NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The interim consolidated financial statements of Wintrust Financial Corporation and its subsidiaries (collectively, “Wintrust” or the “Company”) presented herein are unaudited, but in the opinion of management, reflect all necessary adjustments of a normal or recurring nature for a fair presentation of results as of the dates and for the periods covered by the interim consolidated financial statements.
The accompanying interim consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with U.S. generally accepted accounting principles (“GAAP”). The interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). Operating results reported for the period are not necessarily indicative of the results which may be expected for the entire year. Reclassifications of certain prior period amounts have been made to conform to the current period presentation.
The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. Management believes that the estimates made are reasonable; however, changes in estimates may be required if economic or other conditions develop differently from management’s expectations. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for credit losses, including the allowance for loan losses, the allowance for unfunded commitment losses and the allowance for held-to-maturity securities losses, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available. Descriptions of the Company’s significant accounting policies are included in Note (1) “Summary of Significant Accounting Policies” of the 2022 Form 10-K. In preparation of these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users or filed with the SEC.
(2) Recent Accounting Developments
Business Combinations
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which clarifies diversity in practice related to recognition and measurement of contract assets and liabilities related to revenue contracts with customers which are acquired in a business combination by aligning business combination accounting with the subsequent accounting for contract assets and liabilities by requiring entities to apply ASC Topic 606, Revenue from Contracts with Customers, in order to recognize and measure deferred revenue in a business combination. The guidance also creates an exception to the general recognition and measurement principle in ASC Topic 805, Business Combinations, under which such amounts are recognized by the acquirer at fair value on the acquisition date by providing two practical expedients for acquirers. The Company adopted ASU No. 2021-08 as of January 1, 2023. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Fair Value Hedging - Portfolio Layer Method
In March 2022, the FASB issued ASU No. 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method” which expands the current last-of-layer method by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. The Company adopted ASU No. 2022-01 as of January 1, 2023. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” which eliminates the separate recognition and measurement guidance for troubled debt restructurings (“TDRs”) by creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty, and requiring entities to disclose current-period gross write-offs by year of origination for certain financing receivables and net investments in leases. The Company adopted ASU No. 2022-02 as of January 1, 2023. Guidance was adopted under a modified retrospective approach and, at January 1, 2023, the Company recognized a cumulative-effect adjustment to the allowance for loan losses of $741,000 representing the change in methodology of estimating expected credit losses for loans previously classified as TDRs. This amount was a positive adjustment to the allowance for loan losses, presented separately on the Company’s Consolidated Statements of Condition, with an offsetting negative adjustment recorded directly to retained earnings, net of taxes.
Fair Value Measurement - Equity Securities with Contractual Sale Restrictions
In June 2022, the FASB issued ASU No. 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” which clarifies the guidance in ASC 820 when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, and also requires specific disclosures related to these types of securities. This guidance is effective for fiscal years beginning after December 15, 2023, including interim periods therein, and is to be applied under a prospective approach. Early adoption is permitted. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Legislation Issued Related to Stock Repurchases
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed by the President of the United States. Among other things, the IRA imposes a 1% excise tax on the fair market value of stock repurchased after December 31, 2022. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. This new legislation did not have a material impact on the Company's consolidated financial statements.
Equity Method and Joint Ventures - Investments in Tax Credit Structures
In March 2023, the FASB issued ASU No. 2023-02, “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method,” which allows reporting entities the option to apply the proportional amortization method to other tax credit programs besides the Low-Income Housing Tax Credit (“LIHTC”) structures. The guidance requires application of the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing the method at the reporting level entity level. This guidance is effective for fiscal years beginning after December 15, 2023, including interim periods therein, and is to be applied under either a modified retrospective or retrospective approach. Early adoption is permitted. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
(3) Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include cash on hand, cash items in the process of collection, non-interest bearing amounts due from correspondent banks, federal funds sold and securities purchased under resale agreements with original maturities of three months or less. These items are included within the Company’s Consolidated Statements of Condition as cash and due from banks, and federal funds sold and securities purchased under resale agreements.
(4) Investment Securities
The following tables are a summary of the investment securities portfolios as of the dates shown:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| (In thousands) | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| Available-for-sale securities | | | | | | | |
| U.S. Treasury | $ | 4,947 | | | $ | 1 | | | $ | — | | | $ | 4,948 | |
| U.S. government agencies | 80,000 | | | — | | | (5,138) | | | 74,862 | |
| Municipal | 164,110 | | | 439 | | | (4,163) | | | 160,386 | |
| Corporate notes: | | | | | | | |
| Financial issuers | 93,995 | | | — | | | (11,320) | | | 82,675 | |
| Other | 1,000 | | | — | | | — | | | 1,000 | |
Mortgage-backed: (1) | | | | | | | |
| Mortgage-backed securities | 3,300,048 | | | 1,787 | | | (445,405) | | | 2,856,430 | |
| Collateralized mortgage obligations | 95,880 | | | — | | | (16,336) | | | 79,544 | |
| Total available-for-sale securities | $ | 3,739,980 | | | $ | 2,227 | | | $ | (482,362) | | | $ | 3,259,845 | |
| Held-to-maturity securities | | | | | | | |
| U.S. government agencies | $ | 339,608 | | | $ | 24 | | | $ | (70,064) | | | $ | 269,568 | |
| Municipal | 174,720 | | | 1,117 | | | (2,880) | | | 172,957 | |
Mortgage-backed: (1) | | | | | | | |
| Mortgage-backed securities | 2,872,591 | | | 1,197 | | | (533,415) | | | 2,340,373 | |
| Collateralized mortgage obligations | 161,874 | | | — | | | (22,431) | | | 139,443 | |
| Corporate notes | 58,061 | | | 14 | | | (4,218) | | | 53,857 | |
| Total held-to-maturity securities | $ | 3,606,854 | | | $ | 2,352 | | | $ | (633,008) | | | $ | 2,976,198 | |
| Less: Allowance for credit losses | (463) | | | | | | | |
| Held-to-maturity securities, net of allowance for credit losses | $ | 3,606,391 | | | | | | | |
| Equity securities with readily determinable fair value | $ | 116,296 | | | $ | 3,065 | | | $ | (7,418) | | | $ | 111,943 | |
(1)Consisting entirely of residential mortgage-backed securities, none of which are subprime.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| (In thousands) | | | |
| Available-for-sale securities | | | | | | | |
| U.S. Treasury | $ | 14,943 | | | $ | 5 | | | $ | — | | | $ | 14,948 | |
| U.S. government agencies | 80,000 | | | 36 | | | (5,814) | | | 74,222 | |
| Municipal | 173,861 | | | 230 | | | (5,436) | | | 168,655 | |
| Corporate notes: | | | | | | | |
| Financial issuers | 93,994 | | | — | | | (9,291) | | | 84,703 | |
| Other | 1,000 | | | 2 | | | — | | | 1,002 | |
Mortgage-backed: (1) | | | | | | | |
| Mortgage-backed securities | 3,308,494 | | | 238 | | | (488,795) | | | 2,819,937 | |
| Collateralized mortgage obligations | 97,342 | | | — | | | (17,792) | | | 79,550 | |
| Total available-for-sale securities | $ | 3,769,634 | | | $ | 511 | | | $ | (527,128) | | | $ | 3,243,017 | |
| Held-to-maturity securities | | | | | | | |
| U.S. government agencies | $ | 339,614 | | | $ | — | | | $ | (75,293) | | | $ | 264,321 | |
| Municipal | 179,027 | | | 477 | | | (4,066) | | | 175,438 | |
Mortgage-backed: (1) | | | | | | | |
| Mortgage-backed securities | 2,900,031 | | | — | | | (583,682) | | | 2,316,349 | |
| Collateralized mortgage obligations | 164,151 | | | — | | | (23,322) | | | 140,829 | |
| Corporate notes | 58,232 | | | — | | | (5,348) | | | 52,884 | |
| Total held-to-maturity securities | $ | 3,641,055 | | | $ | 477 | | | $ | (691,711) | | | $ | 2,949,821 | |
| Less: Allowance for credit losses | (488) | | | | | | | |
| Held-to-maturity securities, net of allowance for credit losses | $ | 3,640,567 | | | | | | | |
| Equity securities with readily determinable fair value | $ | 115,552 | | | $ | 2,935 | | | $ | (8,122) | | | $ | 110,365 | |
(1)Consisting entirely of residential mortgage-backed securities, none of which are subprime.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| (In thousands) | | | |
| Available-for-sale securities | | | | | | | |
| U.S. Treasury | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| U.S. government agencies | 50,000 | | | 366 | | | (729) | | | 49,637 | |
| Municipal | 157,563 | | | 1,019 | | | (3,093) | | | 155,489 | |
| Corporate notes: | | | | | | | |
| Financial issuers | 86,994 | | | 1 | | | (5,047) | | | 81,948 | |
| Other | 1,000 | | | — | | | (9) | | | 991 | |
Mortgage-backed: (1) | | | | | | | |
| Mortgage-backed securities | 2,794,760 | | | 591 | | | (177,899) | | | 2,617,452 | |
| Collateralized mortgage obligations | 103,424 | | | 1 | | | (10,044) | | | 93,381 | |
| Total available-for-sale securities | $ | 3,193,741 | | | $ | 1,978 | | | $ | (196,821) | | | $ | 2,998,898 | |
| Held-to-maturity securities | | | | | | | |
| U.S. government agencies | $ | 264,661 | | | $ | 35 | | | $ | (27,673) | | | $ | 237,023 | |
| Municipal | 180,548 | | | 3,176 | | | (1,693) | | | 182,031 | |
Mortgage-backed: (1) | | | | | | | |
| Mortgage-backed securities | 2,772,622 | | | — | | | (253,254) | | | 2,519,368 | |
| Collateralized mortgage obligations | 174,273 | | | — | | | (6,847) | | | 167,426 | |
| Corporate notes | 43,784 | | | — | | | (3,205) | | | 40,579 | |
| Total held-to-maturity securities | $ | 3,435,888 | | | $ | 3,211 | | | $ | (292,672) | | | $ | 3,146,427 | |
| Less: Allowance for credit losses | (159) | | | | | | | |
| Held-to-maturity securities, net of allowance for credit losses | $ | 3,435,729 | | | | | | | |
| Equity securities with readily determinable fair value | $ | 91,629 | | | $ | 5,259 | | | $ | (4,199) | | | $ | 92,689 | |
(1)Consisting entirely of residential mortgage-backed securities, none of which are subprime.
Equity securities without readily determinable fair values totaled $52.5 million as of March 31, 2023. Equity securities without readily determinable fair values are included as part of accrued interest receivable and other assets in the Company’s Consolidated Statements of Condition. The Company monitors its equity investments without readily determinable fair values to identify potential transactions that may indicate an observable price change in orderly transactions for the identical or a similar investment of the same issuer, requiring adjustment to its carrying amount. The Company recorded no upward or downward adjustments related to such observable price changes for the three months ended March 31, 2023 or March 31, 2022. The Company conducts a quarterly assessment of its equity securities without readily determinable fair values to determine whether impairment exists in such securities, considering, among other factors, the nature of the securities, financial condition of the issuer and expected future cash flows. During the three months ended March 31, 2023, the Company recorded no impairment of equity securities without readily determinable fair values. During the three months ended March 31, 2022, the Company recorded $571,000 of impairment of equity securities without readily determinable fair values.
The following table presents the portion of the Company’s available-for-sale investment securities portfolios that have gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuous unrealized
losses existing for
less than 12 months | | Continuous unrealized
losses existing for
greater than 12 months | | Total |
| (In thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| Available-for-sale securities | | | | | | | | | | | |
| | | | | | | | | | | |
| U.S. government agencies | $ | 29,945 | | | $ | (55) | | | $ | 44,917 | | | $ | (5,083) | | | $ | 74,862 | | | $ | (5,138) | |
| Municipal | 58,695 | | | (624) | | | 55,413 | | | (3,539) | | | 114,108 | | | (4,163) | |
| Corporate notes: | | | | | | | | | | | |
| Financial issuers | 9,912 | | | (87) | | | 72,763 | | | (11,233) | | | 82,675 | | | (11,320) | |
| | | | | | | | | | | |
Mortgage-backed: (1) | | | | | | | | | | | |
| Mortgage-backed securities | 219,643 | | | (7,558) | | | 2,297,025 | | | (437,847) | | | 2,516,668 | | | (445,405) | |
| Collateralized mortgage obligations | 72 | | | (1) | | | 79,472 | | | (16,335) | | | 79,544 | | | (16,336) | |
| Total available-for-sale securities | $ | 318,267 | | | $ | (8,325) | | | $ | 2,549,590 | | | $ | (474,037) | | | $ | 2,867,857 | | | $ | (482,362) | |
(1)Consisting entirely of residential mortgage-backed securities, none of which are subprime.
The Company conducts a regular assessment of its investment securities to determine whether securities are experiencing credit losses. Factors for consideration include the nature of the securities, credit ratings or financial condition of the issuer, the extent of the unrealized loss, expected cash flows, market conditions and the Company’s ability to hold the securities through the anticipated recovery period.
The Company does not consider available-for-sale securities with unrealized losses at March 31, 2023 to be experiencing credit losses and recognized no resulting allowance for credit losses for such individually assessed credit losses. The Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these investments before recovery of the amortized cost bases, which may be the maturity dates of the securities. The unrealized losses within each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. Available-for-sale securities with continuous unrealized losses existing for more than twelve months at March 31, 2023 were primarily mortgage-backed securities with unrealized losses due to increased market rates during such period.
See Note (6) “Allowance for Credit Losses” for further discussion regarding any credit losses associated with held-to-maturity securities at March 31, 2023.
The following table provides information as to the amount of gross gains and losses, adjustments and impairment on investment securities recognized in earnings and proceeds received through the sale or call of investment securities:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| (In thousands) | 2023 | | 2022 | | | | |
| Realized gains on investment securities | $ | 605 | | | $ | 258 | | | | | |
| Realized losses on investment securities | (45) | | | (8) | | | | | |
| Net realized gains on investment securities | 560 | | | 250 | | | | | |
| Unrealized gains on equity securities with readily determinable fair value | 2,290 | | | 180 | | | | | |
| Unrealized losses on equity securities with readily determinable fair value | (1,452) | | | (2,641) | | | | | |
| Net unrealized gains (losses) on equity securities with readily determinable fair value | 838 | | | (2,461) | | | | | |
| Upward adjustments of equity securities without readily determinable fair values | — | | | — | | | | | |
| Downward adjustments of equity securities without readily determinable fair values | — | | | — | | | | | |
| Impairment of equity securities without readily determinable fair values | — | | | (571) | | | | | |
| Adjustment and impairment, net, of equity securities without readily determinable fair values | — | | | (571) | | | | | |
| Gains (losses) on investment securities, net | $ | 1,398 | | | $ | (2,782) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Proceeds from sales of available-for-sale securities(1) | $ | — | | | $ | — | | | | | |
| | | | | | | |
| Proceeds from sales of equity securities with readily determinable fair value | 23,592 | | | 18,753 | | | | | |
| Proceeds from sales and capital distributions of equity securities without readily determinable fair value | 67 | | | 250 | | | | | |
(1)Includes proceeds from available-for-sale securities sold in accordance with written covered call options sold to a third party.
The amortized cost and fair value of available-for-sale and held-to-maturity investment securities as of March 31, 2023, December 31, 2022 and March 31, 2022, by contractual maturity, are shown in the following table. Contractual maturities may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Mortgage-backed securities are not included in the maturity categories in the following maturity summary as actual maturities may differ from contractual maturities because the underlying mortgages may be called or prepaid without penalties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| (In thousands) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Available-for-sale securities | | | | | | | | | | | |
| Due in one year or less | $ | 108,880 | | | $ | 108,429 | | | $ | 119,830 | | | $ | 119,275 | | | $ | 48,130 | | | $ | 47,945 | |
| Due in one to five years | 131,959 | | | 122,172 | | | 63,644 | | | 61,701 | | | 67,138 | | | 66,034 | |
| Due in five to ten years | 39,019 | | | 35,158 | | | 115,734 | | | 105,076 | | | 110,960 | | | 105,670 | |
| Due after ten years | 64,194 | | | 58,112 | | | 64,590 | | | 57,478 | | | 69,329 | | | 68,416 | |
| Mortgage-backed | 3,395,928 | | | 2,935,974 | | | 3,405,836 | | | 2,899,487 | | | 2,898,184 | | | 2,710,833 | |
| Total available-for-sale securities | $ | 3,739,980 | | | $ | 3,259,845 | | | $ | 3,769,634 | | | $ | 3,243,017 | | | $ | 3,193,741 | | | $ | 2,998,898 | |
| Held-to-maturity securities | | | | | | | | | | | |
| Due in one year or less | $ | 2,302 | | | $ | 2,300 | | | $ | 1,340 | | | $ | 1,332 | | | $ | 1,208 | | | $ | 1,213 | |
| Due in one to five years | 98,207 | | | 93,717 | | | 94,705 | | | 89,093 | | | 83,085 | | | 80,210 | |
| Due in five to ten years | 110,967 | | | 110,892 | | | 115,318 | | | 113,758 | | | 101,410 | | | 102,940 | |
| Due after ten years | 360,913 | | | 289,473 | | | 365,510 | | | 288,460 | | | 303,290 | | | 275,270 | |
| Mortgage-backed | 3,034,465 | | | 2,479,816 | | | 3,064,182 | | | 2,457,178 | | | 2,946,895 | | | 2,686,794 | |
| Total held-to-maturity securities | $ | 3,606,854 | | | $ | 2,976,198 | | | $ | 3,641,055 | | | $ | 2,949,821 | | | $ | 3,435,888 | | | $ | 3,146,427 | |
| Less: Allowance for credit losses | (463) | | | | | (488) | | | | | (159) | | | |
| Held-to-maturity securities, net of allowance for credit losses | $ | 3,606,391 | | | | | $ | 3,640,567 | | | | | $ | 3,435,729 | | | |
| | | | | | | | | | | |
Securities having a carrying value of $5.7 billion at March 31, 2023 as well as securities having a carrying value of $2.8 billion and $2.5 billion at December 31, 2022 and March 31, 2022, respectively, were pledged as collateral for public deposits, trust
deposits, Federal Home Loan Bank (“FHLB”) advances and available lines of credit, securities sold under repurchase agreements and derivatives. At March 31, 2023, there were no securities of a single issuer, other than U.S. government-sponsored agency securities, which exceeded 10% of shareholders’ equity.
(5) Loans
The following table shows the Company’s loan portfolio by category as of the dates shown:
| | | | | | | | | | | | | | | | | |
| March 31, | | December 31, | | March 31, |
| (Dollars in thousands) | 2023 | | 2022 | | 2022 |
| Balance: | | | | | |
| Commercial | $ | 12,576,985 | | | $ | 12,549,164 | | | $ | 11,583,963 | |
| Commercial real estate | 10,239,078 | | | 9,950,947 | | | 9,235,074 | |
| Home equity | 337,016 | | | 332,698 | | | 321,435 | |
| Residential real estate | 2,505,545 | | | 2,372,383 | | | 1,799,985 | |
| Premium finance receivables | | | | | |
| Property and casualty insurance | 5,738,880 | | | 5,849,459 | | | 4,937,408 | |
| Life insurance | 8,125,802 | | | 8,090,998 | | | 7,354,163 | |
| Consumer and other | 42,165 | | | 50,836 | | | 48,519 | |
| Total loans, net of unearned income | $ | 39,565,471 | | | $ | 39,196,485 | | | $ | 35,280,547 | |
| Mix: | | | | | |
| Commercial | 32 | % | | 32 | % | | 33 | % |
| Commercial real estate | 26 | | | 25 | | | 26 | |
| Home equity | 1 | | | 1 | | | 1 | |
| Residential real estate | 6 | | | 6 | | | 5 | |
| Premium finance receivables | | | | | |
| Property and casualty insurance | 14 | | | 15 | | | 14 | |
| Life insurance | 21 | | | 21 | | | 21 | |
| Consumer and other | 0 | | | 0 | | | 0 | |
| Total loans, net of unearned income | 100 | % | | 100 | % | | 100 | % |
The Company’s loan portfolio is generally comprised of loans to consumers and small to medium-sized businesses, which, for the commercial and commercial real estate portfolios, are located primarily within the geographic market areas that the banks serve. Various niche lending businesses, including lease finance and franchise lending, operate on a national level. The premium finance receivables portfolios are made to customers throughout the United States and Canada. The Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry, borrower and geographic concentrations. Such diversification reduces the exposure to economic downturns that may occur in different segments of the economy or in different industries.
Certain premium finance receivables are recorded net of unearned income. The unearned income portions of such premium finance receivables were $244.0 million at March 31, 2023, $224.5 million at December 31, 2022 and $140.3 million at March 31, 2022.
Total loans, excluding purchased credit deteriorated (“PCD”) loans, include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $70.9 million at March 31, 2023, $71.8 million at December 31, 2022 and $59.3 million at March 31, 2022.
It is the policy of the Company to review each prospective credit in order to determine the appropriateness and, when required, the adequacy of security or collateral necessary to obtain when making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to ensure access to collateral, in the event of default, through adherence to state lending laws and the Company’s credit monitoring procedures.
(6) Allowance for Credit Losses
In accordance with ASC 326, the Company is required to measure the allowance for credit losses of financial assets with similar risk characteristics on a collective or pooled basis. In considering the segmentation of financial assets measured at amortized
cost into pools, the Company considered various risk characteristics in its analysis. Generally, the segmentation utilized represents the level at which the Company develops and documents its systematic methodology to determine the allowance for credit losses for the financial assets held at amortized cost, specifically the Company's loan portfolio and debt securities classified as held-to-maturity. Descriptions of the Company’s loan portfolio segments and major debt security types are included in Note (5) “Allowance for Credit Losses” of the 2022 Form 10-K.
In accordance with ASC 326, the Company elected to not measure an allowance for credit losses on accrued interest. As such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. In addition, the Company elected to not include accrued interest within presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the Company's financial statements. Accrued interest related to financial assets held at amortized cost is included within accrued interest receivable and other assets within the Company's Consolidated Statements of Condition and totaled $245.1 million at March 31, 2023, $214.0 million at December 31, 2022, and $124.4 million at March 31, 2022.
The tables below show the aging of the Company’s loan portfolio by the segmentation noted above at March 31, 2023, December 31, 2022 and March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | | | 90+ days and still accruing | | 60-89 days past due | | 30-59 days past due | | | | |
| (In thousands) | Nonaccrual | | | | | Current | | Total Loans |
| Loan Balances (includes PCD): | | | | | | | | | | | |
| Commercial | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Commercial, industrial and other | $ | 47,950 | | | $ | — | | | $ | 10,755 | | | $ | 95,593 | | | $ | 12,422,687 | | | $ | 12,576,985 | |
| | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | |
| Construction and development | 5,404 | | | — | | | 4,438 | | | 19,616 | | | 1,567,595 | | | 1,597,053 | |
| Non-construction | 5,792 | | | — | | | 16,101 | | | 53,064 | | | 8,567,068 | | | 8,642,025 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Home equity | 1,190 | | | — | | | 116 | | | 1,118 | | | 334,592 | | | 337,016 | |
| | | | | | | | | | | |
| Residential real estate, excluding early buy-out loans | 11,333 | | | 104 | | | 74 | | | 19,183 | | | 2,278,699 | | | 2,309,393 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Premium finance receivables | | | | | | | | | | | |
| Property and casualty insurance loans | 18,543 | | | 9,215 | | | 14,287 | | | 32,545 | | | 5,664,290 | | | 5,738,880 | |
| Life insurance loans | — | | | 1,066 | | | 21,552 | | | 52,975 | | | 8,050,209 | | | 8,125,802 | |
| | | | | | | | | | | |
| Consumer and other | 6 | | | 87 | | | 10 | | | 379 | | | 41,683 | | | 42,165 | |
| Total loans, net of unearned income, excluding early buy-out loans | $ | 90,218 | | | $ | 10,472 | | | $ | 67,333 | | | $ | 274,473 | | | $ | 38,926,823 | | | $ | 39,369,319 | |
Early buy-out loans guaranteed by U.S. government agencies (1) | 29,245 | | | 36,920 | | | — | | | 1,485 | | | 128,502 | | | 196,152 | |
| Total loans, net of unearned income | $ | 119,463 | | | $ | 47,392 | | | $ | 67,333 | | | $ | 275,958 | | | $ | 39,055,325 | | | $ | 39,565,471 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | | | 90+ days and still accruing | | 60-89 days past due | | 30-59 days past due | | | | | | |
| (In thousands) | Nonaccrual | | | | | Current | | Total Loans | | |
| Loan Balances (includes PCD): | | | | | | | | | | | | | |
| Commercial | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Commercial, industrial and other | $ | 35,579 | | | $ | 462 | | | $ | 21,128 | | | $ | 56,696 | | | $ | 12,435,299 | | | $ | 12,549,164 | | | |
| | | | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | | | |
| Construction and development | 416 | | | — | | | 361 | | | 14,390 | | | 1,471,763 | | | 1,486,930 | | | |
| Non-construction | 5,971 | | | — | | | 1,883 | | | 16,285 | | | 8,439,878 | | | 8,464,017 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Home equity | 1,487 | | | — | | | — | | | 2,152 | | | 329,059 | | | 332,698 | | | |
| | | | | | | | | | | | | |
| Residential real estate, excluding early buy-out loans | 10,171 | | | — | | | 4,364 | | | 9,982 | | | 2,183,078 | | | 2,207,595 | | | |
| | | | | | | | | | | | | |
| Premium finance receivables | | | | | | | | | | | | | |
| Property and casualty insurance loans | 13,470 | | | 15,841 | | | 14,926 | | | 40,557 | | | 5,764,665 | | | 5,849,459 | | | |
| Life insurance loans | — | | | 17,245 | | | 5,260 | | | 68,725 | | | 7,999,768 | | | 8,090,998 | | | |
| | | | | | | | | | | | | |
| Consumer and other | 6 | | | 49 | | | 18 | | | 224 | | | 50,539 | | | 50,836 | | | |
| Total loans, net of unearned income, excluding early buy-out loans | $ | 67,100 | | | $ | 33,597 | | | $ | 47,940 | | | $ | 209,011 | | | $ | 38,674,049 | | | $ | 39,031,697 | | | |
Early buy-out loans guaranteed by U.S. government agencies (1) | 31,279 | | | 47,450 | | | 984 | | | 1,584 | | | 83,491 | | | 164,788 | | | |
| Total loans, net of unearned income | $ | 98,379 | | | $ | 81,047 | | | $ | 48,924 | | | $ | 210,595 | | | $ | 38,757,540 | | | $ | 39,196,485 | | | |
(1)Early buy-out loans are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs, subject to indemnifications and insurance limits for certain loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | | 90+ days and still accruing | | 60-89 days past due | | 30-59 days past due | | | | |
| (In thousands) | Nonaccrual | | | | | Current | | Total Loans |
| Loan Balances (includes PCD): | | | | | | | | | | | |
| Commercial | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Commercial, industrial and other | $ | 16,878 | | | $ | — | | | $ | 1,294 | | | $ | 31,889 | | | $ | 11,533,902 | | | $ | 11,583,963 | |
| | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | |
| Construction and development | 1,054 | | | — | | | — | | | 1,409 | | | 1,393,943 | | | 1,396,406 | |
| Non-construction | 11,247 | | | — | | | 2,648 | | | 28,732 | | | 7,796,041 | | | 7,838,668 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Home equity | 1,747 | | | — | | | 199 | | | 545 | | | 318,944 | | | 321,435 | |
| | | | | | | | | | | |
| Residential real estate, excluding early buy-out loans | 7,262 | | | — | | | 293 | | | 18,808 | | | 1,723,526 | | | 1,749,889 | |
| | | | | | | | | | | |
| Premium finance receivables | | | | | | | | | | | |
| Property and casualty insurance loans | 6,707 | | | 12,363 | | | 8,890 | | | 21,278 | | | 4,888,170 | | | 4,937,408 | |
| Life insurance loans | — | | | — | | | 22,401 | | | 15,522 | | | 7,316,240 | | | 7,354,163 | |
| | | | | | | | | | | |
| Consumer and other | 4 | | | 43 | | | 5 | | | 221 | | | 48,246 | | | 48,519 | |
| Total loans, net of unearned income, excluding early buy-out loans | $ | 44,899 | | | $ | 12,406 | | | $ | 35,730 | | | $ | 118,404 | | | $ | 35,019,012 | | | $ | 35,230,451 | |
Early buy-out loans guaranteed by U.S. government agencies (1) | 4,661 | | | 28,958 | | | — | | | 185 | | | 16,292 | | | 50,096 | |
| Total loans, net of unearned income | $ | 49,560 | | | $ | 41,364 | | | $ | 35,730 | | | $ | 118,589 | | | $ | 35,035,304 | | | $ | 35,280,547 | |
(1)Early buy-out loans are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs, subject to indemnifications and insurance limits for certain loans.
Credit Quality Indicators
Credit quality indicators, specifically the Company's internal risk rating systems, reflect how the Company monitors credit losses and represents factors used by the Company when measuring the allowance for credit losses. Descriptions of the Company’s credit quality indicators by financial asset are included in Note (5) “Allowance for Credit Losses” of the 2022 Form 10-K.
The table below shows the Company’s loan portfolio by credit quality indicator and year of origination at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year of Origination | | | Revolving | | Total |
| (In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | | Revolving | to Term | | Loans |
| Loan Balances: | | | | | | | | | | | |
| Commercial, industrial and other | | | | | | | | | | | |
| Pass | $ | 752,119 | | $ | 2,576,073 | | $ | 2,081,628 | | $ | 940,341 | | $ | 603,016 | | $ | 1,213,066 | | | $ | 3,872,419 | | $ | 3,497 | | | $ | 12,042,159 | |
| Special mention | 402 | | 55,314 | | 92,315 | | 9,462 | | 23,220 | | 10,695 | | | 149,012 | | 268 | | | 340,688 | |
| Substandard accrual | — | | 13,415 | | 40,397 | | 2,401 | | 12,670 | | 40,814 | | | 36,035 | | 456 | | | 146,188 | |
| Substandard nonaccrual/doubtful | — | | 550 | | 5,479 | | 10,985 | | 28,490 | | 2,215 | | | 231 | | — | | | 47,950 | |
| Total commercial, industrial and other | $ | 752,521 | | $ | 2,645,352 | | $ | 2,219,819 | | $ | 963,189 | | $ | 667,396 | | $ | 1,266,790 | | | $ | 4,057,697 | | $ | 4,221 | | | $ | 12,576,985 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Construction and development | | | | | | | | | | | |
| Pass | $ | 42,635 | | $ | 506,714 | | $ | 512,801 | | $ | 204,113 | | $ | 111,497 | | $ | 119,478 | | | $ | 12,626 | | $ | 369 | | | $ | 1,510,233 | |
| Special mention | — | | — | | 1,475 | | 16,480 | | 23,494 | | 14,360 | | | — | | — | | | 55,809 | |
| Substandard accrual | — | | 2,337 | | — | | 8,301 | | — | | 14,969 | | | — | | — | | | 25,607 | |
| Substandard nonaccrual/doubtful | — | | 4,190 | | 798 | | — | | — | | 416 | | | — | | — | | | 5,404 | |
| Total construction and development | $ | 42,635 | | $ | 513,241 | | $ | 515,074 | | $ | 228,894 | | $ | 134,991 | | $ | 149,223 | | | $ | 12,626 | | $ | 369 | | | $ | 1,597,053 | |
| Non-construction | | | | | | | | | | | |
| Pass | $ | 472,528 | | $ | 1,862,370 | | $ | 1,441,054 | | $ | 1,002,397 | | $ | 814,910 | | $ | 2,637,342 | | | $ | 184,246 | | $ | 649 | | | $ | 8,415,496 | |
| Special mention | — | | 4,351 | | 11,872 | | 2,140 | | 29,868 | | 74,174 | | | 1,439 | | — | | | 123,844 | |
| Substandard accrual | — | | — | | 3,163 | | 22,041 | | 16,827 | | 54,862 | | | — | | — | | | 96,893 | |
| Substandard nonaccrual/doubtful | — | | — | | — | | — | | — | | 5,792 | | | — | | — | | | 5,792 | |
| Total non-construction | $ | 472,528 | | $ | 1,866,721 | | $ | 1,456,089 | | $ | 1,026,578 | | $ | 861,605 | | $ | 2,772,170 | | | $ | 185,685 | | $ | 649 | | | $ | 8,642,025 | |
| Home equity | | | | | | | | | | | |
| Pass | $ | — | | $ | — | | $ | — | | $ | — | | $ | 56 | | $ | 5,633 | | | $ | 317,387 | | $ | — | | | $ | 323,076 | |
| Special mention | — | | — | | — | | — | | — | | 1,430 | | | 2,193 | | — | | | 3,623 | |
| Substandard accrual | — | | — | | — | | — | | — | | 8,214 | | | 869 | | 44 | | | 9,127 | |
| Substandard nonaccrual/doubtful | — | | — | | 77 | | 116 | | 18 | | 880 | | | 99 | | — | | | 1,190 | |
| Total home equity | $ | — | | $ | — | | $ | 77 | | $ | 116 | | $ | 74 | | $ | 16,157 | | | $ | 320,548 | | $ | 44 | | | $ | 337,016 | |
| Residential real estate | | | | | | | | | | | |
| Early buy-out loans guaranteed by U.S. government agencies | $ | — | | $ | — | | $ | 769 | | $ | 9,250 | | $ | 19,430 | | $ | 166,703 | | | $ | — | | $ | — | | | $ | 196,152 | |
| Pass | 95,403 | | 815,003 | | 825,881 | | 225,297 | | 118,840 | | 196,150 | | | — | | — | | | 2,276,574 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Special mention | 40 | | 3,816 | | 718 | | 1,992 | | 542 | | 4,488 | | | — | | — | | | 11,596 | |
| Substandard accrual | 323 | | 1,204 | | 1,825 | | 1,182 | | 1,100 | | 4,256 | | | — | | — | | | 9,890 | |
| Substandard nonaccrual/doubtful | — | | 284 | | 1,100 | | 759 | | 1,665 | | 7,525 | | | — | | — | | | 11,333 | |
| Total residential real estate | $ | 95,766 | | $ | 820,307 | | $ | 830,293 | | $ | 238,480 | | $ | 141,577 | | $ | 379,122 | | | $ | — | | $ | — | | | $ | 2,505,545 | |
| Premium finance receivables - property and casualty | | | | | | | | | | | |
| Pass | $ | 2,826,947 | | $ | 2,757,313 | | $ | 35,647 | | $ | 5,270 | | $ | 906 | | $ | — | | | $ | — | | $ | — | | | $ | 5,626,083 | |
| Special mention | 42,025 | | 49,190 | | 969 | | 17 | | — | | — | | | — | | — | | | 92,201 | |
| Substandard accrual | 205 | | 1,700 | | 148 | | — | | — | | — | | | — | | — | | | 2,053 | |
| Substandard nonaccrual/doubtful | 777 | | 16,975 | | 779 | | 12 | | — | | — | | | — | | — | | | 18,543 | |
| Total premium finance receivables - property and casualty | $ | 2,869,954 | | $ | 2,825,178 | | $ | 37,543 | | $ | 5,299 | | $ | 906 | | $ | — | | | $ | — | | $ | — | | | $ | 5,738,880 | |
| Premium finance receivables - life | | | | | | | | | | | |
| Pass | $ | 49,164 | | $ | 550,396 | | $ | 830,917 | | $ | 1,056,414 | | $ | 936,674 | | $ | 4,699,645 | | | $ | — | | $ | — | | | $ | 8,123,210 | |
| Special mention | — | | — | | 1,156 | | 1,436 | | — | | — | | | — | | — | | | 2,592 | |
| Substandard accrual | — | | — | | — | | — | | — | | — | | | — | | — | | | — | |
| Substandard nonaccrual/doubtful | — | | — | | — | | — | | — | | — | | | — | | — | | | — | |
| Total premium finance receivables - life | $ | 49,164 | | $ | 550,396 | | $ | 832,073 | | $ | 1,057,850 | | $ | 936,674 | | $ | 4,699,645 | | | $ | — | | $ | — | | | $ | 8,125,802 | |
| Consumer and other | | | | | | | | | | | |
| Pass | $ | 750 | | $ | 2,469 | | $ | 1,414 | | $ | 200 | | $ | 433 | | $ | 5,306 | | | $ | 31,392 | | $ | — | | | $ | 41,964 | |
| Special mention | — | | 6 | | 1 | | — | | 2 | | 133 | | | 3 | | — | | | 145 | |
| Substandard accrual | — | | 2 | | — | | — | | — | | 40 | | | 8 | | — | | | 50 | |
| Substandard nonaccrual/doubtful | — | | — | | 6 | | — | | — | | — | | | — | | — | | | 6 | |
| Total consumer and other | $ | 750 | | $ | 2,477 | | $ | 1,421 | | $ | 200 | | $ | 435 | | $ | 5,479 | | | $ | 31,403 | | $ | — | | | $ | 42,165 | |
| Total loans | | | | | | | | | | | |
| Early buy-out loans guaranteed by U.S. government agencies | $ | — | | $ | — | | $ | 769 | | $ | 9,250 | | $ | 19,430 | | $ | 166,703 | | | $ | — | | $ | — | | | $ | 196,152 | |
| Pass | 4,239,546 | | 9,070,338 | | 5,729,342 | | 3,434,032 | | 2,586,332 | | 8,876,620 | | | 4,418,070 | | 4,515 | | | 38,358,795 | |
| Special mention | 42,467 | | 112,677 | | 108,506 | | 31,527 | | 77,126 | | 105,280 | | | 152,647 | | 268 | | | 630,498 | |
| Substandard accrual | 528 | | 18,658 | | 45,533 | | 33,925 | | 30,597 | | 123,155 | | | 36,912 | | 500 | | | 289,808 | |
| Substandard nonaccrual/doubtful | 777 | | 21,999 | | 8,239 | | 11,872 | | 30,173 | | 16,828 | | | 330 | | — | | | 90,218 | |
| Total loans | $ | 4,283,318 | | $ | 9,223,672 | | $ | 5,892,389 | | $ | 3,520,606 | | $ | 2,743,658 | | $ | 9,288,586 | | | $ | 4,607,959 | | $ | 5,283 | | | $ | 39,565,471 | |
| Current period gross write offs | $ | 478 | | $ | 4,893 | | $ | 1,194 | | $ | 337 | | $ | 318 | | $ | 131 | | | $ | — | | $ | — | | | $ | 7,351 | |
Held-to-maturity debt securities
The Company conducts an assessment of its investment securities, including those classified as held-to-maturity, at the time of purchase and on at least an annual basis to ensure such investment securities remain within appropriate levels of risk and continue to perform satisfactorily in fulfilling its obligations. The Company considers, among other factors, the nature of the securities and credit ratings or financial condition of the issuer. If available, the Company obtains a credit rating for issuers from a Nationally Recognized Statistical Rating Organization (“NRSRO”) for consideration. If no such rating is available for an issuer, the Company performs an internal rating based on the scale utilized within the loan portfolio as discussed above. For purposes of the table below, the Company has converted any issuer rating from an NRSRO into the Company’s internal ratings based on Investment Policy and review by the Company’s management.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | Year of Origination | | Total |
| (In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | | Balance |
| Amortized Cost Balances: | | | | | | | | |
| U.S. government agencies | | | | | | | | |
| 1-4 internal grade | $ | — | | $ | 160,000 | | $ | 147,804 | | $ | 25,000 | | $ | 4,000 | | $ | 2,804 | | | $ | 339,608 | |
| 5-7 internal grade | | | | | | | | — | |
| 8-10 internal grade | | | | | | | | — | |
| Total U.S. government agencies | $ | — | | $ | 160,000 | | $ | 147,804 | | $ | 25,000 | | $ | 4,000 | | $ | 2,804 | | | $ | 339,608 | |
| Municipal | | | | | | | | |
| 1-4 internal grade | $ | — | | $ | 1,042 | | $ | 6,978 | | $ | 264 | | $ | 618 | | $ | 165,818 | | | $ | 174,720 | |
| 5-7 internal grade | — | | — | | — | | — | | — | | — | | | — | |
| 8-10 internal grade | — | | — | | — | | — | | — | | — | | | — | |
| Total municipal | $ | — | | $ | 1,042 | | $ | 6,978 | | $ | 264 | | $ | 618 | | $ | 165,818 | | | $ | 174,720 | |
| Mortgage-backed securities | | | | | | | | |
| 1-4 internal grade | $ | 5,065 | | $ | 606,922 | | $ | 2,422,478 | | $ | — | | $ | — | | $ | — | | | $ | 3,034,465 | |
| 5-7 internal grade | — | | — | | — | | — | | — | | — | | | — | |
| 8-10 internal grade | — | | — | | — | | — | | — | | — | | | — | |
| Total mortgage-backed securities | $ | 5,065 | | $ | 606,922 | | $ | 2,422,478 | | $ | — | | $ | — | | $ | — | | | $ | 3,034,465 | |
| Corporate notes | | | | | | | | |
| 1-4 internal grade | $ | — | | $ | 14,964 | | $ | — | | $ | 6,009 | | $ | 7,291 | | $ | 29,797 | | | $ | 58,061 | |
| 5-7 internal grade | — | | — | | — | | — | | — | | — | | | — | |
| 8-10 internal grade | — | | — | | — | | — | | — | | — | | | — | |
| Total corporate notes | $ | — | | $ | 14,964 | | $ | — | | $ | 6,009 | | $ | 7,291 | | $ | 29,797 | | | $ | 58,061 | |
| Total held-to-maturity securities | | | | | | | | $ | 3,606,854 | |
| Less: Allowance for credit losses | | | | | | | | (463) | |
| Held-to-maturity securities, net of allowance for credit losses | | | | | | | | $ | 3,606,391 | |
Measurement of Allowance for Credit Losses
The Company's allowance for credit losses consists of the allowance for loan losses, the allowance for unfunded commitment losses and the allowance for held-to-maturity debt security losses. In accordance with ASC 326, the Company measures the allowance for credit losses at the time of origination or purchase of a financial asset, representing an estimate of lifetime expected credit losses on the related asset. When developing its estimate, the Company considers available information relevant to assessing the collectability of cash flows, from both internal and external sources. Historical credit loss experience is one input in the estimation process as well as inputs relevant to current conditions and reasonable and supportable forecasts. In considering past events, the Company considers the relevance, or lack thereof, of historical information due to changes in such things as financial asset underwriting or collection practices, and changes in portfolio mix due to changing business plans and strategies. In considering current conditions and forecasts, the Company considers both the current economic environment and the forecasted direction of the economic environment with emphasis on those factors deemed relevant to or driving changes in expected credit losses. As significant judgment is required, the review of the appropriateness of the allowance for credit losses is performed quarterly by various committees with participation by the Company's executive management.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, | | | | | | December 31, | | March 31, |
| (In thousands) | | 2023 | | | | | | 2022 | | 2022 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Allowance for loan losses | | $ | 287,972 | | | | | | | $ | 270,173 | | | $ | 250,539 | |
| Allowance for unfunded lending-related commitments losses | | 87,826 | | | | | | | 87,275 | | | 50,629 | |
| Allowance for loan losses and unfunded lending-related commitments losses | | 375,798 | | | | | | | 357,448 | | | 301,168 | |
| Allowance for held-to-maturity securities losses | | 463 | | | | | | | 488 | | | 159 | |
| Allowance for credit losses | | $ | 376,261 | | | | | | | $ | 357,936 | | | $ | 301,327 | |
The allowance for credit losses is measured on a collective or pooled basis when similar risk characteristics exist, based upon the segmentation discussed above. The Company utilizes modeling methodologies that estimate lifetime credit loss rates on each pool, including methodologies estimating the probability of default and loss given default on specific segments. Historical credit loss history is adjusted for reasonable and supportable forecasts developed by the Company on a quantitative or qualitative basis and incorporates third party economic forecasts. Reasonable and supportable forecasts consider the macroeconomic factors that are most relevant to evaluating and predicting expected credit losses in the Company's financial assets. Currently, the Company utilizes an eight quarter forecast period using a single macroeconomic scenario provided by a
third party and reviewed within the Company's governance structure. For periods beyond the ability to develop reasonable and supportable forecasts, the Company reverts to historical loss rates at an input level, straight-line over a four quarter reversion period. Expected credit losses are measured over the contractual term of the financial asset with consideration of expected prepayments. Expected extensions, renewals or modifications of the financial asset are considered when the expected extension, renewal or modification is contained within the existing agreement and is not unconditionally cancelable. The methodologies discussed above are applied to both current asset balances on the Company's Consolidated Statements of Condition and off-balance sheet commitments (i.e. unfunded lending-related commitments).
Assets that do not share similar risk characteristics with a pool are assessed for the allowance for credit losses on an individual basis. These typically include assets experiencing financial difficulties, including assets rated as substandard nonaccrual and doubtful. If foreclosure is probable or the asset is considered collateral-dependent, expected credit losses are measured based upon the fair value of the underlying collateral adjusted for selling costs, if appropriate. Underlying collateral across the Company's segments consist primarily of real estate, land and construction assets as well as general business assets of the borrower. As of March 31, 2023, excluding loans carried at fair value, substandard nonaccrual loans totaling $23.3 million in carrying balance had no related allowance for credit losses.
The Company does not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when assets are placed on nonaccrual status.
Loan portfolios
A summary of activity in the allowance for credit losses, specifically for the loan portfolio (i.e. allowance for loan losses and allowance for unfunded commitment losses), for the three and three months ended March 31, 2023 and 2022 is as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 | | | Commercial Real Estate | | Home Equity | | Residential Real Estate | | Premium Finance Receivables | | Consumer and Other | | Total Loans |
| (In thousands) | Commercial | | | | | | |
| | | | | | | | | | | | | |
| Allowance for credit losses at beginning of period | $ | 142,769 | | | $ | 184,352 | | | $ | 7,573 | | | $ | 11,585 | | | $ | 10,671 | | | $ | 498 | | | $ | 357,448 | |
| Cumulative effect adjustment from the adoption of ASU 2022-02 | 111 | | | 1,356 | | | (33) | | | (692) | | | — | | | (1) | | | 741 | |
| Other adjustments | — | | | — | | | — | | | — | | | 4 | | | — | | | 4 | |
| Charge-offs | (2,543) | | | (5) | | | — | | | — | | | (4,650) | | | (153) | | | (7,351) | |
| Recoveries | 392 | | | 100 | | | 35 | | | 4 | | | 1,323 | | | 32 | | | 1,886 | |
| Provision for credit losses | 8,772 | | | 8,977 | | | 153 | | | 537 | | | 4,607 | | | 24 | | | 23,070 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Allowance for credit losses at period end | $ | 149,501 | | | $ | 194,780 | | | $ | 7,728 | | | $ | 11,434 | | | $ | 11,955 | | | $ | 400 | | | $ | 375,798 | |
| By measurement method: | | | | | | | | | | | | | |
| Individually measured | $ | 11,281 | | | $ | 1,621 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 12,903 | |
| Collectively measured | 138,220 | | | 193,159 | | | 7,728 | | | 11,434 | | | 11,955 | | | 399 | | | 362,895 | |
| | | | | | | | | | | | | |
| Loans at period end | | | | | | | | | | | | | |
| Individually measured | $ | 47,950 | | | $ | 11,196 | | | $ | 1,190 | | | $ | 11,280 | | | $ | — | | | $ | 6 | | | $ | 71,622 | |
| Collectively measured | 12,529,035 | | | 10,227,882 | | | 335,826 | | | 2,286,733 | | | 13,864,682 | | | 42,159 | | | 39,286,317 | |
| | | | | | | | | | | | | |
| Loans held at fair value | — | | | — | | | — | | | 207,532 | | | — | | | — | | | 207,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 | Commercial | | Commercial Real Estate | | Home Equity | | Residential Real Estate | | Premium Finance Receivables | | Consumer and Other | | Total Loans |
| (In thousands) | | | | | | |
| | | | | | | | | | | | | |
| Allowance for credit losses at beginning of period | $ | 119,307 | | | $ | 144,583 | | | $ | 10,699 | | | $ | 8,782 | | | $ | 15,859 | | | $ | 423 | | | $ | 299,653 | |
| | | | | | | | | | | | | |
| Other adjustments | — | | | — | | | — | | | — | | | 22 | | | — | | | 22 | |
| | | | | | | | | | | | | |
| Charge-offs | (1,414) | | | (777) | | | (197) | | | (466) | | | (1,678) | | | (193) | | | (4,725) | |
| Recoveries | 538 | | | 32 | | | 93 | | | 5 | | | 1,476 | | | 49 | | | 2,193 | |
| Provision for credit losses | 2,480 | | | 1,068 | | | (29) | | | 1,108 | | | (957) | | | 355 | | | 4,025 | |
| Allowance for credit losses at period end | $ | 120,911 | | | $ | 144,906 | | | $ | 10,566 | | | $ | 9,429 | | | $ | 14,722 | | | $ | 634 | | | $ | 301,168 | |
| By measurement method: | | | | | | | | | | | | | |
| Individually measured | $ | 3,698 | | | $ | 522 | | | $ | 127 | | | $ | 800 | | | $ | — | | | $ | 5 | | | $ | 5,152 | |
| Collectively measured | 117,213 | | | 144,384 | | | 10,439 | | | 8,629 | | | 14,722 | | | 629 | | | 296,016 | |
| | | | | | | | | | | | | |
| Loans at period end | | | | | | | | | | | | | |
| Individually measured | $ | 19,651 | | | $ | 22,370 | | | $ | 12,904 | | | $ | 17,842 | | | $ | — | | | $ | 79 | | | $ | 72,846 | |
| Collectively measured | 11,564,312 | | | 9,212,704 | | | 308,531 | | | 1,724,159 | | | 12,291,571 | | | 48,440 | | | 35,149,717 | |
| | | | | | | | | | | | | |
| Loans held at fair value | — | | | — | | | — | | | 57,984 | | | — | | | — | | | 57,984 | |
For the three months ended March 31, 2023, and 2022, the Company recognized approximately $23.1 million and $4.0 million of provision for credit losses, respectively, related to loans and lending agreements. The provision for each period was primarily the result of loan growth as well as the Company's macroeconomic forecasts of key model inputs (most notably, Baa corporate credit spreads). Uncertainties remain regarding expected economic performance and macroeconomic forecasts utilized in the measurement of the allowance for credit losses as of March 31, 2023. Other key drivers of provision for credit losses in these portfolios include, but are not limited to, stable loan risk rating migration. Net charge-offs in the three month periods ending March 31, 2023 and 2022, totaled $5.5 million and $2.5 million, respectively.
Held-to-maturity debt securities
The allowance for credit losses on the Company’s held-to-maturity debt securities is presented as a reduction to the amortized cost basis of held-to-maturity securities on the Company's Consolidated Statements of Condition. For the three month period ended March 31, 2023 and 2022, the Company recognized approximately $(25,000) and $81,000, respectively, of provision for credit losses related to held-to-maturity securities. At March 31, 2023, the Company did not identify any losses within its portfolio that it would deem a credit loss and require additional measurement of an allowance for credit losses.
Loan Modifications to Borrowers Experiencing Financial Difficulties
The Company’s approach to restructuring or modifying loans is built on its credit risk rating system, which requires credit management personnel to assign a credit risk rating to each loan. In each case, the loan officer is responsible for recommending a credit risk rating for each loan and ensuring the credit risk ratings are appropriate. These credit risk ratings are then reviewed and approved by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors, including a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. The Company’s credit risk rating scale is one through ten with higher scores indicating higher risk. In the case of loans rated six or worse following modification, the Company’s Managed Assets Division evaluates the loan and the credit risk rating and determines that the loan has been restructured to be reasonably assured of repayment and of performance according to the modified terms and is supported by a current, well-documented credit assessment of the borrower’s financial condition and prospects for repayment under the revised terms. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is 5 or better are not experiencing financial difficulties.
Restructurings may arise when, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to other real estate owned (“OREO”), which is included within other assets in the Consolidated Statements of Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. At March 31, 2023, the Company had $1.1 million of foreclosed residential real estate properties included within OREO. Further, the recorded investment in residential mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $53.4 million and $7.7 million at March 31, 2023 and 2022, respectively.
The table below presents a summary of the balance immediately following the modification of loans to borrowers experiencing financial difficulties during the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2023 (Dollars in thousands) | | Total (1) | | Percentage of Total Class of Loan | | Extension of Term (1) | | Reduction of Interest Rate (1) | | Delay in Contractual Payments (1) | | Extension of Term and Reduction of Interest Rate (1) |
| | | | | | | | | | | | |
| Commercial | | | | | | | | | | | | |
| Commercial, industrial and other | | $ | 37,474 | | | 0.3 | % | | $ | 1,938 | | | $ | 221 | | | $ | 35,265 | | | $ | 50 | |
| Commercial real estate | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Non-construction | | 1,333 | | | — | | | 467 | | | 827 | | | 39 | | | — | |
| Home equity | | 203 | | | 0.1 | | | 203 | | | — | | | — | | | — | |
| Residential real estate | | 1,708 | | | 0.1 | | | 1,253 | | | 271 | | | — | | | 184 | |
| Premium finance receivables | | | | | | | | | | | | |
| Property and casualty insurance loans | | 11 | | | 0.0 | | | 3 | | | — | | | — | | | 8 | |
| Total loans | | $ | 40,729 | | | 0.1 | % | | $ | 3,864 | | | $ | 1,319 | | | $ | 35,304 | | | $ | 242 | |
| | | | | | | | | | | | |
| Weighted average magnitude of modifications: | | | | | | | | | | | | |
| Duration of extension and delayed payment terms | | | | | | 27 months | | | | 17 months | | |
| Reduction of interest rate | | | | | | | | 275 | bps | | | | |
(1)Balances represent the recorded investment in the loan at the time of the restructuring.
The following table presents a summary of all loans for borrowers experiencing financial difficulties modified during the three months ended March 31, 2023, and such loans that were in payment default under the restructured terms during the respective periods below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | As of March 31, 2023 | | | | Three Months Ended March 31, 2023 | | | | | | |
| | Total (2) | | Payments in Default (1)(2) | | | | | | | | | | |
| Commercial | | | | | | | | | | | | | | | | | | | |
| Commercial, industrial and other | | | $ | 37,474 | | | | | $ | 2 | | | | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Non-construction | | | 1,333 | | | | | 828 | | | | | | | | | | | | | |
| Home equity | | | 203 | | | | | 104 | | | | | | | | | | | | | |
| Residential real estate | | | 1,708 | | | | | — | | | | | | | | | | | | | |
| Premium finance receivables | | | | | | | | | | | | | | | | | | | |
| Property and casualty insurance loans | | | 11 | | | | | 11 | | | | | | | | | | | | | |
| Total loans | | | $ | 40,729 | | | | | $ | 945 | | | | | | | | | | | | | |
(1)Modified loans considered to be in payment default are over 30 days past due subsequent to the restructuring.
(2)Balances represent the recorded investment in the loan at the time of the restructuring.
TDRs
Reporting periods prior to the adoption of ASU 2022-02 as of January 1, 2023 present information on loan modifications representing TDRs under the prior accounting standards and related disclosure requirements.
The table below presents a summary of the balance immediately following the modification of loans restructured during the three months ended March 31, 2022 which represent TDRs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2022 (Dollars in thousands) | | Total (1)(2) | | Extension at Below Market Terms (2) | | Reduction of Interest Rate (2) | | Modification to Interest-only Payments (2) | | Forgiveness of Debt (2) |
| Count | | Balance | | Count | | Balance | | Count | | Balance | | Count | | Balance | | Count | | Balance |
| Commercial | | | | | | | | | | | | | | | | | | | | |
| Commercial, industrial and other | | 3 | | | $ | 282 | | | 2 | | | $ | 120 | | | 1 | | | $ | 85 | | | 2 | | | $ | 247 | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Non-construction | | 2 | | | 1,907 | | | 1 | | | 1,178 | | | 1 | | | 1,178 | | | 2 | | | 1,907 | | | — | | | — | |
| Residential real estate and other | | 8 | | | 908 | | | 8 | | | 908 | | | 7 | | | 762 | | | — | | | — | | | — | | | — | |
| Total loans | | 13 | | | $ | 3,097 | | | 11 | | | $ | 2,206 | | | 9 | | | $ | 2,025 | | | 4 | | | $ | 2,154 | | | — | | | $ | — | |
(1)TDRs may have more than one modification representing a concession. As such, TDRs during the period may be represented in more than one of the categories noted above.
(2)Balances represent the recorded investment in the loan at the time of the restructuring.
During the three months ended March 31, 2022, 13 loans totaling $3.1 million were determined to be TDRs. Of these loans extended at below market terms, the weighted average extension had a term of 71 months for the quarter ended March 31, 2022. Further, the weighted average decrease in the stated interest rate for loans with a reduction of interest rate during the period was approximately 79 basis points during the three months ended March 31, 2022. Additionally, no principal balances were forgiven during the quarter ended March 31, 2022.
The following table presents a summary of all loans restructured in TDRs during the twelve months ended March 31, 2022 and such loans that were in payment default under the restructured terms during the respective periods below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | As of March 31, 2022 | | Three Months Ended March 31, 2022 | | | | | |
Total (1)(3) | | Payments in Default (2)(3) | | | | | |
| Count | | Balance | | Count | | Balance | | | | | | | | | | | |
| Commercial | | | | | | | | | | | | | | | | | | |
| Commercial, industrial and other | 17 | | | $ | 5,205 | | | 11 | | | $ | 4,526 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Non-construction | 5 | | | 4,613 | | | 2 | | | 2,163 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Residential real estate and other | 35 | | | 5,021 | | | 1 | | | 104 | | | | | | | | | | | | |
| Total loans | 57 | | | $ | 14,839 | | | 14 | | | $ | 6,793 | | | | | | | | | | | | |
(1)Total TDRs represent all loans restructured om TDRs during the previous twelve months from the date indicated.
(2)TDRs considered to be in payment default are over 30 days past due subsequent to the restructuring.
(3)Balances represent the recorded investment in the loan at the time of the restructuring.
(7) Goodwill and Other Acquisition-Related Intangible Assets
A summary of the Company’s goodwill assets by reporting unit is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | December 31, 2022 | | Goodwill
Acquired | | Impairment
Loss | | Goodwill Adjustments | | March 31,
2023 |
| Community banking | $ | 545,671 | | | $ | — | | | $ | — | | | $ | — | | | $ | 545,671 | |
| Specialty finance | 38,480 | | | — | | | — | | | 63 | | | 38,543 | |
| Wealth management | 69,373 | | | — | | | — | | | — | | | 69,373 | |
| Total | $ | 653,524 | | | $ | — | | | $ | — | | | $ | 63 | | | $ | 653,587 | |
The specialty finance unit’s goodwill increased $63,000 in the first three months of 2023 as a result of foreign currency translation adjustments related to the Canadian acquisitions.
The Company assesses each reporting unit’s goodwill for impairment on at least an annual basis and considers potential indicators of impairment at each reporting date between annual goodwill impairment tests. At October 1, 2022, the Company utilized a qualitative approach for its annual goodwill impairment tests of the banking, specialty finance and wealth management reporting units and determined that no impairment existed at that time.
At each reporting date between annual goodwill impairment tests, the Company considers potential indicators of impairment. The Company assessed whether events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Potential impairment indicators considered include the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting units; performance of the Company’s stock and other relevant events.
At the conclusion of this assessment of all reporting units, the Company determined that as of March 31, 2023, it was more likely than not that the fair value of all reporting units exceeded the respective carrying value of such reporting unit.
A summary of acquisition-related intangible assets as of the dates shown and the expected amortization of finite-lived acquisition-related intangible assets as of March 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | March 31,
2023 | | December 31,
2022 | | March 31,
2022 |
| Community banking segment: | | | | | |
| Core deposit intangibles with finite lives: | | | | | |
| Gross carrying amount | $ | 55,206 | | | $ | 55,206 | | | $ | 55,206 | |
| Accumulated amortization | (43,473) | | | (42,501) | | | (39,243) | |
| Net carrying amount | $ | 11,733 | | | $ | 12,705 | | | $ | 15,963 | |
| Trademark with indefinite lives: | | | | | |
| Carrying amount | 5,800 | | | 5,800 | | | 5,800 | |
| Total net carrying amount | $ | 17,533 | | | $ | 18,505 | | | $ | 21,763 | |
| Specialty finance segment: | | | | | |
| Customer list intangibles with finite lives: | | | | | |
| Gross carrying amount | $ | 1,962 | | | $ | 1,962 | | | $ | 1,968 | |
| Accumulated amortization | (1,799) | | | (1,785) | | | (1,738) | |
| Net carrying amount | $ | 163 | | | $ | 177 | | | $ | 230 | |
| Wealth management segment: | | | | | |
| Customer list and other intangibles with finite lives: | | | | | |
| Gross carrying amount | $ | 20,430 | | | $ | 20,430 | | | $ | 20,430 | |
| Accumulated amortization | (17,175) | | | (16,926) | | | (15,724) | |
| Net carrying amount | $ | 3,255 | | | $ | 3,504 | | | $ | 4,706 | |
| Total acquisition-related intangible assets: | | | | | |
| Gross carrying amount | $ | 83,398 | | | $ | 83,398 | | | $ | 83,404 | |
| Accumulated amortization | (62,447) | | | (61,212) | | | (56,705) | |
| Total other acquisition-related intangible assets, net | $ | 20,951 | | | $ | 22,186 | | | $ | 26,699 | |
| | | | | |
| Estimated amortization | |
| Actual in three months ended March 31, 2023 | $ | 1,235 | |
| Estimated remaining in 2023 | 3,422 | |
| Estimated—2024 | 3,259 | |
| Estimated—2025 | 2,552 | |
| Estimated—2026 | 1,954 | |
| Estimated—2027 | 1,450 | |
The core deposit intangibles recognized in connection with prior bank acquisitions are amortized over a ten-year period on an accelerated basis. The customer list intangibles recognized in connection with the purchase of life insurance premium finance assets in 2009 are being amortized over an 18-year period on an accelerated basis. The customer list and other intangibles recognized in connection with prior acquisitions within the wealth management segment are being amortized over a period of up to ten years on a straight-line basis. Indefinite-lived intangible assets consist of certain trade and domain names recognized in connection with the acquisition of certain assets of Veterans First Mortgage in 2018. As indefinite-lived intangible assets are not amortized, the Company assesses impairment on at least an annual basis.
Total amortization expense associated with finite-lived acquisition-related intangibles totaled approximately $1.2 million and $1.6 million for the three months ended March 31, 2023 and 2022, respectively.
(8) Mortgage Servicing Rights (“MSRs”)
The following is a summary of the changes in the carrying value of MSRs, accounted for at fair value, for the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, | | March 31, | | | | |
| (In thousands) | | 2023 | | 2022 | | | | |
| Fair value at beginning of the period | | $ | 230,225 | | | $ | 147,571 | | | | | |
| Additions from loans sold with servicing retained | | 5,107 | | | 14,401 | | | | | |
| | | | | | | | |
| Estimate of changes in fair value due to: | | | | | | | | |
| Early buyout options (“EBO”) exercised | | — | | | (175) | | | | | |
| | | | | | | | |
| Payoffs and paydowns | | (3,909) | | | (6,016) | | | | | |
| Changes in valuation inputs or assumptions | | (6,953) | | | 43,365 | | | | | |
| Fair value at end of the period | | $ | 224,470 | | | $ | 199,146 | | | | | |
| Unpaid principal balance of mortgage loans serviced for others | | $ | 14,080,461 | | | $ | 13,426,535 | | | | | |
The Company recognizes MSR assets upon the sale of residential real estate loans to external third parties when it retains the obligation to service the loans and the servicing fee is more than adequate compensation. MSRs are included in other assets in the Consolidated Statements of Condition. The initial recognition of MSR assets from loans sold with servicing retained and subsequent changes in fair value of all MSRs are recognized in mortgage banking revenue. MSRs are subject to changes in value from actual and expected prepayment of the underlying loans.
The estimation of fair value related to MSRs is partly impacted by the Company exercising its EBO on eligible loans previously sold to the Government National Mortgage Association (“GNMA”). Under such optional repurchase program, financial institutions acting as servicers are allowed to buy back from the securitized loan pool individual delinquent mortgage loans meeting certain criteria for which the institution was the original transferor of such loans. At the option of the servicer and without prior authorization from GNMA, the servicer may repurchase such delinquent loans for an amount equal to the remaining principal balance of the loan. At the time of such repurchase, any MSR value related to such loans is derecognized.
The MSR asset fair value is determined by using a discounted cash flow model that incorporates the objective characteristics of the portfolio as well as subjective valuation parameters that purchasers of servicing would apply to such portfolios sold into the secondary market. The subjective factors include loan prepayment speeds, discount rates, servicing costs and other economic factors. The Company uses a third party to assist in the valuation of MSRs.
Periodically, the Company will purchase options for the right to purchase securities not currently held within the banks’ investment portfolios or enter into interest rate swaps in which the Company elects not to designate such derivatives as hedging instruments. These option and swap transactions are designed primarily to economically hedge a portion of the fair value adjustments related to the Company’s MSRs. The gain or loss associated with these derivative contracts is included in mortgage banking revenue. For more information regarding these hedges outstanding as of March 31, 2023, see Note (13) “Derivative Financial Instruments” in Item 1 of this report. There were no such options or swaps outstanding as of March 31, 2022.
(9) Deposits
The following table is a summary of deposits as of the dates shown:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2023 | | December 31,
2022 | | March 31,
2022 |
| Balance: | | | | | |
| Non-interest-bearing | $ | 11,236,083 | | | $ | 12,668,160 | | | $ | 13,748,918 | |
| NOW and interest-bearing demand deposits | 5,576,558 | | | 5,591,986 | | | 5,089,724 | |
| Wealth management deposits | 1,809,933 | | | 2,463,833 | | | 2,542,995 | |
| Money market | 13,552,277 | | | 12,886,795 | | | 13,012,460 | |
| Savings | 5,192,108 | | | 4,556,635 | | | 4,089,230 | |
| Time certificates of deposit | 5,351,252 | | | 4,735,135 | | | 3,735,995 | |
| Total deposits | $ | 42,718,211 | | | $ | 42,902,544 | | | $ | 42,219,322 | |
| Mix: | | | | | |
| Non-interest-bearing | 26 | % | | 30 | % | | 32 | % |
| NOW and interest-bearing demand deposits | 13 | | | 13 | | | 12 | |
| Wealth management deposits | 4 | | | 5 | | | 6 | |
| Money market | 32 | | | 30 | | | 31 | |
| Savings | 12 | | | 11 | | | 10 | |
| Time certificates of deposit | 13 | | | 11 | | | 9 | |
| Total deposits | 100 | % | | 100 | % | | 100 | % |
Wealth management deposits represent deposit balances (primarily money market accounts) at the Company’s subsidiary banks from brokerage customers of Wintrust Investments, LLC (“Wintrust Investments”), Chicago Deferred Exchange Company (“CDEC”) and trust and asset management customers of the Company.
(10) FHLB Advances, Other Borrowings and Subordinated Notes
The following table is a summary of FHLB advances, other borrowings and subordinated notes as of the dates shown:
| | | | | | | | | | | | | | | | | |
| (In thousands) | March 31,
2023 | | December 31,
2022 | | March 31,
2022 |
| FHLB advances | $ | 2,316,071 | | | $ | 2,316,071 | | | $ | 1,241,071 | |
| Other borrowings: | | | | | |
| Notes payable | 192,666 | | | 199,793 | | | 74,969 | |
| Short-term borrowings | 10,124 | | | 17,612 | | | 15,872 | |
| Secured borrowings | 320,007 | | | 317,942 | | | 328,889 | |
| Other | 60,751 | | | 61,267 | | | 62,786 | |
| Total other borrowings | 583,548 | | | 596,614 | | | 482,516 | |
| Subordinated notes | 437,493 | | | 437,392 | | | 437,033 | |
| Total FHLB advances, other borrowings and subordinated notes | $ | 3,337,112 | | | $ | 3,350,077 | | | $ | 2,160,620 | |
Descriptions of the Company’s FHLB advances, other borrowings, and subordinated notes are included in Note (11) “Federal Home Loan Bank Advances”, Note (12) “Subordinated Notes” and Note (13) “Other Borrowings” of the 2022 Form 10-K.
Notes Payable
At March 31, 2023, the outstanding principal balance under the term loan facility was $192.7 million and there was no outstanding balance under the revolving credit facility. Borrowings under notes payable are secured by pledges of and first priority perfected security interests in the Company’s equity interest in its bank subsidiaries and contain several restrictive covenants, including the maintenance of various capital adequacy levels, asset quality and profitability ratios, and certain restrictions on dividends and other indebtedness. At March 31, 2023, the Company was in compliance with all such covenants.
Short-term Borrowings
As of March 31, 2023, the Company had pledged securities related to its customer balances in sweep accounts of $18.3 million. Securities pledged for customer balances in sweep accounts and short-term borrowings from brokers are maintained under the Company’s control and consist of mortgage-backed securities and U.S. government agencies. These securities are included in the available-for-sale portfolio as reflected on the Company’s Consolidated Statements of Condition.
The following is a summary of these securities pledged as of March 31, 2023 disaggregated by investment category and maturity of the related customer sweep account, and reconciled to the outstanding balance of securities sold under repurchase agreements:
| | | | | | | | |
| (In thousands) | | Overnight Sweep Collateral |
| Available-for-sale securities pledged | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Mortgage-backed securities | | $ | 18,348 | |
| | |
| | |
| | |
| | |
| | |
| Excess collateral | | 8,224 | |
| Securities sold under repurchase agreements | | $ | 10,124 | |
Secured Borrowings
At March 31, 2023, the translated balance of the secured borrowings totaled $310.6 million compared to $309.7 million at December 31, 2022 and $319.8 million at March 31, 2022. The interest rate under the receivables purchase agreement is the Canadian Commercial Paper Rate plus 78 basis points.
The remaining $9.4 million within secured borrowings at March 31, 2023 represents other sold interests in certain loans by the Company that were not considered sales and, as such, related proceeds received are reflected on the Company’s Consolidated Statements of Condition as a secured borrowing owed to the various unrelated third parties.
Other Borrowings
Other borrowings contain several restrictive covenants, including the maintenance of various capital adequacy levels, asset quality and profitability ratios, and certain restrictions on dividends and indebtedness. At March 31, 2023, the Company was in compliance with all such covenants.
(11) Junior Subordinated Debentures
The following table provides a summary of the Company’s junior subordinated debentures as of March 31, 2023. The junior subordinated debentures represent the par value of the obligations owed to the Trusts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Common
Securities | | Trust
Preferred
Securities | | Junior
Subordinated
Debentures | | Rate
Structure | | Contractual Rate at 3/31/2023 | | Issue
Date | | Maturity
Date | | Earliest
Redemption
Date |
| Wintrust Capital Trust III | $ | 774 | | | $ | 25,000 | | | $ | 25,774 | | | L+3.25 | | 8.08 | % | | 04/2003 | | 04/2033 | | 04/2008 |
| Wintrust Statutory Trust IV | 619 | | | 20,000 | | | 20,619 | | | L+2.80 | | 7.96 | % | | 12/2003 | | 12/2033 | | 12/2008 |
| Wintrust Statutory Trust V | 1,238 | | | 40,000 | | | 41,238 | | | L+2.60 | | 7.76 | % | | 05/2004 | | 05/2034 | | 06/2009 |
| Wintrust Capital Trust VII | 1,550 | | | 50,000 | | | 51,550 | | | L+1.95 | | 6.82 | % | | 12/2004 | | 03/2035 | | 03/2010 |
| Wintrust Capital Trust VIII | 1,238 | | | 25,000 | | | 26,238 | | | L+1.45 | | 6.61 | % | | 08/2005 | | 09/2035 | | 09/2010 |
| Wintrust Capital Trust IX | 1,547 | | | 50,000 | | | 51,547 | | | L+1.63 | | 6.50 | % | | 09/2006 | | 09/2036 | | 09/2011 |
| Northview Capital Trust I | 186 | | | 6,000 | | | 6,186 | | | L+3.00 | | 7.81 | % | | 08/2003 | | 11/2033 | | 08/2008 |
| Town Bankshares Capital Trust I | 186 | | | 6,000 | | | 6,186 | | | L+3.00 | | 7.81 | % | | 08/2003 | | 11/2033 | | 08/2008 |
| First Northwest Capital Trust I | 155 | | | 5,000 | | | 5,155 | | | L+3.00 | | 8.16 | % | | 05/2004 | | 05/2034 | | 05/2009 |
| Suburban Illinois Capital Trust II | 464 | | | 15,000 | | | 15,464 | | | L+1.75 | | 6.62 | % | | 12/2006 | | 12/2036 | | 12/2011 |
| Community Financial Shares Statutory Trust II | 109 | | | 3,500 | | | 3,609 | | | L+1.62 | | 6.49 | % | | 06/2007 | | 09/2037 | | 06/2012 |
| Total | | | | | $ | 253,566 | | | | | 7.16 | % | | | | | | |
The junior subordinated debentures totaled $253.6 million at March 31, 2023, December 31, 2022 and March 31, 2022.
The interest rates on the variable rate junior subordinated debentures are based on the three-month London Interbank Offered Rate (“LIBOR”) and reset on a quarterly basis. At March 31, 2023, the weighted average contractual interest rate on the junior subordinated debentures was 7.16%.
Under the Adjustable Interest Rate (LIBOR) Act (“AIRLA”) and Part 253 of Regulation ZZ (Rule 253), after June 30, 2023, the interest rate on the junior subordinated debentures will, by operation of law, change their base rate from USD LIBOR to Chicago Mercantile Exchange (“CME”) Term Secured Overnight Financing Rate (“SOFR”) of the same tenor, plus an applicable tenor spread adjustment. CME Term SOFR is an indicative, forward-looking measurement of daily overnight SOFR. CME Term SOFR is published by CME Group Inc., as administrator of that rate. The calculation agent for any series of the junior subordinated debentures may also make additional administrative conforming changes to the terms of that series of the junior subordinated debentures under AIRLA and Rule 253.
(12) Segment Information
The Company’s operations consist of three primary segments: community banking, specialty finance and wealth management.
The three reportable segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. In addition, each segment’s customer base has varying characteristics and each segment has a different regulatory environment. While the Company’s management monitors each of the fifteen bank subsidiaries’ operations and profitability separately, these subsidiaries have been aggregated into one reportable operating segment due to the similarities in products and services, customer base, operations, profitability measures, and economic characteristics.
For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates a portion of revenues to the specialty finance segment related to loans and leases originated by the specialty finance segment and sold or assigned to the community banking segment. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. See Note (9) “Deposits” for more information on these deposits. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment’s risk-weighted assets.
The segment financial information provided in the following table has been derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. The accounting policies of the segments are substantially similar to those described in Note (1) “Summary of Significant Accounting Policies” of the 2022 Form 10-K. The Company evaluates segment performance based on after-tax profit or loss and other appropriate profitability measures common to each segment.
The following is a summary of certain operating information for reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | $ Change in
Contribution | | % Change in
Contribution |
| (Dollars in thousands) | March 31,
2023 | | March 31,
2022 | |
| Net interest income: | | | | | | | |
| Community Banking | $ | 369,848 | | | $ | 228,615 | | | $ | 141,233 | | | 62 | % |
| Specialty Finance | 70,351 | | | 55,370 | | | 14,981 | | | 27 | |
| Wealth Management | 8,955 | | | 8,376 | | | 579 | | | 7 | |
| Total Operating Segments | 449,154 | | | 292,361 | | | 156,793 | | | 54 | |
| Intersegment Eliminations | 8,841 | | | 6,933 | | | 1,908 | | | 28 | |
| Consolidated net interest income | $ | 457,995 | | | $ | 299,294 | | | $ | 158,701 | | | 53 | % |
| Provision for credit losses: | | | | | | | |
| Community Banking | $ | 21,099 | | | $ | 4,118 | | | $ | 16,981 | | | NM |
| Specialty Finance | 1,946 | | | (12) | | | 1,958 | | | NM |
| Wealth Management | — | | | — | | | — | | | — | |
| Total Operating Segments | 23,045 | | | 4,106 | | | 18,939 | | | NM |
| Intersegment Eliminations | — | | | — | | | — | | | — | |
| Consolidated provision for credit losses | $ | 23,045 | | | $ | 4,106 | | | $ | 18,939 | | | NM |
| Non-interest income: | | | | | | | |
| Community Banking | $ | 68,733 | | | $ | 121,888 | | | $ | (53,155) | | | (44) | % |
| Specialty Finance | 25,790 | | | 24,122 | | | 1,668 | | | 7 | |
| Wealth Management | 30,297 | | | 30,578 | | | (281) | | | (1) | |
| Total Operating Segments | 124,820 | | | 176,588 | | | (51,768) | | | (29) | |
| Intersegment Eliminations | (17,051) | | | (13,798) | | | (3,253) | | | 24 | |
| Consolidated non-interest income | $ | 107,769 | | | $ | 162,790 | | | $ | (55,021) | | | (34) | % |
| Net revenue: | | | | | | | |
| Community Banking | $ | 438,581 | | | $ | 350,503 | | | $ | 88,078 | | | 25 | % |
| Specialty Finance | 96,141 | | | 79,492 | | | 16,649 | | | 21 | |
| Wealth Management | 39,252 | | | 38,954 | | | 298 | | | 1 | |
| Total Operating Segments | 573,974 | | | 468,949 | | | 105,025 | | | 22 | |
| Intersegment Eliminations | (8,210) | | | (6,865) | | | (1,345) | | | 20 | |
| Consolidated net revenue | $ | 565,764 | | | $ | 462,084 | | | $ | 103,680 | | | 22 | % |
| Segment profit: | | | | | | | |
| Community Banking | $ | 134,232 | | | $ | 90,099 | | | $ | 44,133 | | | 49 | % |
| Specialty Finance | 36,737 | | | 29,604 | | | 7,133 | | | 24 | |
| Wealth Management | 9,229 | | | 7,688 | | | 1,541 | | | 20 | |
| Consolidated net income | $ | 180,198 | | | $ | 127,391 | | | $ | 52,807 | | | 41 | % |
| Segment assets: | | | | | | | |
| Community Banking | $ | 41,611,980 | | | $ | 40,050,015 | | | $ | 1,561,965 | | | 4 | % |
| Specialty Finance | 9,841,044 | | | 8,624,501 | | | 1,216,543 | | | 14 | |
| Wealth Management | 1,420,487 | | | 1,576,145 | | | (155,658) | | | (10) | |
| Consolidated total assets | $ | 52,873,511 | | | $ | 50,250,661 | | | $ | 2,622,850 | | | 5 | % |
NM - Not meaningful
(13) Derivative Financial Instruments
The Company primarily enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index or commodity price) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.
The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate swaps and collars to manage the interest rate risk of certain fixed and variable rate assets and variable rate liabilities; (2) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market; (3) forward commitments for the future delivery of such mortgage loans to protect the Company from adverse changes in interest rates and corresponding changes in the value of mortgage loans held-for-sale; (4) covered call options to
economically hedge specific investment securities and receive fee income, effectively enhancing the overall yield on such securities to compensate for net interest margin compression; and (5) options and swaps to economically hedge a portion of the fair value adjustments related to the Company’s mortgage servicing rights portfolio. The Company also enters into derivatives (typically interest rate swaps and commodity forward contracts) with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently enters into mirror-image derivatives with a third party counterparty, effectively making a market in the derivatives for such borrowers. Additionally, the Company enters into foreign currency contracts to manage foreign exchange risk associated with certain foreign currency denominated assets.
The Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.
Changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges are recorded as a component of accumulated other comprehensive income or loss, net of deferred taxes, and reclassified to earnings when the hedged transaction affects earnings. Changes in fair values of derivative financial instruments not designated in a hedging relationship pursuant to ASC 815 are reported in non-interest income during the period of the change. Derivative financial instruments are valued by a third party and are corroborated by comparison with valuations provided by the respective counterparties. Fair values of certain mortgage banking derivatives (interest rate lock commitments and forward commitments to sell mortgage loans) are estimated based on changes in mortgage interest rates from the date of the loan commitment. The fair value of foreign currency derivatives is computed based on changes in foreign currency rates stated in the contract compared to those prevailing at the measurement date. Commodity derivative fair values are computed based on changes in the price per unit stated in the contract compared to those prevailing at the measurement date.
The table below presents the fair value of the Company’s derivative financial instruments as of March 31, 2023, December 31, 2022 and March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| (In thousands) | March 31,
2023 | | December 31,
2022 | | March 31,
2022 | | March 31,
2023 | | December 31,
2022 | | March 31,
2022 |
| Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | | | |
| Interest rate derivatives designated as Cash Flow Hedges | $ | 25,730 | | | $ | — | | | $ | 13,257 | | | $ | 43,412 | | | $ | 58,198 | | | $ | 3,361 | |
| Interest rate derivatives designated as Fair Value Hedges | 13,732 | | | 16,768 | | | 7,388 | | | — | | | — | | | 1,716 | |
| Total derivatives designated as hedging instruments under ASC 815 | $ | 39,462 | | | $ | 16,768 | | | $ | 20,645 | | | $ | 43,412 | | | $ | 58,198 | | | $ | 5,077 | |
| Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | |
| Interest rate derivatives | $ | 219,869 | | | $ | 269,670 | | | $ | 119,056 | | | $ | 219,053 | | | $ | 271,109 | | | $ | 115,002 | |
| Interest rate lock commitments | 5,356 | | | 1,711 | | | 3,447 | | | 67 | | | 58 | | | 1,558 | |
| Forward commitments to sell mortgage loans | 121 | | | 220 | | | 10,063 | | | 2,953 | | | 414 | | | 147 | |
| Commodity forward contracts | 491 | | | 257 | | | — | | | 315 | | | 162 | | | — | |
| Foreign exchange contracts | 8,705 | | | 8,222 | | | 323 | | | 8,632 | | | 8,137 | | | 323 | |
| Total derivatives not designated as hedging instruments under ASC 815 | $ | 234,542 | | | $ | 280,080 | | | $ | 132,889 | | | $ | 231,020 | | | $ | 279,880 | | | $ | 117,030 | |
| Total Derivatives | $ | 274,004 | | | $ | 296,848 | | | $ | 153,534 | | | $ | 274,432 | | | $ | 338,078 | | | $ | 122,107 | |
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps and interest rate collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts to or from a counterparty in exchange for the Company receiving or paying fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the settlement of amounts in which the interest rate index specified in the contract
exceeds the agreed upon cap strike price or in which the interest rate index specified in the contract is below the agreed upon floor strike price at the end of each period.
As of March 31, 2023, the Company had various interest rate collar and swap derivatives designated as cash flow hedges of variable rate loans and various interest rate swap derivatives designated as cash flow hedges of variable rate deposits. When the relationship between the hedged item and hedging instrument is highly effective at achieving offsetting changes in cash flows attributable to the hedged risk, changes in the fair value of these cash flow hedges are recorded in accumulated other comprehensive income or loss and are subsequently reclassified to interest income as interest payments are made on such variable rate loans or interest expense as interest payments are made on such variable rate deposits. The changes in fair value (net of tax) are separately disclosed in the Consolidated Statements of Comprehensive Income.
The table below provides details on these cash flow hedges, summarized by derivative type and maturity, as of March 31, 2023:
| | | | | | | | | | | |
| March 31, 2023 |
| Notional | | Fair Value |
| (In thousands) | Amount | | Asset (Liability) |
| Interest Rate Collars at 1-month CME term SOFR: | | | |
| | | |
Buy 2.250% floor, sell 3.743% cap; matures September 2025 | $ | 1,250,000 | | | $ | (16,675) | |
Buy 2.750% floor, sell 4.320% cap; matures October 2026 | 500,000 | | | (126) | |
Buy 2.000% floor, sell 3.450% cap; matures September 2027 | 1,250,000 | | | (26,069) | |
| Interest Rate Swaps at 1-month CME term SOFR: | | | |
Fixed 3.748%; matures December 2025 | 250,000 | | | 26 | |
Fixed 3.759%; matures December 2025 | 250,000 | | | 99 | |
Fixed 3.680%; matures February 2026 | 250,000 | | | (251) | |
Fixed 4.176%; matures March 2026 | 250,000 | | | 3,342 | |
Fixed 3.915%; matures March 2026 | 250,000 | | | 1,531 | |
Fixed 4.450%; matures July 2026 | 250,000 | | | 6,502 | |
Fixed 3.515%, matures December 2026 | 250,000 | | | 123 | |
Fixed 3.512%; matures December 2026 | 250,000 | | | 97 | |
Fixed 3.453%; matures February 2027 | 250,000 | | | (291) | |
Fixed 4.150%; matures July 2027 | 250,000 | | | 7,238 | |
Fixed 3.748%; matures March 2028 | 250,000 | | | 4,649 | |
Fixed 3.526%; matures March 2028 | 250,000 | | | 2,123 | |
| Total Cash Flow Hedges | $ | 6,000,000 | | | $ | (17,682) | |
| | | |
| | | |
| | | |
| | | |
| | | |
In the first quarter of 2022, the Company terminated interest rate swap derivative contracts designated as cash flow hedges of variable rate deposits with a total notional value of $1.0 billion and a five-year term effective July 2022. At the time of termination, the fair value of the derivative contracts totaled an asset of $66.5 million, with such adjustments to fair value recorded in accumulated other comprehensive income or loss. In the second quarter of 2022, the Company terminated two additional interest rate swap derivative contracts designated as cash flow hedges of variable rate deposits with a total notional value of $500.0 million each effective since April 2020. The remaining terms of such derivative contracts were through March 2023 and April 2024 and, at the time of termination, the fair value of the derivative contracts totaled assets of $3.7 million and $10.7 million, respectively, with such adjustments to fair value recorded in accumulated other comprehensive income or loss. In the fourth quarter of 2022, the Company terminated one additional interest rate collar derivative contract designated as a cash flow hedge of the term facility with a total notional value of $64.3 million effective since September 2018. The remaining term of such derivative contract was through September 2023 and, at the time of termination, the fair value of the derivative contract totaled an asset of $875,000, with such adjustments to fair value recorded in accumulated other comprehensive income or loss.
For all such terminations, as the hedged forecasted transactions (interest payments on variable rate deposits and the term facility) are still expected to occur over the remaining term of such terminated derivatives, such adjustments will remain in accumulated other comprehensive income or loss and be reclassified as a reduction to interest expense on a straight-line basis over the original term of the terminated derivative contracts.
A rollforward of the amounts in accumulated other comprehensive income or loss related to interest rate derivatives designated as cash flow hedges, including such derivative contracts terminated during the period, follows:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| (In thousands) | March 31,
2023 | | March 31,
2022 | | | | |
| Unrealized gain at beginning of period | $ | 10,026 | | | $ | 36,908 | | | | | |
| Amount reclassified from accumulated other comprehensive income or loss to interest income or expense on deposits, loans, and other borrowings | 3,572 | | | 5,353 | | | | | |
| Amount of gain recognized in other comprehensive income or loss | 31,094 | | | 34,128 | | | | | |
| Unrealized gain at end of period | $ | 44,692 | | | $ | 76,389 | | | | | |
As of March 31, 2023, the Company estimated that during the next 12 months $85.8 million will be reclassified from accumulated other comprehensive income or loss as an increase to net interest income. Such estimate consists of $19.2 million reclassified as a reduction to interest expense on the terminated cash flow hedges discussed above and $66.6 million reclassified as an addition to interest income related to the interest rate collars and swaps noted above that remain outstanding.
Fair Value Hedges of Interest Rate Risk
Interest rate swaps designated as fair value hedges involve the payment of fixed amounts to a counterparty in exchange for the Company receiving variable payments over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2023, the Company had 14 interest rate swaps with an aggregate notional amount of $206.0 million that were designated as fair value hedges primarily associated with fixed rate commercial and industrial and commercial real estate loans as well as life insurance premium finance receivables.
For derivatives designated and that qualify as fair value hedges, the net gain or loss from the entire change in the fair value of the derivative instrument is recognized in the same income statement line item as the earnings effect, including the net gain or loss, of the hedged item (interest income earned on fixed rate loans) when the hedged item affects earnings.
The following table presents the carrying amount of the hedged assets/(liabilities) and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/(liabilities) that are designated as a fair value hedge accounting relationship as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 |
(In thousands)
Derivatives in Fair Value Hedging Relationships | Location in the Statement of Condition | | Carrying Amount of the Hedged Assets/(Liabilities) | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) | | | Cumulative Amount of Fair Value Hedging Adjustment Remaining for any Hedged Assets/(Liabilities) for which Hedge Accounting has been Discontinued |
| Interest rate swaps | Loans, net of unearned income | | $ | 138,254 | | | $ | (13,682) | | | | $ | (100) | |
| Available-for-sale debt securities | | 898 | | | (15) | | | | — | |
The following table presents the loss or gain recognized related to derivative instruments that are designated as fair value hedges for the respective period:
| | | | | | | | | | | | | |
(In thousands)
Derivatives in Fair Value Hedging Relationships | Location of (Loss)/Gain Recognized
in Income on Derivative | | Three Months Ended | | |
| March 31, 2023 | | |
| Interest rate swaps | Interest and fees on loans | | $ | (9) | | | |
| Interest income - investment securities | | — | | | |
Non-Designated Hedges
The Company does not use derivatives for speculative purposes. Derivatives not designated as accounting hedges are used to manage the Company’s economic exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
Interest Rate Derivatives—Periodically, the Company may purchase interest rate cap derivatives designed to act as an economic hedge of the risk of the negative impact on its fixed-rate loan portfolios from rising interest rates, most recently related to the LIBOR index. As of March 31, 2023, there were no interest rate caps outstanding that were designed to act as an economic hedge. During 2022, the Company terminated an interest rate cap derivative contract related to LIBOR that was not designated as an accounting hedge with a total notional value of $1.0 billion.
Additionally, the Company has interest rate derivatives, including swaps and option products, resulting from a service the Company provides to certain qualified borrowers. The Company’s banking subsidiaries execute certain derivative products (typically interest rate swaps) directly with qualified commercial borrowers to facilitate their respective risk management strategies. For example, these arrangements allow the Company’s commercial borrowers to effectively convert a variable rate loan to a fixed rate. In order to minimize the Company’s exposure on these transactions, the Company simultaneously executes offsetting derivatives with third parties. In most cases, the offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. However, to the extent that the derivatives are not a mirror-image and because of differences in counterparty credit risk, changes in fair value will not completely offset resulting in some earnings impact each period. Changes in the fair value of these derivatives are included in other non-interest income. At March 31, 2023 and December 31, 2022, the Company had interest rate derivative transactions with an aggregate notional amount of approximately $9.9 billion and $9.6 billion, respectively, (all interest rate swaps and caps with customers and third parties) related to this program. At March 31, 2023 these interest rate derivatives had maturity dates ranging from April 2023 to January 2037.
Mortgage Banking Derivatives—These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. It is the Company’s practice to enter into forward commitments for the future delivery of a portion of its residential mortgage loan production when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale. The Company’s mortgage banking derivatives have not been designated as being in hedge relationships. At March 31, 2023 and December 31, 2022, the Company had interest rate lock commitments with an aggregate notional amount of approximately $208.2 million and $121.6 million, and forward commitments to sell mortgage loans with an aggregate notional amount of approximately $498.0 million and $321.0 million, respectively. The fair values of these derivatives were estimated based on changes in mortgage rates from the dates of the commitments. Changes in the fair value of these mortgage banking derivatives are included in mortgage banking revenue.
Commodity Derivatives—The Company has commodity forward contracts resulting from a service the Company provides to certain qualified borrowers. The Company’s banking subsidiaries execute certain derivative products directly with qualified commercial borrowers to facilitate their respective risk management strategies. For example, these arrangements allow the Company’s commercial borrowers to effectively purchase or sell a given commodity at an agreed-upon price on an agreed-upon settlement date. In order to minimize the Company’s exposure on these transactions, the Company simultaneously executes offsetting derivatives with third parties. In most cases, the offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. However, to the extent that the derivatives are not a mirror-image and because of differences in counterparty credit risk, changes in fair value will not completely offset resulting in some earnings impact each period. Changes in the fair value of these derivatives are included in other non-interest income. At March 31, 2023 and December 31, 2022, the Company had commodity derivative transactions with an aggregate notional amount of approximately $5.6 million and $3.6 million, respectively, (all forward contracts with customers and third parties) related to this program. At March 31, 2023, these commodity derivatives had maturity dates ranging from April 2023 to October 2024.
Foreign Currency Derivatives—The Company has foreign currency derivative contracts resulting from a service the Company provides to certain qualified customers. The Company’s banking subsidiaries execute certain derivative products directly with qualified customers to facilitate their respective risk management strategies related to foreign currency fluctuations. For example, these arrangements allow the Company’s customers to effectively exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. In order to minimize the Company’s exposure on these transactions, the Company simultaneously executes offsetting derivatives with third parties. In most cases, the offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. However, to the extent that the derivatives are not a mirror-image and because of differences in counterparty credit risk, changes in fair value will not completely offset resulting in some earnings impact each period. Changes in the fair value of these derivatives are included in other non-interest income. As of March 31, 2023 and December 31, 2022, the Company held foreign currency derivatives with an aggregate notional amount of approximately $225.2 million and $226.2 million, respectively.
Other Derivatives—Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the banks’ investment portfolios (covered call options). These option transactions are designed to increase the total return associated with the investment securities portfolio. These options do not qualify as accounting hedges pursuant to ASC 815 and, accordingly, changes in the fair value of these contracts are recognized as other non-interest income. There were no covered call options outstanding as of March 31, 2023, December 31, 2022 or March 31, 2022.
Periodically, the Company will purchase options for the right to purchase securities not currently held within the banks’ investment portfolios or enter into interest rate swaps in which the Company elects to not designate such derivatives as hedging instruments. These option and swap transactions are designed primarily to economically hedge a portion of the fair value adjustments related to the Company's mortgage servicing rights portfolio. The gain or loss associated with these derivative contracts are included in mortgage banking revenue. As of March 31, 2023 and December 31, 2022, the Company held three interest rate derivatives with an aggregate notional value of $245.0 million and $190.0 million, respectively, for such purpose of economically hedging a portion of the fair value adjustment related to its mortgage servicing rights portfolio.
Amounts included in the Consolidated Statements of Income related to derivative instruments not designated in hedge relationships were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | | Three Months Ended | | |
| Derivative | Location in income statement | | March 31,
2023 | | March 31,
2022 | | | | |
| Interest rate swaps and caps | Trading gains, net | | $ | 800 | | | $ | 4,024 | | | | | |
| Mortgage banking derivatives | Mortgage banking revenue | | 3,640 | | | (7,369) | | | | | |
| Commodity contracts | Trading gains (losses), net | | 177 | | | — | | | | | |
| Foreign exchange contracts | Trading gains, net | | — | | | — | | | | | |
| Covered call options | Fees from covered call options | | 10,391 | | | 3,742 | | | | | |
| Derivative contract held as economic hedge on MSRs | Mortgage banking revenue | | 946 | | | — | | | | | |
Credit Risk
Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the risk that the counterparty will fail to perform according to the terms of the agreement. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and the market value of the derivative instrument and not the notional principal amounts used to express the volume of the transactions. Market and credit risks are managed and monitored as part of the Company’s overall asset-liability management process, except that the credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company’s standard loan underwriting process since these derivatives are secured through collateral provided by the loan agreements. Actual exposures are monitored against various types of credit limits established to contain risk within parameters. When deemed necessary, appropriate types and amounts of collateral are obtained to minimize credit exposure.
The Company has agreements with certain of its interest rate derivative counterparties that contain cross-default provisions, which provide that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that contain a provision allowing the counterparty to terminate the derivative positions if the Company fails to maintain its status as a well or adequately capitalized institution, which would require the Company to settle its obligations under the agreements. As of March 31, 2023, there were no interest rate derivatives in a net liability position that were subject to such agreements. The fair value of such derivatives includes accrued interest related to these agreements.
The Company is also exposed to the credit risk of its commercial borrowers who are counterparties to interest rate derivatives with the banks. This counterparty risk related to the commercial borrowers is managed and monitored through the banks’ standard underwriting process applicable to loans since these derivatives are secured through collateral provided by the loan agreement. The counterparty risk associated with the mirror-image swaps executed with third parties is monitored and managed in connection with the Company’s overall asset liability management process.
The Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the Consolidated Statements of Condition. The table below summarizes the Company’s interest rate derivatives and offsetting positions as of the dates shown.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| Fair Value | | Fair Value |
| (In thousands) | March 31,
2023 | | December 31,
2022 | | March 31,
2022 | | March 31,
2023 | | December 31,
2022 | | March 31,
2022 |
| Gross Amounts Recognized | $ | 259,331 | | | $ | 286,438 | | | $ | 139,701 | | | $ | 262,465 | | | $ | 329,307 | | | $ | 120,079 | |
| Less: Amounts offset in the Statements of Condition | — | | | — | | | — | | | — | | | — | | | — | |
| Net amount presented in the Statements of Condition | $ | 259,331 | | | $ | 286,438 | | | $ | 139,701 | | | $ | 262,465 | | | $ | 329,307 | | | $ | 120,079 | |
| Gross amounts not offset in the Statements of Condition | | | | | | | | | | | |
| Offsetting Derivative Positions | (55,838) | | | (64,100) | | | (19,557) | | | (55,838) | | | (64,100) | | | (19,557) | |
| Collateral Posted | (181,884) | | | (194,666) | | | (70,807) | | | — | | | — | | | (257) | |
| Net Credit Exposure | $ | 21,609 | | | $ | 27,672 | | | $ | 49,337 | | | $ | 206,627 | | | $ | 265,207 | | | $ | 100,265 | |
(14) Fair Values of Assets and Liabilities
The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:
•Level 1—unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2—inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
•Level 3—significant unobservable inputs that reflect the Company’s own assumptions that market participants would use in pricing the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the above valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the assets or liabilities. The following is a description of the valuation methodologies used for the Company’s assets and liabilities measured at fair value on a recurring basis.
Available-for-sale debt securities, trading account securities and equity securities with readily determinable fair value—Fair values for available-for-sale debt securities, trading account securities and equity securities with readily determinable fair value are typically based on prices obtained from independent pricing vendors. Securities measured with these valuation techniques are generally classified as Level 2 of the fair value hierarchy. Typically, standard inputs such as benchmark yields, reported trades for similar securities, issuer spreads, benchmark securities, bids, offers and reference data including market research publications are used to determine the fair value of these securities. When these inputs are not available, broker/dealer quotes may be obtained by the vendor to determine the fair value of the security. We review the vendor’s pricing methodologies to determine if observable market information is being used, versus unobservable inputs. Fair value measurements using significant inputs that are unobservable in the market due to limited activity or a less liquid market are classified as Level 3 in the fair value hierarchy. The fair value of U.S. Treasury securities and certain equity securities with readily determinable fair value are based on unadjusted quoted prices in active markets for identical securities. As such, these securities are classified as Level 1 in the fair value hierarchy.
The Company’s Investment Operations Department is responsible for the valuation of Level 3 available-for-sale debt securities. The methodology and variables used as inputs in pricing Level 3 securities are derived from a combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.
At March 31, 2023, the Company classified $112.3 million of municipal securities as Level 3. These municipal securities are bond issues for various municipal government entities primarily located in the Chicago metropolitan area and southern
Wisconsin and are privately placed, non-rated bonds without CUSIP numbers. The Company’s methodology for pricing these securities focuses on three distinct inputs: equivalent rating, yield and other pricing terms. To determine the rating for a given non-rated investment debt security, the Investment Operations Department references a rated, publicly issued bond by the same issuer if available. A reduction is then applied to the rating obtained from the comparable bond, as the Company believes if liquidated, a non-rated bond would be valued less than a similar bond with a verifiable rating. The reduction applied by the Company is one complete rating grade (i.e. a “AA” rating for a comparable bond would be reduced to “A” for the Company’s valuation). For bond issues without comparable bond proxies, a rating of “BBB” was assigned. In the first quarter of 2023, all of the ratings derived by the Investment Operations Department using the above process were “BBB” or better. The fair value measurement noted above is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined in the above process, Investment Operations obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets. Certain municipal bonds held by the Company at March 31, 2023 are continuously callable. When valuing these bonds, the fair value is capped at par value as the Company assumes a market participant would not pay more than par for a continuously callable bond.
Mortgage loans held-for-sale—The fair value of mortgage loans held-for-sale is typically determined by reference to investor price sheets for loan products with similar characteristics. Loans measured with this valuation technique are classified as Level 2 in the fair value hierarchy.
At March 31, 2023, the Company classified $44.3 million of certain delinquent mortgage loans held-for-sale as Level 3. For such delinquent loans in which investor interest may be limited, the Company estimates fair value by discounting future scheduled cash flows for the specific loan through its life, adjusted for estimated credit losses. The Company uses a discount rate based on prevailing market coupon rates on loans with similar characteristics. The assumed weighted average discount rate used as an input to value these loans at March 31, 2023 was 5.96%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. Additionally, the weighted average credit discount used as an input to value the specific loans was 0.22% with credit loss discount ranging from 0%-10% at March 31, 2023.
Loans held-for-investment—The fair value for certain loans in which the Company previously elected the fair value option is estimated by discounting future scheduled cash flows for the specific loan through maturity, adjusted for estimated credit losses and prepayment or life assumptions. These loans primarily consist of early buyout loans guaranteed by U.S. government agencies that are delinquent and, as a result, investor interest may be limited. The Company uses a discount rate based on the actual coupon rate of the underlying loan. At March 31, 2023, the Company classified $69.5 million of loans held-for-investment carried at fair value as Level 3. The assumed weighted average discount rate used as an input to value these loans at March 31, 2023 was 5.98%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. As noted above, the fair value estimate also includes assumptions of prepayment speeds and average life as well as credit losses. The weighted average prepayments speed used as an input to value current loans was 6.92% at March 31, 2023. Prepayment speeds are inversely related to the fair value of these loans as an increase in prepayment speeds results in a decreased valuation. For delinquent loans in which performance is not assumed and there is a higher probability of resolution of the loan ending in foreclosure, the weighted average life of such loans was 5.4 years. Average life is inversely related to the fair value of these loans as an increase in estimated life results in a decreased valuation. Additionally, the weighted average credit discount used as an input to value the specific loans was 0.86% with credit loss discounts ranging from 0%-13% at March 31, 2023.
MSRs—Fair value for MSRs is determined utilizing a valuation model which calculates the fair value of each servicing right based on the present value of estimated future cash flows. The Company uses a discount rate commensurate with the risk associated with each servicing right, given current market conditions. At March 31, 2023, the Company classified $224.5 million of MSRs as Level 3. The weighted average discount rate used as an input to value the pool of MSRs at March 31, 2023 was 10.33% with discount rates applied ranging from 3%-33%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. The fair value of MSRs was also estimated based on other assumptions including prepayment speeds and the cost to service. Prepayment speeds ranged from 0%-100% or a weighted average prepayment speed of 6.92%. Further, for current and delinquent loans, the Company assumed a weighted average cost of servicing of $76 and $403, respectively, per loan. Prepayment speeds and the cost to service are both inversely related to the fair value of MSRs as an increase in prepayment speeds or the cost to service results in a decreased valuation. See Note (8) “Mortgage Servicing Rights (“MSRs”)” for further discussion of MSRs.
Derivative instruments—The Company’s derivative instruments include interest rate swaps, caps and collars, commitments to fund mortgages for sale into the secondary market (interest rate locks), forward commitments to end investors for the sale of mortgage loans, commodity future contracts and foreign currency contracts. Interest rate swaps, caps and collars and
commodity future contracts are valued by a third party, using models that primarily use market observable inputs, such as yield curves and commodity prices prevailing at the measurement date, and are classified as Level 2 in the fair value hierarchy. The credit risk associated with derivative financial instruments that are subject to master netting agreements is measured on a net basis by counterparty portfolio. The fair value for mortgage-related derivatives is based on changes in mortgage rates from the date of the commitments. The fair value of foreign currency derivatives is computed based on change in foreign currency rates stated in the contract compared to those prevailing at the measurement date.
At March 31, 2023, the Company classified $5.4 million of derivative assets related to interest rate locks as Level 3. The fair value of interest rate locks is based on prices obtained for loans with similar characteristics from third parties, adjusted for the pull-through rate, which represents the Company’s best estimate of the likelihood that a committed loan will ultimately fund. The weighted-average pull-through rate at March 31, 2023 was 82.06% with pull-through rates applied ranging from 31% to 100%. Pull-through rates are directly related to the fair value of interest rate locks as an increase in the pull-through rate results in an increased valuation.
Nonqualified deferred compensation assets—The underlying assets relating to the nonqualified deferred compensation plan are included in a trust and primarily consist of non-exchange traded institutional funds which are priced based by an independent third party service. These assets are classified as Level 2 in the fair value hierarchy.
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| (In thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Available-for-sale securities | | | | | | | |
| U.S. Treasury | $ | 4,948 | | | $ | 4,948 | | | $ | — | | | $ | — | |
| U.S. government agencies | 74,862 | | | — | | | 74,862 | | | — | |
| Municipal | 160,386 | | | — | | | 48,129 | | | 112,257 | |
| Corporate notes | 83,675 | | | — | | | 83,675 | | | — | |
| Mortgage-backed | 2,935,974 | | | — | | | 2,935,974 | | | — | |
| Trading account securities | 102 | | | — | | | 102 | | | — | |
| Equity securities with readily determinable fair value | 111,943 | | | 103,877 | | | 8,066 | | | — | |
| Mortgage loans held-for-sale | 302,493 | | | — | | | 258,243 | | | 44,250 | |
| Loans held-for-investment | 202,143 | | | — | | | 132,650 | | | 69,493 | |
| MSRs | 224,470 | | | — | | | — | | | 224,470 | |
| Nonqualified deferred compensation assets | 14,379 | | | — | | | 14,379 | | | — | |
| Derivative assets | 274,004 | | | — | | | 268,648 | | | 5,356 | |
| Total | $ | 4,389,379 | | | $ | 108,825 | | | $ | 3,824,728 | | | $ | 455,826 | |
| Derivative liabilities | $ | 274,432 | | | $ | — | | | $ | 274,432 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Available-for-sale securities | | | | | | | | |
| U.S. Treasury | | $ | 14,948 | | | $ | 14,948 | | | $ | — | | | $ | — | |
| U.S. government agencies | | 74,222 | | | — | | | 74,222 | | | — | |
| Municipal | | 168,655 | | | — | | | 51,118 | | | 117,537 | |
| Corporate notes | | 85,705 | | | — | | | 85,705 | | | — | |
| Mortgage-backed | | 2,899,487 | | | — | | | 2,899,487 | | | — | |
| Trading account securities | | 1,127 | | | — | | | 1,127 | | | — | |
| Equity securities with readily determinable fair value | | 110,365 | | | 102,299 | | | 8,066 | | | — | |
| Mortgage loans held-for-sale | | 299,935 | | | — | | | 251,280 | | | 48,655 | |
| Loans held-for-investment | | 179,932 | | | — | | | 95,767 | | | 84,165 | |
| MSRs | | 230,225 | | | — | | | — | | | 230,225 | |
| Nonqualified deferred compensation assets | | 13,899 | | | — | | | 13,899 | | | — | |
| Derivative assets | | 296,848 | | | — | | | 295,137 | | | 1,711 | |
| Total | | $ | 4,375,348 | | | $ | 117,247 | | | $ | 3,775,808 | | | $ | 482,293 | |
| Derivative liabilities | | $ | 338,078 | | | $ | — | | | $ | 338,078 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| (In thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
| Available-for-sale securities | | | | | | | |
| U.S. Treasury | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| U.S. government agencies | 49,637 | | | — | | | 49,637 | | | — | |
| Municipal | 155,489 | | | — | | | 55,088 | | | 100,401 | |
| Corporate notes | 82,939 | | | — | | | 82,939 | | | — | |
| Mortgage-backed | 2,710,833 | | | — | | | 2,710,833 | | | — | |
| Trading account securities | 852 | | | — | | | 852 | | | — | |
| Equity securities with readily determinable fair value | 92,689 | | | 84,623 | | | 8,066 | | | — | |
| Mortgage loans held-for-sale | 606,545 | | | — | | | 606,545 | | | — | |
| Loans held-for-investment | 57,984 | | | — | | | 13,520 | | | 44,464 | |
| MSRs | 199,146 | | | — | | | — | | | 199,146 | |
| Nonqualified deferred compensation assets | 15,447 | | | — | | | 15,447 | | | — | |
| Derivative assets | 153,534 | | | — | | | 150,087 | | | 3,447 | |
| Total | $ | 4,125,095 | | | $ | 84,623 | | | $ | 3,693,014 | | | $ | 347,458 | |
| Derivative liabilities | $ | 122,107 | | | $ | — | | | $ | 122,107 | | | $ | — | |
The aggregate remaining contractual principal balance outstanding as of March 31, 2023, December 31, 2022 and March 31, 2022 for mortgage loans held-for-sale measured at fair value under ASC 825 was $307.3 million, $308.9 million and $606.7 million, respectively, while the aggregate fair value of mortgage loans held-for-sale was $302.5 million, $299.9 million and $606.5 million, for the same respective periods, as shown in the above tables. At March 31, 2023, $3.3 million of mortgage loans held-for-sale were classified as nonaccrual as compared to $5.8 million as of December 31, 2022 and none as of March 31, 2022. Additionally, there were $41.4 million of loans past due greater than 90 days and still accruing in the mortgage loans held-for-sale portfolio as of March 31, 2023 compared to $44.0 million as of December 31, 2022 and $113.0 million as of March 31, 2022. All of the nonaccrual loans and loans past due greater than 90 days and still accruing within the mortgage loans held-for-sale portfolio at March 31, 2023, December 31, 2022, and March 31, 2022 were individual delinquent mortgage loans bought back from GNMA at the unconditional option of the Company as servicer for those loans.
The aggregate remaining contractual principal balance outstanding as of March 31, 2023, December 31, 2022 and March 31, 2022 for mortgage loans held-for-investment measured at fair value under ASC 825 was $204.5 million, $184.0 million and $58.7 million, respectively, while the aggregate fair value of mortgage loans held-for-investment was $202.1 million, $179.9 million and $58.0 million, respectively, as shown in the above tables.
The changes in Level 3 assets measured at fair value on a recurring basis during the three months ended March 31, 2023 and 2022 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Mortgage loans held-for-sale | | U.S. Government agencies | | Loans held-for- investment | | Mortgage
servicing rights | | Derivative assets |
| (In thousands) | Municipal | | | | | |
| Balance at January 1, 2023 | $ | 117,537 | | | $ | 48,655 | | | $ | — | | | $ | 84,165 | | | $ | 230,225 | | | $ | 1,711 | |
| Total net (losses) gains included in: | | | | | | | | | | | |
Net income (1) | — | | | 466 | | | — | | | 364 | | | (5,755) | | | 3,645 | |
| Other comprehensive income or loss | (1,662) | | | — | | | — | | | — | | | — | | | — | |
| Purchases | 4,418 | | | — | | | — | | | — | | | — | | | — | |
| Issuances | — | | | — | | | — | | | — | | | — | | | — | |
| Sales | — | | | — | | | — | | | — | | | — | | | — | |
| Settlements | (8,036) | | | (18,619) | | | — | | | (20,322) | | | — | | | — | |
Net transfers into Level 3 | — | | | 13,748 | | | — | | | 5,286 | | | — | | | — | |
| Balance at March 31, 2023 | $ | 112,257 | | | $ | 44,250 | | | $ | — | | | $ | 69,493 | | | $ | 224,470 | | | $ | 5,356 | |
(1)Changes in the balance of mortgage loans held-for-sale, MSRs, and derivative assets related to fair value adjustments are recorded as components of mortgage banking revenue. Changes in the balance of loans held-for-investment related to fair value adjustments are recorded as other non-interest income.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Mortgage loans held-for-sale | | U.S. Government agencies | | Loans held-for- investment | | Mortgage
servicing rights | | Derivative assets |
| (In thousands) | Municipal | | | | | |
| Balance at January 1, 2022 | $ | 105,687 | | | $ | — | | | $ | — | | | $ | 15,891 | | | $ | 147,571 | | | $ | 10,560 | |
| Total net gains (losses) included in: | | | | | | | | | | | |
Net income (1) | — | | | — | | | — | | | (772) | | | 51,575 | | | (7,113) | |
| Other comprehensive income or loss | (5,449) | | | — | | | — | | | — | | | — | | | — | |
| Purchases | 1,246 | | | — | | | — | | | — | | | — | | | — | |
| Issuances | — | | | — | | | — | | | — | | | — | | | — | |
| Sales | — | | | — | | | — | | | — | | | — | | | — | |
| Settlements | (1,083) | | | — | | | — | | | (1,667) | | | — | | | — | |
| Net transfers into Level 3 | — | | | — | | | — | | | 31,012 | | | — | | | — | |
| Balance at March 31, 2022 | $ | 100,401 | | | $ | — | | | $ | — | | | $ | 44,464 | | | $ | 199,146 | | | $ | 3,447 | |
(1)Changes in the balance of mortgage loans held-for-sale, MSRs, and derivative assets related to fair value adjustments are recorded as components of mortgage banking revenue. Changes in the balance of loans held-for-investment related to fair value adjustments are recorded as other non-interest income.
Also, the Company may be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from impairment charges on individual assets. For assets measured at fair value on a non-recurring basis that were still held in the balance sheet at the end of the period, the following table provides the carrying value of the related individual assets or portfolios at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | Three Months Ended March 31, 2023 Fair Value Losses Recognized, net | | |
| (In thousands) | Total | | Level 1 | | Level 2 | | Level 3 | | |
| Individually assessed loans - foreclosure probable and collateral-dependent | $ | 71,622 | | | $ | — | | | $ | — | | | $ | 71,622 | | | $ | 2,501 | | | |
Other real estate owned (1) | 9,361 | | | — | | | — | | | 9,361 | | | 104 | | | |
| Total | $ | 80,983 | | | $ | — | | | $ | — | | | $ | 80,983 | | | $ | 2,605 | | | |
(1)Fair value losses recognized, net on other real estate owned include valuation adjustments and charge-offs during the respective period.
Individually assessed loans—In accordance with ASC 326, the allowance for credit losses for loans and other financial assets held at amortized cost should be measured on a collective or pooled basis when such assets exhibit similar risk characteristics. In instances in which a financial asset does not exhibit similar risk characteristics to a pool, the Company is required to measure such allowance for credit losses on an individual asset basis. For the Company’s loan portfolio, nonaccrual loans are considered to not exhibit similar risk characteristics as pools and thus are individually assessed. Credit losses are measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the fair value of the underlying collateral. Individually assessed loans are considered a fair value measurement where an allowance for credit loss is established based on the fair value of collateral. Appraised values on relevant real estate properties, which may require adjustments to market-based valuation inputs, are generally used on foreclosure probable and collateral-dependent loans within the real estate portfolios.
The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs of individually assessed loans. For more information on individually assessed loans refer to Note (6) “Allowance for Credit Losses”. At March 31, 2023, the Company had $71.6 million of individually assessed loans classified as Level 3. All of the $71.6 million of individually assessed loans were measured at fair value based on the underlying collateral of the loan as shown in the table above. None were valued based on discounted cash flows in accordance with ASC 310.
Other real estate owned —Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans and is included in other assets. Other real estate owned is recorded at its estimated fair value less estimated selling costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in other non-interest expense. Gains and losses upon sale, if any, are also charged to other non-interest expense. Fair value is generally based on third party appraisals and internal estimates that are adjusted by a discount representing the estimated cost of sale and is therefore considered a Level 3 valuation.
The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs for other real estate owned. At March 31, 2023, the Company had $9.4 million of other real estate owned classified as Level 3. The unobservable input applied to other real estate owned relates to the 10% reduction to the appraisal value representing the estimated cost of sale of the foreclosed property. A higher discount for the estimated cost of sale results in a decreased carrying value.
The valuation techniques and significant unobservable inputs used to measure both recurring and non-recurring Level 3 fair value measurements at March 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Fair Value | | Valuation Methodology | | Significant Unobservable Input | | Range
of Inputs | | Weighted
Average
of Inputs | | Impact to valuation
from an increased or
higher input value |
| Measured at fair value on a recurring basis: |
| Municipal securities | $ | 112,257 | | | Bond pricing | | Equivalent rating | | BBB-AA+ | | N/A | | Increase |
| Mortgage loans held-for-sale | 44,250 | | | Discounted cash flows | | Discount rate | | 5.96% | | 5.96% | | Decrease |
| | | | | Credit discount | | 0% - 10% | | 0.22% | | Decrease |
| Loans held-for-investment | 69,493 | | | Discounted cash flows | | Discount rate | | 5.96% - 6.25% | | 5.98% | | Decrease |
| | | | | Credit discount | | 0% - 13% | | 0.86% | | Decrease |
| | | | | Constant prepayment rate (CPR) - current loans | | 6.92% | | 6.92% | | Decrease |
| | | | | Average life - delinquent loans (in years) | | 1.2 years - 10.2 years | | 5.4 years | | Decrease |
| MSRs | 224,470 | | | Discounted cash flows | | Discount rate | | 3% - 33% | | 10.33% | | Decrease |
| | | | | Constant prepayment rate (CPR) | | 0% - 100% | | 6.92% | | Decrease |
| | | | | Cost of servicing | | $70 - $200 | | $ | 76 | | | Decrease |
| | | | | Cost of servicing - delinquent | | $200 - 1,000 | | $ | 403 | | | Decrease |
| Derivatives | 5,356 | | | Discounted cash flows | | Pull-through rate | | 31% - 100% | | 82.06 | % | | Increase |
| Measured at fair value on a non-recurring basis: |
| Individually assessed loans - foreclosure probable and collateral-dependent | 71,622 | | | Appraisal value | | Appraisal adjustment - cost of sale | | 10% | | 10.00% | | Decrease |
| Other real estate owned | 9,361 | | | Appraisal value | | Appraisal adjustment - cost of sale | | 10% | | 10.00% | | Decrease |
The Company is required under applicable accounting guidance to report the fair value of all financial instruments on the Consolidated Statements of Condition, including those financial instruments carried at cost. The table below presents the carrying amounts and estimated fair values of the Company’s financial instruments as of the dates shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2023 | | At December 31, 2022 | | At March 31, 2022 |
| Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair |
| (In thousands) | Value | | Value | | Value | | Value | | Value | | Value |
| Financial Assets: | | | | | | | | | | | |
| Cash and cash equivalents | $ | 445,986 | | | $ | 445,986 | | | $ | 490,966 | | | $ | 490,966 | | | $ | 462,572 | | | $ | 462,572 | |
| Securities sold under agreements to repurchase with original maturities exceeding three months | — | | | — | | | — | | | — | | | 700,000 | | | 700,000 | |
| Interest-bearing deposits with banks | 1,563,578 | | | 1,563,578 | | | 1,988,719 | | | 1,988,719 | | | 4,013,597 | | | 4,013,597 | |
| Available-for-sale securities | 3,259,845 | | | 3,259,845 | | | 3,243,017 | | | 3,243,017 | | | 2,998,898 | | | 2,998,898 | |
| Held-to-maturity securities | 3,606,391 | | | 2,976,198 | | | 3,640,567 | | | 2,949,821 | | | 3,435,729 | | | 3,146,427 | |
| Trading account securities | 102 | | | 102 | | | 1,127 | | | 1,127 | | | 852 | | | 852 | |
| Equity securities with readily determinable fair value | 111,943 | | | 111,943 | | | 110,365 | | | 110,365 | | | 92,689 | | | 92,689 | |
| FHLB and FRB stock, at cost | 244,957 | | | 244,957 | | | 224,759 | | | 224,759 | | | 136,163 | | | 136,163 | |
| Brokerage customer receivables | 16,042 | | | 16,042 | | | 16,387 | | | 16,387 | | | 22,888 | | | 22,888 | |
| Mortgage loans held-for-sale, at fair value | 302,493 | | | 302,493 | | | 299,935 | | | 299,935 | | | 606,545 | | | 606,545 | |
| Loans held-for-investment, at fair value | 202,143 | | | 202,143 | | | 179,932 | | | 179,932 | | | 57,984 | | | 57,984 | |
| Loans held-for-investment, at amortized cost | 39,363,328 | | | 38,577,761 | | | 39,016,553 | | | 38,018,678 | | | 35,222,563 | | | 35,989,840 | |
| Nonqualified deferred compensation assets | 14,379 | | | 14,379 | | | 13,899 | | | 13,899 | | | 15,447 | | | 15,447 | |
| Derivative assets | 274,004 | | | 274,004 | | | 296,848 | | | 296,848 | | | 153,534 | | | 153,534 | |
| Accrued interest receivable and other | 417,066 | | | 417,066 | | | 379,719 | | | 379,719 | | | 278,873 | | | 278,873 | |
| Total financial assets | $ | 49,822,257 | | | $ | 48,406,497 | | | $ | 49,902,793 | | | $ | 48,214,172 | | | $ | 48,198,334 | | | $ | 48,676,309 | |
| Financial Liabilities | | | | | | | | | | | |
| Non-maturity deposits | $ | 37,366,959 | | | $ | 37,366,959 | | | $ | 38,167,409 | | | $ | 38,167,409 | | | $ | 38,483,327 | | | $ | 38,483,327 | |
| Deposits with stated maturities | 5,351,252 | | | 4,970,556 | | | 4,735,135 | | | 4,085,058 | | | 3,735,995 | | | 3,735,750 | |
| FHLB advances | 2,316,071 | | | 2,255,580 | | | 2,316,071 | | | 2,219,983 | | | 1,241,071 | | | 1,193,080 | |
| Other borrowings | 583,548 | | | 555,615 | | | 596,614 | | | 569,342 | | | 482,516 | | | 483,202 | |
| Subordinated notes | 437,493 | | | 410,827 | | | 437,392 | | | 409,395 | | | 437,033 | | | 446,711 | |
| Junior subordinated debentures | 253,566 | | | 252,663 | | | 253,566 | | | 253,405 | | | 253,566 | | | 268,913 | |
| Derivative liabilities | 274,432 | | | 274,432 | | | 338,078 | | | 338,078 | | | 122,107 | | | 122,107 | |
| Accrued interest payable | 42,015 | | | 42,015 | | | 22,176 | | | 22,176 | | | 14,269 | | | 14,269 | |
| Total financial liabilities | $ | 46,625,336 | | | $ | 46,128,647 | | | $ | 46,866,441 | | | $ | 46,064,846 | | | $ | 44,769,884 | | | $ | 44,747,359 | |
Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, interest-bearing deposits with banks, brokerage customer receivables, FHLB and FRB stock, accrued interest receivable and accrued interest payable and non-maturity deposits.
The following methods and assumptions were used by the Company in estimating fair values of financial instruments that were not previously disclosed.
Held-to-maturity securities. Held-to-maturity securities include U.S. government-sponsored agency securities, municipal bonds issued by various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin and mortgage-backed securities. Fair values for held-to-maturity securities are typically based on prices obtained from independent pricing vendors. In accordance with ASC 820, the Company has generally categorized these held-to-maturity securities as a Level 2 fair value measurement. Fair values for certain other held-to-maturity securities are based on the bond pricing methodology discussed previously related to certain available-for-sale securities. In accordance with ASC 820, the Company has categorized these held-to-maturity securities as a Level 3 fair value measurement.
Loans held-for-investment, at amortized cost. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are analyzed by type such as commercial, residential real estate, etc. Each category is further segmented by interest rate type (fixed and variable) and term. For variable-rate loans that reprice frequently, estimated fair values are based
on carrying values. The fair value of residential loans is based on secondary market sources for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for other fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect credit and interest rate risks inherent in the loan. In accordance with ASC 820, the Company has categorized loans as a Level 3 fair value measurement.
Deposits with stated maturities. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently in effect for deposits of similar remaining maturities. In accordance with ASC 820, the Company has categorized deposits with stated maturities as a Level 3 fair value measurement.
FHLB advances. The fair value of FHLB advances is obtained from the FHLB which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities to discount cash flows. In accordance with ASC 820, the Company has categorized FHLB advances as a Level 3 fair value measurement.
Subordinated notes. The fair value of the subordinated notes is based on a market price obtained from an independent pricing vendor. In accordance with ASC 820, the Company has categorized subordinated notes as a Level 2 fair value measurement.
Junior subordinated debentures. The fair value of the junior subordinated debentures is based on the discounted value of contractual cash flows. In accordance with ASC 820, the Company has categorized junior subordinated debentures as a Level 3 fair value measurement.
(15) Stock-Based Compensation Plans
As of March 31, 2023, approximately 1.2 million shares were available for future grants, assuming the maximum number of shares are issued for the performance awards outstanding, approved under the Company Stock Incentive Plans (“the Plans”). Descriptions of the Plans are included in Note (18) “Stock Compensation Plans and Other Employee Benefit Plans” of the 2022 Form 10-K.
Stock-based compensation expense recognized in the Consolidated Statements of Income was $8.3 million in the first quarter of 2023 and $7.9 million in the first quarter of 2022.
A summary of the Plans’ stock option activity for the three months ended March 31, 2023 and March 31, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | Common
Shares | | Weighted
Average
Strike Price | | Remaining Contractual Term (1) | | Intrinsic Value (2) (in thousands) |
Outstanding at January 1, 2023 | 68,093 | | | $ | 41.14 | | | | | |
| Granted | — | | | — | | | | | |
| Exercised | (54,218) | | | 40.87 | | | | | |
| Forfeited or canceled | — | | | — | | | | | |
Outstanding at March 31, 2023 | 13,875 | | | $ | 42.18 | | | 4.7 | | $ | 427 | |
Exercisable at March 31, 2023 | 13,875 | | | $ | 42.18 | | | 4.7 | | $ | 427 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | Common
Shares | | Weighted
Average
Strike Price | | Remaining Contractual Term (1) | | Intrinsic Value (2) (in thousands) |
Outstanding at January 1, 2022 | 193,447 | | | $ | 41.62 | | | | | |
| | | | | | | |
| Granted | — | | | — | | | | | |
| Exercised | (79,376) | | | 42.32 | | | | | |
| Forfeited or canceled | (771) | | | 40.87 | | | | | |
Outstanding at March 31, 2022 | 113,300 | | | $ | 41.13 | | | 1.4 | | $ | 5,869 | |
Exercisable at March 31, 2022 | 113,300 | | | $ | 41.13 | | | 1.4 | | $ | 5,869 | |
(1)Represents the remaining weighted average contractual life in years.
(2)Aggregate intrinsic value represents the total pre-tax intrinsic value (i.e., the difference between the Company’s stock price on the last trading day of the quarter and the option exercise price, multiplied by the number of shares) that would have been received by the option holders if they had exercised their options on the last day of the quarter. Options with exercise prices above the stock price on the last trading day of the quarter are excluded from the calculation of intrinsic value. The intrinsic value will change based on the fair market value of the Company’s stock.
The aggregate intrinsic value of options exercised during the three months ended March 31, 2023 and March 31, 2022, was $2.5 million and $4.5 million, respectively. Cash received from option exercises under the Plans for the three months ended March 31, 2023 and March 31, 2022 was $2.2 million and $3.4 million, respectively.
A summary of the Plans’ restricted share activity for the three months ended March 31, 2023 and March 31, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 | | Three months ended March 31, 2022 |
| Restricted Shares | Common
Shares | | Weighted
Average
Grant-Date
Fair Value | | Common
Shares | | Weighted
Average
Grant-Date
Fair Value |
| Outstanding at January 1 | 610,155 | | | $ | 73.21 | | | 476,813 | | | $ | 61.33 | |
| Granted | 242,576 | | | 89.82 | | | 194,849 | | | 97.30 | |
| Vested and issued | (96,649) | | | 64.14 | | | (52,465) | | | 65.42 | |
| Forfeited or canceled | (1,968) | | | 77.37 | | | (3,615) | | | 66.37 | |
Outstanding at March 31 | 754,114 | | | $ | 79.70 | | | 615,582 | | | $ | 72.34 | |
Vested, but deferred, at March 31 | 97,888 | | | $ | 53.30 | | | 95,806 | | | $ | 52.67 | |
A summary of the Plans’ performance-based stock award activity, based on the target level of the awards, for the three months ended March 31, 2023 and March 31, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 | | Three months ended March 31, 2022 |
| Performance-based Stock | Common
Shares | | Weighted
Average
Grant-Date
Fair Value | | Common
Shares | | Weighted
Average
Grant-Date
Fair Value |
| Outstanding at January 1 | 545,379 | | | $ | 70.30 | | | 557,255 | | | $ | 62.94 | |
| Granted | 185,514 | | | 92.48 | | | 159,202 | | | 97.21 | |
| Added by performance factor at vesting | 23,161 | | | 63.64 | | | — | | | — | |
| Vested and issued | (178,203) | | | 63.64 | | | — | | | — | |
| Forfeited or canceled | (2,301) | | | 78.20 | | | (159,952) | | | 71.56 | |
Outstanding at March 31 | 573,550 | | | $ | 79.24 | | | 556,505 | | | $ | 70.27 | |
Vested, but deferred, at March 31 | 35,852 | | | $ | 44.59 | | | 35,285 | | | $ | 43.88 | |
(16) Accumulated Other Comprehensive Income or Loss and Earnings Per Share
Accumulated Other Comprehensive Income or Loss
The following tables summarize the components of other comprehensive income or loss, including the related income tax effects, and the related amount reclassified to net income for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Accumulated
Unrealized (Losses) Gains
on Securities | | Accumulated
Unrealized Gains (Losses) on
Derivative
Instruments | | Accumulated
Foreign
Currency
Translation
Adjustments | | Total
Accumulated
Other
Comprehensive (Loss) Income |
| Balance at January 1, 2023 | $ | (386,057) | | | $ | 7,381 | | | $ | (48,960) | | | $ | (427,636) | |
| Other comprehensive income during the period, net of tax, before reclassifications | 34,503 | | | 22,808 | | | 710 | | | 58,021 | |
| Amount reclassified from accumulated other comprehensive loss into net income, net of tax | (409) | | | 2,620 | | | — | | | 2,211 | |
| Amount reclassified from accumulated other comprehensive income or loss related to amortization of unrealized gains on investment securities transferred to held-to-maturity from available-for-sale, net of tax | (32) | | | — | | | — | | | (32) | |
| Net other comprehensive income during the period, net of tax | $ | 34,062 | | | $ | 25,428 | | | $ | 710 | | | $ | 60,200 | |
| Balance at March 31, 2023 | $ | (351,995) | | | $ | 32,809 | | | $ | (48,250) | | | $ | (367,436) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Balance at January 1, 2022 | $ | 8,724 | | | $ | 27,111 | | | $ | (31,743) | | | $ | 4,092 | |
| Other comprehensive (loss) income during the period, net of tax, before reclassifications | (151,114) | | | 25,023 | | | 2,288 | | | (123,803) | |
| Amount reclassified from accumulated other comprehensive income or loss into net income, net of tax | (183) | | | 3,926 | | | — | | | 3,743 | |
| Amount reclassified from accumulated other comprehensive loss related to amortization of unrealized gains on investment securities transferred to held-to-maturity from available-for-sale, net of tax | (31) | | | — | | | — | | | (31) | |
| Net other comprehensive (loss) income during the period, net of tax | $ | (151,328) | | | $ | 28,949 | | | $ | 2,288 | | | $ | (120,091) | |
| Balance at March 31, 2022 | $ | (142,604) | | | $ | 56,060 | | | $ | (29,455) | | | $ | (115,999) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) for the | | |
| Details Regarding the Component of Accumulated Other Comprehensive Income (Loss) | | Three Months Ended | | | | Impacted Line on the
Consolidated Statements of Income |
| March 31, | | | |
| 2023 | | 2022 | | | | | |
| Accumulated unrealized gains on securities | | | | | | | | |
| Gains included in net income | | $ | 560 | | | $ | 250 | | | | | | | Gains (losses) on investment securities, net |
| | 560 | | | 250 | | | | | | | Income before taxes |
| Tax effect | | (151) | | | (67) | | | | | | | Income tax expense |
| Net of tax | | $ | 409 | | | $ | 183 | | | | | | | Net income |
| | | | | | | | | | |
| Accumulated unrealized gains on derivative instruments | | | | | | | | | | |
| Amount reclassified to interest income on loans | | $ | 9,072 | | | $ | — | | | | | | | Interest on Loans |
| Amount reclassified to interest expense on deposits | | $ | (5,588) | | | $ | 4,819 | | | | | | | Interest on deposits |
| Amount reclassified to interest expense on other borrowings | | 88 | | | 534 | | | | | | | Interest on other borrowings |
| | | | | | | | | | |
| | (3,572) | | | (5,353) | | | | | | | Income before taxes |
| Tax effect | | 952 | | | 1,427 | | | | | | | Income tax expense |
| Net of tax | | $ | (2,620) | | | $ | (3,926) | | | | | | | Net income |
Earnings per Share
The following table shows the computation of basic and diluted earnings per share for the periods indicated:
| | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | |
| (In thousands, except per share data) | | | March 31,
2023 | | March 31,
2022 | | | | |
| Net income | | | $ | 180,198 | | | $ | 127,391 | | | | | |
| Less: Preferred stock dividends | | | 6,991 | | | 6,991 | | | | | |
| Net income applicable to common shares | (A) | | $ | 173,207 | | | $ | 120,400 | | | | | |
| | | | | | | | | |
| Weighted average common shares outstanding | (B) | | 60,950 | | | 57,196 | | | | | |
| Effect of dilutive potential common shares | | | | | | | | | |
| Common stock equivalents | | | 873 | | | 862 | | | | | |
| Weighted average common shares and effect of dilutive potential common shares | (C) | | 61,823 | | | 58,058 | | | | | |
| Net income per common share: | | | | | | | | | |
| Basic | (A/B) | | $ | 2.84 | | | $ | 2.11 | | | | | |
| Diluted | (A/C) | | $ | 2.80 | | | $ | 2.07 | | | | | |
Potentially dilutive common shares can result from stock options, restricted stock unit awards and shares to be issued under the Employee Stock Purchase Plan and the Directors Deferred Fee and Stock Plan, being treated as if they had been either exercised or issued, computed by application of the treasury stock method. While potentially dilutive common shares are typically included in the computation of diluted earnings per share, potentially dilutive common shares are excluded from this computation in periods in which the effect of inclusion would either reduce the loss per share or increase the income per share.
At the January 2023 meeting of the board of directors of the Company (the “Board of Directors”), a quarterly cash dividend of $0.40 per share ($1.60 on an annualized basis) was declared. It was paid on February 23, 2023 to shareholders of record as of February 9, 2023.
(17) Subsequent Events
On April 3, 2023, the Company completed its acquisition of Rothschild & Co Asset Management US Inc. and Rothschild & Co Risk Based Investments LLC (collectively, “Rothschild & Co Asset Management U.S.”), from Rothschild & Co North America Inc. The acquired entities were merged into the Company’s subsidiary, Great Lakes Advisors, LLC.
ITEM 2