UMB(UMBF) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents the unaudited consolidated financial statements of UMB Financial Corporation for the quarter ended March 31, 2020, including balance sheets, income statements, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, new pronouncements, and specific financial instrument details CONSOLIDATED BALANCE SHEETS | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Total assets | $26,244,886 | $26,561,355 | | Net loans | $13,761,799 | $13,329,934 | | Total securities | $8,946,747 | $8,717,502 | | Total deposits | $21,175,520 | $21,603,244 | | Total liabilities | $23,581,445 | $23,954,915 | | Total shareholders' equity | $2,663,441 | $2,606,440 | CONSOLIDATED STATEMENTS OF INCOME | Metric (in thousands, except per share) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Total interest income | $211,411 | $211,307 | | Total interest expense | $37,470 | $47,439 | | Net interest income | $173,941 | $163,868 | | Provision for credit losses | $88,000 | $12,350 | | Total noninterest income | $98,424 | $107,382 | | Total noninterest expense | $188,619 | $190,626 | | Net (loss) income | $(3,439) | $57,744 | | Net (loss) income – basic per share | $(0.07) | $1.19 | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(3,439) | $57,744 | | Other comprehensive income, before tax | $178,182 | $103,532 | | Other comprehensive income | $136,210 | $78,143 | | Comprehensive income | $132,771 | $135,887 | CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | Metric (in thousands) | Balance – January 1, 2020 | Balance – March 31, 2020 | | :-------------------- | :------------------------ | :----------------------- | | Total shareholders' equity | $2,606,440 | $2,663,441 | | Total comprehensive (loss) income | $132,771 | | | Dividends ($0.31 per share) | $(15,209) | | | Purchase of treasury stock | $(59,386) | | CONSOLIDATED STATEMENTS OF CASH FLOWS | Metric (in thousands) | For the Three Months Ended March 31, 2020 | For the Three Months Ended March 31, 2019 | | :-------------------- | :---------------------------------------- | :---------------------------------------- | | Net cash provided by operating activities | $9,358 | $46,205 | | Net cash provided by (used in) investing activities | $231,123 | $(270,531) | | Net cash (used in) provided by financing activities | $(490,397) | $40,363 | | Decrease in cash and cash equivalents | $(249,916) | $(183,963) | | Cash and cash equivalents at end of period | $1,419,254 | $1,490,158 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Financial Statement Presentation The consolidated financial statements include UMB Financial Corporation and its subsidiaries, with intercompany transactions eliminated, and management believes all necessary adjustments for fair presentation have been made, though interim results may not predict full-year outcomes - The Company is a financial holding company offering a wide range of banking and other financial services through its branches and offices in Missouri, Arizona, Colorado, Illinois, Kansas, Nebraska, Oklahoma, Texas, Pennsylvania, South Dakota, Indiana, Utah, Minnesota, California, and Wisconsin[27] 2. Summary of Significant Accounting Policies This section outlines key accounting policies, including the definition of cash and cash equivalents, the computation of basic and diluted earnings per share, and the accounting treatment for derivatives, emphasizing fair value recognition and hedge accounting criteria | Cash and Cash Equivalents (in thousands) | March 31, 2020 | March 31, 2019 | | :--------------------------------------- | :------------- | :------------- | | Due from the FRB | $1,078,701 | $1,090,771 | | Cash and due from banks | $340,553 | $399,387 | | Cash and cash equivalents at end of period | $1,419,254 | $1,490,158 | - Basic and diluted net loss per share were the same at March 31, 2020, as all potentially dilutive shares were anti-dilutive, while at March 31, 2019, diluted net income per share included the dilutive effect of 286,418 shares[32] - All derivatives are recorded on the Consolidated Balance Sheets at fair value, with accounting for changes in fair value depending on the derivative's intended use and whether it's designated in a qualifying hedging relationship[34] 3. New Accounting Pronouncements The Company adopted new accounting guidance for Leases (ASC Topic 842) on January 1, 2019, recognizing right-of-use assets and lease liabilities, and on January 1, 2020, adopted the Current Expected Credit Loss (CECL) model (ASU 2016-13), which significantly changed credit loss measurement and resulted in a $9.0 million increase to the allowance for credit losses and a $7.0 million reduction to retained earnings - The Company adopted ASU 2016-02, Leases, on January 1, 2019, resulting in the recording of a $58.2 million right-of-use asset and a $63.0 million lease liability[35] - The Company adopted ASU 2016-13, Credit Losses (CECL), on January 1, 2020, using a modified retrospective approach, resulting in a cumulative effect adjustment of $9.0 million increase to the allowance for credit losses and a $7.0 million reduction to retained earnings[36][37] 4. Loans and Allowance for Credit Losses This note details the Company's loan portfolio, credit risk management, and the adoption of the CECL methodology, providing an aging analysis of loans, amortized cost by origination year, and credit quality indicators segmented by loan type, with the allowance for credit losses significantly increasing due to CECL adoption and COVID-19 economic impacts - The Company adopted the CECL methodology for measuring credit losses as of January 1, 2020, and did not recast comparative financial periods[38] - The Company has lending policies and procedures designed to minimize risk through portfolio diversification, established authority levels for credit extension, and an independent loan review department[39] | Loan Aging Analysis (in thousands) | March 31, 2020 | December 31, 2019 | | :--------------------------------- | :------------- | :---------------- | | Total loans | $13,949,710 | $13,431,722 | | Total Past Due | $118,664 | $79,910 | | Non Accrual Loans | $97,029 | $56,347 | Loan Origination/Risk Management - Commercial and industrial loans are underwritten based on borrower profitability and collateral, often secured by assets being financed or other business assets, and may include personal guarantees[40] - Specialty lending includes Asset-based and Factoring loans, underwritten primarily on collateral value with specific monitoring disciplines[41] - Commercial real estate loans involve higher principal amounts, depend on property operation, and are closely monitored due to sensitivity to interest rate changes and economic conditions[42] Loan Aging Analysis | Loan Category (in thousands) | March 31, 2020 Total Loans | December 31, 2019 Total Loans | | :--------------------------- | :------------------------- | :---------------------------- | | Commercial and industrial | $5,952,364 | $5,842,002 | | Specialty lending | $523,425 | $462,791 | | Commercial real estate | $5,283,787 | $5,171,070 | | Consumer real estate | $1,444,511 | $1,411,427 | | Consumer | $146,721 | $133,474 | | Credit cards | $373,607 | $408,980 | | Leases and other | $225,295 | $1,978 | - The Company ceased interest recognition on $97.0 million in loans at March 31, 2020, up from $56.3 million at December 31, 2019, with restructured loans totaling $14.3 million at March 31, 2020[50] Amortized Cost | Loan Segment and Type (in thousands) | Amortized Cost - March 31, 2020 | | :----------------------------------- | :------------------------------ | | Commercial and industrial | $5,952,364 | | Specialty lending | $523,425 | | Commercial real estate | $5,283,787 | | Consumer real estate | $1,444,511 | | Consumer | $146,721 | | Credit cards | $373,607 | | Leases and other | $225,295 | | Total loans | $13,949,710 | - Accrued interest on loans totaled $44.1 million as of March 31, 2020, and is excluded from the amortized cost basis of loans, with the Company electing not to measure an allowance for credit losses for accrued interest receivables[54] Credit Quality Indicators - The Company uses a risk grading matrix for commercial, commercial real estate, and construction real estate loans, categorizing them as Non-watch list, Watch, Special Mention, Substandard, and Doubtful[56] - For Specialty lending, credit risk is tracked by 'in-margin' vs. 'out-of-margin' positions, where out-of-margin indicates collateral value below loan fair value[61][62] | Risk Rating (in thousands) | Commercial and industrial | Specialty lending | | :------------------------- | :------------------------ | :---------------- | | Non-watch list | $5,462,403 | $350,487 (In-margin) | | Watch | $217,709 | $6,149 (Out-of-margin) | | Special Mention | $50,721 | $23,160 (In-margin) | | Substandard | $199,646 | $143,629 (Out-of-margin) | | Doubtful | $6,283 | | Allowance for Credit Losses - The Allowance for Credit Losses (ACL) is a valuation account deducted from loans' amortized cost, estimated using historical experience, current conditions, and reasonable and supportable forecasts (e.g., Moody's baseline scenario for one year)[91][93] - The ACL is measured on a collective basis for portfolio segments like Commercial and industrial, Specialty lending, Commercial real estate, Consumer real estate, Consumer, Credit cards, Leases and other, and Held-to-maturity securities, using various modeling techniques[94] | Allowance for Credit Losses (in thousands) | Three Months Ended March 31, 2020 | | :--------------------------------------- | :-------------------------------- | | Beginning balance | $101,788 | | ASU 2016-13 adjustment | $9,030 | | Provision | $88,000 | | Charge-offs | $(9,764) | | Recoveries | $2,092 | | Ending balance | $191,146 | Collateral Dependent Financial Assets | Loan Segment and Type (in thousands) | Amortized Cost of Collateral Dependent Assets (March 31, 2020) | | :----------------------------------- | :------------------------------------------------------------- | | Commercial and industrial | $42,613 | | Specialty lending | $1,455 | | Commercial real estate | $46,587 | | Consumer real estate | $5,701 | | Consumer | $184 | | Leases and other | $69 | | Total loans | $96,609 | Impaired Loans | Impaired Loans by Class (in thousands) | Recorded Investment with No Allowance (Dec 31, 2019) | Recorded Investment with Allowance (Dec 31, 2019) | | :------------------------------------- | :----------------------------------- | :-------------------------------- | | Commercial | $20,986 | $856 | | Asset-based | $948 | — | | Factoring | $2,979 | — | | Real estate – commercial | $19,314 | $4,928 | | Real estate – residential | $1,617 | $93 | | Total | $45,939 | $5,877 | Troubled Debt Restructurings - A loan modification is considered a Troubled Debt Restructuring (TDR) when a concession is granted to a debtor experiencing financial difficulties, typically involving interest rate adjustments, principal reductions, or maturity extensions[113] - The Company had no new TDRs or payment defaults on TDRs within 12 months following restructure for the three months ended March 31, 2020 and 2019, with one loan modification for $7 thousand due to COVID-19 not identified as a TDR[115][116] 5. Securities This note provides detailed information on the Company's securities portfolio, including Available for Sale (AFS), Held to Maturity (HTM), Trading, and Other securities, highlighting fair values, unrealized gains/losses, contractual maturities, and credit quality, noting that unrealized losses are primarily due to interest rate changes rather than credit deterioration | Securities Category (in thousands) | March 31, 2020 Fair Value | December 31, 2019 Fair Value | | :--------------------------------- | :------------------------ | :--------------------------- | | Available for sale | $7,639,451 | $7,447,362 | | Held to maturity | $1,110,925 | $1,116,102 | | Trading securities | $61,177 | $45,618 | | Other securities | $135,194 | $108,420 | | Total securities | $8,946,747 | $8,717,502 | - Unrealized losses in AFS and HTM securities were primarily caused by changes in interest rates, not credit decline, and the Company does not intend to sell these securities and does not believe it will be required to sell them before recovery of amortized cost[121][124] Securities Available for Sale | AFS Securities (in thousands) | Amortized Cost (March 31, 2020) | Fair Value (March 31, 2020) | Gross Unrealized Gains (March 31, 2020) | Gross Unrealized Losses (March 31, 2020) | | :---------------------------- | :------------------------------ | :-------------------------- | :-------------------------------------- | :--------------------------------------- | | U.S. Treasury | $30,549 | $31,605 | $1,056 | — | | U.S. Agencies | $94,195 | $100,616 | $6,421 | — | | Mortgage-backed | $4,067,786 | $4,234,649 | $171,441 | $(4,578) | | State and political subdivisions | $2,980,676 | $3,093,692 | $114,292 | $(1,276) | | Corporates | $179,974 | $178,889 | $1,368 | $(2,453) | | Total | $7,353,180 | $7,639,451 | $294,578 | $(8,307) | - Proceeds from AFS securities sales were $84.4 million for Q1 2020, up from $53.3 million for Q1 2019, resulting in gross realized gains of $1.2 million and $809 thousand, respectively[118] - As of March 31, 2020, $6.0 billion of AFS securities were pledged to secure various deposits and derivative transactions, including $979.2 million pledged at the Federal Reserve Discount Window but unencumbered[119] Securities Held to Maturity | HTM Securities (in thousands) | Amortized Cost (March 31, 2020) | Fair Value (March 31, 2020) | Gross Unrealized Gains (March 31, 2020) | Gross Unrealized Losses (March 31, 2020) | | :---------------------------- | :------------------------------ | :-------------------------- | :-------------------------------------- | :--------------------------------------- | | State and political subdivisions | $1,114,160 | $1,146,909 | $36,569 | $(3,820) | | Allowance for credit losses | $(3,235) | | | | | Total (net) | $1,110,925 | | | | - The HTM portfolio consists of State and political subdivisions, with the majority in Competitive ($1.04 billion) and Utilities ($77.3 million) bonds, primarily rated A and BBB[125][126] - All held to maturity securities were current and not past due at March 31, 2020, with accrued interest totaling $6.5 million[127] Trading Securities - Net unrealized gains on trading securities were $150 thousand at March 31, 2020, and $52 thousand at March 31, 2019, recognized in trading and investment banking income[128] - Securities sold not yet purchased totaled $17.6 million at March 31, 2020, and $14.6 million at December 31, 2019, classified within Other liabilities[128] Other Securities | Other Securities (in thousands) | Amortized Cost (March 31, 2020) | Fair Value (March 31, 2020) | | :------------------------------ | :------------------------------ | :-------------------------- | | FRB and FHLB stock | $33,252 | $33,252 | | Other securities – non-marketable | $99,543 | $101,942 | | Total | $132,795 | $135,194 | - Other non-marketable securities include alternative investments in hedge funds and private equity funds (equity-method investments) and investments in low-income housing partnerships[130] 6. Goodwill and Other Intangibles This note details the Company's goodwill and other intangible assets, where goodwill balances remained constant across all segments, and finite-lived intangible assets are subject to amortization, with estimated future amortization expenses provided | Goodwill (in thousands) | January 1, 2020 | March 31, 2020 | | :---------------------- | :-------------- | :------------- | | Commercial Banking | $59,419 | $59,419 | | Institutional Banking | $51,332 | $51,332 | | Personal Banking | $70,116 | $70,116 | | Total | $180,867 | $180,867 | | Finite-Lived Intangible Assets (in thousands) | March 31, 2020 Net Carrying Amount | | :-------------------------------------------- | :--------------------------------- | | Core Deposit Intangible Assets | $2,452 | | Customer Relationships | $23,387 | | Total | $25,839 | | Estimated Amortization Expense (in thousands) | Amount | | :-------------------------------------------- | :----- | | For the nine months ending December 31, 2020 | $4,678 | | For the year ending December 31, 2021 | $5,408 | | For the year ending December 31, 2022 | $4,468 | | For the year ending December 31, 2023 | $3,750 | | For the year ending December 31, 2024 | $2,965 | 7. Securities Sold Under Agreements to Repurchase The Company uses repurchase agreements for customer needs and short-term funding, stated at cash received, with collateral levels continuously monitored and the majority having overnight maturities, secured by U.S. Agencies | Repurchase Agreements (in thousands) | March 31, 2020 Total | | :----------------------------------- | :------------------- | | Overnight | $1,664,427 | | 30-90 Days | $202,930 | | Over 90 Days | $500 | | Total | $1,867,857 | - Repurchase agreements are secured by U.S. Agencies, and the Company monitors collateral levels and may be required to provide additional collateral based on fair value[134][135] 8. Business Segment Reporting The Company realigned its reportable segments in Q1 2020, merging Healthcare Services into Institutional Banking, now comprising Commercial Banking, Institutional Banking, and Personal Banking, and this section provides an overview of each segment's activities and their financial performance - In Q1 2020, the Healthcare Services segment was merged into the Institutional Banking segment to better reflect management's evaluation of core businesses, products, and services[136] - Commercial Banking serves small to middle-market businesses with commercial loans, real estate financing, credit cards, and treasury management services[137] - Institutional Banking combines banking, fund, asset management, and healthcare services for institutional clients, including fixed income, corporate trust, and HSA custodial services[138] | Segment Operating Results (in thousands) | Commercial Banking (Q1 2020) | Institutional Banking (Q1 2020) | Personal Banking (Q1 2020) | | :--------------------------------------- | :--------------------------- | :------------------------------ | :------------------------- | | Net interest income | $106,948 | $33,036 | $33,957 | | Provision for credit losses | $82,220 | $275 | $5,505 | | Noninterest income | $11,240 | $61,952 | $25,232 | | Net (loss) income | $(18,654) | $21,228 | $(6,013) | 9. Revenue Recognition This note describes the Company's principal revenue-generating activities under ASC Topic 606, including trust and securities processing, trading and investment banking, service charges on deposits, insurance fees, brokerage fees, and bankcard fees, and disaggregates noninterest income by revenue stream and business segment - Trust and securities processing income is earned from personal and corporate trust accounts, custody services, investment advisory, and mutual fund/alternative asset servicing, with fees generally fixed or percentage-based on market value[142] - Bankcard fees primarily consist of interchange revenue from MasterCard and Visa for processing debit, credit, HSA, and flexible spending account transactions, with performance obligations completed per transaction[147] | Noninterest Income (in thousands) | Commercial Banking (Q1 2020) | Institutional Banking (Q1 2020) | Personal Banking (Q1 2020) | Revenue out of Scope of ASC 606 (Q1 2020) | Total (Q1 2020) | | :-------------------------------- | :--------------------------- | :------------------------------ | :------------------------- | :---------------------------------------- | :-------------- | | Trust and securities processing | — | $31,262 | $15,738 | — | $47,000 | | Trading and investment banking | — | $656 | — | $1,067 | $1,723 | | Service charges on deposit accounts | $6,892 | $15,607 | $2,539 | $43 | $25,081 | | Brokerage fees | $59 | $7,590 | $2,211 | — | $9,860 | | Bankcard fees | $14,988 | $4,724 | $4,990 | $(8,157) | $16,545 | | Total Noninterest income | $22,339 | $60,277 | $26,450 | $(10,642) | $98,424 | 10. Commitments, Contingencies and Guarantees This note outlines the Company's off-balance sheet financial instruments, including commitments to extend credit, commercial letters of credit, standby letters of credit, and foreign exchange contracts, and details the methodology for estimating the allowance for credit losses on these exposures, which was $3.0 million as of March 31, 2020 | Off-Balance Sheet Financial Instruments (in thousands) | March 31, 2020 | December 31, 2019 | | :----------------------------------------------------- | :------------- | :---------------- | | Commitments to extend credit for loans (excluding credit card loans) | $7,254,024 | $7,409,338 | | Commitments to extend credit under credit card loans | $3,285,687 | $3,188,905 | | Commercial letters of credit | $5,320 | $4,460 | | Standby letters of credit | $301,416 | $299,933 | | Forward contracts | $218,750 | $58,287 | | Spot foreign exchange contracts | $4,375 | $1,980 | - The Allowance for Credit Losses (ACL) on off-balance sheet credit exposures was $3.0 million as of March 31, 2020, recorded in Other liabilities[161] - The ACL for off-balance sheet exposures is estimated over the contractual period, considering funding likelihood and expected credit losses on funded commitments, based on utilization rates and portfolio segment loss rates[157] 11. Derivatives and Hedging Activities This note details the Company's use of derivative financial instruments to manage interest rate risk and provide customer services, outlining the fair values of designated and non-designated hedges, their impact on financial statements, and discussing credit-risk-related contingent features - The Company uses derivative financial instruments to manage interest rate exposures arising from business operations and to provide services to customers, minimizing net risk exposure through offsetting positions[162] | Derivative Fair Values (in thousands) | March 31, 2020 Derivative Assets | December 31, 2019 Derivative Assets | March 31, 2020 Derivative Liabilities | December 31, 2019 Derivative Liabilities | | :------------------------------------ | :------------------------------- | :---------------------------------- | :------------------------------------ | :------------------------------------- | | Derivatives not designated as hedging instruments | $112,603 | $47,458 | $10,435 | $5,997 | | Derivatives designated as hedging instruments | $32,744 | $7,818 | $2 | — | | Total | $145,347 | $55,276 | $10,437 | $5,997 | - For Q1 2020, the Company recognized a $(259) thousand loss from non-designated derivatives and a $(1) thousand loss from fair value hedges in the Consolidated Statements of Income[172] 12. Fair Value Measurements This note details the fair value measurements of the Company's financial instruments, categorizing them into Level 1, 2, or 3 based on input observability, and presents assets and liabilities measured at fair value on both a recurring and non-recurring basis, along with their valuation methods and the estimated fair value of all financial instruments - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[178] | Assets Measured at Fair Value on a Recurring Basis (in thousands) | March 31, 2020 Total | | :---------------------------------------------------------------- | :------------------- | | Trading securities | $61,177 | | Available for sale securities | $7,639,451 | | Company-owned life insurance | $47,726 | | Bank-owned life insurance | $282,562 | | Derivatives | $145,347 | | Total | $8,176,263 | | Financial Assets (in thousands) | Carrying Amount (March 31, 2020) | Total Estimated Fair Value (March 31, 2020) | | :------------------------------ | :------------------------------- | :------------------------------------------ | | Cash and short-term investments | $2,234,557 | $2,234,557 | | Securities available for sale | $7,639,451 | $7,639,451 | | Securities held to maturity | $1,114,160 | $1,146,909 | | Loans | $13,959,295 | $14,291,643 | | Total Financial Assets | $25,114,784 | $25,477,621 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the Company's financial condition and results of operations for Q1 2020, highlighting the significant impact of the COVID-19 pandemic, and detailing changes in net interest income, provision for credit losses, noninterest income and expense, and segment performance, alongside an analysis of the balance sheet, capital, and liquidity - The global economy experienced a downturn in Q1 2020 due to COVID-19, leading to significant stock market volatility, a 150-basis-point reduction in the federal funds rate, and the enactment of the CARES Act[206] - The Company recorded a net loss of $3.4 million for Q1 2020, a 106.0% decrease from net income of $57.7 million in Q1 2019, primarily due to higher provision for credit losses and a decline in equity securities valuation[208][218] - The Company processed over 3,000 applications for more than $1.4 billion in loans under the Paycheck Protection Program (PPP) as of the filing date[209] CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS - Forward-looking statements are subject to assumptions, risks, and uncertainties, including economic conditions, regulatory changes, market shifts, and the Company's operational capabilities, which may cause actual results to differ materially[203][204] - The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the statement was made, except as required by applicable securities laws[205] Overview - The Company's strategic objectives include continuously improving operating efficiencies, increasing net interest income through profitable loan and deposit growth, growing noninterest revenue, and effective capital management[212][213][214][216][217] - Net interest income increased by $10.1 million (6.1%) in Q1 2020 YoY, driven by increased volume and mix of average earning assets, despite recent interest rate reductions[214][215] - Noninterest income decreased by $9.0 million (8.3%) in Q1 2020 YoY, primarily due to a significant decrease in the market value of company-owned life insurance[216] Earnings Summary | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change (%) | | :----- | :-------------------------------- | :-------------------------------- | :--------- | | Net (loss) income | $(3.4) million | $57.7 million | (106.0)% | | Basic (losses) earnings per share | $(0.07) | $1.19 | | | Return on average assets | (0.05)% | 1.02% | | | Return on average common shareholders' equity | (0.51)% | 10.48% | | - Net interest income increased $10.1 million (6.1%) in Q1 2020 YoY, with average earning assets up $3.0 billion (14.1%), while net interest margin decreased to 2.97% from 3.20%[219] - Provision for credit losses increased by $75.7 million to $88.0 million in Q1 2020, driven by CECL adoption and the economic downturn from COVID-19, with nonperforming loans increasing to $97.0 million[220] Net Interest Income - Net interest income increased $10.1 million (6.1%) in Q1 2020 YoY, primarily due to favorable volume variance on loans and securities and favorable rate variances on interest-bearing deposits, offset by unfavorable rate variances on earning assets[223][224] | Metric (tax-equivalent basis) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change (bps) | | :---------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net interest spread | 2.67% | 2.76% | (9) | | Net interest margin | 2.97% | 3.20% | (23) | | Tax-equivalent yield on earning assets | 3.58% | 4.10% | (52) | | Cost of interest-bearing liabilities | 0.91% | 1.34% | (43) | - The average balance of interest-free funds increased $913.9 million in Q1 2020 YoY, but the benefit from interest-free funds decreased by 14 basis points due to decreased yields on earning assets[227] Provision and Allowance for Credit Losses - The Allowance for Credit Losses (ACL) represents management's judgment of total expected losses in the loan portfolio, based on lifetime historical loss experience, credit quality, and economic forecasts, following ASC Topic 326 (CECL)[233][234] - Provision for credit losses increased significantly to $88.0 million in Q1 2020, compared to $12.4 million in Q1 2019, due to CECL adoption and the economic downturn from COVID-19[238] | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Allowance - January 1 | $101,788 | $103,635 | | Cumulative effect adjustment | $9,030 | — | | Provision for credit losses | $88,000 | $12,350 | | Net charge-offs | $(7,672) | $(12,324) | | Allowance for credit losses - end of period | $191,146 | $103,661 | | ACL on loans to loans at end of period | 1.35% | 0.83% | Noninterest Income - Noninterest income decreased by $9.0 million (8.3%) in Q1 2020 YoY, primarily driven by a $16.4 million decrease in 'Other' noninterest income due to lower company-owned life insurance and derivative income[245][250] | Noninterest Income (in thousands) | March 31, 2020 | March 31, 2019 | Dollar Change | Percent Change | | :-------------------------------- | :------------- | :------------- | :------------ | :------------- | | Trust and securities processing | $47,000 | $41,957 | $5,043 | 12.0% | | Trading and investment banking | $1,723 | $5,581 | $(3,858) | (69.1)% | | Service charges on deposits | $25,081 | $21,281 | $3,800 | 17.9% | | Brokerage fees | $9,860 | $7,243 | $2,617 | 36.1% | | Other | $(3,271) | $13,106 | $(16,377) | (>100.0)% | | Total noninterest income | $98,424 | $107,382 | $(8,958) | (8.3)% | - Trust and securities processing income increased by $5.0 million (12.0%) due to growth in corporate trust and fund services, while brokerage fees increased $2.6 million (36.1%) from higher money market balances[246][249] Noninterest Expense - Noninterest expense decreased by $2.0 million (1.1%) in Q1 2020 YoY, primarily due to a $5.0 million decrease in salaries and employee benefits, driven by lower deferred compensation expense[252][253] | Noninterest Expense (in thousands) | March 31, 2020 | March 31, 2019 | Dollar Change | Percent Change | | :--------------------------------- | :------------- | :------------- | :------------ | :------------- | | Salaries and employee benefits | $111,060 | $116,032 | $(4,972) | (4.3)% | | Equipment | $21,241 | $19,684 | $1,557 | 7.9% | | Processing fees | $13,390 | $12,132 | $1,258 | 10.4% | | Other | $6,853 | $8,054 | $(1,201) | (14.9)% | | Total noninterest expense | $188,619 | $190,626 | $(2,007) | (1.1)% | - Equipment expense increased $1.6 million (7.9%) due to higher maintenance and software costs, and processing fees increased $1.3 million (10.4%) due to system investments[254] Income Tax Expense - The Company recognized an income tax benefit of $0.8 million (19.2%) on a pre-tax loss of $4.3 million in Q1 2020, compared to an expense of $10.5 million (15.4%) on pre-tax income of $68.3 million in Q1 2019[256] - The tax benefit reflects management's estimate of the annual effective tax rate applied to the year-to-date loss, with the expectation that the pre-tax loss will be offset by income in 2020[257] Strategic Lines of Business - Commercial Banking recognized a net loss of $18.7 million in Q1 2020, a $57.4 million decrease YoY, primarily due to a $71.9 million increase in provision for credit losses and a $11.9 million decrease in noninterest income[259] - Institutional Banking net income increased $2.7 million (14.5%) in Q1 2020 YoY, driven by a $6.1 million increase in noninterest income (trust and securities processing, service charges, brokerage revenue)[261] - Personal Banking recognized a net loss of $6.0 million in Q1 2020, a $6.4 million decrease YoY, mainly due to a $3.8 million increase in provision for credit losses and a $3.1 million decrease in noninterest income[262] Balance Sheet Analysis - Total assets decreased by $316.5 million (1.2%) from Dec 31, 2019, to March 31, 2020, primarily due to a $790.6 million decrease in securities purchased under agreements to resell, partially offset by a $518.0 million increase in loan balances[264] | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Total assets | $26,244,886 | $26,561,355 | | Loans, net of unearned interest | $13,959,295 | $13,439,525 | | Total securities | $8,949,982 | $8,717,502 | | Total deposits | $21,175,520 | $21,603,244 | | Total borrowed funds | $2,012,499 | $1,993,998 | - Actual loan balances increased $519.8 million (3.9%) from Dec 31, 2019, to March 31, 2020, driven by balance sheet optimization and recent loan demand related to the COVID-19 pandemic, including over $1.4 billion in PPP loans[267] Investment Securities - Investment securities totaled $8.9 billion at March 31, 2020, comprising 36.4% of the Company's earning assets, with the AFS portfolio making up 85.4% of total investment securities[269][271] - The AFS securities portfolio provides liquidity and is used to manage interest rate sensitivity, with $6.0 billion pledged as collateral at March 31, 2020[271][272] - The HTM securities portfolio, primarily private placement bonds in healthcare and education, totaled $1.1 billion (net of ACL) at March 31, 2020, with an average life of 6.2 years[273] Deposits and Borrowed Funds - Deposits decreased $427.7 million (2.0%) from Dec 31, 2019, to March 31, 2020, with interest-bearing deposits decreasing $752.8 million and non-interest bearing deposits increasing $325.1 million[275] - Long-term debt totaled $121.6 million at March 31, 2020, primarily consisting of debt obligations from the Marquette acquisition, with interest rates tied to three-month LIBOR[277] - The Company has a $50.0 million revolving line of credit with Wells Fargo Bank, N.A., with an outstanding balance of $15.0 million at March 31, 2020[280] Capital and Liquidity - Total shareholders' equity was $2.7 billion at March 31, 2020, an increase of $57.0 million from Dec 31, 2019, and $312.6 million from March 31, 2019[283] - The Company repurchased 1.0 million shares of common stock at an average price of $53.79 per share in Q1 2020, including 537,182 shares through an accelerated share repurchase agreement (ASR)[284] | Capital Ratios | March 31, 2020 | March 31, 2019 | | :------------- | :------------- | :------------- | | Common equity tier 1 capital ratio | 11.90% | 12.70% | | Tier 1 risk-based capital ratio | 11.90% | 12.70% | | Total risk-based capital ratio | 13.12% | 13.72% | | Leverage ratio | 8.81% | 9.65% | | Return on average assets | (0.05)% | 1.02% | | Return on average equity | (0.51)% | 10.48% | Off-balance Sheet Arrangements - The Company's main off-balance sheet arrangements include loan commitments, commercial and standby letters of credit, futures contracts, and forward exchange contracts, totaling $10.8 billion at March 31, 2020[293][317] Critical Accounting Policies and Estimates - The preparation of financial statements requires management to make estimates and assumptions, including those related to allowance for credit losses, investments, and other contingencies, which are evaluated on an ongoing basis[294][295] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the Company's exposure to market risks, primarily interest rate risk, and its management strategies, including an analysis of net interest income sensitivity to interest rate changes, information on the trading account, and discussions on credit, liquidity, and operational risks - The Company manages interest rate risk through asset and liability management, utilizing Net Interest Income Simulation Analysis, Net Portfolio Value models, and gap analysis, with limited use of hedges[299] - The Company is positioned slightly asset sensitive to interest rate changes, with net interest income predicted to increase in rising rate scenarios and decrease in falling rate scenarios[304] - Nonperforming loans increased $33.8 million to $97.0 million at March 31, 2020, primarily due to two credits in the oil and gas and agricultural industries[309] Risk Management - Market risk is the risk of economic loss from adverse changes in financial instrument fair values due to factors like interest rates, foreign exchange, commodity, or equity prices[297] - The Company's primary market risk is from interest rate changes on assets held for purposes other than trading, with trading instruments having an immaterial impact[298][306] Interest Rate Risk | Hypothetical Change in Interest Rate – Rate Ramp (Percentage change) | Year One (March 31, 2020) | Year Two (March 31, 2020) | | :----------------------------------------------------------------- | :------------------------ | :------------------------ | | 300 basis points | 3.3% | 15.2% | | 200 basis points | 2.1% | 10.6% | | 100 basis points | 1.3% | 5.8% | | (100) basis points | (3.5)% | (8.5)% | | Hypothetical Change in Interest Rate – Rate Shock (Percentage change) | Year One (March 31, 2020) | Year Two (March 31, 2020) | | :------------------------------------------------------------------ | :------------------------ | :------------------------ | | 300 basis points | 8.1% | 18.0% | | 200 basis points | 5.5% | 12.7% | | 100 basis points | 2.7% | 6.7% | | (100) basis points | (6.4)% | (8.9)% | Trading Account - The trading account balance was $61.2 million at March 31, 2020, with securities sold not yet purchased totaling $17.6 million, classified within Other liabilities[305] - The Company manages price volatility risks in its trading account using a value-at-risk methodology and offsets risk with financial instruments like exchange-traded financial futures and short sales[305] Other Market Risk - The Company has minimal foreign currency risk due to its use of foreign exchange contracts[307] Credit Risk Management - Credit risk is managed through a centralized credit administration function and an independent internal loan review staff, ensuring consistent application of loan policy and credit quality monitoring[308] | Loan Quality (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :---------------- | | Nonaccrual loans | $83,097 | $36,909 | | Restructured loans on nonaccrual | $13,932 | $19,438 | | Total nonperforming loans | $97,029 | $56,347 | | Total nonperforming assets | $99,912 | $59,282 | | Loans past due 90 days or more | $2,211 | $2,069 | | Allowance for credit losses on loans | $187,911 | $101,788 | - Nonperforming loans as a percent of loans increased to 0.70% at March 31, 2020, from 0.42% at December 31, 2019[314] Liquidity Risk - The Company's primary liquidity sources are asset maturities and sales, including $7.6 billion of high-quality AFS securities at March 31, 2020, supplemented by federal funds market activity and core deposits[315] - At March 31, 2020, $6.0 billion (78.5%) of AFS securities were pledged as collateral, impacting liquidity by restricting their disposal[316] - The Company has access to $1.3 billion in borrowing capacity through FHLB advances, with no outstanding advances at March 31, 2020[321] Operational Risk - Operational risk encompasses losses from internal operations or third parties, including fraud, unauthorized transactions, processing errors, control breaches, and service interruptions[322] - Management maintains internal controls to ensure proper transaction authorization, asset safeguarding, and data reliability, continuously monitoring and improving systems to mitigate operational risk[323][324] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes to internal control over financial reporting during the first quarter of 2020 - The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020, ensuring timely and accurate SEC filings and information communication[327] - There were no material changes in the Company's internal control over financial reporting during Q1 2020[328] PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in various legal proceedings in the normal course of business, and management, in consultation with legal counsel, believes these lawsuits are not expected to have a materially adverse effect on the Company's financial position, results of operations, or cash flows - Management believes that current legal proceedings are not expected to have a materially adverse effect on the Company's financial position, results of operations, or cash flows[330] ITEM 1A. RISK FACTORS This section highlights material changes to the Company's risk factors, primarily focusing on the significant adverse impacts of the COVID-19 pandemic on its business, financial position, and prospects, and also addresses the increased volatility in credit loss provisions due to the CECL accounting standard, especially in light of economic forecasts related to COVID-19 - The COVID-19 pandemic is adversely affecting the Company and its stakeholders, with potential for significant impacts on capital, liquidity, business, and results of operations, depending on the pandemic's duration, governmental responses, and effects on customers and markets[332][333][334] - Due to CECL, the Company's financial results may be negatively affected by forecasted weak economic conditions, leading to increased volatility in future provisions for credit losses, as evidenced by significant provision expense in Q1 2020[334][335] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the Company's common stock repurchases during Q1 2020 under publicly announced plans, where the Company repurchased over 1 million shares, including through an accelerated share repurchase agreement, but is not currently engaging in further repurchases outside of the ASR settlement | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------- | :------------------------------- | :--------------------------- | | January 1 - January 31, 2020 | 14,012 | $65.80 | | February 1 - February 29, 2020 | 167,389 | $64.94 | | March 1 - March 31, 2020 | 838,964 | $51.37 | | Total | 1,020,365 | $53.79 | - The Company repurchased 1,020,365 shares of common stock in Q1 2020, including 537,182 shares through an accelerated share repurchase agreement (ASR)[284][338] - The Company is not currently engaging in repurchases, other than in connection with the settlement of the ASR, but may resume repurchases in the future[284][338] ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities reported for the period ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the Company ITEM 5. OTHER INFORMATION No other information was reported for this item ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, certification statements, and XBRL-related files - Exhibits include Restated Articles of Incorporation, Bylaws, Performance Share Unit Award Agreement, CEO and CFO Certifications (Sections 302 and 906 of Sarbanes-Oxley Act), and various Inline XBRL Taxonomy Extension Documents[344] SIGNATURES