment
|
|
322,768
|
|
|
—
|
|
|
322,768
|
|
Total consumer loans
|
|
$
|
1,873,051
|
|
|
$
|
8,533
|
|
|
$
|
1,881,584
|
|
As of December 31, 2016
|
|
|
|
|
|
|
Home equity
|
|
$
|
742,518
|
|
|
$
|
5,465
|
|
|
$
|
747,983
|
|
1-4 family mortgages
|
|
420,983
|
|
|
2,939
|
|
|
423,922
|
|
Installment
|
|
237,999
|
|
|
—
|
|
|
237,999
|
|
Total consumer loans
|
|
$
|
1,401,500
|
|
|
$
|
8,404
|
|
|
$
|
1,409,904
|
|
TDR
s
TDR
s are generally performed at the request of the individual borrower and may include forgiveness of principal, reduction in interest rates, changes in payments, and maturity date extensions. The table below presents
TDR
s by class as of
September 30, 2017
and
December 31, 2016
. See Note 1, "Summary of Significant Accounting Policies," for the accounting policy for
TDR
s.
TDR
s by Class
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
|
Accruing
|
|
Non-accrual
(1)
|
|
Total
|
|
Accruing
|
|
Non-accrual
(1)
|
|
Total
|
Commercial and industrial
|
|
$
|
269
|
|
|
$
|
22,780
|
|
|
$
|
23,049
|
|
|
$
|
281
|
|
|
$
|
150
|
|
|
$
|
431
|
|
Agricultural
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Office, retail, and industrial
|
|
—
|
|
|
4,512
|
|
|
4,512
|
|
|
155
|
|
|
4,733
|
|
|
4,888
|
|
Multi-family
|
|
577
|
|
|
153
|
|
|
730
|
|
|
586
|
|
|
168
|
|
|
754
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other commercial real estate
|
|
194
|
|
|
—
|
|
|
194
|
|
|
268
|
|
|
48
|
|
|
316
|
|
Total commercial real estate
|
|
771
|
|
|
4,665
|
|
|
5,436
|
|
|
1,009
|
|
|
4,949
|
|
|
5,958
|
|
Total corporate loans
|
|
1,040
|
|
|
27,445
|
|
|
28,485
|
|
|
1,290
|
|
|
5,099
|
|
|
6,389
|
|
Home equity
|
|
88
|
|
|
755
|
|
|
843
|
|
|
177
|
|
|
820
|
|
|
997
|
|
1-4 family mortgages
|
|
685
|
|
|
462
|
|
|
1,147
|
|
|
824
|
|
|
378
|
|
|
1,202
|
|
Installment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
|
773
|
|
|
1,217
|
|
|
1,990
|
|
|
1,001
|
|
|
1,198
|
|
|
2,199
|
|
Total loans
|
|
$
|
1,813
|
|
|
$
|
28,662
|
|
|
$
|
30,475
|
|
|
$
|
2,291
|
|
|
$
|
6,297
|
|
|
$
|
8,588
|
|
|
|
(1)
|
These
TDR
s are included in non-accrual loans in the preceding tables.
|
TDR
s are included in the calculation of the allowance for credit losses in the same manner as impaired loans. There were
$1.3 million
in specific reserves related to
TDR
s as of
September 30, 2017
. There were
no
specific reserves related to TDRs as of
December 31, 2016
.
The following table presents a summary of loans that were restructured during the
quarter and nine months
ended
September 30, 2017
. There were no material restructures during the
quarter and nine months
ended
September 30, 2016
.
Loans Restructured During the Period
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Loans
|
|
Pre-
Modification
Recorded
Investment
|
|
Funds
Disbursed
|
|
Interest
and Escrow
Capitalized
|
|
Charge-offs
|
|
Post-
Modification
Recorded
Investment
|
Quarter ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
10
|
|
|
$
|
25,811
|
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
24,271
|
|
Office, retail, and industrial
|
|
2
|
|
|
3,656
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,656
|
|
Total TDRs restructured during the period
|
|
12
|
|
|
$
|
29,467
|
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
27,927
|
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
12
|
|
|
$
|
26,733
|
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
25,193
|
|
Office, retail, and industrial
|
|
2
|
|
|
3,656
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,656
|
|
Total TDRs restructured during the period
|
|
14
|
|
|
$
|
30,389
|
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
1,736
|
|
|
$
|
28,849
|
|
Accruing
TDR
s that do not perform in accordance with their modified terms are transferred to non-accrual. There were no material
TDR
s that defaulted within twelve months of the restructure date during the
quarters and nine months
ended
September 30, 2017
and
2016
.
A rollforward of the carrying value of
TDR
s for the
quarters and nine months
ended
September 30, 2017
and
2016
is presented in the following table.
TDR Rollforward
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accruing
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,029
|
|
|
$
|
2,491
|
|
|
$
|
2,291
|
|
|
$
|
2,743
|
|
Additions
|
|
14,897
|
|
|
—
|
|
|
15,819
|
|
|
—
|
|
Net payments received
|
|
(1,798
|
)
|
|
(22
|
)
|
|
(1,905
|
)
|
|
(91
|
)
|
Net transfers to non-accrual
|
|
(13,315
|
)
|
|
(101
|
)
|
|
(14,392
|
)
|
|
(284
|
)
|
Ending balance
|
|
1,813
|
|
|
2,368
|
|
|
1,813
|
|
|
2,368
|
|
Non-accrual
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
3,036
|
|
|
1,690
|
|
|
6,297
|
|
|
2,324
|
|
Additions
|
|
14,570
|
|
|
—
|
|
|
14,570
|
|
|
—
|
|
Net payments received
|
|
(127
|
)
|
|
(31
|
)
|
|
(4,352
|
)
|
|
(609
|
)
|
Charge-offs
|
|
(2,132
|
)
|
|
(170
|
)
|
|
(2,245
|
)
|
|
(409
|
)
|
Net transfers from accruing
|
|
13,315
|
|
|
101
|
|
|
14,392
|
|
|
284
|
|
Ending balance
|
|
28,662
|
|
|
1,590
|
|
|
28,662
|
|
|
1,590
|
|
Total TDRs
|
|
$
|
30,475
|
|
|
$
|
3,958
|
|
|
$
|
30,475
|
|
|
$
|
3,958
|
|
For
TDR
s to be removed from
TDR
status in the calendar year after the restructuring, the loans must (i) have an interest rate and terms that reflect market conditions at the time of restructuring, and (ii) be in compliance with the modified terms. Loans that were not restructured at market rates and terms, that are not in compliance with the modified terms, or for which there is a concern about the future ability of the borrower to meet its obligations under the modified terms, continue to be separately reported as restructured until paid in full or charged-off.
There were
no
material commitments to lend additional funds to borrowers with
TDR
s as of
September 30, 2017
and
December 31, 2016
.
8
.
PREMISES, FURNITURE, AND EQUIPMENT
The following table summarizes the Company's premises, furniture, and equipment by category.
Premises, Furniture, and Equipment
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Land
|
|
$
|
30,267
|
|
|
$
|
18,304
|
|
Premises
|
|
119,325
|
|
|
94,369
|
|
Furniture and equipment
|
|
114,547
|
|
|
105,859
|
|
Total cost
|
|
264,139
|
|
|
218,532
|
|
Accumulated depreciation
|
|
(142,001
|
)
|
|
(140,030
|
)
|
Net book value of premises, furniture, and equipment
|
|
122,138
|
|
|
78,502
|
|
Assets held-for-sale
|
|
9,157
|
|
|
4,075
|
|
Total premises, furniture, and equipment
|
|
$
|
131,295
|
|
|
$
|
82,577
|
|
During 2016, the Bank completed a sale-leaseback transaction, whereby the Bank sold to a third party for an aggregate cash purchase price of
$150.3 million
,
55
properties with book values totaling
$58.8 million
, owned and operated by the Bank as branches. The Bank concurrently entered into triple net lease agreements with certain affiliates of the third party for each of the branches sold. Subject to the right of the Bank to terminate certain of the lease agreements at the end of the eleventh year, the lease agreements have initial terms of 14 years. Each lease agreement provides the Bank with
five
consecutive renewal options of five years each. The sale-leaseback transaction resulted in a pre-tax gain of
$88.0 million
, net of transaction related expenses, with
$76.1 million
of deferred pre-tax gains remaining as of
September 30, 2017
.
As of
September 30, 2017
and December 31, 2016 assets held-for-sale consisted of former branches that are no longer in operation and parcels of land previously purchased for expansion.
Depreciation on premises, furniture, and equipment totaled
$3.5 million
and
$10.5 million
for the
quarter and nine months
ended
September 30, 2017
, respectively. Depreciation on premises, furniture, and equipment totaled
$3.4 million
and
$10.1 million
for the same periods in
2016
.
Operating Leases
As of
September 30, 2017
, the Company was obligated to utilize certain premises and equipment under certain non-cancelable operating leases, which expire at various dates through the year ending December 31,
2033
. Many of these leases contain renewal options and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specific prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses or proportionately adjusted for increases in consumer or other price indices. The following summary reflects the future minimum payments by year required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of
September 30, 2017
.
Future Minimum Operating Lease Payments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Total
|
One year or less
|
|
$
|
19,298
|
|
After one year to two years
|
|
17,737
|
|
After two years to three years
|
|
17,008
|
|
After three years to four years
|
|
16,815
|
|
After four years to five years
|
|
16,550
|
|
After five years
|
|
120,048
|
|
Total minimum lease payments
|
|
$
|
207,456
|
|
As of
September 30, 2017
, deferred pre-tax gains of
$76.1 million
related to the sale-lease back transaction will be accreted as a reduction to lease expense in other expenses on the Condensed Consolidated Statements of Income on a straight-line basis over the initial terms of the leases.
The Company assumed certain operating leases related to various branches in previous acquisitions. An intangible liability is recorded when the cash flows of a lease exceeds its fair market value. This intangible liability will be accreted into income as a reduction to net occupancy and equipment expense using the straight-line method over the initial term of each lease, which expire between 2018 and 2030. The intangible liability is included in accrued interest and other liabilities in the Consolidated Statements of Financial Condition.
The following table presents the remaining scheduled accretion of the intangible liability by year.
Scheduled Accretion of Operating Lease Intangible
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Total
|
One year or less
|
|
$
|
1,011
|
|
After one year to two years
|
|
742
|
|
After two years to three years
|
|
648
|
|
After three years to four years
|
|
648
|
|
After four years to five years
|
|
648
|
|
After five years
|
|
3,511
|
|
Total accretion
|
|
$
|
7,208
|
|
The following table presents net operating lease expense for the
quarters and nine months
ended
September 30, 2017
and
2016
.
Net Operating Lease Expense
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Lease expense charged to operations
|
|
$
|
4,747
|
|
|
$
|
2,229
|
|
|
$
|
14,027
|
|
|
$
|
5,729
|
|
Accretion of operating lease intangible
(1)
|
|
(295
|
)
|
|
(295
|
)
|
|
(885
|
)
|
|
(876
|
)
|
Accretion of deferred gain on sale-leaseback transaction
(1)
|
|
(1,463
|
)
|
|
—
|
|
|
(4,409
|
)
|
|
—
|
|
Rental income from premises leased to others
(1)
|
|
(171
|
)
|
|
(118
|
)
|
|
(521
|
)
|
|
(404
|
)
|
Net operating lease expense
|
|
$
|
2,818
|
|
|
$
|
1,816
|
|
|
$
|
8,212
|
|
|
$
|
4,449
|
|
|
|
(1)
|
Included as reductions to net occupancy and equipment expense in the Condensed Consolidated Statements of Income.
|
9
.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's annual goodwill impairment test was performed as of October 1, 2016. It was determined that no impairment existed as of that date or as of
September 30, 2017
. For a discussion of the accounting policies for goodwill and other intangible assets, see Note
1
, "
Summary of Significant Accounting Policies
" to the Consolidated Financial Statements in the
Company
's
2016
10-K.
The following table presents changes in the carrying amount of goodwill for the
quarters and nine months
ended
September 30, 2017
and
2016
.
Changes in the Carrying Amount of Goodwill
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
691,527
|
|
|
$
|
341,513
|
|
|
$
|
340,879
|
|
|
$
|
319,007
|
|
Acquisitions
|
|
(46
|
)
|
|
(756
|
)
|
|
350,602
|
|
|
21,750
|
|
Ending balance
|
|
$
|
691,481
|
|
|
$
|
340,757
|
|
|
$
|
691,481
|
|
|
$
|
340,757
|
|
|
|
|
|
|
|
|
|
|
The decrease in goodwill for the quarter ended
September 30, 2017
resulted from measurement period adjustments associated with the Standard transaction. The increase for the nine months ended
September 30, 2017
resulted from the Standard and Premier acquisitions and measurement period adjustments related to finalizing the fair values of the assets acquired and liabilities assumed in the NI Bancshares acquisition. The decrease in goodwill for the quarter ended
September 30, 2016
resulted from measurement period adjustments associated with the NI Bancshares acquisition. The increase for the nine months ended
September 30, 2016
resulted from the NI Bancshares acquisition.
The Company's other intangible assets are core deposit intangibles and trust department customer relationship intangibles, which are being amortized over their estimated useful lives. Other intangible assets are subject to impairment testing when events or circumstances indicate that its carrying amount may not be recoverable. The increase in other intangible assets for the nine months ended
September 30, 2017
resulted from the Standard and Premier acquisitions. The increase in other intangible assets for the nine months ended
September 30, 2016
resulted from the NI Bancshares acquisition. During the quarters ended
September 30, 2017
and
September 30, 2016
there were no events or circumstances to indicate impairment.
Other Intangible Assets
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Beginning balance
|
|
$
|
58,959
|
|
|
$
|
32,962
|
|
|
$
|
25,997
|
|
|
$
|
48,550
|
|
|
$
|
28,280
|
|
|
$
|
20,270
|
|
Additions
|
|
39,017
|
|
|
—
|
|
|
39,017
|
|
|
10,409
|
|
|
—
|
|
|
10,409
|
|
Amortization expense
|
|
—
|
|
|
6,059
|
|
|
(6,059
|
)
|
|
—
|
|
|
3,475
|
|
|
(3,475
|
)
|
Ending balance
|
|
$
|
97,976
|
|
|
$
|
39,021
|
|
|
$
|
58,955
|
|
|
$
|
58,959
|
|
|
$
|
31,755
|
|
|
$
|
27,204
|
|
Scheduled Amortization of Other Intangible Assets
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
Total
|
Year Ending September 30,
|
|
|
2018
|
|
$
|
7,173
|
|
2019
|
|
7,083
|
|
2020
|
|
7,036
|
|
2021
|
|
6,970
|
|
2022
|
|
6,898
|
|
2023 and thereafter
|
|
23,795
|
|
Total
|
|
$
|
58,955
|
|
10
.
DEPOSITS
The following table presents the Company's deposits by type.
Summary of Deposits
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Demand deposits
|
|
$
|
3,580,922
|
|
|
$
|
2,766,748
|
|
Savings deposits
|
|
2,022,717
|
|
|
1,615,833
|
|
NOW accounts
|
|
2,048,893
|
|
|
1,675,421
|
|
Money market deposits
|
|
1,969,865
|
|
|
1,577,316
|
|
Time deposits less than $100,000
|
|
888,238
|
|
|
755,558
|
|
Time deposits greater than $100,000
|
|
697,862
|
|
|
437,727
|
|
Total deposits
|
|
$
|
11,208,497
|
|
|
$
|
8,828,603
|
|
The increase in total deposits for the nine months ended
September 30, 2017
includes deposits assumed in the Standard acquisition. For additional disclosure related to the Standard transaction, see Note
3
, "
Acquisitions
."
11
.
BORROWED FUNDS
The following table summarizes the
Company
's borrowed funds by funding source.
Summary of Borrowed Funds
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Securities sold under agreements to repurchase
|
|
$
|
110,536
|
|
|
$
|
129,008
|
|
FHLB advances
|
|
590,000
|
|
|
750,000
|
|
Total borrowed funds
|
|
$
|
700,536
|
|
|
$
|
879,008
|
|
Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase securities sold are included as a liability in the Consolidated Statements of Financial Condition. Repurchase agreements are secured by U.S. treasury and agency securities. The securities underlying the agreements remain in the respective asset accounts.
The Bank is a member of the
FHLB
and has access to term financing from the
FHLB
. These advances are secured by designated assets that may include qualifying commercial real estate, residential and multi-family mortgages, home equity loans, and municipal and mortgage-backed securities. As of
September 30, 2017
, the
Company
held various short-term
FHLB
advances with fixed interest rates that range from
1.18%
to
1.24%
and maturity dates that range from
October 2, 2017
to
December 1, 2017
.
The
Company
hedges interest rates on borrowed funds using interest rate swaps through which the
Company
receives variable amounts and pays fixed amounts. See Note
14
"Derivative Instruments and Hedging Activities" for a detailed discussion of interest rate swaps.
On September 27, 2016, the Company entered into a loan agreement with U.S. Bank National Association providing for a
$50.0 million
short-term, unsecured revolving credit facility. On September 26, 2017, the Company entered into a first amendment to this credit facility, which extends the maturity to September 26, 2018. Advances will bear interest at a rate equal to one-month LIBOR plus
1.75%
, adjusted on a monthly basis, and the Company must pay an unused facility fee equal to
0.35%
per annum on a quarterly basis. Management expects to use this line of credit for general corporate purposes. As of
September 30, 2017
,
no
amount was outstanding under the facility.
12
.
MATERIAL TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On
May 17, 2017
, the Company's stockholders approved and adopted an amendment to the Company's Restated Certificate of Incorporation. The amendment increased the Company's authorized common stock by
100,000,000
shares. Following this
amendment, the Company is now authorized to issue a total of
251,000,000
shares, including
1,000,000
shares of Preferred Stock, without a par value, and
250,000,000
shares of Common Stock,
$0.01
par value per share.
13
.
EARNINGS PER COMMON SHARE
The table below displays the calculation of basic and diluted earnings per common share ("
EPS
").
Basic and Diluted EPS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
|
$
|
38,235
|
|
|
$
|
28,402
|
|
|
$
|
96,040
|
|
|
$
|
71,631
|
|
Net income applicable to non-vested restricted shares
|
|
(340
|
)
|
|
(324
|
)
|
|
(910
|
)
|
|
(826
|
)
|
Net income applicable to common shares
|
|
$
|
37,895
|
|
|
$
|
28,078
|
|
|
$
|
95,130
|
|
|
$
|
70,805
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (basic)
|
|
101,752
|
|
|
80,396
|
|
|
101,307
|
|
|
79,589
|
|
Dilutive effect of common stock equivalents
|
|
20
|
|
|
13
|
|
|
20
|
|
|
13
|
|
Weighted-average diluted common shares outstanding
|
|
101,772
|
|
|
80,409
|
|
|
101,327
|
|
|
79,602
|
|
Basic EPS
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.94
|
|
|
$
|
0.89
|
|
Diluted EPS
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.94
|
|
|
$
|
0.89
|
|
Anti-dilutive shares not included in the computation of
diluted EPS
(1)
|
|
190
|
|
|
454
|
|
|
242
|
|
|
510
|
|
|
|
(1)
|
This amount represents outstanding stock options for which the exercise price is greater than the average market price of the Company's common stock.
|
14
.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the ordinary course of business, the Company enters into derivative transactions as part of its overall interest rate risk management strategy. The significant accounting policies related to derivative instruments and hedging activities are presented in Note 1, "Summary of Significant Accounting Policies."
Fair Value Hedges
The Company hedges the fair value of fixed rate commercial real estate loans using interest rate swaps through which the Company pays fixed amounts and receives variable amounts. These derivative contracts are designated as fair value hedges.
Fair Value Hedges
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Gross notional amount outstanding
|
|
$
|
5,583
|
|
|
$
|
5,958
|
|
Derivative liability fair value
|
|
(146
|
)
|
|
(282
|
)
|
Weighted-average interest rate received
|
|
3.23
|
%
|
|
2.63
|
%
|
Weighted-average interest rate paid
|
|
5.96
|
%
|
|
5.96
|
%
|
Weighted-average maturity (in years)
|
|
1.10
|
|
|
1.84
|
|
Fair value of derivative
(1)
|
|
$
|
157
|
|
|
$
|
296
|
|
|
|
(1)
|
This amount represents the fair value if credit risk related contingent features were triggered.
|
Hedge ineffectiveness is recognized in other noninterest income in the Condensed Consolidated Statements of Income. For the
quarters and nine months
ended
September 30, 2017
and
2016
, gains or losses related to fair value hedge ineffectiveness were not material.
Cash Flow Hedges
As of
September 30, 2017
, the Company hedged
$980.0 million
of certain corporate variable rate loans using interest rate swaps through which the Company receives fixed amounts and pays variable amounts. The Company also hedged
$980.0 million
of borrowed funds using forward starting interest rate swaps through which the Company receives variable amounts and pays fixed amounts. These transactions allow the Company to add stability to net interest income and manage its exposure to interest rate movements.
Forward starting interest rate swaps totaling
$415.0 million
began on various dates between June of 2015 and February of 2017, and mature between June of 2019 and February of 2020. The remaining forward starting interest rate swaps totaling
$565.0 million
begin at various dates between February of 2018 and February of 2020 and mature between February of 2020 and April of 2022. The weighted-average fixed interest rate to be paid on these interest rate swaps that have not yet begun was
1.96%
as of
September 30, 2017
. These derivative contracts are designated as cash flow hedges.
Cash Flow Hedges
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Gross notional amount outstanding
|
|
$
|
1,960,000
|
|
|
$
|
1,470,000
|
|
Derivative asset fair value
|
|
3,234
|
|
|
5,402
|
|
Derivative liability fair value
|
|
(6,729
|
)
|
|
(7,390
|
)
|
Weighted-average interest rate received
|
|
1.55
|
%
|
|
1.37
|
%
|
Weighted-average interest rate paid
|
|
1.51
|
%
|
|
1.11
|
%
|
Weighted-average maturity (in years)
|
|
2.50
|
|
|
2.83
|
|
The effective portion of gains or losses on cash flow hedges is recorded in accumulated other comprehensive loss on an after-tax basis and is subsequently reclassified to interest income or expense in the period that the forecasted hedged item impacts earnings. Hedge effectiveness is determined using a regression
analysis at the inception of the hedge relationship and on an ongoing basis. For the
quarters and nine months
ended
September 30, 2017
and 2016, there were no material gains or losses related to cash flow hedge ineffectiveness. As of
September 30, 2017
, the Company estimates that
$581,000
will be reclassified from accumulated other comprehensive loss as a decrease to interest income over the next twelve months.
Other Derivative Instruments
The Company also enters into derivative transactions through capital market products with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with third-parties. This transaction allows the Company's customers to effectively convert a variable rate loan into a fixed rate loan. Due to the offsetting nature of these transactions, the Company does not apply hedge accounting treatment. The Company's credit exposure on these derivative transactions results primarily from counterparty credit risk. The credit valuation adjustment ("
CVA
") is a fair value adjustment to the derivative to account for this risk. As of
September 30, 2017
and
December 31, 2016
, the Company's credit exposure was fully secured by the underlying collateral on customer loans and mitigated through netting arrangements with third-parties, therefore, no
CVA
was recorded. Capital market products income related to commercial customer derivative instruments of
$2.6 million
and
$6.2 million
were recorded in noninterest income for the
quarter and nine months
ended
September 30, 2017
, respectively. There were
$2.9 million
and
$8.2 million
of capital market products income recorded for the
quarter and nine months
ended
September 30, 2016
, respectively.
Other Derivative Instruments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Gross notional amount outstanding
|
|
$
|
2,463,967
|
|
|
$
|
1,656,612
|
|
Derivative asset fair value
|
|
18,268
|
|
|
13,478
|
|
Derivative liability fair value
|
|
(14,443
|
)
|
|
(13,478
|
)
|
Fair value of derivative
(1)
|
|
14,704
|
|
|
13,753
|
|
|
|
(1)
|
This amount represents the fair value if credit risk related contingent features were triggered.
|
The Company occasionally enters into risk participation agreements with counterparty banks to transfer or assume a portion of the credit risk related to customer transactions. The amounts of these instruments were not material for any periods presented. The Company had no other derivative instruments as of
September 30, 2017
and
December 31, 2016
. The Company does not enter into derivative transactions for purely speculative purposes.
Credit Risk
Derivative instruments are inherently subject to credit risk, which represents the Company's risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Credit risk is managed by limiting and collateralizing the aggregate amount of net unrealized losses by transaction, monitoring the size and the maturity structure of the derivatives, and applying uniform credit standards. Company policy establishes limits on credit exposure to any single counterparty. In addition, the Company established bilateral collateral agreements with derivative counterparties that provide for exchanges of marketable securities or cash to collateralize either party's net losses above a stated minimum threshold. As of
September 30, 2017
and
December 31, 2016
, these collateral agreements covered
100%
of the fair value of the Company's outstanding fair value hedges. Derivative assets and liabilities are presented gross, rather than net, of pledged collateral amounts.
Certain derivative instruments are subject to master netting agreements with counterparties. The Company records these transactions at their gross fair values and does not offset derivative assets and liabilities in the Consolidated Statements of Financial Condition. The following table presents the fair value of the Company's derivatives and offsetting positions as of
September 30, 2017
and
December 31, 2016
.
Fair Value of Offsetting Derivatives
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Gross amounts recognized
|
|
$
|
21,502
|
|
|
$
|
21,318
|
|
|
$
|
18,880
|
|
|
$
|
21,150
|
|
Less: amounts offset in the Consolidated Statements of
Financial Condition
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net amount presented in the Consolidated Statements of
Financial Condition
(1)
|
|
21,502
|
|
|
21,318
|
|
|
18,880
|
|
|
21,150
|
|
Gross amounts not offset in the Consolidated Statements of
Financial Condition:
|
|
|
|
|
|
|
|
|
Offsetting derivative positions
|
|
(16,557
|
)
|
|
(16,557
|
)
|
|
(10,889
|
)
|
|
(10,889
|
)
|
Cash collateral pledged
|
|
—
|
|
|
(4,761
|
)
|
|
—
|
|
|
(10,261
|
)
|
Net credit exposure
|
|
$
|
4,945
|
|
|
$
|
—
|
|
|
$
|
7,991
|
|
|
$
|
—
|
|
|
|
(1)
|
Included in other assets or other liabilities in the Consolidated Statements of Financial Condition.
|
As of
September 30, 2017
and
December 31, 2016
, the Company's derivative instruments generally contained provisions that require the Company's debt to remain above a certain credit rating by each of the major credit rating agencies or that the Company maintain certain capital levels. If the Company's debt were to fall below that credit rating or the Company's capital were to fall below the required levels, it would be in violation of those provisions, and the counterparties to the derivative instruments could terminate the swap transaction and demand cash settlement of the derivative instrument in an amount equal to the derivative liability fair value. As of
September 30, 2017
and
December 31, 2016
the Company was in compliance with these provisions.
15
.
COMMITMENTS, GUARANTEES, AND CONTINGENT LIABILITIES
Credit Commitments and Guarantees
In the normal course of business, the Company enters into a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and to conduct lending activities, including commitments to extend credit and standby and commercial letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.
Contractual or Notional Amounts of Financial Instruments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Commitments to extend credit:
|
|
|
|
|
Commercial, industrial, and agricultural
|
|
$
|
1,739,259
|
|
|
$
|
1,522,152
|
|
Commercial real estate
|
|
322,705
|
|
|
397,423
|
|
Home equity
|
|
512,560
|
|
|
426,384
|
|
Other commitments
(1)
|
|
246,609
|
|
|
214,943
|
|
Total commitments to extend credit
|
|
$
|
2,821,133
|
|
|
$
|
2,560,902
|
|
|
|
|
|
|
Letters of credit
|
|
$
|
132,990
|
|
|
$
|
100,430
|
|
|
|
(1)
|
Other commitments includes installment and overdraft protection program commitments.
|
Commitments to extend credit are agreements to lend funds to a customer, subject to contractual terms and covenants. Commitments generally have fixed expiration dates or other termination clauses, variable interest rates, and fee requirements, when applicable. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash flow requirements.
In the event of a customer's non-performance, the Company's credit loss exposure is equal to the contractual amount of the commitments. The credit risk is essentially the same as extending loans to customers for the full contractual amount. The Company uses the same credit policies for credit commitments as its loans and minimizes exposure to credit loss through various collateral requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Letters of credit generally are contingent on the failure of the customer to perform according to the terms of the contract with the third-party and are often issued in favor of a municipality where construction is taking place to ensure the borrower adequately completes the construction. Commercial letters of credit are issued to facilitate transactions between a customer and a third party based on agreed upon terms.
The maximum potential future payments guaranteed by the Company under letters of credit arrangements are equal to the contractual amount of the commitment. If a commitment is funded, the Company may seek recourse through the liquidation of the underlying collateral, including real estate, production plants and property, marketable securities, or receipt of cash.
As a result of the sale of certain 1-4 family mortgage loans, the Company is contractually obligated to repurchase early payment default loans or loans that do not meet underwriting requirements at recorded value. In accordance with the sales agreements, there is no limitation to the maximum potential future payments or expiration of the Company's recourse obligation. There were no material loan repurchases during the
quarters and nine months
ended
September 30, 2017
and
2016
.
Legal Proceedings
In the ordinary course of business, there were certain legal proceedings pending against the Company and its subsidiaries at
September 30, 2017
. While the outcome of any legal proceeding is inherently uncertain, based on information currently available, the Company's management does not expect that any liabilities arising from pending legal matters will have a material adverse effect on the Company's financial position, results of operations, or cash flows.
16
.
FAIR VALUE
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Statements of Financial Condition. Those assets and liabilities are presented below in the sections titled "Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis" and "Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis."
Other assets and liabilities are not required to be measured at fair value in the Consolidated Statements of Financial Condition, but must be disclosed at fair value. See the "Fair Value Measurements of Other Financial Instruments" section of this note. Any aggregation of the estimated fair values presented in this note does not represent the value of the Company.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value.
GAAP
provides a three-tiered fair value hierarchy based on the inputs used to measure fair value. The hierarchy is defined as follows:
|
|
•
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 - Observable inputs other than level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
|
|
|
•
|
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs require significant management judgment or estimation, some of which use model-based techniques and may be internally developed.
|
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.
Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured at fair value on a recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Recurring Fair Value Measurements
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,738
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,645
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds
|
|
18,687
|
|
|
—
|
|
|
—
|
|
|
16,275
|
|
|
—
|
|
|
—
|
|
Total trading securities
|
|
20,425
|
|
|
—
|
|
|
—
|
|
|
17,920
|
|
|
—
|
|
|
—
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
42,504
|
|
|
—
|
|
|
—
|
|
|
48,541
|
|
|
—
|
|
|
—
|
|
U.S. agency securities
|
|
—
|
|
|
154,607
|
|
|
—
|
|
|
—
|
|
|
183,637
|
|
|
—
|
|
CMOs
|
|
—
|
|
|
937,222
|
|
|
—
|
|
|
—
|
|
|
1,047,446
|
|
|
—
|
|
MBSs
|
|
—
|
|
|
355,473
|
|
|
—
|
|
|
—
|
|
|
332,655
|
|
|
—
|
|
Municipal securities
|
|
—
|
|
|
205,024
|
|
|
—
|
|
|
—
|
|
|
270,846
|
|
|
—
|
|
CDOs
|
|
—
|
|
|
—
|
|
|
30,826
|
|
|
—
|
|
|
—
|
|
|
33,260
|
|
Equity securities
|
|
—
|
|
|
7,328
|
|
|
—
|
|
|
—
|
|
|
3,065
|
|
|
—
|
|
Total securities available-for-sale
|
|
42,504
|
|
|
1,659,654
|
|
|
30,826
|
|
|
48,541
|
|
|
1,837,649
|
|
|
33,260
|
|
Mortgage servicing rights ("MSRs")
(1)
|
|
—
|
|
|
—
|
|
|
5,766
|
|
|
—
|
|
|
—
|
|
|
6,120
|
|
Derivative assets
(1)
|
|
—
|
|
|
21,502
|
|
|
—
|
|
|
—
|
|
|
18,880
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
(2)
|
|
$
|
—
|
|
|
$
|
21,318
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,150
|
|
|
$
|
—
|
|
|
|
(1)
|
Included in other assets in the Consolidated Statements of Financial Condition.
|
|
|
(2)
|
Included in other liabilities in the Consolidated Statements of Financial Condition.
|
The following sections describe the specific valuation techniques and inputs used to measure financial assets and liabilities at fair value.
Trading Securities
The Company's trading securities consist of diversified investment securities held in a grantor trust and are invested in money market and mutual funds. The fair value of these money market and mutual funds is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy.
Securities Available-for-Sale
The Company's securities available-for-sale are primarily fixed income instruments that are not quoted on an exchange, but may be traded in active markets. The fair values for these securities are based on quoted prices in active markets or market prices for similar securities obtained from external pricing services or dealer market participants and are classified in level 2 of the fair value hierarchy. The fair value of U.S. treasury securities is based on quoted market prices in active exchange markets and is classified in level 1 of the fair value hierarchy. Quarterly, the Company evaluates the methodologies used by its external pricing services to estimate the fair value of these securities to determine whether the valuations represent an exit price in the Company's principal markets.
CDOs
are classified in level 3 of the fair value hierarchy. The Company estimates the fair values for each
CDO
using discounted cash flow analyses with the assistance of a structured credit valuation firm. This methodology is based on credit analysis and historical financial data for each of the issuers underlying the
CDOs
(the "Issuers"). These estimates are highly subjective and sensitive to several significant, unobservable inputs. The cash flows for each Issuer are then discounted to present values using LIBOR plus an adjustment to reflect the impact of market factors. Finally, the discounted cash flows for each Issuer are aggregated to derive the estimated fair value for the specific
CDO
.
The following table presents the ranges of significant, unobservable inputs calculated using the weighted-average of the Issuers used by the Company as of
September 30, 2017
and December 31, 2016.
Significant Unobservable Inputs Used in the Valuation of CDOs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Probability of prepayment
|
|
0.0
|
%
|
-
|
11.4%
|
|
0.0
|
%
|
-
|
10.9%
|
Probability of default
|
|
16.5
|
%
|
-
|
44.8%
|
|
16.7
|
%
|
-
|
46.8%
|
Loss given default
|
|
93.4
|
%
|
-
|
99.2%
|
|
93.3
|
%
|
-
|
98.9%
|
Probability of deferral cure
|
|
0.0
|
%
|
-
|
100.0%
|
|
7.6
|
%
|
-
|
100.0%
|
Most Issuers have the right to prepay the securities on the fifth anniversary of issuance and under other limited circumstances. To estimate prepayments, a credit analysis of each Issuer is performed to estimate its ability and likelihood to fund a prepayment. If a prepayment occurs, the Company receives cash equal to the par value for the portion of the
CDO
associated with that Issuer.
The likelihood that an Issuer who is currently deferring payment on the securities will pay all deferred amounts and remain current thereafter is based on an analysis of the Issuer's asset quality, leverage ratios, and other measures of financial viability.
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for each
CDO
. The timing of the default, the magnitude of the default, and the timing and magnitude of the cure probability are directly interrelated. Defaults that occur sooner and/or are greater than anticipated have a negative impact on the valuation. In addition, a high cure probability assumption has a positive effect on the fair value, and, if a cure event takes place sooner than anticipated, the impact on the valuation is also favorable.
Management monitors the valuation results of each
CDO
on a quarterly basis, which includes an analysis of historical pricing trends for these types of securities, overall economic conditions (such as tracking LIBOR curves), and the performance of the Issuers' industries. Annually, management validates significant assumptions by reviewing detailed back-testing performed by the structured credit valuation firm.
A rollforward of the carrying value of
CDOs
for the
quarters and nine months
ended
September 30, 2017
and
2016
is presented in the following table.
Carrying Value of CDOs
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
33,454
|
|
|
$
|
30,431
|
|
|
$
|
33,260
|
|
|
$
|
31,529
|
|
Change in other comprehensive income
(1)
|
|
(739
|
)
|
|
1,794
|
|
|
(604
|
)
|
|
764
|
|
Other
|
|
(1,889
|
)
|
|
(326
|
)
|
|
(1,830
|
)
|
|
(394
|
)
|
Ending balance
|
|
$
|
30,826
|
|
|
$
|
31,899
|
|
|
$
|
30,826
|
|
|
$
|
31,899
|
|
|
|
(1)
|
Included in unrealized holding gains in the Consolidated Statements of Comprehensive Income.
|
During the third quarter of 2017,
three
CDOs with carrying values totaling
$1.9 million
were sold at gains.
MSR
s
The Company services loans for others totaling
$616.7 million
as of
September 30, 2017
and
$640.5 million
as of
December 31, 2016
. These loans are owned by third parties and are not included in the Consolidated Statements of Financial Condition. The Company determines the fair value of
MSR
s by estimating the present value of expected future cash flows associated with the mortgage loans being serviced and classifies them in level 3 of the fair value hierarchy. The following table presents the ranges of significant, unobservable inputs used by the Company to determine the fair value of
MSR
s as of
September 30, 2017
and
December 31, 2016
.
Significant Unobservable Inputs Used in the Valuation of
MSR
s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Prepayment speed
|
|
8.8
|
%
|
-
|
26.2%
|
|
7.7
|
%
|
-
|
22.8%
|
Maturity (months)
|
|
7
|
|
-
|
91
|
|
12
|
|
-
|
103
|
Discount rate
|
|
9.5
|
%
|
-
|
13.0%
|
|
9.5
|
%
|
-
|
13.0%
|
The impact of changes in these key inputs could result in a significantly higher or lower fair value measurement for
MSR
s. Significant increases in expected prepayment speeds and discount rates have negative impacts on the valuation. Higher maturity assumptions have a favorable effect on the estimated fair value.
A rollforward of the carrying value of
MSR
s for the
quarters and nine months
ended
September 30, 2017
and
2016
is presented in the following table.
Carrying Value of
MSR
s
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
5,925
|
|
|
$
|
4,938
|
|
|
$
|
6,120
|
|
|
$
|
1,853
|
|
Additions from acquisition
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,092
|
|
New MSRs
|
|
161
|
|
|
581
|
|
|
522
|
|
|
928
|
|
Total losses included in earnings
(1)
:
|
|
|
|
|
|
|
|
|
Changes in valuation inputs and assumptions
|
|
(121
|
)
|
|
(205
|
)
|
|
(209
|
)
|
|
(377
|
)
|
Other changes in fair value
(2)
|
|
(199
|
)
|
|
(238
|
)
|
|
(667
|
)
|
|
(420
|
)
|
Ending balance
|
|
$
|
5,766
|
|
|
$
|
5,076
|
|
|
$
|
5,766
|
|
|
$
|
5,076
|
|
Contractual servicing fees earned
(1)
|
|
$
|
379
|
|
|
$
|
373
|
|
|
$
|
1,158
|
|
|
$
|
922
|
|
|
|
(1)
|
Included in mortgage banking income in the Condensed Consolidated Statements of Income and related to assets held as of
September 30, 2017
and
2016
.
|
|
|
(2)
|
Primarily represents changes in expected future cash flows due to payoffs and paydowns.
|
Derivative Assets and Derivative Liabilities
The Company enters into interest rate swaps and derivative transactions with commercial customers. These derivative transactions are executed in the dealer market, and pricing is based on market quotes obtained from the counterparties. The market quotes were developed using market observable inputs, which primarily include LIBOR. Therefore, derivatives are classified in level 2 of the fair value hierarchy. For its derivative assets and liabilities, the Company also considers non-performance risk, including the likelihood of default by itself and its counterparties, when evaluating whether the market quotes from the counterparty are representative of an exit price.
Assets and Liabilities Required to be Measured at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured at fair value on a non-recurring basis in the Consolidated Statements of Financial Condition by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Collateral-dependent impaired loans
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,265
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,019
|
|
OREO
(2)
|
|
—
|
|
|
—
|
|
|
8,304
|
|
|
—
|
|
|
—
|
|
|
8,624
|
|
Loans held-for-sale
(3)
|
|
—
|
|
|
—
|
|
|
17,508
|
|
|
—
|
|
|
—
|
|
|
10,484
|
|
Assets held-for-sale
(4)
|
|
—
|
|
|
—
|
|
|
9,157
|
|
|
—
|
|
|
—
|
|
|
4,075
|
|
|
|
(1)
|
Includes impaired loans with charge-offs and impaired loans with a specific reserve during the periods presented.
|
|
|
(2)
|
Includes
OREO
with fair value adjustments subsequent to initial transfer that occurred during the periods presented.
|
|
|
(3)
|
Included in other assets in the Consolidated Statements of Financial Condition.
|
|
|
(4)
|
Included in premises, furniture, and equipment in the Consolidated Statements of Financial Condition.
|
Collateral-Dependent Impaired Loans
Certain collateral-dependent impaired loans are subject to fair value adjustments to reflect the difference between the carrying value of the loan and the value of the underlying collateral. The fair values of collateral-dependent impaired loans are primarily determined by current appraised values of the underlying collateral. Based on the age and/or type, appraisals may be adjusted in the range of
0%
to
15%
. In certain cases, an internal valuation may be used when the underlying collateral is located in areas where comparable sales data is limited or unavailable. Accordingly, collateral-dependent impaired loans are classified in level 3 of the fair value hierarchy.
Collateral-dependent impaired loans for which the fair value is greater than the recorded investment are not measured at fair value in the Consolidated Statements of Financial Condition and are not included in this disclosure.
OREO
The fair value of
OREO
is measured using the current appraised value of the properties. In certain circumstances, a current appraisal may not be available or may not represent an accurate measurement of the property's fair value due to outdated market information or other factors. In these cases, the fair value is determined based on the lower of the (i) most recent appraised value, (ii) broker price opinion, (iii) current listing price, or (iv) signed sales contract. Given these valuation methods,
OREO
is classified in level 3 of the fair value hierarchy.
Loans Held-for-Sale
As of
September 30, 2017
, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell. These loans were recorded in the held-for-sale category at the contract price and, accordingly, are classified in level 3 of the fair value hierarchy. As of
December 31, 2016
, loans held-for-sale consists of 1-4 family mortgage loans, which were originated with the intent to sell, and a corporate loan.
Assets Held-for-Sale
Assets held-for-sale as of
September 30, 2017
and
December 31, 2016
consists of former branches that are no longer in operation and parcels of land previously purchased for expansion. These properties are being actively marketed and were transferred into the held-for-sale category at their fair value as determined by current appraisals. Based on these valuation methods, they are classified in level 3 of the fair value hierarchy.
Financial Instruments Not Required to be Measured at Fair Value
For certain financial instruments that are not required to be measured at fair value in the Consolidated Statements of Financial Condition, the Company must disclose the estimated fair values and the level within the fair value hierarchy as shown in the following table.
Fair Value Measurements of Other Financial Instruments
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Fair Value Hierarchy
Level
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
1
|
|
$
|
174,147
|
|
|
$
|
174,147
|
|
|
$
|
155,055
|
|
|
$
|
155,055
|
|
Interest-bearing deposits in other banks
|
|
2
|
|
252,753
|
|
|
252,753
|
|
|
107,093
|
|
|
107,093
|
|
Securities held-to-maturity
|
|
2
|
|
14,638
|
|
|
12,921
|
|
|
22,291
|
|
|
18,212
|
|
FHLB and FRB stock
|
|
2
|
|
69,708
|
|
|
69,708
|
|
|
59,131
|
|
|
59,131
|
|
Loans
|
|
3
|
|
10,299,094
|
|
|
10,048,553
|
|
|
8,172,584
|
|
|
7,973,845
|
|
Investment in BOLI
|
|
3
|
|
279,639
|
|
|
279,639
|
|
|
219,746
|
|
|
219,746
|
|
Accrued interest receivable
|
|
3
|
|
43,697
|
|
|
43,697
|
|
|
34,384
|
|
|
34,384
|
|
Other interest-earning assets
|
|
3
|
|
327
|
|
|
327
|
|
|
834
|
|
|
834
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2
|
|
$
|
11,208,497
|
|
|
$
|
11,195,159
|
|
|
$
|
8,828,603
|
|
|
$
|
8,820,572
|
|
Borrowed funds
|
|
2
|
|
700,536
|
|
|
700,536
|
|
|
879,008
|
|
|
879,008
|
|
Senior and subordinated debt
|
|
2
|
|
195,028
|
|
|
194,449
|
|
|
194,603
|
|
|
197,888
|
|
Accrued interest payable
|
|
2
|
|
3,336
|
|
|
3,336
|
|
|
3,416
|
|
|
3,416
|
|
Management uses various methodologies and assumptions to determine the estimated fair values of the financial instruments in the table above. The fair value estimates are made at a discrete point in time based on relevant market information and consider management's judgments regarding future expected economic conditions, loss experience, and specific risk characteristics of the financial instruments.
Short-Term Financial Assets and Liabilities -
For financial instruments with a shorter-term or with no stated maturity, prevailing market rates, and limited credit risk, the carrying amounts approximate fair value. Those financial instruments include cash and due from banks, interest-bearing deposits in other banks, accrued interest receivable, and accrued interest payable.
Securities Held-to-Maturity -
The fair value of securities held-to-maturity is estimated using the present value of expected future cash flows of the remaining maturities of the securities.
FHLB
and
FRB
Stock -
The carrying amounts approximate fair value as the stock is non-marketable.
Loans -
Loans includes the
FDIC
indemnification asset and net loans, which consists of loans held-for-investment, acquired loans, and the allowance for loan losses. The fair value of loans is estimated using the present value of the expected future cash flows of the remaining maturities of the loans. Prepayment assumptions that consider the Company's historical experience and current economic and lending conditions were included. The discount rate was based on the LIBOR yield curve with adjustments for liquidity and credit risk inherent in the loans.
Investment in
BOLI
-
The fair value of
BOLI
approximates the carrying amount as both are based on each policy's respective cash surrender value ("CSV"), which is the amount the
Company
would receive from the liquidation of these investments. The CSV is derived from monthly reports provided by the managing brokers and is determined using the
Company
's initial insurance premium and earnings of the underlying assets, offset by management fees.
Other Interest-Earning Assets -
The fair value of other interest-earning assets is estimated using the present value of the expected future cash flows of the remaining maturities of the assets.
Deposits -
The fair values disclosed for demand deposits, savings deposits, NOW accounts, and money market deposits are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for fixed-rate time deposits
was estimated using the expected future cash flows discounted based on the LIBOR yield curve, plus or minus the spread associated with current pricing.
Borrowed Funds
-
The fair value of
FHLB
advances is estimated by discounting the agreements based on maturities using the rates currently offered for
FHLB
advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date. The carrying amounts of securities sold under agreements to repurchase approximate their fair value due to their short-term nature.
Senior and Subordinated Debt -
The fair values of senior and subordinated notes are estimated based on quoted market prices of similar instruments. The fair values of junior subordinated debentures are estimated based on quoted market prices of comparable securities when available, or by discounting the expected future cash flows at market interest rates.
Commitments to Extend Credit and Letters of Credit -
The
Company
estimated the fair value of lending commitments outstanding to be immaterial based on (i) the limited interest rate exposure of the commitments outstanding due to their variable nature, (ii) the short-term nature of the commitment periods, (iii) termination clauses provided in the agreements, and (iv) the market rate of fees charged.