Notes to Consolidated Financial Statements (Unaudited)
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2017 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.
Business Combinations
On January 1, 2018, the Company completed the acquisition of Xenith, a bank holding company based in Richmond, Virginia, for a purchase price of approximately
$801.0 million
. Under the terms of the merger agreement, Xenith’s common stockholders received
0.9354
shares of the Company’s common stock in exchange for each share of Xenith’s common stock, resulting in the Company issuing
21,922,077
shares of the Company's common stock. In addition, the Company paid
$6.2 million
in exchange for Xenith's outstanding options.
In connection with the acquisition, the Company recorded
$425.6 million
in goodwill and
$38.5
million of amortizable assets, which relate to core deposit intangibles. The goodwill is not expected to be deductible for tax purposes. The Company currently estimates that these intangibles assets will be amortized over
10
years using sum-of-years digits. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition.
Affordable Housing Entities
The Company invests in private investment funds that make equity investments in multifamily affordable housing properties that provide affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For the
three
months ended
March 31, 2018
and
March 31, 2017
, the Company recognized amortization of
$235,000
and
$223,000
, respectively, and tax credits of
$283,000
and
$309,000
, respectively, associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. The carrying value of the Company’s investments in these qualified affordable housing projects was
$11.6 million
and
$11.0 million
as of
March 31, 2018
and
December 31, 2017
, respectively. At
March 31, 2018
and
December 31, 2017
, the Company's recorded liability totaled
$8.3 million
and $
7.3 million
, respectively, for the related unfunded commitments, which are expected to be paid from 2018 to 2019.
Adoption of New Accounting Standards
On January 1, 2018, the Company adopted ASU No. 2014-09, “
Revenue from Contracts with Customers: Topic 606
” and all subsequent amendments to the ASU (“Topic 606”). This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The guidance, as amended, is applicable to all entities and replaces a significant portion of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope. The Company adopted this ASU using the modified retrospective approach, which requires a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. The adoption of ASU No. 2016-09 did not have a material impact on the Company’s consolidated financial results but did result in expanded disclosures related to noninterest income and enhanced qualitative disclosures on the revenues within the scope of the new guidance. Refer to Note 11 “Revenue" for further discussion on the Company's accounting policies for revenue sources within the scope of ASC 606.
On January 1, 2018, the Company adopted ASU No. 2016-01, “
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
.” This ASU requires an entity to, among other things: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in
instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements and resulted in enhancements to the financial instrument disclosures.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842).
” This ASU requires lessees to put most leases on their balance sheets, but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates the real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs, and lease executory costs for all entities. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently working to identify the complete lease population, including potential embedded leases. The adoption of this standard is expected to result in additional assets and liabilities, as the Company will be required to recognize operating leases on the Consolidated Balance Sheet. Other implementation matters to be addressed include, but are not limited to, the determination of effects on the financial and capital ratios and the quantification of the impacts that this accounting guidance will have on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
”
This ASU updates the existing guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The CECL model will replace the Company's current accounting for PCI and impaired loans. The guidance also amends the AFS debt securities OTTI model. The amendment is effective for fiscal years beginning after December 15, 2019. The Company is currently assessing the requirements and necessary changes to the existing credit loss estimation methods and identifying a complete set of data requirements and sources. The Company is currently evaluating the impact ASU No. 2016-13 will have on its consolidated financial statements. This guidance may result in material changes in the Company's accounting for credit losses on financial instruments.
In August 2017, the FASB issued ASU No. 2017-12, “
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
” This ASU relates to any entity that elects to apply hedge accounting in accordance with current GAAP. The amendment simplifies the application of the hedge accounting guidance and improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The targeted improvements in ASU No. 2017-12 will allow the Company a one-time transfer of certain debt securities from HTM to AFS. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company plans to early adopt this standard in the second quarter of 2018 using the modified retrospective approach. As part of this adoption, the Company plans to make the one time election to transfer eligible HTM securities to the AFS category in order to optimize the investment portfolio management for capital and risk management considerations. The Company plans to transfer HTM securities with a carrying amount of approximately
$200 million
, which will result in an impact to accumulated other comprehensive income. The consolidated financial statements for the quarter ended June 30, 2018, will also include a cumulative effect adjustment to the opening balance of retained earnings to reflect the application of the new guidance related to the fair value hedges. The Company is in the process of developing the required disclosures, which will be included in its second quarter 2018 Quarterly Report on Form 10-Q.
In February 2018, the FASB issued ASU No. 2018-02, “
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
”
This ASU allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about the stranded tax effects. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company plans to adopt this guidance in 2018 via the retrospective approach applying the effect of the change to the date of the enacted Tax Act, which was December 22, 2017. The Company has concluded the adoption of ASU No. 2018-02 will not have a material impact on its consolidated financial statements.
2. ACQUISITIONS
On January 1, 2018, the Company completed its acquisition of Xenith, a bank holding company based in Richmond, Virginia. Xenith's common stockholders received
0.9354
shares of the Company's common stock in exchange for each share of Xenith's common stock, resulting in the Company issuing
21,922,077
shares of the Company's common stock at a fair value of $
794.8 million
. In addition, the Company paid $
6.2 million
in exchange for Xenith's outstanding stock options.
The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350,
Intangibles-Goodwill and Other
. The following table provides a preliminary assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):
|
|
|
|
|
|
|
|
Purchase Price:
|
|
|
Fair value of shares of Union common stock issued & warrants converted
|
|
$
|
794,809
|
|
Cash paid for Xenith options
|
|
6,170
|
|
Total purchase price
|
|
$
|
800,979
|
|
|
|
|
Fair value of assets acquired:
|
|
|
Cash and cash equivalents
|
$
|
174,218
|
|
|
Securities available for sale
|
295,782
|
|
|
Restricted stock, at cost
|
27,569
|
|
|
Net loans
|
2,458,981
|
|
|
Premises and equipment
|
45,520
|
|
|
OREO
|
5,412
|
|
|
Core deposit intangibles
|
38,470
|
|
|
Other assets
|
203,468
|
|
|
Total assets
|
$
|
3,249,420
|
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
Deposits
|
$
|
2,549,683
|
|
|
Other short-term borrowings
|
235,000
|
|
|
Borrowings
|
55,542
|
|
|
Other liabilities
|
33,793
|
|
|
Total liabilities
|
$
|
2,874,018
|
|
|
|
|
|
Net assets acquired
|
|
$
|
375,402
|
|
Preliminary goodwill
|
|
$
|
425,577
|
|
The acquired loans were recorded at fair value at the acquisition date without carryover of Xenith’s previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). If new information is obtained about facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust fair values in accordance with accounting for business combinations.
The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30,
Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality
, (acquired impaired) and loans that
do not meet these criteria, which are accounted for under ASC 310-20,
Receivables - Nonrefundable Fees and Other Costs
, (acquired performing). The fair values of the acquired performing loans were $
2.4 billion
and the fair values of the acquired impaired loans were $
68.5 million
. The gross contractually required principal and interest payments receivable for acquired performing loans was $
2.7 billion
. The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $
22.2 million
.
The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):
|
|
|
|
|
Contractually required principal and interest payments
|
$
|
97,123
|
|
Nonaccretable difference
|
(16,422
|
)
|
Cash flows expected to be collected
|
80,701
|
|
Accretable difference
|
(12,225
|
)
|
Fair value of loans acquired with a deterioration of credit quality
|
$
|
68,476
|
|
The following table presents certain pro forma information as if Xenith had been acquired on January 1, 2017. These results combine the historical results of Xenith in the Company's Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017. In particular, no adjustments have been made to eliminate the amount of Xenith’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2017. Pro forma adjustments below include the net impact of accretion for 2017 and the elimination of merger-related costs for 2018. The Company expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Pro forma for the three months ended
|
|
March 31,
|
|
2018
|
|
2017
|
|
(unaudited)
|
|
(unaudited)
|
Total revenues
(1)
|
$
|
126,056
|
|
|
$
|
116,733
|
|
Net income
|
$
|
38,875
|
|
|
$
|
25,921
|
|
Earnings per share
|
$
|
0.59
|
|
|
$
|
0.40
|
|
(1)
Includes net interest income and noninterest income.
Merger-related costs associated with the acquisition of Xenith were $
27.7 million
for the three months ended March 31, 2018;
no
merger-related costs were incurred for the three months ended March 31, 2017. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, and employee severances, which have been expensed as incurred.
3. SECURITIES
Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of
March 31, 2018
and
December 31, 2017
are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Estimated
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Fair Value
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
365,816
|
|
|
$
|
3,002
|
|
|
$
|
(4,179
|
)
|
|
$
|
364,639
|
|
Corporate bonds
|
122,903
|
|
|
1,175
|
|
|
(938
|
)
|
|
123,140
|
|
Mortgage-backed securities
|
767,366
|
|
|
1,807
|
|
|
(14,761
|
)
|
|
754,412
|
|
Other securities
|
11,120
|
|
|
—
|
|
|
(132
|
)
|
|
10,988
|
|
Total available for sale securities
|
$
|
1,267,205
|
|
|
$
|
5,984
|
|
|
$
|
(20,010
|
)
|
|
$
|
1,253,179
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
295,546
|
|
|
$
|
6,842
|
|
|
$
|
(564
|
)
|
|
$
|
301,824
|
|
Corporate bonds
|
113,625
|
|
|
1,131
|
|
|
(876
|
)
|
|
113,880
|
|
Mortgage-backed securities
|
552,431
|
|
|
2,596
|
|
|
(6,169
|
)
|
|
548,858
|
|
Other securities
|
9,737
|
|
|
—
|
|
|
(77
|
)
|
|
9,660
|
|
Total available for sale securities
|
$
|
971,339
|
|
|
$
|
10,569
|
|
|
$
|
(7,686
|
)
|
|
$
|
974,222
|
|
The following table shows the gross unrealized losses and fair value (dollars in thousands) of the Company’s available for sale securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of
March 31, 2018
and
December 31, 2017
. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
More than 12 months
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
150,366
|
|
|
$
|
(3,288
|
)
|
|
$
|
16,413
|
|
|
$
|
(891
|
)
|
|
$
|
166,779
|
|
|
$
|
(4,179
|
)
|
Mortgage-backed securities
|
531,141
|
|
|
(10,089
|
)
|
|
139,217
|
|
|
(4,672
|
)
|
|
670,358
|
|
|
(14,761
|
)
|
Corporate bonds and other securities
|
21,775
|
|
|
(156
|
)
|
|
37,591
|
|
|
(914
|
)
|
|
59,366
|
|
|
(1,070
|
)
|
Total available for sale securities
|
$
|
703,282
|
|
|
$
|
(13,533
|
)
|
|
$
|
193,221
|
|
|
$
|
(6,477
|
)
|
|
$
|
896,503
|
|
|
$
|
(20,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
25,790
|
|
|
$
|
(132
|
)
|
|
$
|
16,934
|
|
|
$
|
(432
|
)
|
|
$
|
42,724
|
|
|
$
|
(564
|
)
|
Mortgage-backed securities
|
298,439
|
|
|
(3,267
|
)
|
|
136,298
|
|
|
(2,902
|
)
|
|
434,737
|
|
|
(6,169
|
)
|
Corporate bonds and other securities
|
10,976
|
|
|
(99
|
)
|
|
44,408
|
|
|
(854
|
)
|
|
55,384
|
|
|
(953
|
)
|
Total available for sale securities
|
$
|
335,205
|
|
|
$
|
(3,498
|
)
|
|
$
|
197,640
|
|
|
$
|
(4,188
|
)
|
|
$
|
532,845
|
|
|
$
|
(7,686
|
)
|
As of
March 31, 2018
, there were
$193.2 million
, or
74
issues, of individual available for sale securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of
$6.5 million
. As of
December 31, 2017
, there were
$197.6 million
, or
71
issues, of individual securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of
$4.2 million
. The Company has determined that these securities are temporarily impaired at
March 31, 2018
and
December 31, 2017
for the reasons set out below:
Mortgage-backed securities.
This category’s unrealized losses are primarily the result of interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired. Also, the majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee.
Obligations of state and political subdivisions.
This category’s unrealized losses are primarily the result of interest rate fluctuations and also a certain few ratings downgrades brought about by the impact of the credit crisis on states and political subdivisions. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
Corporate bonds.
The Company’s unrealized losses in corporate debt securities are related to both interest rate fluctuations and ratings downgrades for a limited number of securities. The majority of the securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
The following table presents the amortized cost and estimated fair value of available for sale securities as of
March 31, 2018
and
December 31, 2017
, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
30,048
|
|
|
$
|
30,097
|
|
|
$
|
25,179
|
|
|
$
|
25,326
|
|
Due after one year through five years
|
201,580
|
|
|
199,198
|
|
|
145,276
|
|
|
145,980
|
|
Due after five years through ten years
|
228,924
|
|
|
228,561
|
|
|
223,210
|
|
|
226,251
|
|
Due after ten years
|
806,653
|
|
|
795,323
|
|
|
577,674
|
|
|
576,665
|
|
Total securities available for sale
|
$
|
1,267,205
|
|
|
$
|
1,253,179
|
|
|
$
|
971,339
|
|
|
$
|
974,222
|
|
For information regarding the estimated fair value of available for sale securities which were pledged to secure public deposits, repurchase agreements, and for other purposes as permitted or required by law as of
March 31, 2018
and
December 31, 2017
, see Note 7 “Commitments and Contingencies.”
Held to Maturity
The Company reports securities held to maturity on the Consolidated Balance Sheets at carrying value. Carrying value is amortized cost which includes any unamortized unrealized gains and losses recognized in accumulated other comprehensive income prior to reclassifying the securities from securities available for sale to securities held to maturity. Investment securities transferred into the held to maturity category from the available for sale category are recorded at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the securities held to maturity. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.
The carrying value, gross unrealized gains and losses, and estimated fair values of securities held to maturity as of
March 31, 2018
and
December 31, 2017
are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Gross Unrealized
|
|
Estimated
|
|
Value
(1)
|
|
Gains
|
|
(Losses)
|
|
Fair Value
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
198,733
|
|
|
$
|
1,540
|
|
|
$
|
(369
|
)
|
|
$
|
199,904
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
199,639
|
|
|
$
|
4,014
|
|
|
$
|
(170
|
)
|
|
$
|
203,483
|
|
(1)
The carrying value includes
$3.2 million
as of
March 31, 2018
and
$3.6 million
as of
December 31, 2017
of net unrealized gains present at the time of transfer from available for sale securities, net of any accretion.
The following table shows the gross unrealized losses and fair value (dollars in thousands) of the Company’s held to maturity securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of
March 31, 2018
and
December 31, 2017
. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
More than 12 months
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
57,691
|
|
|
$
|
(302
|
)
|
|
$
|
2,629
|
|
|
$
|
(67
|
)
|
|
$
|
60,320
|
|
|
$
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
18,896
|
|
|
$
|
(139
|
)
|
|
$
|
1,084
|
|
|
$
|
(31
|
)
|
|
$
|
19,980
|
|
|
$
|
(170
|
)
|
As of
March 31, 2018
, there was
$2.6 million
, or
four
issues, of individual held to maturity securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of
$67,000
. As of
December 31, 2017
, there was
$1.1 million
, or
two
issues, of individual held to maturity securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of
$31,000
. These securities are municipal bonds with minimal credit exposure. For this reason, the Company has determined that these securities in a loss position were temporarily impaired as of
March 31, 2018
and
December 31, 2017
. Because the Company does not intend to sell these investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
The following table presents the amortized cost and estimated fair value of held to maturity securities as of
March 31, 2018
and
December 31, 2017
, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Carrying
Value
(1)
|
|
Estimated
Fair Value
|
|
Carrying
Value
(1)
|
|
Estimated
Fair Value
|
Due in one year or less
|
$
|
6,764
|
|
|
$
|
6,780
|
|
|
$
|
3,221
|
|
|
$
|
3,230
|
|
Due after one year through five years
|
48,016
|
|
|
48,265
|
|
|
44,289
|
|
|
44,601
|
|
Due after five years through ten years
|
78,816
|
|
|
79,099
|
|
|
79,114
|
|
|
80,532
|
|
Due after ten years
|
65,137
|
|
|
65,760
|
|
|
73,015
|
|
|
75,120
|
|
Total securities held to maturity
|
$
|
198,733
|
|
|
$
|
199,904
|
|
|
$
|
199,639
|
|
|
$
|
203,483
|
|
(1)
The carrying value includes
$3.2 million
as of
March 31, 2018
and
$3.6 million
as of
December 31, 2017
of net unrealized gains present at the time of transfer from available for sale securities, net of any accretion.
For information regarding the estimated fair value of held to maturity securities which were pledged to secure public deposits as permitted or required by law as of
March 31, 2018
and
December 31, 2017
, see Note 7 “Commitments and Contingencies.”
Restricted Stock, at cost
Due to restrictions placed upon the Bank’s common stock investment in the Federal Reserve Bank and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company’s Consolidated Balance Sheets. At
March 31, 2018
and
December 31, 2017
, the FHLB required the Bank to maintain stock in an amount equal to
4.25%
of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank required the Bank to maintain stock with a par value equal to
6%
of the Bank's outstanding capital at both
March 31, 2018
and
December 31, 2017
. Restricted equity securities consist of Federal Reserve Bank stock in the amount of
$42.0 million
and
$27.6 million
for
March 31, 2018
and
December 31, 2017
and FHLB stock in the amount of
$63.2 million
and
$47.7 million
as of
March 31, 2018
and
December 31, 2017
, respectively.
Other-Than-Temporary-Impairment
During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the
three
months ended
March 31, 2018
, and in accordance with accounting guidance,
no
OTTI was recognized.
Realized Gains and Losses
The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the
three
months ended
March 31, 2018
and
2017
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2018
|
|
Three Months Ended
March 31, 2017
|
Realized gains (losses):
|
|
|
|
|
|
Gross realized gains
|
$
|
697
|
|
|
$
|
481
|
|
Gross realized losses
|
(484
|
)
|
|
—
|
|
Net realized gains
|
$
|
213
|
|
|
$
|
481
|
|
|
|
|
|
Proceeds from sales of securities
|
$
|
115,850
|
|
|
$
|
21,306
|
|
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at their face amount, net of deferred fees and costs, and consist of the following at
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Construction and Land Development
|
$
|
1,249,196
|
|
|
$
|
948,791
|
|
Commercial Real Estate - Owner Occupied
|
1,279,155
|
|
|
943,933
|
|
Commercial Real Estate - Non-Owner Occupied
|
2,230,463
|
|
|
1,713,659
|
|
Multifamily Real Estate
|
547,520
|
|
|
357,079
|
|
Commercial & Industrial
|
1,125,733
|
|
|
612,023
|
|
Residential 1-4 Family - Commercial
|
714,660
|
|
|
612,395
|
|
Residential 1-4 Family - Mortgage
|
604,354
|
|
|
485,690
|
|
Auto
|
288,089
|
|
|
282,474
|
|
HELOC
|
642,084
|
|
|
537,521
|
|
Consumer
|
839,699
|
|
|
408,667
|
|
Other Commercial
|
284,770
|
|
|
239,320
|
|
Total loans held for investment, net
(1)
|
$
|
9,805,723
|
|
|
$
|
7,141,552
|
|
(1)
Loans, as presented, are net of deferred fees and costs totaling
$2.7 million
and
$1.3 million
as of
March 31, 2018
and
December 31, 2017
, respectively.
The following table shows the aging of the Company’s loan portfolio, by segment, at
March 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater than 90
Days and still
Accruing
|
|
PCI
|
|
Nonaccrual
|
|
Current
|
|
Total Loans
|
Construction and Land Development
|
$
|
403
|
|
|
$
|
1,291
|
|
|
$
|
322
|
|
|
$
|
10,202
|
|
|
$
|
6,391
|
|
|
$
|
1,230,587
|
|
|
$
|
1,249,196
|
|
Commercial Real Estate - Owner Occupied
|
4,985
|
|
|
777
|
|
|
—
|
|
|
25,826
|
|
|
2,539
|
|
|
1,245,028
|
|
|
1,279,155
|
|
Commercial Real Estate - Non-Owner Occupied
|
1,867
|
|
|
—
|
|
|
—
|
|
|
19,594
|
|
|
2,089
|
|
|
2,206,913
|
|
|
2,230,463
|
|
Multifamily Real Estate
|
—
|
|
|
—
|
|
|
—
|
|
|
3,380
|
|
|
—
|
|
|
544,140
|
|
|
547,520
|
|
Commercial & Industrial
|
2,608
|
|
|
1,254
|
|
|
200
|
|
|
2,890
|
|
|
1,969
|
|
|
1,116,812
|
|
|
1,125,733
|
|
Residential 1-4 Family - Commercial
|
3,707
|
|
|
960
|
|
|
113
|
|
|
14,826
|
|
|
1,512
|
|
|
693,542
|
|
|
714,660
|
|
Residential 1-4 Family - Mortgage
|
6,210
|
|
|
1,397
|
|
|
1,148
|
|
|
20,517
|
|
|
7,929
|
|
|
567,153
|
|
|
604,354
|
|
Auto
|
2,167
|
|
|
193
|
|
|
170
|
|
|
14
|
|
|
394
|
|
|
285,151
|
|
|
288,089
|
|
HELOC
|
3,564
|
|
|
1,346
|
|
|
306
|
|
|
1,884
|
|
|
2,072
|
|
|
632,912
|
|
|
642,084
|
|
Consumer and all
other
(1)
|
4,179
|
|
|
2,074
|
|
|
371
|
|
|
3,728
|
|
|
243
|
|
|
1,113,874
|
|
|
1,124,469
|
|
Total loans held for investment
|
$
|
29,690
|
|
|
$
|
9,292
|
|
|
$
|
2,630
|
|
|
$
|
102,861
|
|
|
$
|
25,138
|
|
|
$
|
9,636,112
|
|
|
$
|
9,805,723
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following table shows the aging of the Company’s loan portfolio, by segment, at
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater than 90
Days and still
Accruing
|
|
PCI
|
|
Nonaccrual
|
|
Current
|
|
Total Loans
|
Construction and Land Development
|
$
|
1,248
|
|
|
$
|
898
|
|
|
$
|
1,340
|
|
|
$
|
2,838
|
|
|
$
|
5,610
|
|
|
$
|
936,857
|
|
|
$
|
948,791
|
|
Commercial Real Estate - Owner Occupied
|
444
|
|
|
81
|
|
|
—
|
|
|
14,790
|
|
|
2,708
|
|
|
925,910
|
|
|
943,933
|
|
Commercial Real Estate - Non-Owner Occupied
|
187
|
|
|
84
|
|
|
194
|
|
|
6,610
|
|
|
2,992
|
|
|
1,703,592
|
|
|
1,713,659
|
|
Multifamily Real Estate
|
—
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
—
|
|
|
356,999
|
|
|
357,079
|
|
Commercial & Industrial
|
1,147
|
|
|
109
|
|
|
214
|
|
|
408
|
|
|
316
|
|
|
609,829
|
|
|
612,023
|
|
Residential 1-4 Family - Commercial
|
1,682
|
|
|
700
|
|
|
579
|
|
|
9,414
|
|
|
1,085
|
|
|
598,935
|
|
|
612,395
|
|
Residential 1-4 Family - Mortgage
|
3,838
|
|
|
2,541
|
|
|
546
|
|
|
3,733
|
|
|
6,269
|
|
|
468,763
|
|
|
485,690
|
|
Auto
|
3,541
|
|
|
185
|
|
|
40
|
|
|
—
|
|
|
413
|
|
|
278,295
|
|
|
282,474
|
|
HELOC
|
2,382
|
|
|
717
|
|
|
217
|
|
|
950
|
|
|
2,075
|
|
|
531,180
|
|
|
537,521
|
|
Consumer and all other
(1)
|
2,404
|
|
|
2,052
|
|
|
402
|
|
|
198
|
|
|
275
|
|
|
642,656
|
|
|
647,987
|
|
Total loans held for investment
|
$
|
16,873
|
|
|
$
|
7,367
|
|
|
$
|
3,532
|
|
|
$
|
39,021
|
|
|
$
|
21,743
|
|
|
$
|
7,053,016
|
|
|
$
|
7,141,552
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following table shows the PCI loan portfolios, by segment and their delinquency status, at
March 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days Past
Due
|
|
Greater than 90
Days
|
|
Current
|
|
Total
|
Construction and Land Development
|
$
|
54
|
|
|
$
|
1,909
|
|
|
$
|
8,239
|
|
|
$
|
10,202
|
|
Commercial Real Estate - Owner Occupied
|
438
|
|
|
4,995
|
|
|
20,393
|
|
|
25,826
|
|
Commercial Real Estate - Non-Owner Occupied
|
180
|
|
|
1,558
|
|
|
17,856
|
|
|
19,594
|
|
Multifamily Real Estate
|
—
|
|
|
—
|
|
|
3,380
|
|
|
3,380
|
|
Commercial & Industrial
|
38
|
|
|
120
|
|
|
2,732
|
|
|
2,890
|
|
Residential 1-4 Family - Commercial
|
383
|
|
|
1,454
|
|
|
12,989
|
|
|
14,826
|
|
Residential 1-4 Family - Mortgage
|
1,673
|
|
|
4,076
|
|
|
14,768
|
|
|
20,517
|
|
Auto
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
HELOC
|
83
|
|
|
645
|
|
|
1,156
|
|
|
1,884
|
|
Consumer and all other
(1)
|
7
|
|
|
220
|
|
|
3,501
|
|
|
3,728
|
|
Total
|
$
|
2,856
|
|
|
$
|
14,977
|
|
|
$
|
85,028
|
|
|
$
|
102,861
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following table shows the PCI loan portfolios, by segment and their delinquency status, at
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-89 Days Past
Due
|
|
Greater than 90
Days
|
|
Current
|
|
Total
|
Construction and Land Development
|
$
|
8
|
|
|
$
|
57
|
|
|
$
|
2,773
|
|
|
$
|
2,838
|
|
Commercial Real Estate - Owner Occupied
|
381
|
|
|
478
|
|
|
13,931
|
|
|
14,790
|
|
Commercial Real Estate - Non-Owner Occupied
|
188
|
|
|
233
|
|
|
6,189
|
|
|
6,610
|
|
Multifamily Real Estate
|
—
|
|
|
—
|
|
|
80
|
|
|
80
|
|
Commercial & Industrial
|
—
|
|
|
—
|
|
|
408
|
|
|
408
|
|
Residential 1-4 Family - Commercial
|
433
|
|
|
351
|
|
|
8,630
|
|
|
9,414
|
|
Residential 1-4 Family - Mortgage
|
343
|
|
|
626
|
|
|
2,764
|
|
|
3,733
|
|
HELOC
|
291
|
|
|
214
|
|
|
445
|
|
|
950
|
|
Consumer and all other
(1)
|
—
|
|
|
—
|
|
|
198
|
|
|
198
|
|
Total
|
$
|
1,644
|
|
|
$
|
1,959
|
|
|
$
|
35,418
|
|
|
$
|
39,021
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. The following table shows the Company’s impaired loans, excluding PCI loans, by segment at
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
Loans without a specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
$
|
11,652
|
|
|
$
|
11,831
|
|
|
$
|
—
|
|
|
$
|
16,035
|
|
|
$
|
16,214
|
|
|
$
|
—
|
|
Commercial Real Estate - Owner Occupied
|
15,966
|
|
|
16,347
|
|
|
—
|
|
|
5,427
|
|
|
5,527
|
|
|
—
|
|
Commercial Real Estate - Non-Owner Occupied
|
7,545
|
|
|
7,727
|
|
|
—
|
|
|
6,017
|
|
|
6,103
|
|
|
—
|
|
Commercial & Industrial
|
2,313
|
|
|
2,649
|
|
|
—
|
|
|
1,681
|
|
|
1,933
|
|
|
—
|
|
Residential 1-4 Family - Commercial
|
5,459
|
|
|
6,254
|
|
|
—
|
|
|
4,098
|
|
|
4,879
|
|
|
—
|
|
Residential 1-4 Family - Mortgage
|
12,910
|
|
|
13,238
|
|
|
—
|
|
|
9,512
|
|
|
9,786
|
|
|
|
HELOC
|
3,497
|
|
|
3,788
|
|
|
—
|
|
|
2,056
|
|
|
2,144
|
|
|
—
|
|
Consumer and all other
(1)
|
585
|
|
|
753
|
|
|
—
|
|
|
567
|
|
|
734
|
|
|
—
|
|
Total impaired loans without a specific allowance
|
$
|
59,927
|
|
|
$
|
62,587
|
|
|
$
|
—
|
|
|
$
|
45,393
|
|
|
$
|
47,320
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with a specific allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
$
|
526
|
|
|
$
|
572
|
|
|
$
|
78
|
|
|
$
|
1,536
|
|
|
$
|
1,573
|
|
|
$
|
122
|
|
Commercial Real Estate - Owner Occupied
|
820
|
|
|
830
|
|
|
74
|
|
|
1,161
|
|
|
1,161
|
|
|
94
|
|
Commercial Real Estate - Non-Owner Occupied
|
83
|
|
|
83
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial & Industrial
|
2,074
|
|
|
2,113
|
|
|
60
|
|
|
1,295
|
|
|
1,319
|
|
|
128
|
|
Residential 1-4 Family - Commercial
|
909
|
|
|
921
|
|
|
30
|
|
|
1,062
|
|
|
1,068
|
|
|
35
|
|
Residential 1-4 Family - Mortgage
|
3,279
|
|
|
3,532
|
|
|
88
|
|
|
1,953
|
|
|
2,070
|
|
|
36
|
|
Auto
|
740
|
|
|
900
|
|
|
3
|
|
|
413
|
|
|
577
|
|
|
2
|
|
HELOC
|
936
|
|
|
1,053
|
|
|
167
|
|
|
464
|
|
|
535
|
|
|
51
|
|
Consumer and all other
(1)
|
159
|
|
|
298
|
|
|
1
|
|
|
204
|
|
|
309
|
|
|
35
|
|
Total impaired loans with a specific allowance
|
$
|
9,526
|
|
|
$
|
10,302
|
|
|
$
|
502
|
|
|
$
|
8,088
|
|
|
$
|
8,612
|
|
|
$
|
503
|
|
Total impaired loans
|
$
|
69,453
|
|
|
$
|
72,889
|
|
|
$
|
502
|
|
|
$
|
53,481
|
|
|
$
|
55,932
|
|
|
$
|
503
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following tables show the average recorded investment and interest income recognized for the Company’s impaired loans, excluding PCI loans, by segment for the
three
months ended
March 31, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2018
|
|
Three Months Ended
March 31, 2017
|
|
Average
Investment
|
|
Interest Income
Recognized
|
|
Average
Investment
|
|
Interest Income
Recognized
|
Construction and Land Development
|
$
|
12,326
|
|
|
$
|
74
|
|
|
$
|
17,179
|
|
|
$
|
139
|
|
Commercial Real Estate - Owner Occupied
|
17,112
|
|
|
160
|
|
|
6,793
|
|
|
64
|
|
Commercial Real Estate - Non-Owner Occupied
|
7,904
|
|
|
61
|
|
|
11,540
|
|
|
108
|
|
Commercial & Industrial
|
4,933
|
|
|
45
|
|
|
6,830
|
|
|
36
|
|
Residential 1-4 Family - Commercial
|
6,618
|
|
|
56
|
|
|
5,251
|
|
|
43
|
|
Residential 1-4 Family - Mortgage
|
16,529
|
|
|
77
|
|
|
7,796
|
|
|
30
|
|
Auto
|
836
|
|
|
5
|
|
|
477
|
|
|
1
|
|
HELOC
|
4,784
|
|
|
32
|
|
|
2,366
|
|
|
4
|
|
Consumer and all other
(1)
|
764
|
|
|
7
|
|
|
303
|
|
|
—
|
|
Total impaired loans
|
$
|
71,806
|
|
|
$
|
517
|
|
|
$
|
58,535
|
|
|
$
|
425
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The Company considers TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology and are included in the preceding impaired loan tables. For the
three
months ended
March 31, 2018
, the recorded investment in TDRs prior to modifications was not materially impacted by the modification.
The following table provides a summary, by segment, of TDRs that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and TDRs that have been placed on nonaccrual status, which are considered to be nonperforming, as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
No. of
Loans
|
|
Recorded
Investment
|
|
Outstanding
Commitment
|
|
No. of
Loans
|
|
Recorded
Investment
|
|
Outstanding
Commitment
|
Performing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
3
|
|
|
$
|
1,658
|
|
|
$
|
—
|
|
|
7
|
|
|
$
|
2,803
|
|
|
$
|
—
|
|
Commercial Real Estate - Owner Occupied
|
8
|
|
|
3,010
|
|
|
—
|
|
|
5
|
|
|
2,221
|
|
|
—
|
|
Commercial Real Estate - Non-Owner Occupied
|
2
|
|
|
571
|
|
|
—
|
|
|
2
|
|
|
715
|
|
|
—
|
|
Commercial & Industrial
|
4
|
|
|
876
|
|
|
—
|
|
|
12
|
|
|
2,057
|
|
|
—
|
|
Residential 1-4 Family - Commercial
|
17
|
|
|
1,189
|
|
|
—
|
|
|
16
|
|
|
1,048
|
|
|
—
|
|
Residential 1-4 Family - Mortgage
|
27
|
|
|
5,478
|
|
|
—
|
|
|
24
|
|
|
5,194
|
|
|
—
|
|
HELOC
|
1
|
|
|
20
|
|
|
—
|
|
|
1
|
|
|
20
|
|
|
—
|
|
Consumer and all other
(1)
|
1
|
|
|
490
|
|
|
—
|
|
|
1
|
|
|
495
|
|
|
—
|
|
Total performing
|
63
|
|
|
$
|
13,292
|
|
|
$
|
—
|
|
|
68
|
|
|
$
|
14,553
|
|
|
$
|
—
|
|
Nonperforming
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
3
|
|
|
$
|
1,175
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
702
|
|
|
$
|
—
|
|
Commercial Real Estate - Owner Occupied
|
2
|
|
|
128
|
|
|
—
|
|
|
2
|
|
|
134
|
|
|
—
|
|
Commercial & Industrial
|
10
|
|
|
1,116
|
|
|
—
|
|
|
2
|
|
|
108
|
|
|
—
|
|
Residential 1-4 Family - Commercial
|
5
|
|
|
535
|
|
|
—
|
|
|
5
|
|
|
558
|
|
|
—
|
|
Residential 1-4 Family - Mortgage
|
7
|
|
|
1,249
|
|
|
—
|
|
|
7
|
|
|
1,264
|
|
|
—
|
|
HELOC
|
1
|
|
|
60
|
|
|
—
|
|
|
1
|
|
|
59
|
|
|
—
|
|
Consumer and all other
(1)
|
1
|
|
|
21
|
|
|
—
|
|
|
1
|
|
|
24
|
|
|
—
|
|
Total nonperforming
|
29
|
|
|
$
|
4,284
|
|
|
$
|
—
|
|
|
20
|
|
|
$
|
2,849
|
|
|
$
|
—
|
|
Total performing and nonperforming
|
92
|
|
|
$
|
17,576
|
|
|
$
|
—
|
|
|
88
|
|
|
$
|
17,402
|
|
|
$
|
—
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The Company considers a default of a TDR to occur when the borrower is
90 days
past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. The following table shows, by segment and modification type, TDRs that occurred during the
three
months ended
March 31, 2018
and
2017
and TDRs that were identified by the Company as going into default during the period shown that were restructured in the prior twelve-month period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Restructurings
|
|
Restructurings with Payment Default
|
|
Three Months Ended
March 31, 2018
|
|
Three Months Ended
March 31, 2017
|
|
Three Months Ended
March 31, 2018
|
|
Three Months Ended
March 31, 2017
|
|
No. of
Loans
|
|
Recorded
Investment at
Period End
|
|
No. of
Loans
|
|
Recorded
Investment at
Period End
|
|
No. of
Loans
|
|
Recorded
Investment at
Period End
|
|
No. of
Loans
|
|
Recorded
Investment at
Period End
|
Modified to interest only, at a market rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
—
|
|
|
$
|
—
|
|
|
5
|
|
|
$
|
661
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Total interest only at market rate of interest
|
—
|
|
|
$
|
—
|
|
|
5
|
|
|
$
|
661
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term modification, at a market rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
1,015
|
|
|
—
|
|
|
$
|
—
|
|
Commercial Real Estate - Owner Occupied
|
3
|
|
|
811
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial Real Estate - Non-Owner Occupied
|
—
|
|
|
—
|
|
|
2
|
|
|
1,637
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial & Industrial
|
—
|
|
|
—
|
|
|
2
|
|
|
836
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential 1-4 Family - Commercial
|
1
|
|
|
152
|
|
|
1
|
|
|
207
|
|
|
1
|
|
|
60
|
|
|
—
|
|
|
—
|
|
Residential 1-4 Family - Mortgage
|
1
|
|
|
140
|
|
|
2
|
|
|
173
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total loan term extended at a market rate
|
5
|
|
|
$
|
1,103
|
|
|
7
|
|
|
$
|
2,853
|
|
|
3
|
|
|
$
|
1,075
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term modification, below market rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
—
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
128
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Residential 1-4 Family - Commercial
|
—
|
|
|
—
|
|
|
2
|
|
|
87
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential 1-4 Family - Mortgage
|
2
|
|
|
164
|
|
|
2
|
|
|
778
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total loan term extended at a below market rate
|
2
|
|
|
$
|
164
|
|
|
6
|
|
|
$
|
993
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
7
|
|
|
$
|
1,267
|
|
|
18
|
|
|
$
|
4,507
|
|
|
3
|
|
|
$
|
1,075
|
|
|
—
|
|
|
$
|
—
|
|
The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by segment for the
three
months ended and as of
March 31, 2018
. The table below includes the provision for loan losses. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
Balance,
beginning of the
year
|
|
Recoveries
credited to
allowance
|
|
Loans charged
off
|
|
Provision
charged to
operations
|
|
Balance, end of
period
|
Construction and Land Development
|
$
|
9,709
|
|
|
$
|
226
|
|
|
$
|
(6
|
)
|
|
$
|
287
|
|
|
$
|
10,216
|
|
Commercial Real Estate - Owner Occupied
|
2,931
|
|
|
109
|
|
|
(125
|
)
|
|
1,057
|
|
|
3,972
|
|
Commercial Real Estate - Non-Owner Occupied
|
7,544
|
|
|
4
|
|
|
(94
|
)
|
|
(353
|
)
|
|
7,101
|
|
Multifamily Real Estate
|
1,092
|
|
|
5
|
|
|
—
|
|
|
290
|
|
|
1,387
|
|
Commercial & Industrial
|
4,552
|
|
|
186
|
|
|
(206
|
)
|
|
1,162
|
|
|
5,694
|
|
Residential 1-4 Family - Commercial
|
4,437
|
|
|
52
|
|
|
(10
|
)
|
|
(1,787
|
)
|
|
2,692
|
|
Residential 1-4 Family - Mortgage
|
1,524
|
|
|
153
|
|
|
(100
|
)
|
|
638
|
|
|
2,215
|
|
Auto
|
975
|
|
|
88
|
|
|
(168
|
)
|
|
125
|
|
|
1,020
|
|
HELOC
|
1,360
|
|
|
276
|
|
|
(84
|
)
|
|
(81
|
)
|
|
1,471
|
|
Consumer and all other
(1)
|
4,084
|
|
|
381
|
|
|
(1,766
|
)
|
|
2,162
|
|
|
4,861
|
|
Total
|
$
|
38,208
|
|
|
$
|
1,480
|
|
|
$
|
(2,559
|
)
|
|
$
|
3,500
|
|
|
$
|
40,629
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated
for impairment
|
|
Loans collectively evaluated for
impairment
|
|
Loans acquired with
deteriorated credit quality
|
|
Total
|
|
Loans
|
|
ALL
|
|
Loans
|
|
ALL
|
|
Loans
|
|
ALL
|
|
Loans
|
|
ALL
|
Construction and Land Development
|
$
|
12,178
|
|
|
$
|
78
|
|
|
$
|
1,226,816
|
|
|
$
|
10,138
|
|
|
$
|
10,202
|
|
|
$
|
—
|
|
|
$
|
1,249,196
|
|
|
$
|
10,216
|
|
Commercial Real Estate - Owner Occupied
|
16,786
|
|
|
74
|
|
|
1,236,543
|
|
|
3,898
|
|
|
25,826
|
|
|
—
|
|
|
1,279,155
|
|
|
3,972
|
|
Commercial Real Estate - Non-Owner Occupied
|
7,628
|
|
|
1
|
|
|
2,203,241
|
|
|
7,100
|
|
|
19,594
|
|
|
—
|
|
|
2,230,463
|
|
|
7,101
|
|
Multifamily Real Estate
|
—
|
|
|
—
|
|
|
544,140
|
|
|
1,387
|
|
|
3,380
|
|
|
—
|
|
|
547,520
|
|
|
1,387
|
|
Commercial & Industrial
|
4,387
|
|
|
60
|
|
|
1,118,456
|
|
|
5,634
|
|
|
2,890
|
|
|
—
|
|
|
1,125,733
|
|
|
5,694
|
|
Residential 1-4 Family - Commercial
|
6,368
|
|
|
30
|
|
|
693,466
|
|
|
2,662
|
|
|
14,826
|
|
|
—
|
|
|
714,660
|
|
|
2,692
|
|
Residential 1-4 Family - Mortgage
|
16,189
|
|
|
88
|
|
|
567,648
|
|
|
2,127
|
|
|
20,517
|
|
|
—
|
|
|
604,354
|
|
|
2,215
|
|
Auto
|
740
|
|
|
3
|
|
|
287,335
|
|
|
1,017
|
|
|
14
|
|
|
—
|
|
|
288,089
|
|
|
1,020
|
|
HELOC
|
4,433
|
|
|
167
|
|
|
635,767
|
|
|
1,304
|
|
|
1,884
|
|
|
—
|
|
|
642,084
|
|
|
1,471
|
|
Consumer and all other
(1)
|
744
|
|
|
1
|
|
|
1,119,997
|
|
|
4,860
|
|
|
3,728
|
|
|
—
|
|
|
1,124,469
|
|
|
4,861
|
|
Total loans held for investment, net
|
$
|
69,453
|
|
|
$
|
502
|
|
|
$
|
9,633,409
|
|
|
$
|
40,127
|
|
|
$
|
102,861
|
|
|
$
|
—
|
|
|
$
|
9,805,723
|
|
|
$
|
40,629
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by segment for the
three
months ended and as of
March 31, 2017
. In addition, a $
112,000
provision was recognized during the
three
months ended
March 31, 2017
for unfunded loan commitments for which the reserves are recorded as a component of “Other Liabilities” on the Company’s Consolidated Balance Sheets. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
Balance,
beginning of the
year
|
|
Recoveries
credited to
allowance
|
|
Loans charged
off
|
|
Provision
charged to
operations
|
|
Balance, end of
period
|
Construction and Land Development
|
$
|
10,055
|
|
|
$
|
37
|
|
|
$
|
(45
|
)
|
|
$
|
(496
|
)
|
|
$
|
9,551
|
|
Commercial Real Estate - Owner Occupied
|
3,801
|
|
|
20
|
|
|
—
|
|
|
(600
|
)
|
|
3,221
|
|
Commercial Real Estate - Non-Owner Occupied
|
6,622
|
|
|
—
|
|
|
—
|
|
|
640
|
|
|
7,262
|
|
Multifamily Real Estate
|
1,236
|
|
|
—
|
|
|
—
|
|
|
198
|
|
|
1,434
|
|
Commercial & Industrial
|
4,627
|
|
|
139
|
|
|
(241
|
)
|
|
754
|
|
|
5,279
|
|
Residential 1-4 Family - Commercial
|
3,698
|
|
|
91
|
|
|
(70
|
)
|
|
132
|
|
|
3,851
|
|
Residential 1-4 Family - Mortgage
|
2,701
|
|
|
37
|
|
|
(65
|
)
|
|
95
|
|
|
2,768
|
|
Auto
|
946
|
|
|
108
|
|
|
(248
|
)
|
|
139
|
|
|
945
|
|
HELOC
|
1,328
|
|
|
88
|
|
|
(194
|
)
|
|
47
|
|
|
1,269
|
|
Consumer and all other
(1)
|
2,178
|
|
|
325
|
|
|
(770
|
)
|
|
1,101
|
|
|
2,834
|
|
Total
|
$
|
37,192
|
|
|
$
|
845
|
|
|
$
|
(1,633
|
)
|
|
$
|
2,010
|
|
|
$
|
38,414
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated
for impairment
|
|
Loans collectively evaluated for
impairment
|
|
Loans acquired with
deteriorated credit quality
|
|
Total
|
|
Loans
|
|
ALL
|
|
Loans
|
|
ALL
|
|
Loans
|
|
ALL
|
|
Loans
|
|
ALL
|
Construction and Land Development
|
$
|
17,301
|
|
|
$
|
729
|
|
|
$
|
750,210
|
|
|
$
|
8,822
|
|
|
$
|
2,776
|
|
|
$
|
—
|
|
|
$
|
770,287
|
|
|
$
|
9,551
|
|
Commercial Real Estate - Owner Occupied
|
6,759
|
|
|
3
|
|
|
845,601
|
|
|
3,218
|
|
|
18,199
|
|
|
—
|
|
|
870,559
|
|
|
3,221
|
|
Commercial Real Estate - Non-Owner Occupied
|
11,516
|
|
|
745
|
|
|
1,603,526
|
|
|
6,517
|
|
|
16,725
|
|
|
—
|
|
|
1,631,767
|
|
|
7,262
|
|
Multifamily Real Estate
|
—
|
|
|
—
|
|
|
351,711
|
|
|
1,434
|
|
|
2,058
|
|
|
—
|
|
|
353,769
|
|
|
1,434
|
|
Commercial & Industrial
|
6,100
|
|
|
617
|
|
|
569,734
|
|
|
4,662
|
|
|
733
|
|
|
—
|
|
|
576,567
|
|
|
5,279
|
|
Residential 1-4 Family - Commercial
|
5,120
|
|
|
112
|
|
|
563,502
|
|
|
3,739
|
|
|
11,946
|
|
|
—
|
|
|
580,568
|
|
|
3,851
|
|
Residential 1-4 Family - Mortgage
|
7,664
|
|
|
281
|
|
|
465,243
|
|
|
2,487
|
|
|
3,964
|
|
|
—
|
|
|
476,871
|
|
|
2,768
|
|
Auto
|
393
|
|
|
1
|
|
|
271,073
|
|
|
944
|
|
|
—
|
|
|
—
|
|
|
271,466
|
|
|
945
|
|
HELOC
|
2,200
|
|
|
20
|
|
|
524,507
|
|
|
1,249
|
|
|
1,156
|
|
|
—
|
|
|
527,863
|
|
|
1,269
|
|
Consumer and all other
(1)
|
302
|
|
|
7
|
|
|
493,814
|
|
|
2,827
|
|
|
213
|
|
|
—
|
|
|
494,329
|
|
|
2,834
|
|
Total loans held for investment, net
|
$
|
57,355
|
|
|
$
|
2,515
|
|
|
$
|
6,438,921
|
|
|
$
|
35,899
|
|
|
$
|
57,770
|
|
|
$
|
—
|
|
|
$
|
6,554,046
|
|
|
$
|
38,414
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The Company uses a risk rating system and past due status as the primary credit quality indicators for the loan categories. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the allowance for loan losses; on those loans without a risk rating, the Company uses past due status to determine risk level. The risk levels, as described below, do not necessarily follow the regulatory definitions of risk levels with the same name. A general description of the characteristics of the risk levels follows:
Pass is determined by the following criteria:
•
Risk rated 0 loans have little or no risk and are with General Obligation Municipal Borrowers;
•
Risk rated 1 loans have little or no risk and are generally secured by cash or cash equivalents;
•
Risk rated 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;
•
Risk rated 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;
•
Risk rated 4 loans are satisfactory loans with borrowers not as strong as risk rated 3 loans and may exhibit a greater
degree of financial risk based on the type of business supporting the loan; or
•
Loans that are not risk rated but that are 0 to 29 days past due.
Special Mention is determined by the following criteria:
•
Risk rated 5 loans are watch loans that warrant more than the normal level of supervision and have the possibility of an
event occurring that may weaken the borrower’s ability to repay;
•
Risk rated 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if
not addressed could lead to inadequately protecting the Company’s credit position; or
•
Loans that are not risk rated but that are 30 to 89 days past due.
Substandard is determined by the following criteria:
•
Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity
of the obligor or the collateral pledged; these have well defined weaknesses that jeopardize the liquidation of the debt
with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected; or
•
Loans that are not risk rated but that are 90 to 149 days past due.
Doubtful is determined by the following criteria:
•
Risk rated 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for
recovery, its classification as a loss is deferred until its more exact status is determined;
•
Risk rated 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as
bankable assets is not warranted; or
•
Loans that are not risk rated but that are over 149 days past due.
The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of
March 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
Construction and Land Development
|
$
|
1,160,775
|
|
|
$
|
67,489
|
|
|
$
|
10,730
|
|
|
$
|
—
|
|
|
$
|
1,238,994
|
|
Commercial Real Estate - Owner Occupied
|
1,180,445
|
|
|
57,927
|
|
|
14,957
|
|
|
—
|
|
|
1,253,329
|
|
Commercial Real Estate - Non-Owner Occupied
|
2,178,842
|
|
|
24,579
|
|
|
7,448
|
|
|
—
|
|
|
2,210,869
|
|
Multifamily Real Estate
|
532,643
|
|
|
11,497
|
|
|
—
|
|
|
—
|
|
|
544,140
|
|
Commercial & Industrial
|
1,076,460
|
|
|
42,852
|
|
|
3,531
|
|
|
—
|
|
|
1,122,843
|
|
Residential 1-4 Family - Commercial
|
677,693
|
|
|
17,688
|
|
|
4,453
|
|
|
—
|
|
|
699,834
|
|
Residential 1-4 Family - Mortgage
|
563,869
|
|
|
11,893
|
|
|
8,075
|
|
|
—
|
|
|
583,837
|
|
Auto
|
284,933
|
|
|
2,552
|
|
|
579
|
|
|
11
|
|
|
288,075
|
|
HELOC
|
620,155
|
|
|
16,992
|
|
|
3,053
|
|
|
—
|
|
|
640,200
|
|
Consumer and all other
(1)
|
1,115,732
|
|
|
4,304
|
|
|
697
|
|
|
8
|
|
|
1,120,741
|
|
Total
|
$
|
9,391,547
|
|
|
$
|
257,773
|
|
|
$
|
53,523
|
|
|
$
|
19
|
|
|
$
|
9,702,862
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
Construction and Land Development
|
$
|
869,111
|
|
|
$
|
62,517
|
|
|
$
|
14,325
|
|
|
$
|
—
|
|
|
$
|
945,953
|
|
Commercial Real Estate - Owner Occupied
|
872,130
|
|
|
52,268
|
|
|
4,745
|
|
|
—
|
|
|
929,143
|
|
Commercial Real Estate - Non-Owner Occupied
|
1,681,314
|
|
|
19,899
|
|
|
5,836
|
|
|
—
|
|
|
1,707,049
|
|
Multifamily Real Estate
|
349,625
|
|
|
7,374
|
|
|
—
|
|
|
—
|
|
|
356,999
|
|
Commercial & Industrial
|
595,923
|
|
|
13,533
|
|
|
2,159
|
|
|
—
|
|
|
611,615
|
|
Residential 1-4 Family - Commercial
|
587,169
|
|
|
12,117
|
|
|
3,650
|
|
|
45
|
|
|
602,981
|
|
Residential 1-4 Family - Mortgage
|
470,646
|
|
|
7,190
|
|
|
1,642
|
|
|
2,479
|
|
|
481,957
|
|
Auto
|
278,063
|
|
|
4,131
|
|
|
119
|
|
|
161
|
|
|
282,474
|
|
HELOC
|
531,358
|
|
|
3,867
|
|
|
857
|
|
|
489
|
|
|
536,571
|
|
Consumer and all other
(1)
|
645,187
|
|
|
1,758
|
|
|
781
|
|
|
63
|
|
|
647,789
|
|
Total
|
$
|
6,880,526
|
|
|
$
|
184,654
|
|
|
$
|
34,114
|
|
|
$
|
3,237
|
|
|
$
|
7,102,531
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following table shows the recorded investment in only PCI loans by segment with their related risk level as of
March 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
Construction and Land Development
|
$
|
1,410
|
|
|
$
|
6,498
|
|
|
$
|
2,294
|
|
|
$
|
—
|
|
|
$
|
10,202
|
|
Commercial Real Estate - Owner Occupied
|
6,788
|
|
|
11,261
|
|
|
7,777
|
|
|
—
|
|
|
25,826
|
|
Commercial Real Estate - Non-Owner Occupied
|
3,065
|
|
|
10,689
|
|
|
5,840
|
|
|
—
|
|
|
19,594
|
|
Multifamily Real Estate
|
—
|
|
|
81
|
|
|
3,299
|
|
|
—
|
|
|
3,380
|
|
Commercial & Industrial
|
1,707
|
|
|
842
|
|
|
341
|
|
|
—
|
|
|
2,890
|
|
Residential 1-4 Family - Commercial
|
5,771
|
|
|
5,746
|
|
|
3,309
|
|
|
—
|
|
|
14,826
|
|
Residential 1-4 Family - Mortgage
|
2,712
|
|
|
10,142
|
|
|
7,455
|
|
|
208
|
|
|
20,517
|
|
Auto
|
—
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
HELOC
|
719
|
|
|
362
|
|
|
592
|
|
|
211
|
|
|
1,884
|
|
Consumer and all other
(1)
|
970
|
|
|
2,493
|
|
|
265
|
|
|
—
|
|
|
3,728
|
|
Total
|
$
|
23,142
|
|
|
$
|
48,128
|
|
|
$
|
31,172
|
|
|
$
|
419
|
|
|
$
|
102,861
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
The following table shows the recorded investment in only PCI loans by segment with their related risk level as of
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
Construction and Land Development
|
$
|
1,462
|
|
|
$
|
1,260
|
|
|
$
|
116
|
|
|
$
|
—
|
|
|
$
|
2,838
|
|
Commercial Real Estate - Owner Occupied
|
4,958
|
|
|
7,486
|
|
|
2,346
|
|
|
—
|
|
|
14,790
|
|
Commercial Real Estate - Non-Owner Occupied
|
3,920
|
|
|
1,394
|
|
|
1,296
|
|
|
—
|
|
|
6,610
|
|
Multifamily Real Estate
|
—
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
80
|
|
Commercial & Industrial
|
85
|
|
|
123
|
|
|
200
|
|
|
—
|
|
|
408
|
|
Residential 1-4 Family - Commercial
|
5,234
|
|
|
2,877
|
|
|
1,303
|
|
|
—
|
|
|
9,414
|
|
Residential 1-4 Family - Mortgage
|
2,764
|
|
|
329
|
|
|
71
|
|
|
569
|
|
|
3,733
|
|
HELOC
|
446
|
|
|
291
|
|
|
94
|
|
|
119
|
|
|
950
|
|
Consumer and all other
(1)
|
148
|
|
|
41
|
|
|
9
|
|
|
—
|
|
|
198
|
|
Total
|
$
|
19,017
|
|
|
$
|
13,881
|
|
|
$
|
5,435
|
|
|
$
|
688
|
|
|
$
|
39,021
|
|
(1)
Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.
Loans acquired are originally recorded at fair value, with certain loans being identified as impaired at the date of purchase. The fair values were determined based on the credit quality of the portfolio, expected future cash flows, and timing of those expected future cash flows.
The following shows changes in the accretable yield for loans accounted for under ASC 310-30,
Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality,
for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Balance at beginning of period
|
$
|
14,563
|
|
|
$
|
19,739
|
|
Additions
|
12,225
|
|
|
—
|
|
Accretion
|
(2,144
|
)
|
|
(1,511
|
)
|
Reclass of nonaccretable difference due to changes in expected cash flows
|
(35
|
)
|
|
1,680
|
|
Other, net
(1)
|
293
|
|
|
(908
|
)
|
Balance at end of period
|
$
|
24,902
|
|
|
$
|
19,000
|
|
(1)
This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate PCI loans, and discounted payoffs that occurred in the quarter.
The carrying value of the Company’s PCI loan portfolio, accounted for under ASC 310-30, totaled
$102.9 million
at
March 31, 2018
and
$39.0 million
at
December 31, 2017
. The outstanding balance of the Company’s PCI loan portfolio totaled
$124.5 million
at
March 31, 2018
and
$47.9 million
at
December 31, 2017
. The carrying value of the Company’s acquired performing loan portfolio, accounted for under ASC 310-20,
Receivables – Nonrefundable Fees and Other Costs
, totaled
$2.9 billion
at
March 31, 2018
and
$892.4 million
at
December 31, 2017
; the remaining discount on these loans totaled
$44.8 million
at
March 31, 2018
and
$13.7 million
at
December 31, 2017
.
5.
INTANGIBLE ASSETS
The Company’s intangible assets consist of core deposits, goodwill, and other intangibles arising from acquisitions. The Company has determined that core deposit intangibles have finite lives and amortizes them over their estimated useful lives. Core deposit intangibles are being amortized over the period of expected benefit, which ranges from
4
to
14 years
, using an accelerated method. Other amortizable intangible assets are being amortized over the period of expected benefit, which ranges from
5
to
10 years
, using a straight-line method. On January 1, 2018, the Company completed its acquisition of Xenith and acquired core deposit intangibles of $
38.5 million
and recorded goodwill in the amount of $
425.6 million
. See Note 2 "Acquisitions" for additional information.
In accordance with ASC 350,
Intangibles-Goodwill and Other,
the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing in the second quarter of 2017 and determined that there was
no
impairment to its goodwill or intangible assets.
Amortization expense of intangibles for the
three
months ended
March 31, 2018
and
2017
totaled
$3.2 million
and
$1.6 million
, respectively. As of
March 31, 2018
, the estimated remaining amortization expense of intangibles is as follows (dollars in thousands):
|
|
|
|
|
For the remaining nine months of 2018
|
$
|
8,787
|
|
For the year ending December 31, 2019
|
10,143
|
|
For the year ending December 31, 2020
|
8,291
|
|
For the year ending December 31, 2021
|
6,500
|
|
For the year ending December 31, 2022
|
4,927
|
|
Thereafter
|
11,444
|
|
Total estimated amortization expense
|
$
|
50,092
|
|
6. BORROWINGS
Short-term Borrowings
The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Total short-term borrowings consist primarily of advances from the FHLB, federal funds purchased (which are secured overnight borrowings from other financial institutions), and other lines of credit. Also included in total short-term borrowings are securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Total short-term borrowings consist of the following as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Securities sold under agreements to repurchase
|
$
|
31,593
|
|
|
$
|
49,152
|
|
Other short-term borrowings
(1)
|
1,022,000
|
|
|
745,000
|
|
Total short-term borrowings
|
$
|
1,053,593
|
|
|
$
|
794,152
|
|
|
|
|
|
Maximum month-end outstanding balance
|
$
|
1,207,206
|
|
|
$
|
794,152
|
|
Average outstanding balance during the period
|
1,133,603
|
|
|
602,553
|
|
Average interest rate (during the period)
|
1.52
|
%
|
|
1.00
|
%
|
Average interest rate at end of period
|
1.64
|
%
|
|
1.32
|
%
|
(1)
As of
March 31, 2018
and
December 31, 2017
, all other short-term borrowings were FHLB advances.
The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was
$227.0 million
at both
March 31, 2018
and
December 31, 2017
. The Company maintains an alternate line of credit at a correspondent bank; the available balance was $
25.0 million
at both
March 31, 2018
and
December 31, 2017
. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is considered to be in compliance with these covenants. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to
$3.9 billion
and
$2.7 billion
at
March 31, 2018
and
December 31, 2017
, respectively.
Long-term Borrowings
In connection with several previous bank acquisitions, the Company issued and acquired trust preferred capital notes of
$58.5 million
and
$32.0 million
, respectively. In connection with the acquisition of Xenith on January 1, 2018, the Company acquired trust preferred capital notes totaling
$55.0 million
with a fair value discount of
$9.9 million
. The remaining fair value discount on all acquired trust preferred capital notes was
$16.2 million
at
March 31, 2018
. The trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred
Capital
Securities
(1)
|
|
Investment
(1)
|
|
Spread to
3-Month LIBOR
|
|
Rate
(2)
|
|
Maturity
|
Trust Preferred Capital Note - Statutory Trust I
|
$
|
22,500,000
|
|
|
$
|
696,000
|
|
|
2.75
|
%
|
|
5.06
|
%
|
|
6/17/2034
|
Trust Preferred Capital Note - Statutory Trust II
|
36,000,000
|
|
|
1,114,000
|
|
|
1.40
|
%
|
|
3.71
|
%
|
|
6/15/2036
|
VFG Limited Liability Trust I Indenture
|
20,000,000
|
|
|
619,000
|
|
|
2.73
|
%
|
|
5.04
|
%
|
|
3/18/2034
|
FNB Statutory Trust II Indenture
|
12,000,000
|
|
|
372,000
|
|
|
3.10
|
%
|
|
5.41
|
%
|
|
6/26/2033
|
Gateway Capital Statutory Trust I
|
8,000,000
|
|
|
248,000
|
|
|
3.10
|
%
|
|
5.41
|
%
|
|
9/17/2033
|
Gateway Capital Statutory Trust II
|
7,000,000
|
|
|
217,000
|
|
|
2.65
|
%
|
|
4.96
|
%
|
|
6/17/2034
|
Gateway Capital Statutory Trust III
|
15,000,000
|
|
|
464,000
|
|
|
1.50
|
%
|
|
3.81
|
%
|
|
5/30/2036
|
Gateway Capital Statutory Trust IV
|
25,000,000
|
|
|
774,000
|
|
|
1.55
|
%
|
|
3.86
|
%
|
|
7/30/2037
|
Total
|
$
|
145,500,000
|
|
|
$
|
4,504,000
|
|
|
|
|
|
|
|
|
|
(1)
The total of the trust preferred capital securities and investments in the respective trusts represents the principal asset of the Company's junior subordinated debt securities with like maturities and like interest rates to the capital securities. The Company's investment in the trusts is reported in "Other Assets" on the Consolidated Balance Sheets.
(2)
Rate as of
March 31, 2018
.
During the fourth quarter of 2016, the Company issued
$150.0 million
of fixed-to-floating rate subordinated notes with an initial fixed interest rate of
5.00%
through December 15, 2021. The interest rate then changes to a floating rate of LIBOR plus
3.175%
through its maturity date on
December 15, 2026
. In connection with the acquisition of Xenith on January 1, 2018, the Company acquired
$8.5 million
of subordinated notes with a fair value premium of
$259,000
, which was $
233,000
at
March 31, 2018
. The acquired subordinated notes have a fixed interest rate of
6.75%
and a maturity date of
June 30, 2025
. At
March 31, 2018
and
December 31, 2017
, the carrying value of all subordinated notes was
$158.5 million
and $
150.0 million
, respectively, with a remaining issuance discount of
$1.7 million
and $
1.8 million
, respectively. The subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes.
On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances, which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of
$19.6 million
on the original advances, which is included as a component of long-term borrowings on the Company’s Consolidated Balance Sheets. In accordance with ASC 470-50,
Modifications and Extinguishments
, the Company is amortizing this prepayment penalty over the term of the modified advances using the effective rate method. The amortization expense is included as a component of interest expense on long-term borrowings on the Company’s Consolidated Statements of Income. Amortization expense for the
three
months ended
March 31, 2018
and
2017
was
$481,000
and
$470,000
, respectively.
In connection with an acquisition in 2014, the Company assumed
$70.0 million
in long-term borrowings with the FHLB of which there is
$10.0 million
remaining at
March 31, 2018
that had a remaining fair value premium of
$74,000
.
As of
March 31, 2018
, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Type
|
|
Spread to
3-Month LIBOR
|
|
Interest Rate
(1)
|
|
Maturity Date
|
|
Advance Amount
|
Adjustable Rate Credit
|
|
0.44
|
%
|
|
2.75
|
%
|
|
8/23/2022
|
|
$
|
55,000
|
|
Adjustable Rate Credit
|
|
0.45
|
%
|
|
2.76
|
%
|
|
11/23/2022
|
|
65,000
|
|
Adjustable Rate Credit
|
|
0.45
|
%
|
|
2.76
|
%
|
|
11/23/2022
|
|
10,000
|
|
Adjustable Rate Credit
|
|
0.45
|
%
|
|
2.76
|
%
|
|
11/23/2022
|
|
10,000
|
|
Fixed Rate
|
|
—
|
|
|
3.75
|
%
|
|
7/30/2018
|
|
5,000
|
|
Fixed Rate
|
|
—
|
|
|
3.97
|
%
|
|
7/30/2018
|
|
5,000
|
|
Fixed Rate Hybrid
|
|
—
|
|
|
0.99
|
%
|
|
10/19/2018
|
|
30,000
|
|
Fixed Rate Hybrid
|
|
—
|
|
|
1.58
|
%
|
|
5/18/2020
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000
|
|
(1)
Interest rates calculated using non-rounded numbers.
|
|
|
|
|
|
|
|
|
As of
December 31, 2017
, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Type
|
|
Spread to
3-Month LIBOR
|
|
Interest Rate
(1)
|
|
Maturity Date
|
|
Advance Amount
|
|
|
|
|
|
|
|
|
|
Adjustable Rate Credit
|
|
0.44
|
%
|
|
2.13
|
%
|
|
8/23/2022
|
|
$
|
55,000
|
|
Adjustable Rate Credit
|
|
0.45
|
%
|
|
2.15
|
%
|
|
11/23/2022
|
|
65,000
|
|
Adjustable Rate Credit
|
|
0.45
|
%
|
|
2.15
|
%
|
|
11/23/2022
|
|
10,000
|
|
Adjustable Rate Credit
|
|
0.45
|
%
|
|
2.15
|
%
|
|
11/23/2022
|
|
10,000
|
|
Fixed Rate
|
|
—
|
|
|
3.75
|
%
|
|
7/30/2018
|
|
5,000
|
|
Fixed Rate
|
|
—
|
|
|
3.97
|
%
|
|
7/30/2018
|
|
5,000
|
|
Fixed Rate Hybrid
|
|
—
|
|
|
0.99
|
%
|
|
10/19/2018
|
|
30,000
|
|
Fixed Rate Hybrid
|
|
—
|
|
|
1.58
|
%
|
|
5/18/2020
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000
|
|
(1)
Interest rates calculated using non-rounded numbers.
|
|
|
|
|
|
|
|
|
For information on the carrying value of loans and securities pledged as collateral on FHLB advances as of
March 31, 2018
and
December 31, 2017
, refer to Note 7 "Commitments and Contingencies".
As of
March 31, 2018
, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred
Capital
Notes
|
|
Subordinated
Debt
|
|
FHLB
Advances
|
|
Fair Value
Premium
(Discount)
(1)
|
|
Prepayment
Penalty
|
|
Total Long-term
Borrowings
|
For the remaining nine months of 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
(559
|
)
|
|
$
|
(1,489
|
)
|
|
$
|
37,952
|
|
2019
|
—
|
|
|
—
|
|
|
—
|
|
|
(862
|
)
|
|
(2,018
|
)
|
|
(2,880
|
)
|
2020
|
—
|
|
|
—
|
|
|
20,000
|
|
|
(935
|
)
|
|
(2,074
|
)
|
|
16,991
|
|
2021
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,006
|
)
|
|
(2,119
|
)
|
|
(3,125
|
)
|
2022
|
—
|
|
|
—
|
|
|
140,000
|
|
|
(1,029
|
)
|
|
(1,707
|
)
|
|
137,264
|
|
Thereafter
|
150,004
|
|
|
158,500
|
|
|
—
|
|
|
(13,273
|
)
|
|
—
|
|
|
295,231
|
|
Total long-term borrowings
|
$
|
150,004
|
|
|
$
|
158,500
|
|
|
$
|
200,000
|
|
|
$
|
(17,664
|
)
|
|
$
|
(9,407
|
)
|
|
$
|
481,433
|
|
(1)
Includes discount on issued subordinated notes.
7. COMMITMENTS AND CONTINGENCIES
Litigation Matters
In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized on the Company’s Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. The Company considers credit losses related to off-balance sheet commitments by undergoing a similar process in evaluating losses for loans that are carried on the balance sheet. The Company considers historical loss rates, current economic conditions, risk ratings, and past due status among other factors in the consideration of whether credit losses are inherent in the Company’s off-balance sheet commitments to extend credit. The Company also records an indemnification reserve that includes balances relating to mortgage loans previously sold based on historical statistics and loss rates. As of
March 31, 2018
and
December 31, 2017
, the Company's reserves for off-balance sheet credit risk and indemnification were
$1.6 million
and
$795,000
, respectively, and are reported as a component of "Other Liabilities" on the Company's Consolidated Balance Sheets.
Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The following table presents the balances of commitments and contingencies (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Commitments with off-balance sheet risk:
|
|
|
|
|
|
Commitments to extend credit
(1)
|
$
|
2,926,208
|
|
|
$
|
2,192,812
|
|
Standby letters of credit
|
155,826
|
|
|
127,435
|
|
Total commitments with off-balance sheet risk
|
$
|
3,082,034
|
|
|
$
|
2,320,247
|
|
(1)
Includes unfunded overdraft protection.
The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the period ended
March 31, 2018
, the aggregate amount of daily average required reserves was approximately
$162.6 million
and was satisfied by vault cash holdings and deposits maintained with the Federal Reserve Bank.
As of
March 31, 2018
, the Company had approximately
$51.9 million
in deposits in other financial institutions, of which
$13.3 million
served as collateral for cash flow and loan swap derivatives. The Company had approximately
$36.4 million
in deposits
in other financial institutions that were uninsured at
March 31, 2018
. At least annually, the Company’s management evaluates the loss risk of its uninsured deposits in financial counterparties.
For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify the interest rate characteristics of various balance sheet accounts. See Note 8 “Derivatives” for additional information.
As part of the Company's liquidity management strategy, it pledges collateral to secure various financing and other activities that occur during the normal course of business. The following tables present the types of collateral pledged, at
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pledged Assets as of March 31, 2018
|
|
|
Cash
|
|
AFS Securities
(1)
|
|
HTM Securities
(1)
|
|
Loans
(2)
|
|
Total
|
Public deposits
|
$
|
—
|
|
|
$
|
289,698
|
|
|
$
|
194,042
|
|
|
$
|
—
|
|
|
$
|
483,740
|
|
Repurchase agreements
|
—
|
|
|
74,441
|
|
|
—
|
|
|
—
|
|
|
74,441
|
|
FHLB advances
|
—
|
|
|
754
|
|
|
—
|
|
|
2,585,329
|
|
|
2,586,083
|
|
Derivatives
|
13,316
|
|
|
2,590
|
|
|
—
|
|
|
—
|
|
|
15,906
|
|
Other purposes
|
—
|
|
|
25,461
|
|
|
—
|
|
|
—
|
|
|
25,461
|
|
Total pledged assets
|
$
|
13,316
|
|
|
$
|
392,944
|
|
|
$
|
194,042
|
|
|
$
|
2,585,329
|
|
|
$
|
3,185,631
|
|
(1)
Balance represents market value.
(2)
Balance represents book value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pledged Assets as of December 31, 2017
|
|
|
Cash
|
|
AFS Securities
(1)
|
|
HTM Securities
(1)
|
|
Loans
(2)
|
|
Total
|
Public deposits
|
$
|
—
|
|
|
$
|
242,472
|
|
|
$
|
197,482
|
|
|
$
|
—
|
|
|
$
|
439,954
|
|
Repurchase agreements
|
—
|
|
|
77,942
|
|
|
—
|
|
|
—
|
|
|
77,942
|
|
FHLB advances
|
—
|
|
|
878
|
|
|
—
|
|
|
2,390,509
|
|
|
2,391,387
|
|
Derivatives
|
23,870
|
|
|
3,656
|
|
|
—
|
|
|
—
|
|
|
27,526
|
|
Other purposes
|
—
|
|
|
15,043
|
|
|
—
|
|
|
—
|
|
|
15,043
|
|
Total pledged assets
|
$
|
23,870
|
|
|
$
|
339,991
|
|
|
$
|
197,482
|
|
|
$
|
2,390,509
|
|
|
$
|
2,951,852
|
|
(1)
Balance represents market value.
(2)
Balance represents book value.
8. DERIVATIVES
The Company is exposed to economic risks arising from its business operations and uses derivatives primarily to manage risk associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge). The remaining are classified as free-standing derivatives consisting of customer accommodation loan swaps and interest rate lock commitments that do not qualify for hedge accounting.
Cash Flow Hedges
The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as trust preferred capital notes, FHLB borrowings, and prime commercial loans. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging a notional amount, equal to the principal amount of the borrowings, for fixed-rate interest based on benchmarked interest rates. The original terms and conditions of the interest rate swaps vary and range in length with a maximum hedging time through
November 2022
. Amounts receivable or payable are recognized as accrued under the terms of the agreements.
All swaps entered into with counterparties met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contracts is not significant.
The Company assesses the effectiveness of each hedging relationship on a periodic basis using statistical regression analysis. The Company also measures the ineffectiveness of each hedging relationship using the change in variable cash flows method which compares the cumulative changes in cash flows of the hedging instrument relative to cumulative changes in the hedged item’s cash flows. In accordance with ASC 815,
Derivatives and Hedging
, the effective portions of the derivatives’ unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company’s assessment, its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in interest income or interest expense on the Company’s Consolidated Statements of Income.
On June 13, 2016, the Company terminated
three
interest rate swaps designated as cash flow hedges prior to their respective maturity dates. The unrealized gain of
$1.3 million
within Accumulated Other Comprehensive Income will be reclassified into earnings over a
three
year period, the term of the hedged item, using the effective interest method. The estimated net amount of gains expected to be reclassified into earnings by
March 31, 2019
is
$405,000
.
Fair Value Hedge
Derivatives are designated as fair value hedges when they are used to manage exposure to changes in the fair value of certain financial assets and liabilities, referred to as the hedged items, which fluctuate in value as a result of movements in interest rates. During the normal course of business, the Company enters into interest rate swaps to convert certain long-term fixed-rate loans to floating rates to hedge the Company’s exposure to interest rate risk. The Company pays a fixed interest rate to the counterparty and receives a floating rate from the same counterparty calculated on the aggregate notional amount. At
March 31, 2018
and
December 31, 2017
, the aggregate notional amount of the related hedged items totaled
$80.0 million
and
$81.0 million
, respectively, and the fair value of the related hedged items was an unrealized loss of $
3.1 million
and
$1.2 million
, respectively.
The Company applies hedge accounting in accordance with ASC 815,
Derivatives and Hedging,
and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded on the Company’s Consolidated Statements of Income. Statistical regression analysis is used to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset being hedged due to changes in the hedged risk. The Company’s fair value hedges continue to be highly effective and had no material impact on the Consolidated Statements of Income, but if any ineffectiveness exists, portions of the unrealized gains or losses would be recorded in interest income or interest expense on the Company’s Consolidated Statements of Income.
Loan Swaps
During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with a third party in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values as reported in “Other Assets” and “Other Liabilities” on the Company’s Consolidated Balance Sheets.
Interest Rate Lock Commitments
During the normal course of business, the Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (“rate lock commitments”). Rate lock commitments on mortgage loans that are intended to be sold in the secondary market are considered to be derivatives. The period of time between issuance of a loan
commitment, closing, and sale of the loan generally ranges from
30
to
120 days
. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. The correlation between the rate lock commitments and the best efforts contracts is high due to their similarity.
The market values of rate lock commitments and best efforts forward delivery commitments is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset, while taking into consideration the probability that the rate lock commitments will close. The fair value of the rate lock commitments is reported as a component of “Other Assets” on the Company’s Consolidated Balance Sheets; the fair value of the Company’s best efforts forward delivery commitments is recorded as a component of “Other Liabilities” on the Company’s Consolidated Balance Sheets. Any impact to income is recorded in current period earnings as a component of “Mortgage banking income, net” on the Company’s Consolidated Statements of Income.
The following table summarizes key elements of the Company’s derivative instruments as of
March 31, 2018
and
December 31, 2017
, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
|
Derivative
(2)
|
|
|
Derivative
(2)
|
|
Notional or
Contractual
Amount
(1)
|
|
Assets
|
|
Liabilities
|
|
|
Notional or
Contractual
Amount
(1)
|
|
Assets
|
|
Liabilities
|
|
Derivatives designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
$
|
152,500
|
|
|
$
|
—
|
|
|
$
|
5,063
|
|
|
|
$
|
152,500
|
|
|
$
|
49
|
|
|
$
|
8,005
|
|
|
Fair value hedges
|
79,963
|
|
|
3,468
|
|
|
—
|
|
|
|
80,973
|
|
|
1,598
|
|
|
76
|
|
|
Derivatives not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay fixed - receive floating interest rate swaps
|
704,424
|
|
|
13,368
|
|
|
2,641
|
|
|
|
529,736
|
|
|
—
|
|
|
1,350
|
|
|
Pay floating - receive fixed interest rate swaps
|
704,424
|
|
|
2,641
|
|
|
13,368
|
|
|
|
529,736
|
|
|
1,350
|
|
|
—
|
|
|
Other contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
47,949
|
|
|
828
|
|
|
—
|
|
|
|
34,314
|
|
|
559
|
|
|
—
|
|
|
Best efforts forward delivery commitments
|
75,011
|
|
|
—
|
|
|
22
|
|
|
|
73,777
|
|
|
12
|
|
|
—
|
|
|
(1)
Notional amounts are not recorded on the balance sheet and are generally used only as a basis on which interest and other payments are determined.
(2)
Balances
represent fair value of derivative financial instruments.
For information regarding collateral pledged on derivative instruments, see Note 7 “Commitments and Contingencies.”
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The change in accumulated other comprehensive income (loss) for the
three
months ended
March 31, 2018
is summarized as follows, net of tax (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains (Losses)
on AFS
Securities
|
|
Unrealized Gain
for AFS
Securities
Transferred to
HTM
|
|
Change in Fair
Value of Cash
Flow Hedge
|
|
Unrealized Gains (Losses) on BOLI
|
|
Total
|
Balance - December 31, 2017
|
$
|
1,874
|
|
|
$
|
2,705
|
|
|
$
|
(4,361
|
)
|
|
$
|
(1,102
|
)
|
|
$
|
(884
|
)
|
Other comprehensive income (loss)
|
(13,191
|
)
|
|
—
|
|
|
1,964
|
|
|
—
|
|
|
(11,227
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
(168
|
)
|
|
(299
|
)
|
|
249
|
|
|
19
|
|
|
(199
|
)
|
Net current period other comprehensive income (loss)
|
(13,359
|
)
|
|
(299
|
)
|
|
2,213
|
|
|
19
|
|
|
(11,426
|
)
|
Balance - March 31, 2018
|
$
|
(11,485
|
)
|
|
$
|
2,406
|
|
|
$
|
(2,148
|
)
|
|
$
|
(1,083
|
)
|
|
$
|
(12,310
|
)
|
The change in accumulated other comprehensive income (loss) for the
three
months ended
March 31, 2017
is summarized as follows, net of tax (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains
(Losses) on AFS
Securities
|
|
Unrealized Gain
for AFS
Securities
Transferred to
HTM
|
|
Change in Fair
Value of Cash
Flow Hedge
|
|
Unrealized Gains (Losses) on BOLI
|
|
Total
|
Balance - December 31, 2016
|
$
|
(542
|
)
|
|
$
|
3,377
|
|
|
$
|
(5,179
|
)
|
|
$
|
(1,465
|
)
|
|
$
|
(3,809
|
)
|
Other comprehensive income (loss)
|
3,637
|
|
|
—
|
|
|
(31
|
)
|
|
—
|
|
|
3,606
|
|
Amounts reclassified from accumulated other comprehensive income
|
(313
|
)
|
|
(184
|
)
|
|
180
|
|
|
$
|
109
|
|
|
(208
|
)
|
Net current period other comprehensive income (loss)
|
3,324
|
|
|
(184
|
)
|
|
149
|
|
|
109
|
|
|
3,398
|
|
Balance - March 31, 2017
|
$
|
2,782
|
|
|
$
|
3,193
|
|
|
$
|
(5,030
|
)
|
|
$
|
(1,356
|
)
|
|
$
|
(411
|
)
|
Reclassifications of unrealized gains (losses) on available for sale securities are reported on the Company’s Consolidated Statements of Income as “Gains on securities transactions, net” with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported gains of
$213,000
and
$481,000
for the
three
months ended
March 31, 2018
and
2017
, respectively, related to the sale of securities. The tax effects of these transactions during the
three
months ended
March 31, 2018
and
2017
were
$45,000
and
$168,000
, respectively, which amounts were included as a component of income tax expense.
During the second quarter of 2015, the Company transferred securities, which it intends and has the ability to hold until maturity, with a fair value of
$201.8 million
on the date of transfer, from securities available for sale to securities held to maturity. The securities included net pre-tax unrealized gains of
$8.1 million
at the date of transfer. Reclassifications of the unrealized gains on transferred securities are reported over time as accretion within interest income on the Company's Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense. The Company recorded accretion of
$379,000
and
$283,000
for the
three
months ended
March 31, 2018
and
2017
, respectively. The tax effect of these transactions during the
three
months ended
March 31, 2018
and
2017
were
$80,000
and
$99,000
, respectively, which were included as a component of income tax expense.
Reclassifications of the change in fair value of cash flow hedges are reported in interest income and interest expense on the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of
income tax expense. The Company reported net interest expense of
$315,000
and
$277,000
for the
three
months ended
March 31, 2018
and
2017
, respectively. The tax effects of these transactions during the
three
months ended
March 31, 2018
and
2017
were
$66,000
and
$97,000
, respectively, which were included as a component of income tax expense.
Reclassifications of unrealized losses on BOLI are reported in salaries and benefits expense on the Company's Consolidated Statements of Income. The Company reported expenses of
$19,000
and
$109,000
for the
three
months ended
March 31, 2018
and
2017
, respectively.
10. FAIR VALUE MEASUREMENTS
The Company follows ASC 820,
Fair Value Measurements and Disclosures
, to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:
|
|
|
|
Level 1
|
|
Valuation is based on quoted prices in active markets for identical assets and liabilities.
|
|
|
|
Level 2
|
|
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.
|
|
|
|
Level 3
|
|
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.
|
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.
Derivative instruments
As discussed in Note 8 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.
During the ordinary course of business, the Company enters into interest rate lock commitments related to the origination of mortgage loans held for sale, as well as best effort forward delivery commitments to mitigate interest rate risk; these instruments are recorded at estimated fair value based on the value of the underlying loan, which in turn is based on quoted prices for similar loans in the secondary market. This value, however, is adjusted by a pull-through rate, which considers the likelihood that the loan in a lock position will ultimately close. The pull-through rate is derived from the Company’s internal data and is adjusted using significant management judgment. The pull-through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. As such, interest rate lock commitments are classified as Level 3. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments, while a decrease in the pull-through rate will result in a negative fair value adjustment. The Company’s weighted average pull-through rate was approximately
80%
as of
March 31, 2018
and
December 31, 2017
. The interest rate lock commitments are recorded as a component of “Other Assets” on the Company’s Consolidated Balance Sheets.
Securities available for sale
Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).
The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is IDC, which evaluates securities based on market data. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.
The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.
The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over
4,000
market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of
March 31, 2018
and
December 31, 2017
.
The carrying value of restricted Federal Reserve Bank and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.
Loans held for sale
Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded within the mortgage segment and are reported on a separate line item on the Company’s Consolidated Statements of Income.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018 using
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
—
|
|
|
$
|
364,639
|
|
|
$
|
—
|
|
|
$
|
364,639
|
|
Corporate and other bonds
|
—
|
|
|
123,140
|
|
|
—
|
|
|
123,140
|
|
Mortgage-backed securities
|
—
|
|
|
754,412
|
|
|
—
|
|
|
754,412
|
|
Other securities
|
—
|
|
|
10,988
|
|
|
—
|
|
|
10,988
|
|
Loans held for sale
|
—
|
|
|
27,727
|
|
|
—
|
|
|
27,727
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
—
|
|
|
16,009
|
|
|
—
|
|
|
16,009
|
|
Fair value hedges
|
—
|
|
|
3,468
|
|
|
—
|
|
|
3,468
|
|
Interest rate lock commitments
|
—
|
|
|
—
|
|
|
828
|
|
|
828
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
16,009
|
|
|
$
|
—
|
|
|
$
|
16,009
|
|
Cash flow hedges
|
—
|
|
|
5,063
|
|
|
—
|
|
|
5,063
|
|
Best efforts forward delivery commitments
|
—
|
|
|
—
|
|
|
22
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 using
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
$
|
—
|
|
|
$
|
301,824
|
|
|
$
|
—
|
|
|
$
|
301,824
|
|
Corporate and other bonds
|
—
|
|
|
113,880
|
|
|
—
|
|
|
113,880
|
|
Mortgage-backed securities
|
—
|
|
|
548,858
|
|
|
—
|
|
|
548,858
|
|
Other securities
|
—
|
|
|
9,660
|
|
|
—
|
|
|
9,660
|
|
Loans held for sale
|
—
|
|
|
40,662
|
|
|
—
|
|
|
40,662
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
—
|
|
|
1,350
|
|
|
—
|
|
|
1,350
|
|
Cash flow hedges
|
—
|
|
|
49
|
|
|
—
|
|
|
49
|
|
Fair value hedges
|
—
|
|
|
1,598
|
|
|
—
|
|
|
1,598
|
|
Interest rate lock commitments
|
—
|
|
|
—
|
|
|
559
|
|
|
559
|
|
Best efforts forward delivery commitments
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
1,350
|
|
Cash flow hedges
|
—
|
|
|
8,005
|
|
|
—
|
|
|
8,005
|
|
Fair value hedges
|
—
|
|
|
76
|
|
|
—
|
|
|
76
|
|
Certain assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.
Impaired loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. When evaluating the fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). At
March 31, 2018
and
December 31, 2017
, the Level 3 weighted average adjustments related to impaired loans were
1.3%
and
3.0%
, respectively. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Company’s Consolidated Statements of Income.
Other real estate owned
OREO is evaluated for impairment at least quarterly by the Bank’s Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment and included as a component of noninterest expense. Fair values of OREO are carried at fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation. At
March 31, 2018
and
December 31, 2017
, the Level 3 weighted average adjustments related to OREO were approximately
18.8%
and
22.5%
, respectively.
Total valuation expenses related to OREO properties for the three months ended
March 31, 2018
and
2017
totaled
$759,000
and
$238,000
, respectively.
The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018 using
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,685
|
|
|
$
|
2,685
|
|
OREO
|
—
|
|
|
—
|
|
|
10,099
|
|
|
10,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 using
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,229
|
|
|
$
|
3,229
|
|
OREO
|
—
|
|
|
—
|
|
|
6,636
|
|
|
6,636
|
|
ASC 825,
Financial Instruments,
requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Cash and cash equivalents
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Held to Maturity Securities
The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is IDC, which evaluates securities based on market data. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.
The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.
The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over
4,000
market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of
March 31, 2018
and
December 31, 2017
.
Loans
With the adoption of ASU No. 2016-01 during the first quarter of 2018, the fair value of loans at March 31, 2018 were estimated using an exit price, representing the amount that would be expected to be received if the Company sold the loans. At December 31, 2017, the fair value of performing loans were estimated by discounting expected future cash flows using a yield curve that is constructed by adding a loan spread to a market yield curve. Loan spreads are based on spreads currently observed in the market for loans of similar type and structure. Fair value for impaired loans and their respective level within the fair value hierarchy are described in the previous disclosure related to fair value measurements of assets that are measured on a nonrecurring basis.
Bank-owned life insurance
The carrying value of BOLI approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. With the adoption of ASU No. 2016-01 during the first quarter of 2018, the fair value of certificates of deposits at March 31, 2018 were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period. At December 31, 2017, the fair value of certificates of deposit was estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Borrowings
The carrying value of the Company’s repurchase agreements is a reasonable estimate of fair value. With the adoption of ASU No. 2016-01 during the first quarter of 2018, subordinated debt and trust preferred cash flows at March 31, 2018 are forecasted at the stated coupon rate and discounted back to the measurement date using the prevailing market rate. The prevailing market rate is based on implied market yields for recently issued debt with similar durations by institutions of similar size. Other borrowings, including subordinated debt and trust preferred at December 31, 2017 are discounted using the current yield curve for the same type of borrowing. For borrowings with embedded optionality, a third party source is used to value the instrument. The Company validates all third party valuations for borrowings with optionality using Bloomberg Valuation Service’s derivative pricing functions.
Accrued interest
The carrying amounts of accrued interest approximate fair value.
The carrying values and estimated fair values of the Company’s financial instruments at
March 31, 2018
and
December 31, 2017
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018 using
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total Fair
Value
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
342,463
|
|
|
$
|
342,463
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
342,463
|
|
Securities available for sale
|
1,253,179
|
|
|
—
|
|
|
1,253,179
|
|
|
—
|
|
|
1,253,179
|
|
Held to maturity securities
|
198,733
|
|
|
—
|
|
|
199,904
|
|
|
—
|
|
|
199,904
|
|
Restricted stock
|
105,261
|
|
|
—
|
|
|
105,261
|
|
|
—
|
|
|
105,261
|
|
Loans held for sale
|
27,727
|
|
|
—
|
|
|
27,727
|
|
|
—
|
|
|
27,727
|
|
Net loans
|
9,765,094
|
|
|
—
|
|
|
—
|
|
|
9,668,738
|
|
|
9,668,738
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
16,009
|
|
|
—
|
|
|
16,009
|
|
|
—
|
|
|
16,009
|
|
Fair value hedge
|
3,468
|
|
|
—
|
|
|
3,468
|
|
|
—
|
|
|
3,468
|
|
Interest rate lock commitments
|
828
|
|
|
—
|
|
|
—
|
|
|
828
|
|
|
828
|
|
Accrued interest receivable
|
35,329
|
|
|
—
|
|
|
35,329
|
|
|
—
|
|
|
35,329
|
|
BOLI
|
258,381
|
|
|
—
|
|
|
258,381
|
|
|
—
|
|
|
258,381
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
9,677,955
|
|
|
$
|
—
|
|
|
$
|
9,698,797
|
|
|
$
|
—
|
|
|
$
|
9,698,797
|
|
Borrowings
|
1,535,026
|
|
|
—
|
|
|
1,521,524
|
|
|
—
|
|
|
1,521,524
|
|
Accrued interest payable
|
5,638
|
|
|
—
|
|
|
5,638
|
|
|
—
|
|
|
5,638
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
16,009
|
|
|
—
|
|
|
16,009
|
|
|
—
|
|
|
16,009
|
|
Cash flow hedges
|
5,063
|
|
|
—
|
|
|
5,063
|
|
|
—
|
|
|
5,063
|
|
Best efforts forward delivery commitments
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 using
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total Fair
Value
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
199,373
|
|
|
$
|
199,373
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
199,373
|
|
Securities available for sale
|
974,222
|
|
|
—
|
|
|
974,222
|
|
|
—
|
|
|
974,222
|
|
Held to maturity securities
|
199,639
|
|
|
—
|
|
|
203,483
|
|
|
—
|
|
|
203,483
|
|
Restricted stock
|
75,283
|
|
|
—
|
|
|
75,283
|
|
|
—
|
|
|
75,283
|
|
Loans held for sale
|
40,662
|
|
|
—
|
|
|
40,662
|
|
|
—
|
|
|
40,662
|
|
Net loans
|
7,103,344
|
|
|
—
|
|
|
—
|
|
|
7,117,593
|
|
|
7,117,593
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
1,350
|
|
|
—
|
|
|
1,350
|
|
|
—
|
|
|
1,350
|
|
Cash flow hedges
|
49
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
49
|
|
Fair value hedges
|
1,598
|
|
|
—
|
|
|
1,598
|
|
|
—
|
|
|
1,598
|
|
Interest rate lock commitments
|
559
|
|
|
—
|
|
|
—
|
|
|
559
|
|
|
559
|
|
Best efforts forward delivery commitments
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Accrued interest receivable
|
26,427
|
|
|
—
|
|
|
26,427
|
|
|
—
|
|
|
26,427
|
|
BOLI
|
182,854
|
|
|
—
|
|
|
182,854
|
|
|
—
|
|
|
182,854
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
6,991,718
|
|
|
$
|
—
|
|
|
$
|
6,977,845
|
|
|
$
|
—
|
|
|
$
|
6,977,845
|
|
Borrowings
|
1,219,414
|
|
|
—
|
|
|
1,198,645
|
|
|
—
|
|
|
1,198,645
|
|
Accrued interest payable
|
2,538
|
|
|
—
|
|
|
2,538
|
|
|
—
|
|
|
2,538
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
1,350
|
|
|
—
|
|
|
1,350
|
|
|
—
|
|
|
1,350
|
|
Cash flow hedges
|
8,005
|
|
|
—
|
|
|
8,005
|
|
|
—
|
|
|
8,005
|
|
Fair value hedges
|
76
|
|
|
—
|
|
|
76
|
|
|
—
|
|
|
76
|
|
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
11. REVENUE
On January 1, 2018, the Company adopted ASU No. 2014-09, “
Revenue from Contracts with Customers: Topic 606
” (“Topic 606” or the “Standard”), and all subsequent amendments to the ASU. Using Topic 606 guidelines and other authoritative guidance, the Company concluded that the Standard applies to noninterest income excluding out of scope revenue such as mortgage banking income, gains on securities transactions, and trading revenue (i.e., derivatives). Additionally, the reporting Standard only applies to the community bank segment.
Public entities are required to disclose (1) revenue disaggregated into categories that show how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors; (2) contract balances; (3) a description of when performance obligations are satisfied and (4) significant judgments made in evaluating when a customer obtains control of promised goods or services for performance obligations satisfied at a point in time.
The majority of the Company’s noninterest income comes from short term contracts associated with fees for services provided on deposit accounts, credit cards, and wealth management accounts and is being accounted for in accordance with Topic 606. Typically the duration of a contract does not extend beyond the services performed; therefore the Company concluded that discussion regarding contract balances is immaterial. Additionally, due to the short duration of most customer contracts the revenue from which constitutes noninterest income, the Company will not need to make many judgments that would affect the amount and timing of revenue.
The Company’s performance obligations on revenue from interchange fees and deposit accounts are generally satisfied immediately, when the transaction occurs or by month-end. Performance obligations on revenue from fiduciary and asset management fees are generally satisfied monthly or quarterly. For a majority of fee income on deposit accounts the Company is a principal controlling the promised good or service before transferring it to the customer. However, for income related to most wealth management income, the Company is an agent responsible for arranging for the provision of goods and services by another party.
Noninterest income disaggregated by major source, for the
three
months ended
March 31, 2018
and
2017
, consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
March 31, 2017
|
Noninterest income:
|
|
|
|
Deposit Service Charges
(1)
:
|
|
|
|
Overdraft fees, net
|
$
|
4,820
|
|
|
$
|
3,731
|
|
Maintenance fees & other
|
1,074
|
|
|
785
|
|
Other service charges and fees
(1)
|
1,233
|
|
|
1,139
|
|
Interchange fees, net
(1)
|
4,489
|
|
|
3,582
|
|
Fiduciary and asset management fees
(1)
:
|
|
|
|
Trust asset management fees
|
1,345
|
|
|
1,268
|
|
Registered advisor management fees, net
|
720
|
|
|
670
|
|
Brokerage management fees, net
|
991
|
|
|
856
|
|
Mortgage banking income, net
|
2,041
|
|
|
2,025
|
|
Gains on securities transactions, net
|
213
|
|
|
481
|
|
Bank owned life insurance income
|
1,667
|
|
|
2,125
|
|
Loan-related interest rate swap fees
|
718
|
|
|
1,180
|
|
Other operating income
(2)
|
2,998
|
|
|
997
|
|
Total noninterest income
|
$
|
22,309
|
|
|
$
|
18,839
|
|
(1) Income within scope of ASC 606.
(2) Income within the scope of ASC 606 of $707,000 and $561,000 for the three months ended, March 31, 2018 and 2017, respectively. The remaining balancing is outside the scope of ASC 606.
12. EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock awards and warrants.
The following is a reconciliation of the denominators of the basic and diluted EPS computations for the
three
months ended
March 31, 2018
and
2017
(dollars in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to
Common Stockholders
(Numerator)
|
|
Weighted
Average
Common Shares
(Denominator)
|
|
Per Share
Amount
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
Basic
|
$
|
16,639
|
|
|
65,555
|
|
|
$
|
0.25
|
|
Effect of dilutive stock awards and warrants
|
—
|
|
|
81
|
|
|
—
|
|
Diluted
|
$
|
16,639
|
|
|
65,636
|
|
|
$
|
0.25
|
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
Basic
|
$
|
19,124
|
|
|
43,654
|
|
|
$
|
0.44
|
|
Add: potentially dilutive common shares - stock awards
|
—
|
|
|
72
|
|
|
—
|
|
Diluted
|
$
|
19,124
|
|
|
43,726
|
|
|
$
|
0.44
|
|
13. SEGMENT REPORTING DISCLOSURES
The Company has
two
reportable segments: a traditional full service community bank segment and a mortgage loan origination business segment. The community bank segment includes
one
subsidiary bank, the Bank, which provides loan, deposit, investment, and trust services to retail and commercial customers throughout its
150
retail locations throughout Virginia and in portions of Maryland and North Carolina as of
March 31, 2018
. The mortgage segment includes UMG, which provides a variety of mortgage loan products principally in Virginia, North Carolina, Maryland, and the Washington D.C. metro area. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which serves to mitigate the Company’s exposure to interest rate risk.
Profit and loss is measured by net income after taxes including realized gains and losses on the Company’s investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process.
Both of the Company’s reportable segments are service-based. The mortgage segment's business is a primarily fee-based business, while the community bank segment is driven principally by net interest income. The community bank segment provides a distribution and referral network through its customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the bank segment.
The community bank segment provides the mortgage segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest. The interest rate on the warehouse line of credit for the
three
months ended
March 31, 2018
and
2017
was the three month LIBOR rate plus
0.15%
with
no
floor. These transactions are eliminated in the consolidation process.
A management fee for operations and administrative support services is charged to all subsidiaries and eliminated in the consolidated totals.
Information about reportable segments and reconciliation of such information to the consolidated financial statements for the
three
months ended
March 31, 2018
and
2017
is as follows (dollars in thousands):
UNION BANKSHARES CORPORATION AND SUBSIDIARIES
SEGMENT FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
Mortgage
|
|
Eliminations
|
|
Consolidated
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
103,314
|
|
|
$
|
433
|
|
|
$
|
—
|
|
|
$
|
103,747
|
|
Provision for credit losses
|
3,524
|
|
|
(24
|
)
|
|
—
|
|
|
3,500
|
|
Net interest income after provision for credit losses
|
99,790
|
|
|
457
|
|
|
—
|
|
|
100,247
|
|
Noninterest income
|
20,157
|
|
|
2,278
|
|
|
(126
|
)
|
|
22,309
|
|
Noninterest expenses
|
101,669
|
|
|
2,465
|
|
|
(126
|
)
|
|
104,008
|
|
Income before income taxes
|
18,278
|
|
|
270
|
|
|
—
|
|
|
18,548
|
|
Income tax expense
|
1,847
|
|
|
62
|
|
|
—
|
|
|
1,909
|
|
Net income
|
$
|
16,431
|
|
|
$
|
208
|
|
|
$
|
—
|
|
|
$
|
16,639
|
|
Total assets
|
$
|
13,140,316
|
|
|
$
|
100,587
|
|
|
$
|
(91,611
|
)
|
|
$
|
13,149,292
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
$
|
66,234
|
|
|
$
|
333
|
|
|
$
|
—
|
|
|
$
|
66,567
|
|
Provision for credit losses
|
2,104
|
|
|
18
|
|
|
—
|
|
|
2,122
|
|
Net interest income after provision for credit losses
|
64,130
|
|
|
315
|
|
|
—
|
|
|
64,445
|
|
Noninterest income
|
16,757
|
|
|
2,223
|
|
|
(141
|
)
|
|
18,839
|
|
Noninterest expenses
|
55,014
|
|
|
2,522
|
|
|
(141
|
)
|
|
57,395
|
|
Income before income taxes
|
25,873
|
|
|
16
|
|
|
—
|
|
|
25,889
|
|
Income tax expense
|
6,753
|
|
|
12
|
|
|
—
|
|
|
6,765
|
|
Net income
|
$
|
19,120
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
19,124
|
|
Total assets
|
$
|
8,660,987
|
|
|
$
|
76,818
|
|
|
$
|
(67,885
|
)
|
|
$
|
8,669,920
|
|
|
|
|
|
|
|
|
|
14. SUBSEQUENT EVENTS
On April 1, 2018, the Bank completed its acquisition of DHFB, a Roanoke, Virginia based investment advisory firm with approximately
$600 million
in assets under management and advisement. DHFB will operate as a subsidiary of the Bank.
On April 12, 2018, the Bank announced its subsidiary ODCM entered into an agreement to acquire Outfitter Advisors, Inc., a McLean, Virginia based registered investment advisory firm with approximately
$400 million
in assets under management and advisement.
Review Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Union Bankshares Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Union Bankshares Corporation (the “Company”) as of March 31, 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2018 and 2017, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February 27, 2018, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the
standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an opinion.
Ernst & Young LLP
Richmond, Virginia
May 9, 2018