NOTE 2: ACQUISITIONS (Subsequent Event)
Landmark Community Bank
On June 4, 2021, the Company and the Bank entered into an Agreement and Plan of Merger (“Landmark Agreement”) with Landmark Community Bank (“Landmark”), headquartered in Collierville, Tennessee. The merger was completed on October 8, 2021, at which time Landmark was merged with and into the Bank, with the Bank continuing as the surviving entity. Pursuant to the terms of the Landmark Agreement, holders of Landmark’s common stock and common stock equivalents received, in the aggregate, 4,499,872 shares of the Company’s common stock and $6,451,727.43 in cash.
Prior to the acquisition, Landmark conducted banking business from 8 branches located in the Memphis and Nashville, Tennessee, metropolitan areas. As of September 30, 2021, Landmark had approximately $978.8 million in assets, $784.4 million in loans and $813.3 million in deposits.
The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the merger. Due to the recent closing, management remains in the early stages of reviewing the estimated fair values and evaluating the assumed tax positions of this merger. The Company expects to finalize its analysis of the acquired assets and assumed liabilities in this transaction within one year of the merger.
Triumph Bancshares, Inc.
On June 4, 2021, the Company entered into an Agreement and Plan of Merger (“Triumph Agreement”) with Triumph Bancshares, Inc. (“Triumph”), the parent company of Triumph Bank, headquartered in Memphis, Tennessee. The merger was completed on October 8, 2021, at which time Triumph was merged with and into the Company, with the Company continuing as the surviving corporation. Pursuant to the terms of the Triumph Agreement, holders of Triumph’s common stock and common stock equivalents received, in the aggregate, 4,164,712 shares of the Company’s common stock and $1,693,402.93 in cash.
Prior to the acquisition, Triumph conducted banking business from 6 branches located in the Memphis and Nashville, Tennessee, metropolitan areas. As of September 30, 2021, Triumph had approximately $855.3 million in assets, $708.0 million in loans and $724.0 million in deposits.
The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the merger. Due to the recent closing, management remains in the early stages of reviewing the estimated fair values and evaluating the assumed tax positions of this merger. The Company expects to finalize its analysis of the acquired assets and assumed liabilities in this transaction within one year of the merger.
NOTE 3: INVESTMENT SECURITIES
Held-to-maturity securities (“HTM”), which include any security for which the Company has both the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the security’s estimated life. Prepayments are anticipated for mortgage-backed and SBA securities. Premiums on callable securities are amortized to their earliest call date.
Available-for-sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders’ equity, further discussed below. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the estimated life of the security. Prepayments are anticipated for mortgage-backed and SBA securities. Premiums on callable securities are amortized to their earliest call date.
During the third quarter of 2021, the Company transferred, at fair value, $500.8 million of securities from the available-for-sale portfolio to the held-to-maturity portfolio. The related net unrealized gains of $1.1 million remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities. No gains or losses on these securities were recognized at the time of transfer.
The amortized cost, fair value and allowance for credit losses of investment securities that are classified as HTM are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Amortized Cost
|
|
Allowance
for Credit Losses
|
|
Net Carrying Amount
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
(Losses)
|
|
Estimated Fair
Value
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
232,549
|
|
|
$
|
—
|
|
|
$
|
232,549
|
|
|
$
|
—
|
|
|
$
|
(5,179)
|
|
|
$
|
227,370
|
|
Mortgage-backed securities
|
57,930
|
|
|
—
|
|
|
57,930
|
|
|
417
|
|
|
(1,024)
|
|
|
57,323
|
|
State and political subdivisions
|
1,210,287
|
|
|
(1,196)
|
|
|
1,209,091
|
|
|
2,206
|
|
|
(24,962)
|
|
|
1,186,335
|
|
Other securities
|
17,310
|
|
|
(83)
|
|
|
17,227
|
|
|
—
|
|
|
(339)
|
|
|
16,888
|
|
Total HTM
|
$
|
1,518,076
|
|
|
$
|
(1,279)
|
|
|
$
|
1,516,797
|
|
|
$
|
2,623
|
|
|
$
|
(31,504)
|
|
|
$
|
1,487,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
|
22,354
|
|
|
$
|
—
|
|
|
$
|
22,354
|
|
|
$
|
683
|
|
|
$
|
—
|
|
|
$
|
23,037
|
|
State and political subdivisions
|
312,416
|
|
|
(2,307)
|
|
|
310,109
|
|
|
8,148
|
|
|
(30)
|
|
|
318,227
|
|
Other securities
|
1,176
|
|
|
(608)
|
|
|
568
|
|
|
93
|
|
|
—
|
|
|
661
|
|
Total HTM
|
$
|
335,946
|
|
|
$
|
(2,915)
|
|
|
$
|
333,031
|
|
|
$
|
8,924
|
|
|
$
|
(30)
|
|
|
$
|
341,925
|
|
Mortgage-backed securities (“MBS”) are commercial MBS, secured by commercial properties, and residential MBS, generally secured by single-family residential properties. As of September 30, 2021, HTM MBS consists of $5.4 million and $52.5 million of commercial MBS and residential MBS, respectively. As of December 31, 2020, HTM MBS consists of $7.7 million and $14.7 million of commercial MBS and residential MBS, respectively.
The amortized cost, fair value and allowance for credit losses of investment securities that are classified as AFS are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Amortized
Cost
|
|
Allowance
for Credit Losses
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
(Losses)
|
|
Estimated Fair
Value
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
300
|
|
U.S. Government agencies
|
361,452
|
|
|
—
|
|
|
635
|
|
|
(7,705)
|
|
|
354,382
|
|
Mortgage-backed securities
|
4,434,981
|
|
|
—
|
|
|
14,741
|
|
|
(28,102)
|
|
|
4,421,620
|
|
State and political subdivisions
|
1,574,674
|
|
|
—
|
|
|
17,877
|
|
|
(17,343)
|
|
|
1,575,208
|
|
Other securities
|
467,336
|
|
|
—
|
|
|
7,328
|
|
|
(3,971)
|
|
|
470,693
|
|
Total AFS
|
$
|
6,838,743
|
|
|
$
|
—
|
|
|
$
|
40,581
|
|
|
$
|
(57,121)
|
|
|
$
|
6,822,203
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
477,693
|
|
|
$
|
—
|
|
|
$
|
844
|
|
|
$
|
(1,300)
|
|
|
$
|
477,237
|
|
Mortgage-backed securities
|
1,374,769
|
|
|
—
|
|
|
21,261
|
|
|
(1,094)
|
|
|
1,394,936
|
|
State and political subdivisions
|
1,416,136
|
|
|
(217)
|
|
|
55,111
|
|
|
(307)
|
|
|
1,470,723
|
|
Other securities
|
128,445
|
|
|
(95)
|
|
|
2,447
|
|
|
(95)
|
|
|
130,702
|
|
Total AFS
|
$
|
3,397,043
|
|
|
$
|
(312)
|
|
|
$
|
79,663
|
|
|
$
|
(2,796)
|
|
|
$
|
3,473,598
|
|
As of September 30, 2021, AFS MBS consists of $1.56 billion and $2.86 billion of commercial MBS and residential MBS, respectively. As of December 31, 2020, AFS MBS consists of $406.1 million and $988.8 million of commercial MBS and residential MBS, respectively.
Accrued interest receivable on HTM and AFS securities at September 30, 2021 was $8.3 million and $20.9 million, respectively, and is included in interest receivable on the consolidated balance sheets. The Company has made the election to exclude all accrued interest receivable from securities from the estimate of credit losses.
The following table summarizes the Company’s AFS investments in an unrealized loss position for which an allowance for credit loss has not been recorded as of September 30, 2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
(In thousands)
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Losses
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
190,275
|
|
|
$
|
(3,759)
|
|
|
$
|
111,662
|
|
|
$
|
(3,946)
|
|
|
$
|
301,937
|
|
|
$
|
(7,705)
|
|
Mortgage-backed securities
|
2,342,244
|
|
|
(27,380)
|
|
|
46,253
|
|
|
(722)
|
|
|
2,388,497
|
|
|
(28,102)
|
|
State and political subdivisions
|
969,120
|
|
|
(16,056)
|
|
|
23,372
|
|
|
(1,287)
|
|
|
992,492
|
|
|
(17,343)
|
|
Other securities
|
157,974
|
|
|
(3,971)
|
|
|
—
|
|
|
—
|
|
|
157,974
|
|
|
(3,971)
|
|
Total AFS
|
$
|
3,659,613
|
|
|
$
|
(51,166)
|
|
|
$
|
181,287
|
|
|
$
|
(5,955)
|
|
|
$
|
3,840,900
|
|
|
$
|
(57,121)
|
|
As of September 30, 2021, the Company’s investment portfolio included $6.8 billion of AFS securities, of which $3.8 billion, or 56.3%, were in an unrealized loss position that were not deemed to have credit losses. A portion of the unrealized losses were related to the Company’s MBS, which are issued and guaranteed by U.S. government-sponsored entities and agencies, and the Company’s state and political subdivision securities, specifically investments in insured fixed rate municipal bonds for which the issuers continue to make timely principal and interest payments under the contractual terms of the securities.
Furthermore, the decline in fair value for each of the above AFS securities is attributable to the rates for those investments yielding less than current market rates. Management does not believe any of the securities are impaired due to reasons of credit quality. Management believes the declines in fair value for the securities are temporary. Management does not have the intent to
sell the securities, and management believes it is more likely than not the Company will not have to sell the securities before recovery of their amortized cost basis.
Allowance for Credit Losses
All MBS held by the Company are issued by U.S. government-sponsored entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, highly rated by major rating agencies and have a long history of no credit losses. Accordingly, no allowance for credit losses has been recorded for these securities.
Regarding securities issued by state and political subdivisions and other HTM securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal forecasts, and (v) whether or not such securities provide insurance or other credit enhancement or are pre-refunded by the issuers.
The following table details activity in the allowance for credit losses by investment security type for the three and nine months ended September 30, 2021 on the Company’s HTM and AFS securities portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
State and Political Subdivisions
|
|
Other
Securities
|
|
Total
|
Three Months Ended September 30, 2021
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
Beginning balance, July 1, 2021
|
$
|
871
|
|
|
$
|
261
|
|
|
$
|
1,132
|
|
Provision for credit loss expense
|
325
|
|
|
(325)
|
|
|
—
|
|
Recoveries
|
—
|
|
|
147
|
|
|
147
|
|
Ending balance, September 30, 2021
|
$
|
1,196
|
|
|
$
|
83
|
|
|
$
|
1,279
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
Beginning balance, July 1, 2021
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net decrease in allowance on previously impaired securities
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance, September 30, 2021
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
Beginning balance, January 1, 2021
|
$
|
2,307
|
|
|
$
|
608
|
|
|
$
|
2,915
|
|
Provision for credit loss expense
|
(1,111)
|
|
|
(72)
|
|
|
(1,183)
|
|
Securities charged-off
|
—
|
|
|
(600)
|
|
|
(600)
|
|
Recoveries
|
—
|
|
|
147
|
|
|
147
|
|
Ending balance, September 30, 2021
|
$
|
1,196
|
|
|
$
|
83
|
|
|
$
|
1,279
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
Beginning balance, January 1, 2021
|
$
|
217
|
|
|
$
|
95
|
|
|
$
|
312
|
|
Reduction due to sales
|
—
|
|
|
(11)
|
|
|
(11)
|
|
Net decrease in allowance on previously impaired securities
|
(217)
|
|
|
(84)
|
|
|
(301)
|
|
Ending balance, September 30, 2021
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Activity in the allowance for credit losses by investment security type for the three and nine months ended September 30, 2020 on the Company’s HTM and AFS securities portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
State and Political Subdivisions
|
|
Other
Securities
|
|
Total
|
Three Months Ended September 30, 2020
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
Beginning balance, July 1, 2020
|
$
|
95
|
|
|
$
|
212
|
|
|
$
|
307
|
|
Provision for credit loss expense
|
(22)
|
|
|
88
|
|
|
66
|
|
Ending balance, September 30, 2020
|
$
|
73
|
|
|
$
|
300
|
|
|
$
|
373
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
Beginning balance, July 1, 2020
|
$
|
371
|
|
|
$
|
238
|
|
|
$
|
609
|
|
Credit losses on securities not previously recorded
|
1,137
|
|
|
23
|
|
|
1,160
|
|
Reduction due to sales
|
$
|
(294)
|
|
|
$
|
—
|
|
|
$
|
(294)
|
|
Net decrease in allowance on previously impaired securities
|
(66)
|
|
|
(201)
|
|
|
(267)
|
|
Ending balance, September 30, 2020
|
$
|
1,148
|
|
|
$
|
60
|
|
|
$
|
1,208
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
Beginning balance, January 1, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Impact of ASU 2016-13 adoption
|
58
|
|
|
311
|
|
|
369
|
|
Provision for credit loss expense
|
15
|
|
|
(11)
|
|
|
4
|
|
Ending balance, September 30, 2020
|
$
|
73
|
|
|
$
|
300
|
|
|
$
|
373
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
Beginning balance, January 1, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Impact of ASU 2016-13 adoption
|
373
|
|
|
—
|
|
|
373
|
|
Credit losses on securities not previously recorded
|
1,130
|
|
|
78
|
|
|
1,208
|
|
Reduction due to sales
|
(244)
|
|
|
—
|
|
|
(244)
|
|
Net increase in allowance on previously impaired securities
|
(111)
|
|
|
(18)
|
|
|
(129)
|
|
Ending balance, September 30, 2020
|
$
|
1,148
|
|
|
$
|
60
|
|
|
$
|
1,208
|
|
Based upon the Company’s analysis of the underlying risk characteristics of its AFS portfolio, including credit ratings and other qualitative factors, as previously discussed, there was no provision for credit losses related to AFS securities recorded in the third quarter of 2021 and it was reduced by $312,000 during the nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, the provision for credit losses was $599,000 and $835,000, respectively, related to AFS securities.
The following table summarizes bond ratings for the Company’s HTM portfolio, based upon amortized cost, issued by state and political subdivisions and other securities as of September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and Political Subdivisions
|
|
|
(In thousands)
|
Not Guaranteed or Pre-Refunded
|
|
Other Credit Enhancement or Insurance
|
|
Pre-Refunded
|
|
Total
|
|
Other Securities
|
Aaa/AAA
|
$
|
130,326
|
|
|
$
|
114,831
|
|
|
$
|
—
|
|
|
$
|
245,157
|
|
|
$
|
—
|
|
Aa/AA
|
495,498
|
|
|
308,656
|
|
|
—
|
|
|
804,154
|
|
|
—
|
|
A
|
45,229
|
|
|
82,432
|
|
|
—
|
|
|
127,661
|
|
|
—
|
|
Baa/BBB
|
1,049
|
|
|
10,302
|
|
|
—
|
|
|
11,351
|
|
|
—
|
|
Not Rated
|
6,322
|
|
|
15,642
|
|
|
—
|
|
|
21,964
|
|
|
17,310
|
|
Total
|
$
|
678,424
|
|
|
$
|
531,863
|
|
|
$
|
—
|
|
|
$
|
1,210,287
|
|
|
$
|
17,310
|
|
Historical loss rates associated with securities having similar grades as those in the Company’s portfolio have generally not been significant. Pre-refunded securities, if any, have been defeased by the issuer and are fully secured by cash and/or U.S. Treasury
securities held in escrow for payment to holders when the underlying call dates of the securities are reached. Securities with other credit enhancement or insurance continue to make timely principal and interest payments under the contractual terms of the securities. Accordingly, no allowance for credit losses has been recorded for these securities as there is no current expectation of credit losses related to these securities.
Income earned on securities for the three and nine months ended September 30, 2021 and 2020, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Taxable:
|
|
|
|
|
|
|
|
Held-to-maturity
|
$
|
1,127
|
|
|
$
|
256
|
|
|
$
|
2,477
|
|
|
$
|
715
|
|
Available-for-sale
|
15,949
|
|
|
6,937
|
|
|
39,313
|
|
|
26,604
|
|
|
|
|
|
|
|
|
|
Non-taxable:
|
|
|
|
|
|
|
|
Held-to-maturity
|
4,853
|
|
|
65
|
|
|
9,887
|
|
|
205
|
|
Available-for-sale
|
8,788
|
|
|
7,652
|
|
|
27,741
|
|
|
19,802
|
|
Total
|
$
|
30,717
|
|
|
$
|
14,910
|
|
|
$
|
79,418
|
|
|
$
|
47,326
|
|
The amortized cost and estimated fair value by maturity of securities as of September 30, 2021 are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
Available-for-Sale
|
(In thousands)
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
One year or less
|
$
|
5,644
|
|
|
$
|
5,678
|
|
|
$
|
8,385
|
|
|
$
|
8,423
|
|
After one through five years
|
7,676
|
|
|
7,993
|
|
|
53,515
|
|
|
54,008
|
|
After five through ten years
|
27,094
|
|
|
26,019
|
|
|
487,966
|
|
|
492,654
|
|
After ten years
|
1,419,732
|
|
|
1,390,903
|
|
|
1,853,165
|
|
|
1,844,768
|
|
Securities not due on a single maturity date
|
57,930
|
|
|
57,323
|
|
|
4,434,981
|
|
|
4,421,620
|
|
Other securities (no maturity)
|
—
|
|
|
—
|
|
|
731
|
|
|
730
|
|
Total
|
$
|
1,518,076
|
|
|
$
|
1,487,916
|
|
|
$
|
6,838,743
|
|
|
$
|
6,822,203
|
|
The carrying value, which approximates the fair value, of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $3.69 billion at September 30, 2021 and $2.01 billion at December 31, 2020.
There were approximately $5.3 million of gross realized gains and $24,500 of gross realized losses from the sale of securities during the three months ended September 30, 2021, and approximately $15.9 million of gross realized gains and $63,600 of gross realized losses from the sale of securities during the nine months ended September 30, 2021. The Company sold approximately $342.6 million of investment securities during the nine months ended September 30, 2021. There were approximately $22.3 of gross realized gains and $1,700 of gross realized losses from the sale of securities during the three months ended September 30, 2020, and approximately $54.8 million of gross realized gains and $4,400 of gross realized losses from the sale of securities during the nine months ended September 30, 2020. During the first half of 2020, the Company sold approximately $1.7 billion of investment securities to create additional liquidity. The income tax expense/benefit related to security gains/losses was 26.135% of the gross amounts in 2021 and 2020.
The Company has entered into various fair value hedging transactions to mitigate the impact of changing interest rates on the fair value of AFS securities. See Note 23: Derivative Instruments for disclosure of the gains and losses recognized on derivative instruments and the cumulative fair value hedging adjustments to the carrying amount of the hedged securities.
NOTE 4: OTHER LIABILITIES HELD FOR SALE
Illinois Branch Sale
On November 30, 2020, the Company’s subsidiary bank, Simmons Bank, entered into a Branch Purchase and Assumption Agreement (the “Citizens Equity Agreement”) with Citizens Equity First Credit Union (“CEFCU”).
On March 12, 2021, CEFCU completed its purchase of certain assets and assumption of certain liabilities (“Illinois Branch Sale”) associated with four Simmons Bank locations in the Metro East area of Southern Illinois, near St. Louis (collectively, the “Illinois Branches”). Pursuant to the terms of the Citizens Equity Agreement, CEFCU assumed certain deposit liabilities and acquired certain loans, as well as cash, personal property and other fixed assets associated with the Illinois Branches. The loan and deposit balances of the Illinois Branches were $354,000 and $137.9 million, respectively.
The Company recognized a gain on sale of $5.3 million related to the Illinois Branches in the nine month period ended September 30, 2021.
As of September 30, 2021, there were no outstanding other liabilities held for sale.
NOTE 5: LOANS AND ALLOWANCE FOR CREDIT LOSSES
At September 30, 2021, the Company’s loan portfolio was $10.83 billion, compared to $12.90 billion at December 31, 2020. The various categories of loans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2021
|
|
2020
|
Consumer:
|
|
|
|
Credit cards
|
$
|
175,884
|
|
|
$
|
188,845
|
|
Other consumer
|
182,492
|
|
|
202,379
|
|
Total consumer
|
358,376
|
|
|
391,224
|
|
Real Estate:
|
|
|
|
Construction and development
|
1,229,740
|
|
|
1,596,255
|
|
Single family residential
|
1,540,701
|
|
|
1,880,673
|
|
Other commercial
|
5,308,902
|
|
|
5,746,863
|
|
Total real estate
|
8,079,343
|
|
|
9,223,791
|
|
Commercial:
|
|
|
|
Commercial
|
1,821,905
|
|
|
2,574,386
|
|
Agricultural
|
216,735
|
|
|
175,905
|
|
Total commercial
|
2,038,640
|
|
|
2,750,291
|
|
Other
|
348,868
|
|
|
535,591
|
|
Total loans
|
$
|
10,825,227
|
|
|
$
|
12,900,897
|
|
The above table presents total loans at amortized cost. The difference between amortized cost and unpaid principal balance is primarily premiums and discounts associated with acquisition date fair value adjustments on acquired loans as well as net deferred origination fees totaling $29.4 million and $57.3 million at September 30, 2021 and December 31, 2020, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $39.2 million and $54.4 million at September 30, 2021 and December 31, 2020, respectively, and is included in interest receivable on the consolidated balance sheets.
Loan Origination/Risk Management – The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; and providing an adequate allowance for credit losses by regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry. The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio if weaknesses develop in either the
economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default.
Consumer – The consumer loan portfolio consists of credit card loans and other consumer loans. Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to economic downturns that result in increased unemployment. Other consumer loans include direct and indirect installment loans and account overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
Real estate – The real estate loan portfolio consists of construction and development loans (“C&D”), single family residential loans and commercial loans. C&D and commercial real estate (“CRE”) loans can be particularly sensitive to valuation of real estate. CRE cycles are inevitable. The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties. While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market. CRE cycles tend to be local in nature and longer than other credit cycles. Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult. Additionally, submarkets within CRE – such as office, industrial, apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and duration. The Company monitors these loans closely.
Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchases or other expansion projects. Paycheck Protection Program (“PPP”) loans are also included in the commercial loan portfolio. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations. The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates. Term loans are generally set up with one or three year balloons, and the Company has instituted a pricing mechanism for commercial loans. It is standard practice to require personal guaranties on commercial loans for closely-held or limited liability entities.
Paycheck Protection Program Loans – The Company originated loans pursuant to multiple PPP appropriations of the CARES Act which provided 100% federally guaranteed loans for small businesses to cover up to 24 weeks of payroll costs and assistance with mortgage interest, rent and utilities. Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions. PPP loans have a zero percent risk-weight for regulatory capital ratios. As of September 30, 2021 and December 31, 2020, the total outstanding balance of PPP loans was $212.1 million and $904.7 million, respectively.
Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The amortized cost basis of nonaccrual loans segregated by category of loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2021
|
|
2020
|
Consumer:
|
|
|
|
Credit cards
|
$
|
390
|
|
|
$
|
301
|
|
Other consumer
|
391
|
|
|
1,219
|
|
Total consumer
|
781
|
|
|
1,520
|
|
Real estate:
|
|
|
|
Construction and development
|
2,330
|
|
|
3,625
|
|
Single family residential
|
21,068
|
|
|
28,062
|
|
Other commercial
|
17,838
|
|
|
24,155
|
|
Total real estate
|
41,236
|
|
|
55,842
|
|
Commercial:
|
|
|
|
Commercial
|
16,532
|
|
|
65,244
|
|
Agricultural
|
505
|
|
|
273
|
|
Total commercial
|
17,037
|
|
|
65,517
|
|
Total
|
$
|
59,054
|
|
|
$
|
122,879
|
|
As of September 30, 2021 and December 31, 2020, nonaccrual loans for which there was no related allowance for credit losses had an amortized cost of $20.2 million and $16.8 million, respectively. These loans are individually assessed and do not hold an allowance due to being adequately collateralized under the collateral-dependent valuation method.
An age analysis of the amortized cost basis of past due loans, including nonaccrual loans, segregated by class of loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross
30-89 Days
Past Due
|
|
90 Days
or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Total
Loans
|
|
90 Days
Past Due &
Accruing
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
751
|
|
|
$
|
253
|
|
|
$
|
1,004
|
|
|
$
|
174,880
|
|
|
$
|
175,884
|
|
|
$
|
154
|
|
Other consumer
|
925
|
|
|
90
|
|
|
1,015
|
|
|
181,477
|
|
|
182,492
|
|
|
1
|
|
Total consumer
|
1,676
|
|
|
343
|
|
|
2,019
|
|
|
356,357
|
|
|
358,376
|
|
|
155
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
2,854
|
|
|
605
|
|
|
3,459
|
|
|
1,226,281
|
|
|
1,229,740
|
|
|
5
|
|
Single family residential
|
6,546
|
|
|
6,154
|
|
|
12,700
|
|
|
1,528,001
|
|
|
1,540,701
|
|
|
75
|
|
Other commercial
|
2,293
|
|
|
13,620
|
|
|
15,913
|
|
|
5,292,989
|
|
|
5,308,902
|
|
|
—
|
|
Total real estate
|
11,693
|
|
|
20,379
|
|
|
32,072
|
|
|
8,047,271
|
|
|
8,079,343
|
|
|
80
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
2,130
|
|
|
6,639
|
|
|
8,769
|
|
|
1,813,136
|
|
|
1,821,905
|
|
|
99
|
|
Agricultural
|
140
|
|
|
459
|
|
|
599
|
|
|
216,136
|
|
|
216,735
|
|
|
—
|
|
Total commercial
|
2,270
|
|
|
7,098
|
|
|
9,368
|
|
|
2,029,272
|
|
|
2,038,640
|
|
|
99
|
|
Other
|
7
|
|
|
—
|
|
|
7
|
|
|
348,861
|
|
|
348,868
|
|
|
—
|
|
Total
|
$
|
15,646
|
|
|
$
|
27,820
|
|
|
$
|
43,466
|
|
|
$
|
10,781,761
|
|
|
$
|
10,825,227
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Gross
30-89 Days
Past Due
|
|
90 Days
or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Total
Loans
|
|
90 Days
Past Due &
Accruing
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards
|
$
|
708
|
|
|
$
|
256
|
|
|
$
|
964
|
|
|
$
|
187,881
|
|
|
$
|
188,845
|
|
|
$
|
256
|
|
Other consumer
|
2,771
|
|
|
302
|
|
|
3,073
|
|
|
199,306
|
|
|
202,379
|
|
|
13
|
|
Total consumer
|
3,479
|
|
|
558
|
|
|
4,037
|
|
|
387,187
|
|
|
391,224
|
|
|
269
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
1,375
|
|
|
3,089
|
|
|
4,464
|
|
|
1,591,791
|
|
|
1,596,255
|
|
|
—
|
|
Single family residential
|
23,726
|
|
|
14,339
|
|
|
38,065
|
|
|
1,842,608
|
|
|
1,880,673
|
|
|
253
|
|
Other commercial
|
2,660
|
|
|
9,586
|
|
|
12,246
|
|
|
5,734,617
|
|
|
5,746,863
|
|
|
—
|
|
Total real estate
|
27,761
|
|
|
27,014
|
|
|
54,775
|
|
|
9,169,016
|
|
|
9,223,791
|
|
|
253
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
7,514
|
|
|
7,429
|
|
|
14,943
|
|
|
2,559,443
|
|
|
2,574,386
|
|
|
56
|
|
Agricultural
|
226
|
|
|
187
|
|
|
413
|
|
|
175,492
|
|
|
175,905
|
|
|
—
|
|
Total commercial
|
7,740
|
|
|
7,616
|
|
|
15,356
|
|
|
2,734,935
|
|
|
2,750,291
|
|
|
56
|
|
Other
|
92
|
|
|
—
|
|
|
92
|
|
|
535,499
|
|
|
535,591
|
|
|
—
|
|
Total
|
$
|
39,072
|
|
|
$
|
35,188
|
|
|
$
|
74,260
|
|
|
$
|
12,826,637
|
|
|
$
|
12,900,897
|
|
|
$
|
578
|
|
When the Company restructures a loan to a borrower that is experiencing financial difficulty and grants a concession that it would not otherwise consider, a “troubled debt restructuring” (“TDR”) results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.
Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. The Company returns TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months.
The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. In March 2020, the federal financial institution regulatory agencies issued an interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and provided information regarding loan modifications. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. In response to the concerns related to the expiration of the applicable period for which the election to not apply the guidance on accounting for TDRs to loan modifications, the CARES Act was amended in late fourth quarter of 2020 to extend COVID-19 relief related to loan modifications to the earlier of (i) January 1, 2022 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. As of September 30, 2021, the Company had 35 COVID-19 loan modifications outstanding in the amount of $82.0 million. Deferred interest on these loan modifications will be collected at the end of the note or once regular payments are resumed.
TDRs are individually evaluated for expected credit losses. The Company assesses the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determines if a specific allowance for credit losses is needed.
The following table presents a summary of TDRs segregated by class of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing TDR Loans
|
|
Nonaccrual TDR Loans
|
|
Total TDR Loans
|
(Dollars in thousands)
|
Number
|
|
Balance
|
|
Number
|
|
Balance
|
|
Number
|
|
Balance
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Single-family residential
|
28
|
|
|
$
|
2,994
|
|
|
12
|
|
|
$
|
1,141
|
|
|
40
|
|
|
$
|
4,135
|
|
Other commercial
|
2
|
|
|
820
|
|
|
1
|
|
|
1
|
|
|
3
|
|
|
821
|
|
Total real estate
|
30
|
|
|
3,814
|
|
|
13
|
|
|
1,142
|
|
|
43
|
|
|
4,956
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
2
|
|
|
437
|
|
|
2
|
|
|
1,408
|
|
|
4
|
|
|
1,845
|
|
Total commercial
|
2
|
|
|
437
|
|
|
2
|
|
|
1,408
|
|
|
4
|
|
|
1,845
|
|
Total
|
32
|
|
|
$
|
4,251
|
|
|
15
|
|
|
$
|
2,550
|
|
|
47
|
|
|
$
|
6,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Single-family residential
|
28
|
|
|
$
|
2,463
|
|
|
18
|
|
|
$
|
2,736
|
|
|
46
|
|
|
$
|
5,199
|
|
Other commercial
|
1
|
|
|
49
|
|
|
1
|
|
|
12
|
|
|
2
|
|
|
61
|
|
Total real estate
|
29
|
|
|
2,512
|
|
|
19
|
|
|
2,748
|
|
|
48
|
|
|
5,260
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
3
|
|
|
626
|
|
|
3
|
|
|
1,627
|
|
|
6
|
|
|
2,253
|
|
Total commercial
|
3
|
|
|
626
|
|
|
3
|
|
|
1,627
|
|
|
6
|
|
|
2,253
|
|
Total
|
32
|
|
|
$
|
3,138
|
|
|
22
|
|
|
$
|
4,375
|
|
|
54
|
|
|
$
|
7,513
|
|
The following table presents loans that were restructured as TDRs during the nine month periods ended September 30, 2021 and 2020. There were no loans restructured as TDRs during the three month periods ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Number of loans
|
|
Balance Prior to TDR
|
|
Balance at September 30,
|
|
Change in Maturity Date
|
|
Change in Rate
|
|
Financial Impact on Date of Restructure
|
Nine Months Ended Sept 30, 2021
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial
|
1
|
|
|
$
|
784
|
|
|
$
|
778
|
|
|
$
|
—
|
|
|
$
|
778
|
|
|
$
|
—
|
|
Total real estate
|
1
|
|
|
$
|
784
|
|
|
$
|
778
|
|
|
$
|
—
|
|
|
$
|
778
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended Sept 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Single-family residential
|
5
|
|
|
$
|
1,948
|
|
|
$
|
1,896
|
|
|
$
|
1,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total real estate
|
5
|
|
|
$
|
1,948
|
|
|
$
|
1,896
|
|
|
$
|
1,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During the nine months ended September 30, 2021, the Company modified one loan with a recorded investment of $784,000 prior to modification which was deemed a TDR. The restructured loan was modified by deferring amortized principal payments and requiring interest only payments for a period of up to 12 months. A specific reserve of approximately $5,100 was recorded with respect to this TDR. Also, there was no immediate financial impact from the restructuring of this loan, as it was not considered necessary to charge-off interest or principal on the date of restructure.
During the nine months ended September 30, 2020, the Company modified five loans with a recorded investment of $1.9 million prior to modification which was deemed troubled debt restructuring. The restructured loan was modified by deferring amortized principal payments, changing the maturity date and requiring interest only payments for a period of up to 12 months. A specific
reserve of $16,600 was determined necessary for this loan. Also, there was no immediate financial impact from the restructuring of this loan, as it was not considered necessary to charge-off interest or principal on the date of restructure.
Additionally, there were no loans considered TDRs for which a payment default occurred during the nine months ended September 30, 2021. There was one commercial loan considered a TDR for which a payment default occurred during the nine months ended September 30, 2020. The Company defines a payment default as a payment received more than 90 days after its due date.
There were no TDRs with pre-modification loan balances for which Other Real Estate Owned (“OREO”) was received in full or partial satisfaction of the loans during the three and nine month periods ended September 30, 2021 or 2020. At September 30, 2021 and December 31, 2020, the Company had $2.9 million and $7.2 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At September 30, 2021 and December 31, 2020, the Company had $1.6 million and $3.2 million, respectively, of OREO secured by residential real estate properties.
Credit Quality Indicators – As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions of the Company’s local markets.
The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. A description of the general characteristics of the risk ratings is as follows:
•Pass (Excellent) – This category includes loans which are virtually free of credit risk. Borrowers in this category represent the highest credit quality and greatest financial strength.
•Pass (Good) - Loans under this category possess a nominal risk of default. This category includes borrowers with strong financial strength and superior financial ratios and trends. These loans are generally fully secured by cash or equivalents (other than those rated “excellent”).
•Pass (Acceptable – Average) - Loans in this category are considered to possess a normal level of risk. Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements. If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters.
•Pass (Monitor) - Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent “red flags”. These “red flags” require a higher level of supervision or monitoring than the normal “Pass” rated credit. The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a higher rating. These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability.
•Special Mention - A loan in this category has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention loans are not adversely classified (although they are “criticized”) and do not expose an institution to sufficient risk to warrant adverse classification. Borrowers may be experiencing adverse operating trends or an ill-proportioned balance sheet. Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.
•Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan.
•Doubtful - A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to
remain an operating entity. The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans. Loans classified as Doubtful are placed on nonaccrual status.
•Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future. Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Loans should be classified as Loss and charged-off in the period in which they become uncollectible.
The Company monitors credit quality in the consumer portfolio by delinquency status. The delinquency status of loans is updated daily. A description of the delinquency credit quality indicators is as follows:
•Current - Loans in this category are either current in payments or are under 30 days past due. These loans are considered to have a normal level of risk.
•30-89 Days Past Due - Loans in this category are between 30 and 89 days past due and are subject to the Company’s loss mitigation process. These loans are considered to have a moderate level of risk.
•90+ Days Past Due - Loans in this category are 90 days or more past due and are placed on nonaccrual status. These loans have been subject to the Company’s loss mitigation process and foreclosure and/or charge-off proceedings have commenced.
Effective April 2021, the Company implemented an expanded, dual risk rating scale that utilizes quantitative models and qualitative factors (“score cards”) to assist in determining the appropriate risk rating for its commercial loans. This dual risk rating methodology incorporates a “probability of default” analysis which utilizes quantified metrics such as loan terms and financial performance, as well as a “loss given default” analysis which utilizes collateral values and economics of the market, among other attributes. Model outputs are reviewed and analyzed to ensure the projected risk levels are commensurate with underwriting and credit leader expectations. The expanded risk rating scale includes Probability of Default levels of 1 – 16 and Loss Given Default levels of A – I. The expanded scale allows for more granular recognition of risk and diversification of grading among traditional Pass grades. Implementation of the expanded risk rating scale did not have a material impact on the results of the allowance for credit losses calculation.
The following table presents a summary of loans by credit quality indicator, as of September 30, 2021, segregated by class of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans Amortized Cost Basis by Origination Year
|
|
|
|
|
|
|
(In thousands)
|
2021 (YTD)
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016 and Prior
|
|
Lines of Credit (“LOC”) Amortized Cost Basis
|
|
LOC Converted to Term Loans Amortized Cost Basis
|
|
Total
|
Consumer - credit cards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
174,880
|
|
|
—
|
|
|
174,880
|
|
30-89 days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
751
|
|
|
—
|
|
|
751
|
|
90+ days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
253
|
|
|
—
|
|
|
253
|
|
Total consumer - credit cards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
175,884
|
|
|
—
|
|
|
175,884
|
|
Consumer - other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
105,415
|
|
|
26,334
|
|
|
15,158
|
|
|
8,396
|
|
|
7,051
|
|
|
5,138
|
|
|
13,985
|
|
|
—
|
|
|
181,477
|
|
30-89 days past due
|
197
|
|
|
148
|
|
|
113
|
|
|
142
|
|
|
184
|
|
|
129
|
|
|
12
|
|
|
—
|
|
|
925
|
|
90+ days past due
|
—
|
|
|
14
|
|
|
27
|
|
|
9
|
|
|
20
|
|
|
19
|
|
|
1
|
|
|
—
|
|
|
90
|
|
Total consumer - other
|
105,612
|
|
|
26,496
|
|
|
15,298
|
|
|
8,547
|
|
|
7,255
|
|
|
5,286
|
|
|
13,998
|
|
|
—
|
|
|
182,492
|
|
Real estate - C&D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
47,644
|
|
|
94,278
|
|
|
33,487
|
|
|
19,254
|
|
|
12,848
|
|
|
10,030
|
|
|
982,776
|
|
|
21,429
|
|
|
1,221,746
|
|
Special mention
|
—
|
|
|
—
|
|
|
279
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
279
|
|
Substandard
|
1,801
|
|
|
83
|
|
|
146
|
|
|
57
|
|
|
328
|
|
|
674
|
|
|
2,673
|
|
|
1,953
|
|
|
7,715
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate - C&D
|
49,445
|
|
|
94,361
|
|
|
33,912
|
|
|
19,311
|
|
|
13,176
|
|
|
10,704
|
|
|
985,449
|
|
|
23,382
|
|
|
1,229,740
|
|
Real estate - SF residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
223,243
|
|
|
245,410
|
|
|
152,838
|
|
|
229,241
|
|
|
179,874
|
|
|
318,019
|
|
|
169,693
|
|
|
9,683
|
|
|
1,528,001
|
|
30-89 days past due
|
—
|
|
|
217
|
|
|
1,124
|
|
|
704
|
|
|
1,279
|
|
|
2,215
|
|
|
1,007
|
|
|
—
|
|
|
6,546
|
|
90+ days past due
|
67
|
|
|
380
|
|
|
595
|
|
|
1,141
|
|
|
1,528
|
|
|
1,785
|
|
|
586
|
|
|
72
|
|
|
6,154
|
|
Total real estate - SF residential
|
223,310
|
|
|
246,007
|
|
|
154,557
|
|
|
231,086
|
|
|
182,681
|
|
|
322,019
|
|
|
171,286
|
|
|
9,755
|
|
|
1,540,701
|
|
Real estate - other commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
712,198
|
|
|
825,416
|
|
|
361,642
|
|
|
305,381
|
|
|
484,230
|
|
|
549,452
|
|
|
1,410,186
|
|
|
217,398
|
|
|
4,865,903
|
|
Special mention
|
32,752
|
|
|
57,067
|
|
|
2,833
|
|
|
7,666
|
|
|
34,164
|
|
|
8,723
|
|
|
91,572
|
|
|
7,194
|
|
|
241,971
|
|
Substandard
|
33,001
|
|
|
25,289
|
|
|
6,172
|
|
|
9,800
|
|
|
33,130
|
|
|
22,630
|
|
|
50,335
|
|
|
20,671
|
|
|
201,028
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate - other commercial
|
777,951
|
|
|
907,772
|
|
|
370,647
|
|
|
322,847
|
|
|
551,524
|
|
|
580,805
|
|
|
1,552,093
|
|
|
245,263
|
|
|
5,308,902
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
419,739
|
|
|
212,161
|
|
|
91,328
|
|
|
66,078
|
|
|
30,687
|
|
|
44,298
|
|
|
852,103
|
|
|
46,186
|
|
|
1,762,580
|
|
Special mention
|
—
|
|
|
2,438
|
|
|
569
|
|
|
210
|
|
|
252
|
|
|
384
|
|
|
106
|
|
|
11,016
|
|
|
14,975
|
|
Substandard
|
3,726
|
|
|
18,934
|
|
|
2,016
|
|
|
1,512
|
|
|
688
|
|
|
978
|
|
|
10,048
|
|
|
6,448
|
|
|
44,350
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial
|
423,465
|
|
|
233,533
|
|
|
93,913
|
|
|
67,800
|
|
|
31,627
|
|
|
45,660
|
|
|
862,257
|
|
|
63,650
|
|
|
1,821,905
|
|
Commercial - agriculture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
27,000
|
|
|
22,841
|
|
|
11,726
|
|
|
4,599
|
|
|
2,688
|
|
|
655
|
|
|
144,909
|
|
|
1,447
|
|
|
215,865
|
|
Special mention
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Substandard
|
192
|
|
|
70
|
|
|
99
|
|
|
254
|
|
|
68
|
|
|
9
|
|
|
99
|
|
|
70
|
|
|
861
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial - agriculture
|
27,192
|
|
|
22,911
|
|
|
11,825
|
|
|
4,862
|
|
|
2,756
|
|
|
664
|
|
|
145,008
|
|
|
1,517
|
|
|
216,735
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
58
|
|
|
4,789
|
|
|
1,287
|
|
|
24,108
|
|
|
5,483
|
|
|
6,111
|
|
|
307,025
|
|
|
—
|
|
|
348,861
|
|
30-89 days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
90+ days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other
|
58
|
|
|
4,789
|
|
|
1,287
|
|
|
24,108
|
|
|
5,483
|
|
|
6,118
|
|
|
307,025
|
|
|
—
|
|
|
348,868
|
|
Total
|
$
|
1,607,033
|
|
|
$
|
1,535,869
|
|
|
$
|
681,439
|
|
|
$
|
678,561
|
|
|
$
|
794,502
|
|
|
$
|
971,256
|
|
|
$
|
4,213,000
|
|
|
$
|
343,567
|
|
|
$
|
10,825,227
|
|
The following table presents a summary of loans by credit quality indicator, as of December 31, 2020, segregated by class of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans Amortized Cost Basis by Origination Year
|
|
|
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 and Prior
|
|
Lines of Credit (“LOC”) Amortized Cost Basis
|
|
LOC Converted to Term Loans Amortized Cost Basis
|
|
Total
|
Consumer - credit cards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
187,881
|
|
|
—
|
|
|
187,881
|
|
30-89 days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
708
|
|
|
—
|
|
|
708
|
|
90+ days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
256
|
|
|
—
|
|
|
256
|
|
Total consumer - credit cards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
188,845
|
|
|
—
|
|
|
188,845
|
|
Consumer - other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
69,334
|
|
|
44,215
|
|
|
27,525
|
|
|
21,995
|
|
|
19,023
|
|
|
2,530
|
|
|
14,684
|
|
|
—
|
|
|
199,306
|
|
30-89 days past due
|
234
|
|
|
441
|
|
|
327
|
|
|
658
|
|
|
689
|
|
|
84
|
|
|
338
|
|
|
—
|
|
|
2,771
|
|
90+ days past due
|
79
|
|
|
58
|
|
|
25
|
|
|
80
|
|
|
40
|
|
|
12
|
|
|
8
|
|
|
—
|
|
|
302
|
|
Total consumer - other
|
69,647
|
|
|
44,714
|
|
|
27,877
|
|
|
22,733
|
|
|
19,752
|
|
|
2,626
|
|
|
15,030
|
|
|
—
|
|
|
202,379
|
|
Real estate - C&D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
165,990
|
|
|
35,989
|
|
|
31,279
|
|
|
15,960
|
|
|
9,233
|
|
|
4,807
|
|
|
1,272,870
|
|
|
23,251
|
|
|
1,559,379
|
|
Special mention
|
2,728
|
|
|
344
|
|
|
259
|
|
|
2,107
|
|
|
19
|
|
|
—
|
|
|
9,613
|
|
|
—
|
|
|
15,070
|
|
Substandard
|
294
|
|
|
2,069
|
|
|
404
|
|
|
449
|
|
|
342
|
|
|
320
|
|
|
17,914
|
|
|
14
|
|
|
21,806
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate - C&D
|
169,012
|
|
|
38,402
|
|
|
31,942
|
|
|
18,516
|
|
|
9,594
|
|
|
5,127
|
|
|
1,300,397
|
|
|
23,265
|
|
|
1,596,255
|
|
Real estate - SF residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
473,340
|
|
|
209,810
|
|
|
297,308
|
|
|
235,429
|
|
|
183,229
|
|
|
236,395
|
|
|
196,505
|
|
|
10,592
|
|
|
1,842,608
|
|
30-89 days past due
|
6,300
|
|
|
2,258
|
|
|
2,593
|
|
|
2,610
|
|
|
2,058
|
|
|
6,050
|
|
|
1,781
|
|
|
76
|
|
|
23,726
|
|
90+ days past due
|
557
|
|
|
1,853
|
|
|
2,735
|
|
|
2,582
|
|
|
832
|
|
|
3,852
|
|
|
1,928
|
|
|
—
|
|
|
14,339
|
|
Total real estate - SF residential
|
480,197
|
|
|
213,921
|
|
|
302,636
|
|
|
240,621
|
|
|
186,119
|
|
|
246,297
|
|
|
200,214
|
|
|
10,668
|
|
|
1,880,673
|
|
Real estate - other commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
1,563,245
|
|
|
525,750
|
|
|
375,303
|
|
|
518,534
|
|
|
372,679
|
|
|
284,098
|
|
|
1,445,428
|
|
|
181,949
|
|
|
5,266,986
|
|
Special mention
|
100,085
|
|
|
4,346
|
|
|
10,738
|
|
|
19,943
|
|
|
26,245
|
|
|
10,608
|
|
|
63,305
|
|
|
23,435
|
|
|
258,705
|
|
Substandard
|
66,737
|
|
|
9,418
|
|
|
24,380
|
|
|
14,067
|
|
|
3,744
|
|
|
11,158
|
|
|
52,182
|
|
|
39,486
|
|
|
221,172
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate - other commercial
|
1,730,067
|
|
|
539,514
|
|
|
410,421
|
|
|
552,544
|
|
|
402,668
|
|
|
305,864
|
|
|
1,560,915
|
|
|
244,870
|
|
|
5,746,863
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
1,168,085
|
|
|
154,740
|
|
|
110,383
|
|
|
65,757
|
|
|
35,198
|
|
|
45,568
|
|
|
803,751
|
|
|
56,648
|
|
|
2,440,130
|
|
Special mention
|
5,707
|
|
|
342
|
|
|
465
|
|
|
972
|
|
|
54
|
|
|
—
|
|
|
12,318
|
|
|
22,546
|
|
|
42,404
|
|
Substandard
|
23,227
|
|
|
4,495
|
|
|
1,586
|
|
|
730
|
|
|
276
|
|
|
334
|
|
|
53,682
|
|
|
7,522
|
|
|
91,852
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial
|
1,197,019
|
|
|
159,577
|
|
|
112,434
|
|
|
67,459
|
|
|
35,528
|
|
|
45,902
|
|
|
869,751
|
|
|
86,716
|
|
|
2,574,386
|
|
Commercial - agriculture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
36,128
|
|
|
19,144
|
|
|
10,014
|
|
|
4,671
|
|
|
1,916
|
|
|
340
|
|
|
101,238
|
|
|
1,560
|
|
|
175,011
|
|
Special mention
|
—
|
|
|
79
|
|
|
13
|
|
|
299
|
|
|
—
|
|
|
6
|
|
|
34
|
|
|
—
|
|
|
431
|
|
Substandard
|
86
|
|
|
101
|
|
|
64
|
|
|
47
|
|
|
12
|
|
|
10
|
|
|
68
|
|
|
75
|
|
|
463
|
|
Doubtful and loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total commercial - agriculture
|
36,214
|
|
|
19,324
|
|
|
10,091
|
|
|
5,017
|
|
|
1,928
|
|
|
356
|
|
|
101,340
|
|
|
1,635
|
|
|
175,905
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
125
|
|
|
4,260
|
|
|
27,256
|
|
|
6,489
|
|
|
2,628
|
|
|
6,065
|
|
|
488,676
|
|
|
—
|
|
|
535,499
|
|
30-89 days past due
|
59
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
92
|
|
90+ days past due
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other
|
184
|
|
|
4,260
|
|
|
27,256
|
|
|
6,489
|
|
|
2,661
|
|
|
6,065
|
|
|
488,676
|
|
|
—
|
|
|
535,591
|
|
Total
|
$
|
3,682,340
|
|
|
$
|
1,019,712
|
|
|
$
|
922,657
|
|
|
$
|
913,379
|
|
|
$
|
658,250
|
|
|
$
|
612,237
|
|
|
$
|
4,725,168
|
|
|
$
|
367,154
|
|
|
$
|
12,900,897
|
|
Allowance for Credit Losses
Allowance for Credit Losses – The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected loan losses and risks inherent in the loan portfolio. The Company’s allowance for credit loss methodology includes reserve factors calculated to estimate current expected credit losses to amortized cost balances over the remaining contractual life of the portfolio, adjusted for the effective interest rate used to discount prepayments, in accordance with ASC Topic 326-20, Financial Instruments - Credit Losses. Accordingly, the methodology is based on the Company’s reasonable and supportable economic forecasts, historical loss experience, and other qualitative adjustments.
Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated into homogeneous segments for assessment. Reserve factors are based on estimated probability of default and loss given default for each segment. The estimates are determined based on economic forecasts over the reasonable and supportable forecast period based on projected performance of economic variables that have a statistical relationship with the historical loss experience of the segments. For contractual periods that extend beyond the one-year forecast period, the estimates revert to average historical loss experiences over a one-year period on a straight-line basis.
The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. Qualitative adjustments include, but are not limited to:
•Changes in asset quality - Adjustments related to trending credit quality metrics including delinquency, non-performing loans, charge-offs, and risk ratings that may not be fully accounted for in the reserve factor.
•Changes in the nature and volume of the portfolio - Adjustments related to current changes in the loan portfolio that are not fully represented or accounted for in the reserve factors.
•Changes in lending and loan monitoring policies and procedures - Adjustments related to current changes in lending and loan monitoring procedures as well as review of specific internal policy compliance metrics.
•Changes in the experience, ability, and depth of lending management and other relevant staff - Adjustments to measure increasing or decreasing credit risk related to lending and loan monitoring management.
•Changes in the value of underlying collateral of collateralized loans - Adjustments related to improving or deterioration of the value of underlying collateral that are not fully captured in the reserve factors.
•Changes in and the existence and effect of any concentrations of credit - Adjustments related to credit risk of specific industries that are not fully captured in the reserve factors.
•Changes in regional and local economic and business conditions and developments - Adjustments related to expected and current economic conditions at a regional or local-level that are not fully captured within the Company’s reasonable and supportable forecast.
•Data imprecisions due to limited historical loss data - Adjustments related to limited historical loss data that is representative of the collective loan portfolio.
Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating or are classified as a troubled debt restructuring. The allowance for credit loss is determined based on several methods including estimating the fair value of the underlying collateral or the present value of expected cash flows.
For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan.
Loans for which the repayment is expected to be provided substantially through the operation or sale of collateral and where the borrower is experiencing financial difficulty had an amortized cost of $42.1 million as of September 30, 2021, as further detailed in the table below. The collateral securing these loans consist of commercial real estate properties, residential properties, other business assets, and secured energy production assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Real Estate Collateral
|
|
Energy
|
|
Other Collateral
|
|
Total
|
Construction and development
|
$
|
4,181
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,181
|
|
Single family residential
|
2,921
|
|
|
—
|
|
|
—
|
|
|
2,921
|
|
Other commercial real estate
|
31,672
|
|
|
—
|
|
|
—
|
|
|
31,672
|
|
Commercial
|
—
|
|
|
—
|
|
|
3,317
|
|
|
3,317
|
|
Total
|
$
|
38,774
|
|
|
$
|
—
|
|
|
$
|
3,317
|
|
|
$
|
42,091
|
|
The following table details activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Commercial
|
|
Real
Estate
|
|
Credit
Card
|
|
Other
Consumer
and Other
|
|
Total
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
Beginning balance, July 1, 2021
|
$
|
29,793
|
|
|
$
|
188,388
|
|
|
$
|
5,442
|
|
|
$
|
3,616
|
|
|
$
|
227,239
|
|
Provision for credit loss expense
|
(11,853)
|
|
|
(7,668)
|
|
|
(247)
|
|
|
(122)
|
|
|
(19,890)
|
|
Charge-offs
|
(932)
|
|
|
(5,941)
|
|
|
(711)
|
|
|
(463)
|
|
|
(8,047)
|
|
Recoveries
|
463
|
|
|
2,068
|
|
|
267
|
|
|
408
|
|
|
3,206
|
|
Net charge-offs
|
(469)
|
|
|
(3,873)
|
|
|
(444)
|
|
|
(55)
|
|
|
(4,841)
|
|
Ending balance, September 30, 2021
|
$
|
17,471
|
|
|
$
|
176,847
|
|
|
$
|
4,751
|
|
|
$
|
3,439
|
|
|
$
|
202,508
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2021
|
$
|
42,093
|
|
|
$
|
182,868
|
|
|
$
|
7,472
|
|
|
$
|
5,617
|
|
|
$
|
238,050
|
|
Provision for credit loss expense
|
(25,453)
|
|
|
(1,948)
|
|
|
(763)
|
|
|
(1,737)
|
|
|
(29,901)
|
|
Charge-offs
|
(2,099)
|
|
|
(8,068)
|
|
|
(2,759)
|
|
|
(1,577)
|
|
|
(14,503)
|
|
Recoveries
|
2,930
|
|
|
3,995
|
|
|
801
|
|
|
1,136
|
|
|
8,862
|
|
Net charge-offs
|
831
|
|
|
(4,073)
|
|
|
(1,958)
|
|
|
(441)
|
|
|
(5,641)
|
|
Ending balance, September 30, 2021
|
$
|
17,471
|
|
|
$
|
176,847
|
|
|
$
|
4,751
|
|
|
$
|
3,439
|
|
|
$
|
202,508
|
|
Activity in the allowance for credit losses for the three and nine months ended September 30, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Commercial
|
|
Real
Estate
|
|
Credit
Card
|
|
Other
Consumer
and Other
|
|
Total
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
Beginning balance, July 1, 2020
|
$
|
59,138
|
|
|
$
|
149,471
|
|
|
$
|
10,979
|
|
|
$
|
12,055
|
|
|
$
|
231,643
|
|
Provision for credit losses
|
(6,499)
|
|
|
33,479
|
|
|
(1,823)
|
|
|
(2,844)
|
|
|
22,313
|
|
Charge-offs
|
(4,327)
|
|
|
(1,153)
|
|
|
(832)
|
|
|
(1,091)
|
|
|
(7,403)
|
|
Recoveries
|
936
|
|
|
120
|
|
|
276
|
|
|
366
|
|
|
1,698
|
|
Net (charge-offs) recoveries
|
(3,391)
|
|
|
(1,033)
|
|
|
(556)
|
|
|
(725)
|
|
|
(5,705)
|
|
Ending balance, September 30, 2020
|
$
|
49,248
|
|
|
$
|
181,917
|
|
|
$
|
8,600
|
|
|
$
|
8,486
|
|
|
$
|
248,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2020 - prior to adoption of CECL
|
$
|
22,863
|
|
|
$
|
39,161
|
|
|
$
|
4,051
|
|
|
$
|
2,169
|
|
|
$
|
68,244
|
|
Impact of CECL adoption
|
22,733
|
|
|
114,314
|
|
|
2,232
|
|
|
12,098
|
|
|
151,377
|
|
Provision for credit loss expense
|
42,808
|
|
|
31,341
|
|
|
4,870
|
|
|
(3,829)
|
|
|
75,190
|
|
Charge-offs
|
(40,537)
|
|
|
(3,373)
|
|
|
(3,326)
|
|
|
(3,062)
|
|
|
(50,298)
|
|
Recoveries
|
1,381
|
|
|
474
|
|
|
773
|
|
|
1,110
|
|
|
3,738
|
|
Net charge-offs
|
(39,156)
|
|
|
(2,899)
|
|
|
(2,553)
|
|
|
(1,952)
|
|
|
(46,560)
|
|
Ending balance, September 30, 2020
|
$
|
49,248
|
|
|
$
|
181,917
|
|
|
$
|
8,600
|
|
|
$
|
8,486
|
|
|
$
|
248,251
|
|
As of September 30, 2021, the Company’s allowance for credit losses was considered sufficient based upon expected loan level cash flows that were supported by economic forecasts. Provision expense was recaptured for the three and nine months ended September 30, 2021 based upon improved asset credit quality metrics combined with improved Moody’s economic modeling scenarios.
The provision for credit losses for the nine months ended September 30, 2020 was primarily related to concern over the economic stresses related to COVID-19 as well as specific provisions for two energy credits that were previously identified as problem loans that were impacted by the sharp decline in commodity pricing. Four energy credits within the Commercial segment were charged off during the second quarter of 2020 for a total of $32.6 million.
Reserve for Unfunded Commitments
In addition to the allowance for credit losses, the Company has established a reserve for unfunded commitments, classified in other liabilities. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The reserve for unfunded commitments as of September 30, 2021 and December 31, 2020 was $22.4 million. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the allowance for credit losses. No adjustment was made to the reserve for unfunded commitments during the three and nine months ended September 30, 2021 as it was considered sufficient to cover any loss expectations. For the nine month period ended September 30, 2020, net adjustments to the reserve for unfunded commitments resulted in a benefit $8.0 million and was included in the provision for credit losses in the statement of income.
Provision for Credit Losses
Provision for credit losses is determined by the Company as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposure after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments.
The components of the provision for credit losses for the three and nine month periods ended September 30, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Provision for credit losses related to:
|
|
|
|
|
|
|
|
Loans
|
$
|
(19,890)
|
|
|
$
|
22,313
|
|
|
$
|
(29,901)
|
|
|
$
|
75,190
|
|
Unfunded commitments
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,000)
|
|
Securities - HTM
|
—
|
|
|
66
|
|
|
(1,183)
|
|
|
4
|
|
Securities - AFS
|
—
|
|
|
602
|
|
|
(312)
|
|
|
836
|
|
Total
|
$
|
(19,890)
|
|
|
$
|
22,981
|
|
|
$
|
(31,396)
|
|
|
$
|
68,030
|
|
NOTE 6: RIGHT-OF-USE LEASE ASSETS AND LEASE LIABILITIES
The Company accounts for its leases in accordance with ASC Topic 842, Leases, which requires recognition of most leases, including operating leases, with a term greater than 12 months on the balance sheet. At lease commencement, the lease contract is reviewed to determine whether the contract is a finance lease or an operating lease; a lease liability is recognized on a discounted basis, related to the Company’s obligation to make lease payments; and a right-of-use asset is also recognized related to the Company’s right to use, or control the use of, a specified asset for the lease term. The Company accounts for lease and non-lease components (such as taxes, insurance and common area maintenance costs) separately as such amounts are generally readily determinable under the lease contracts. Lease payments over the expected term are discounted using the Company’s Federal Home Loan Bank (“FHLB”) advance rates for borrowings of similar term. If it is reasonably certain that a renewal or termination option will be exercised, the effects of such options are included in the determination of the expected lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company’s leases are classified as operating leases with a term, including expected renewal or termination options, greater than one year, and are related to certain office facilities and office equipment. The following table presents information as of September 30, 2021 and December 31, 2020 related to the Company’s right-of-use lease assets, included in premises and equipment, and lease liabilities, included in accrued interest and other liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(Dollars in thousands)
|
2021
|
|
2020
|
Right-of-use lease assets
|
$
|
40,700
|
|
|
$
|
31,348
|
|
Lease liabilities
|
41,110
|
|
|
31,433
|
|
|
|
|
|
Weighted average remaining lease term
|
8.52 years
|
|
6.55 years
|
Weighted average discount rate
|
2.43
|
%
|
|
3.09
|
%
|
Operating lease cost for the three and nine month periods ended September 30, 2021 was $2.8 million and $8.5 million, respectively, as compared to $3.5 million and $10.1 million for the same periods in 2020.
NOTE 7: PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and amortization. Total premises and equipment, net at September 30, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2021
|
|
2020
|
Right-of-use lease assets
|
$
|
40,700
|
|
|
$
|
31,348
|
|
Premises and equipment:
|
|
|
|
Land
|
99,317
|
|
|
90,953
|
|
Buildings and improvements
|
313,884
|
|
|
293,338
|
|
Furniture, fixtures and equipment
|
103,946
|
|
|
100,863
|
|
Software
|
65,855
|
|
|
64,877
|
|
Construction in progress
|
3,950
|
|
|
763
|
|
Accumulated depreciation and amortization
|
(163,728)
|
|
|
(140,450)
|
|
Total premises and equipment, net
|
$
|
463,924
|
|
|
$
|
441,692
|
|
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is tested annually, or more often than annually, if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill totaled $1.1 billion at September 30, 2021 and December 31, 2020.
Goodwill impairment was neither indicated nor recorded during the nine months ended September 30, 2021 or the year ended December 31, 2020. During the first quarter of 2020, the Company’s share price began to decline as the markets in the United States responded to the global COVID-19 pandemic. As a result of that economic decline, the effect on share price and other factors, the Company performed an interim goodwill impairment assessment during each quarter of 2020 and concluded no impairment existed during each period. While the goodwill impairment analyses indicated no impairment during 2020, the Company’s assessment depended on several assumptions which were dependent on market and economic conditions, and future changes in those conditions could impact the Company’s assessment in the future. The Company will complete an interim goodwill impairment analysis if the stock price falls below the book value per share for a full quarter. Due to the improved market and economic conditions, and the related effects on the Company’s share price, the Company did not perform an interim goodwill impairment assessment during the first or third quarter of 2021. During the second quarter of 2021, the Company performed an annual goodwill impairment analysis and concluded no impairment existed.
Core deposit premiums represent the value of the relationships that acquired banks had with their deposit customers and are amortized over periods ranging from 10 years to 15 years and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Other intangible assets represent the value of other acquired relationships, including relationships with trust and wealth management customers, and are being amortized over various periods ranging from 10 years to 15 years.
Changes in the carrying amount and accumulated amortization of the Company’s core deposit premiums and other intangible assets at September 30, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2021
|
|
2020
|
Core deposit premiums:
|
|
|
|
Balance, beginning of year
|
$
|
97,363
|
|
|
$
|
111,808
|
|
Disposition of intangible asset(1)
|
(674)
|
|
|
(2,324)
|
|
Amortization
|
(8,978)
|
|
|
(12,121)
|
|
Balance, end of period
|
87,711
|
|
|
97,363
|
|
Books of business and other intangibles:
|
|
|
|
Balance, beginning of year
|
13,747
|
|
|
15,532
|
|
Disposition of intangible asset
|
—
|
|
|
(413)
|
|
Amortization
|
(1,030)
|
|
|
(1,372)
|
|
Balance, end of period
|
12,717
|
|
|
13,747
|
|
Total other intangible assets, net
|
$
|
100,428
|
|
|
$
|
111,110
|
|
_________________________
(1) Adjustments recorded for the premiums on certain deposit liabilities associated with the sale of banking operations.
The carrying basis and accumulated amortization of the Company’s other intangible assets at September 30, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2021
|
|
2020
|
Core deposit premiums:
|
|
|
|
Gross carrying amount
|
$
|
144,202
|
|
|
$
|
146,355
|
|
Accumulated amortization
|
(56,491)
|
|
|
(48,992)
|
|
Core deposit premiums, net
|
87,711
|
|
|
97,363
|
|
Books of business and other intangibles:
|
|
|
|
Gross carrying amount
|
19,937
|
|
|
19,937
|
|
Accumulated amortization
|
(7,220)
|
|
|
(6,190)
|
|
Books of business and other intangibles, net
|
12,717
|
|
|
13,747
|
|
Total other intangible assets, net
|
$
|
100,428
|
|
|
$
|
111,110
|
|
The Company’s estimated remaining amortization expense on other intangible assets as of September 30, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Year
|
|
Amortization
Expense
|
|
Remainder of 2021
|
|
$
|
3,332
|
|
|
2022
|
|
13,275
|
|
|
2023
|
|
12,992
|
|
|
2024
|
|
12,090
|
|
|
2025
|
|
9,505
|
|
|
Thereafter
|
|
49,234
|
|
|
Total
|
|
$
|
100,428
|
|
NOTE 9: TIME DEPOSITS
Time deposits included approximately $1.76 billion and $2.03 billion of certificates of deposit of $100,000 or more, at September 30, 2021, and December 31, 2020, respectively. Of this total, approximately $819.1 million and $889.8 million of certificates of deposit were over $250,000 at September 30, 2021 and December 31, 2020, respectively.
NOTE 10: INCOME TAXES
The provision for income taxes is comprised of the following components for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Income taxes currently payable
|
$
|
21,500
|
|
|
$
|
19,329
|
|
|
$
|
46,566
|
|
|
$
|
51,000
|
|
Deferred income taxes
|
(2,730)
|
|
|
(1,696)
|
|
|
3,585
|
|
|
2,920
|
|
Provision for income taxes
|
$
|
18,770
|
|
|
$
|
17,633
|
|
|
$
|
50,151
|
|
|
$
|
53,920
|
|
The tax effects of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities, and their approximate tax effects, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2021
|
|
2020
|
Deferred tax assets:
|
|
|
|
Loans acquired
|
$
|
5,882
|
|
|
$
|
10,100
|
|
Allowance for credit losses
|
47,652
|
|
|
58,028
|
|
Valuation of foreclosed assets
|
1,631
|
|
|
1,673
|
|
Tax NOLs from acquisition
|
13,698
|
|
|
16,028
|
|
Deferred compensation payable
|
3,342
|
|
|
3,060
|
|
Accrued equity and other compensation
|
6,091
|
|
|
5,905
|
|
Acquired securities
|
431
|
|
|
587
|
|
Right-of-use lease liability
|
9,992
|
|
|
7,835
|
|
Unrealized loss on AFS securities
|
3,631
|
|
|
—
|
|
Allowance for unfunded commitments
|
5,444
|
|
|
5,583
|
|
Other
|
8,255
|
|
|
7,600
|
|
Gross deferred tax assets
|
106,049
|
|
|
116,399
|
|
Deferred tax liabilities:
|
|
|
|
Goodwill and other intangible amortization
|
(36,584)
|
|
|
(38,882)
|
|
Accumulated depreciation
|
(24,510)
|
|
|
(34,667)
|
|
Right-of-use lease asset
|
(9,893)
|
|
|
(7,813)
|
|
Unrealized gain on AFS securities
|
—
|
|
|
(17,521)
|
|
Other
|
(4,001)
|
|
|
(4,021)
|
|
Gross deferred tax liabilities
|
(74,988)
|
|
|
(102,904)
|
|
|
|
|
|
Net deferred tax asset
|
$
|
31,061
|
|
|
$
|
13,495
|
|
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Computed at the statutory rate (21%)
|
$
|
20,859
|
|
|
$
|
17,539
|
|
|
$
|
57,336
|
|
|
$
|
53,719
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
1,477
|
|
|
1,143
|
|
|
4,855
|
|
|
5,502
|
|
Stock-based compensation
|
(22)
|
|
|
74
|
|
|
15
|
|
|
143
|
|
Tax exempt interest income
|
(2,973)
|
|
|
(1,752)
|
|
|
(8,224)
|
|
|
(4,594)
|
|
Tax exempt earnings on BOLI
|
(435)
|
|
|
(308)
|
|
|
(995)
|
|
|
(839)
|
|
Federal tax credits
|
(491)
|
|
|
(434)
|
|
|
(1,670)
|
|
|
(1,252)
|
|
Other differences, net
|
355
|
|
|
1,371
|
|
|
(1,166)
|
|
|
1,241
|
|
Actual tax provision
|
$
|
18,770
|
|
|
$
|
17,633
|
|
|
$
|
50,151
|
|
|
$
|
53,920
|
|
The Company follows ASC Topic 740, Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company has no history of expiring net operating loss carryforwards and is projecting significant pre-tax and financial taxable income in future years. The Company expects to fully realize its deferred tax assets in the future.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
Section 382 of the Internal Revenue Code imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its U.S. net operating losses to reduce its tax liability. The Company has engaged in two tax-free reorganization transactions in which acquired net operating losses are limited pursuant to Section 382. In total, approximately $62.1 million of federal net operating losses subject to the IRC Section 382 annual limitation are expected to be utilized by the Company. All of the acquired net operating loss carryforwards are expected to be fully utilized by 2036.
The Company files income tax returns in the U.S. federal jurisdiction. The Company’s U.S. federal income tax returns are open and subject to examinations from the 2017 tax year and forward. The Company’s various state income tax returns are generally open from the 2017 and later tax return years based on individual state statute of limitations.
NOTE 11: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company utilizes securities sold under agreements to repurchase to facilitate the needs of its customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis. The Company may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with the Company’s safekeeping agents.
The gross amount of recognized liabilities for repurchase agreements was $202.3 million and $248.9 million at September 30, 2021 and December 31, 2020, respectively. The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2021 and December 31, 2020 is presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Contractual Maturity of the Agreements
|
(In thousands)
|
Overnight and
Continuous
|
|
Up to 30 Days
|
|
30-90 Days
|
|
Greater than
90 Days
|
|
Total
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
202,276
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
202,276
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
248,861
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
248,861
|
|
NOTE 12: OTHER BORROWINGS AND SUBORDINATED NOTES AND DEBENTURES
Debt at September 30, 2021 and December 31, 2020 consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
2021
|
|
2020
|
Other Borrowings
|
|
|
|
FHLB advances, net of discount, due 2022 to 2035, 0.23% to 7.37% secured by real estate loans
|
$
|
1,306,360
|
|
|
$
|
1,308,674
|
|
Other long-term debt
|
32,225
|
|
|
33,393
|
|
Total other borrowings
|
1,338,585
|
|
|
1,342,067
|
|
|
|
|
|
Subordinated Notes and Debentures
|
|
|
|
Subordinated notes payable, due 4/1/2028, fixed-to-floating rate (fixed rate of 5.00% through 3/31/2023, floating rate of 2.15% above the three month LIBOR rate, reset quarterly)
|
330,000
|
|
|
330,000
|
|
Trust preferred securities, due 9/15/2037, floating rate of 1.37% above the three month LIBOR rate, reset quarterly
|
10,310
|
|
|
10,310
|
|
Trust preferred securities, due 6/6/2037, floating rate of 1.57% above the three month LIBOR rate, reset quarterly, callable without penalty
|
10,310
|
|
|
10,310
|
|
Trust preferred securities, due 12/15/2035, floating rate of 1.45% above the three month LIBOR rate, reset quarterly, callable without penalty
|
6,702
|
|
|
6,702
|
|
Trust preferred securities, net of discount, due 6/15/2037, floating rate of 1.85% above the three month LIBOR rate, reset quarterly, callable without penalty
|
25,290
|
|
|
25,172
|
|
Trust preferred securities, net of discount, due 12/15/2036, floating rate of 1.85% above the three month LIBOR rate, reset quarterly, callable without penalty
|
3,036
|
|
|
3,023
|
|
Unamortized debt issuance costs
|
(2,370)
|
|
|
(2,643)
|
|
Total subordinated notes and debentures
|
383,278
|
|
|
382,874
|
|
Total other borrowings and subordinated debt
|
$
|
1,721,863
|
|
|
$
|
1,724,941
|
|
In March 2018, the Company issued $330.0 million in aggregate principal amount, of 5.00% Fixed-to-Floating Rate Subordinated Notes (“Notes”) at a public offering price equal to 100% of the aggregate principal amount of the Notes. The Company incurred $3.6 million in debt issuance costs related to the offering during March 2018. The Notes will mature on April 1, 2028 and will bear interest at an initial fixed rate of 5.00% per annum, payable semi-annually in arrears. From and including April 1, 2023 to, but excluding, the maturity date or the date of earlier redemption, the interest rate will reset quarterly to an annual interest rate equal to the then-current three month LIBOR rate plus 215 basis points, payable quarterly in arrears. The Notes will be subordinated in right of payment to the payment of the Company’s other existing and future senior indebtedness, including all of its general creditors. The Notes are obligations of the Company only and are not obligations of, and are not guaranteed by, any of its subsidiaries. The Company used a portion of the net proceeds from the sale of the Notes to repay certain outstanding indebtedness. The Notes qualify for Tier 2 capital treatment.
The terms of the Company’s Notes and trust preferred securities utilize the three month LIBOR rate to determine the interest rate and expense due each quarter. The Company is currently reviewing all applicable documents and working with the debt holders and all relevant parties to determine the alternate interest rate index to be utilized, or other impacts, when LIBOR is discontinued.
The Company had total FHLB advances of $1.31 billion at September 30, 2021, of which $1.30 billion are FHLB Owns the Option (“FOTO”) advances. FOTO advances are a low cost, fixed-rate source of funding in return for granting to FHLB the flexibility to choose a termination date earlier than the maturity date. Typically, FOTO exercise dates follow a specified lockout period at the beginning of the term when FHLB cannot terminate the FOTO advance. If FHLB exercises its option to terminate the FOTO advance at one of the specified option exercise dates, there is no termination or prepayment fee, and replacement funding will be available at then-prevailing market rates, subject to FHLB’s credit and collateral requirements. The Company’s FOTO advances outstanding at September 30, 2021 have original maturity dates of ten years to fifteen years with lockout periods that have expired. The Company expects the FHLB’s option to terminate the FOTO advances prior to stated maturity dates will not be exercised due to the current low interest rate environment. The possibility of the FHLB exercising the options is continually analyzed by the Company along with the market expected rate outcome. At September 30, 2021, the FHLB advances outstanding were secured by mortgage loans and investment securities totaling approximately $4.4 billion and the Company had approximately $3.0 billion of additional advances available from the FHLB.
The trust preferred securities are tax-advantaged issues that qualify for inclusion as Tier 2 capital at September 30, 2021. Distributions on these securities are included in interest expense on long-term debt. Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds thereof in junior subordinated debentures of the Company, the sole asset of each trust. The preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payments on the related junior subordinated debentures. The Company’s obligations under the junior subordinated securities and other relevant trust agreements, in the aggregate, constitute a full and unconditional guarantee by the Company of each respective trust’s obligations under the trust securities issued by each respective trust.
The Company’s long-term debt primarily includes subordinated debt and long-term FHLB advances with an original maturity of greater than one year. Aggregate annual maturities of long-term debt at September 30, 2021, are as follows:
|
|
|
|
|
|
|
|
|
Year
|
|
(In thousands)
|
Remainder of 2021
|
|
$
|
451
|
|
2022
|
|
1,727
|
|
2023
|
|
1,686
|
|
2024
|
|
2,327
|
|
2025
|
|
4,876
|
|
Thereafter
|
|
1,710,796
|
|
Total
|
|
$
|
1,721,863
|
|
NOTE 13: CONTINGENT LIABILITIES
In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings incidental to the conduct of our business, including proceedings based on breach of contract claims, lender liability claims, and other ordinary-course claims, some of which seek substantial relief or damages.
On May 22, 2019, Danny Walkingstick and Whitnye Fort filed a putative class action complaint against Simmons Bank in the United States District Court for the Western District of Missouri. The operative complaint alleges that Simmons Bank improperly charges overdraft fees on transactions that did not actually overdraw customers’ accounts by utilizing the checking account’s “available balance” to assess overdraft fees instead of the “ledger balance.” Plaintiffs’ claims include breach of contract and unjust enrichment, and they seek to represent a proposed class of all Simmons Bank checking account customers who were assessed an overdraft fee on a transaction that purportedly did not overdraw the account. Plaintiffs seek unspecified damages, costs, attorneys’ fees, pre- and post-judgment interest, and other relief as the Court deems proper for themselves and the putative class. Simmons Bank denies the allegations but has reached a settlement in principle with the plaintiffs to resolve this matter, subject to the preparation and execution of a mutually acceptable settlement agreement and release, as well as the court’s approval. The settlement is not expected to have a material adverse effect on the Company’s business, consolidated results of operations, financial condition, or cash flows.
On January 14, 2020, Susanne Pace filed a putative class action complaint in the Circuit Court of Boone County, Missouri against Landmark Bank, formerly a wholly-owned subsidiary of The Landrum Company, to which Simmons Bank is a successor by merger in connection with the Company’s acquisition of The Landrum Company, which closed in October 2019. The complaint alleges that Landmark Bank improperly charged overdraft fees where a transaction was initially authorized on sufficient funds but later settled negative due to intervening transactions. The complaint asserts a claim for breach of contract, which incorporates the implied duty of good faith and fair dealing. Plaintiff seeks to represent a proposed class of all Landmark Bank checking account customers from Missouri who were allegedly charged overdraft fees on transactions that did not overdraw their checking account. Plaintiff seeks unspecified actual, statutory, and punitive damages as well as costs, attorneys’ fees, prejudgment interest, an injunction, and other relief as the Court deems proper for herself and the putative class. Simmons Bank denies the allegations but has reached a settlement in principle with the plaintiff to resolve this matter, subject to the preparation and execution of a mutually acceptable settlement agreement and release, as well as the court’s approval. The settlement is not expected to have a material adverse effect on the Company’s business, consolidated results of operations, financial condition, or cash flows.
On June 29, 2020, Shunda Wilkins, Diann Graham, and David Watson filed a putative class action complaint against Simmons Bank in the United States District Court for the Eastern District of Arkansas. The complaint alleges that Simmons Bank improperly charges multiple insufficient funds or overdraft fees when a merchant resubmits a rejected payment request. The complaint asserts claims for breach of contract and unjust enrichment. Plaintiffs seek to represent a proposed class of all Simmons Bank checking account customers who were charged multiple insufficient funds or overdraft fees on resubmitted payment requests. Plaintiffs seek unspecified damages, costs, attorney’s fees, pre-judgment interest, an injunction, and other relief as the Court deems proper for themselves and the purported class. Simmons Bank denies the allegations and is vigorously defending the matter.
On May 13, 2021, Susanne Pace filed a second putative class action complaint in the circuit court of Boone County, Missouri against Landmark Bank, to which Simmons Bank is a successor by merger, which has been removed to the United States District Court for the Western District of Missouri, Central Division. The complaint alleges that Landmark Bank improperly charged multiple insufficient funds or overdraft fees when a merchant or other originator resubmits a rejected payment request. The complaint asserts claims for breach of contract, including breach of the covenant of good faith and fair dealing. Plaintiff seeks to represent a proposed class of all Landmark Bank checking account customers who were charged multiple insufficient funds or overdraft fees on resubmitted payment requests. Plaintiff seeks unspecified damages, costs, attorney’s fees, pre- and post-judgment interest, an injunction, and other relief as the Court deems proper for herself and the purported class. Simmons Bank denies the allegations and is vigorously defending the matter.
We establish reserves for legal proceedings when potential losses become probable and can be reasonably estimated. While the ultimate resolution (including amounts thereof) of any legal proceedings, including the matters described above, cannot be determined at this time, based on information presently available and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, either individually or in the aggregate, will not have a material adverse effect on our business, consolidated results of operations, financial condition, or cash flows. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any of these proceedings, which may be material to our results of operations for a given fiscal period.
NOTE 14: CAPITAL STOCK
On February 27, 2009, at a special meeting, the Company’s shareholders approved an amendment to the Articles of Incorporation to establish 40,040,000 authorized shares of preferred stock, $0.01 par value. The aggregate liquidation preference of all shares of preferred stock cannot exceed $80,000,000.
On October 29, 2019, the Company filed Amended and Restated Articles of Incorporation (“October Amended Articles”) with the Arkansas Secretary of State. The October Amended Articles classified and designated Series D Preferred Stock, Par Value $0.01 Per Share, out of the Company’s authorized preferred stock.
Effective July 23, 2021, the Company’s Board of Directors approved an amendment to the Company’s current stock repurchase program (“Program”) that increases the amount of the Company’s common stock that may be repurchased under the Program from a maximum of $180 million to a maximum of $276.5 million and extends the term of the Program from October 31, 2021, to October 31, 2022 (unless terminated sooner). The Program was originally approved on October 17, 2019 and first amended in March 2020; and as of September 30, 2021, the Company has repurchased approximately $178.0 million of its common stock under the Program.
Under the Program, the Company may repurchase shares of its common stock through open market and privately negotiated transactions or otherwise. The timing, pricing, and amount of any repurchases under the Program will be determined by the Company’s management at its discretion based on a variety of factors, including, but not limited to, trading volume and market price of the Company’s common stock, corporate considerations, the Company’s working capital and investment requirements, general market and economic conditions, and legal requirements. The Program does not obligate the Company to repurchase any common stock and may be modified, discontinued, or suspended at any time without prior notice. The Company anticipates funding for this Program to come from available sources of liquidity, including cash on hand and future cash flow.
During the three and nine month periods ended September 30, 2021, the Company repurchased 1,806,205 shares at an average price of $28.48 per share and 1,937,121 shares at an average price of $28.14 per share, respectively, under the Program. Market conditions and the Company’s capital needs will drive decisions regarding additional, future stock repurchases. The Company repurchased 4,922,336 shares at an average price of $18.96 per share under the Program during the nine months ended September 30, 2020. No shares were repurchased during the three months ended September 30, 2020.
NOTE 15: UNDIVIDED PROFITS
Simmons Bank, the Company’s subsidiary bank, is subject to legal limitations on dividends that can be paid to the parent company without prior approval of the applicable regulatory agencies. The approval of the Commissioner of the Arkansas State Bank Department is required if the total of all dividends declared by an Arkansas state bank in any calendar year exceeds seventy-five percent (75%) of the total of its net profits, as defined, for that year combined with seventy-five percent (75%) of its retained net profits of the preceding year. At September 30, 2021, Simmons Bank had approximately $47.0 million available for payment of dividends to the Company, without prior regulatory approval.
The risk-based capital guidelines of the Federal Reserve Board and the Arkansas State Bank Department include the definitions for (1) a well-capitalized institution, (2) an adequately-capitalized institution, and (3) an undercapitalized institution. The criteria for a well-capitalized institution are: a 5% “Tier l leverage capital” ratio, an 8% “Tier 1 risk-based capital” ratio, 10% “total risk-based capital” ratio; and a 6.5% “common equity Tier 1 (CET1)” ratio.
The Company and Simmons Bank, must hold a capital conservation buffer of 2.5% composed of CET1 capital above its minimum risk-based capital requirements. Failure to meet this capital conservation buffer would result in additional limits on dividends, other distributions and discretionary bonuses. As of September 30, 2021, the Company and Simmons Bank met all capital adequacy requirements, including the capital conservation buffer, under the Basel III Capital Rules. The Company’s CET1 ratio was 14.27% at September 30, 2021.
NOTE 16: STOCK-BASED COMPENSATION
The Company’s Board of Directors has adopted various stock-based compensation plans. The plans provide for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and performance stock units. Pursuant to the plans, shares are reserved for future issuance by the Company upon exercise of stock options or awards of restricted stock, restricted stock units, or performance stock units granted to directors, officers and other key employees.
The table below summarizes the transactions under the Company’s active stock-based compensation plans for the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Outstanding
|
|
Non-vested Stock Awards Outstanding
|
|
Non-vested Stock Units Outstanding
|
(Shares in thousands)
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Number
of Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
Beginning balance, January 1, 2021
|
658
|
|
|
$
|
22.48
|
|
|
5
|
|
|
$
|
22.35
|
|
|
1,032
|
|
|
$
|
24.53
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
526
|
|
|
29.00
|
|
Stock options exercised
|
(183)
|
|
|
22.50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock awards/units vested (earned)
|
—
|
|
|
—
|
|
|
(3)
|
|
|
22.48
|
|
|
(331)
|
|
|
25.62
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(77)
|
|
|
25.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021
|
475
|
|
|
$
|
22.47
|
|
|
2
|
|
|
$
|
22.20
|
|
|
1,150
|
|
|
$
|
26.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2021
|
475
|
|
|
$
|
22.47
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options under the plans outstanding at September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number
of Shares
(In thousands)
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
of Shares
(In thousands)
|
|
Weighted
Average
Exercise
Price
|
$
|
9.46
|
|
|
—
|
|
$
|
9.46
|
|
|
1
|
|
0.30
|
|
$9.46
|
|
1
|
|
$9.46
|
10.65
|
|
|
—
|
|
10.65
|
|
|
3
|
|
1.33
|
|
10.65
|
|
3
|
|
10.65
|
20.29
|
|
|
—
|
|
20.29
|
|
|
47
|
|
3.25
|
|
20.29
|
|
47
|
|
20.29
|
20.36
|
|
|
—
|
|
20.36
|
|
|
1
|
|
3.13
|
|
20.36
|
|
1
|
|
20.36
|
22.20
|
|
|
—
|
|
22.20
|
|
|
51
|
|
3.48
|
|
22.20
|
|
51
|
|
22.20
|
22.75
|
|
|
—
|
|
22.75
|
|
|
293
|
|
3.86
|
|
22.75
|
|
293
|
|
22.75
|
23.51
|
|
|
—
|
|
23.51
|
|
|
72
|
|
4.30
|
|
23.51
|
|
72
|
|
23.51
|
24.07
|
|
|
—
|
|
24.07
|
|
|
7
|
|
3.96
|
|
24.07
|
|
7
|
|
24.07
|
$
|
9.46
|
|
|
—
|
|
$
|
24.07
|
|
|
475
|
|
3.80
|
|
$22.47
|
|
475
|
|
$22.47
|
The table below summarizes the Company’s performance stock unit activity for the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Performance Stock Units
|
Non-vested, January 1, 2021
|
|
222
|
|
Granted
|
|
97
|
|
Vested (earned)
|
|
(57)
|
|
Forfeited
|
|
(5)
|
|
Non-vested, June 30, 2021
|
|
257
|
|
Stock-based compensation expense was $12.6 million and $10.8 million during the nine month periods ended September 30, 2021 and 2020, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all stock-based awards. There was no unrecognized stock-based compensation expense related to stock options at September 30, 2021. Unrecognized stock-based compensation expense related to non-vested stock awards and stock units was $15.6 million at September 30, 2021. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.7 years.
The intrinsic value of stock options outstanding and stock options exercisable at September 30, 2021 was $3.4 million. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $29.56 as of September 30, 2021, and the exercise price multiplied by the number of options outstanding. The total intrinsic value of stock options exercised during the nine months ended September 30, 2021 and 2020, was $1.3 million and $5,000, respectively.
The fair value of the Company’s employee stock options granted is estimated on the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. There were no stock options granted during the nine months ended September 30, 2021 and 2020.
NOTE 17: EARNINGS PER SHARE (“EPS”)
Basic EPS is computed by dividing reported net income available to common stockholders by weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing reported net income available to common stockholders by the weighted average common shares and all potential dilutive common shares outstanding during the period.
The computation of earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands, except per share data)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income available to common stockholders
|
$
|
80,561
|
|
|
$
|
65,885
|
|
|
$
|
222,879
|
|
|
$
|
201,897
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
107,822
|
|
|
109,019
|
|
|
108,130
|
|
|
110,292
|
|
Average potential dilutive common shares
|
538
|
|
|
189
|
|
|
538
|
|
|
189
|
|
Average diluted common shares
|
108,360
|
|
|
109,208
|
|
|
108,668
|
|
|
110,481
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.75
|
|
|
$
|
0.60
|
|
|
$
|
2.06
|
|
|
$
|
1.83
|
|
Diluted earnings per share
|
$
|
0.74
|
|
|
$
|
0.60
|
|
|
$
|
2.05
|
|
|
$
|
1.83
|
|
There were no stock options excluded from the earnings per share calculation for the three and nine months ended September 30, 2021 due to the average market price exceeding the related stock option exercise price. There were approximately 653,718 stock options excluded from the earnings per share calculation for the three and nine months ended September 30, 2020 due to the related stock option exercise price exceeding the average market price.
NOTE 18: ADDITIONAL CASH FLOW INFORMATION
The following is a summary of the Company’s additional cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2021
|
|
2020
|
Interest paid
|
$
|
59,535
|
|
|
$
|
95,040
|
|
Income taxes (refunded) paid
|
46,693
|
|
|
30,708
|
|
Transfers of loans to foreclosed assets held for sale
|
3,516
|
|
|
3,083
|
|
Transfers of premises to foreclosed assets and other real estate owned
|
—
|
|
|
3,120
|
|
Transfers of premises to premises held for sale
|
—
|
|
|
1,072
|
|
Transfers of other real estate owned to premises held for sale
|
—
|
|
|
3,504
|
|
Transfers of premises held for sale to other real estate owned
|
4,368
|
|
|
—
|
|
Transfers of premises held for sale to premises
|
5,610
|
|
|
—
|
|
Transfers of loans to other assets held for sale
|
—
|
|
|
114,925
|
|
Transfers of deposits to other liabilities held for sale
|
—
|
|
|
58,405
|
|
NOTE 19: OTHER INCOME AND OTHER OPERATING EXPENSES
Other income for the three and nine months ended September 30, 2021 was $6.2 million and $24.6 million, respectively. Other income for the same periods in 2020 was $5.4 million and $28.0 million, respectively. During the nine month periods in 2021 and 2020, the Company recognized gains on sale of $5.3 million and $8.1 million, respectively, related to the sale of banking operations and bank branches.
Other operating expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(In thousands)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Professional services
|
$
|
4,399
|
|
|
$
|
3,779
|
|
|
$
|
14,207
|
|
|
$
|
13,529
|
|
Postage
|
1,964
|
|
|
1,932
|
|
|
6,277
|
|
|
5,937
|
|
Telephone
|
1,516
|
|
|
2,103
|
|
|
4,758
|
|
|
6,738
|
|
Credit card expense (1)
|
2,727
|
|
|
2,818
|
|
|
7,588
|
|
|
7,690
|
|
Marketing
|
5,019
|
|
|
3,517
|
|
|
12,912
|
|
|
11,430
|
|
Software and technology
|
10,134
|
|
|
9,552
|
|
|
30,242
|
|
|
29,021
|
|
Operating supplies
|
605
|
|
|
824
|
|
|
2,013
|
|
|
2,588
|
|
Amortization of intangibles
|
3,332
|
|
|
3,362
|
|
|
10,008
|
|
|
10,144
|
|
Branch right sizing expense
|
(3,280)
|
|
|
442
|
|
|
(2,187)
|
|
|
2,401
|
|
Other expense
|
8,149
|
|
|
7,478
|
|
|
22,008
|
|
|
23,676
|
|
Total other operating expenses
|
$
|
34,565
|
|
|
$
|
35,807
|
|
|
$
|
107,826
|
|
|
$
|
113,154
|
|
_________________________
(1) During the second and third quarters of 2021, certain debit and credit card transaction fees were reclassified from non-interest expense to non-interest income. Prior periods have been adjusted to reflect this reclassification.
NOTE 20: CERTAIN TRANSACTIONS
From time to time, the Company and its subsidiaries have made loans, other extensions of credit, and vendor contracts to directors, officers, their associates and members of their immediate families. Additionally, some directors, officers and their associates and members of their immediate families have placed deposits with the Company’s subsidiary bank, Simmons Bank. Such loans and other extensions of credit, deposits and vendor contracts (which were not material) were made in the ordinary course of business, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated persons or through a competitive bid process. Further, in management’s opinion, these extensions of credit did not involve more than normal risk of collectability or present other unfavorable features.
NOTE 21: COMMITMENTS AND CREDIT RISK
The Company grants agribusiness, commercial and residential loans to customers primarily throughout Arkansas, Kansas, Missouri, Oklahoma, Tennessee and Texas, along with credit card loans to customers throughout the United States. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
At September 30, 2021, the Company had outstanding commitments to extend credit aggregating approximately $684.6 million and $2.59 billion for credit card commitments and other loan commitments, respectively. At December 31, 2020, the Company had outstanding commitments to extend credit aggregating approximately $671.5 million and $2.36 billion for credit card commitments and other loan commitments, respectively.
As of September 30, 2021, the Company had outstanding commitments to originate fixed rate-rate mortgage loans of approximately $96.6 million. At December 31, 2020, the Company had outstanding commitments to originate fixed-rate mortgage loans of approximately $214.0 million.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company had total outstanding letters of credit amounting to $38.8 million and $49.0 million at September 30, 2021, and December 31, 2020, respectively, with terms ranging from 9 months to 15 years. At September 30, 2021 and December 31, 2020, the Company had no deferred revenue under standby letter of credit agreements.
The Company has purchased letters of credit from the FHLB as security for certain public deposits. The amount of the letters of credit was $69.0 million and $1.5 billion at September 30, 2021 and December 31, 2020, respectively, and they expire in less than one year from issuance.
NOTE 22: FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value:
•Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.
•Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. Other securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. In order to ensure the fair values are consistent with ASC Topic 820, the Company periodically checks the fair values by comparing them to another pricing source, such as Bloomberg. The availability of pricing confirms Level 2 classification in the fair value hierarchy. The third-party pricing service is subject to an annual review of internal controls. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company’s investment in U.S. Treasury securities, if any, is reported at fair value utilizing Level 1 inputs. The remainder of the Company’s available-for-sale securities are reported at fair value utilizing Level 2 inputs.
Mortgage loans held for sale – Mortgage loans held for sale are reported at fair value on an aggregate basis. Adjustments to fair value are recognized monthly and reflected in earnings. In determining the fair value of loans held for sale, the Company may consider outstanding investor commitments, discounted cash flow analyses with market assumptions or the fair value of the collateral if the loan is collateral dependent. Such loans are classified within either Level 2 or Level 3 of the fair value hierarchy. Where assumptions are made using significant unobservable inputs, such loans held for sale are classified as Level 3. At September 30, 2021 and December 31, 2020, the aggregate fair value of mortgage loans held for sale exceeded their cost.
Derivative instruments – The Company’s derivative instruments are reported at fair value utilizing Level 2 inputs. The Company obtains fair value measurements from dealer quotes.
Other liabilities held for sale – The Company’s other liabilities held for sale are reported at fair value utilizing Level 3 inputs. See Note 4, Other Liabilities Held for Sale.
The following table sets forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
(In thousands)
|
|
Fair Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
September 30, 2021
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Government agencies
|
|
354,382
|
|
|
—
|
|
|
354,382
|
|
|
—
|
|
Mortgage-backed securities
|
|
4,421,620
|
|
|
—
|
|
|
4,421,620
|
|
|
—
|
|
State and political subdivisions
|
|
1,575,208
|
|
|
—
|
|
|
1,575,208
|
|
|
—
|
|
Other securities
|
|
470,693
|
|
|
—
|
|
|
470,693
|
|
|
—
|
|
Mortgage loans held for sale
|
|
34,628
|
|
|
—
|
|
|
—
|
|
|
34,628
|
|
Derivative asset
|
|
31,609
|
|
|
—
|
|
|
31,609
|
|
|
—
|
|
Derivative liability
|
|
(17,825)
|
|
|
—
|
|
|
(17,825)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
477,237
|
|
|
$
|
—
|
|
|
$
|
477,237
|
|
|
$
|
—
|
|
Mortgage-backed securities
|
|
1,394,936
|
|
|
—
|
|
|
1,394,936
|
|
|
—
|
|
States and political subdivisions
|
|
1,470,723
|
|
|
—
|
|
|
1,470,723
|
|
|
—
|
|
Other securities
|
|
130,702
|
|
|
—
|
|
|
130,702
|
|
|
—
|
|
Mortgage loans held for sale
|
|
137,378
|
|
|
—
|
|
|
—
|
|
|
137,378
|
|
Derivative asset
|
|
35,846
|
|
|
—
|
|
|
35,846
|
|
|
—
|
|
Other liabilities held for sale
|
|
(154,620)
|
|
|
—
|
|
|
—
|
|
|
(154,620)
|
|
Derivative liability
|
|
(36,141)
|
|
|
—
|
|
|
(36,141)
|
|
|
—
|
|
Certain financial assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets and liabilities measured at fair value on a nonrecurring basis include the following:
Individually assessed loans (collateral-dependent) – When the Company has a specific expectation to initiate, or has initiated, foreclosure proceedings, and when the repayment of a loan is expected to be substantially dependent on the liquidation of underlying collateral, the relationship is deemed collateral-dependent. Fair value of the loan is determined by establishing an allowance for credit loss for any exposure based on the valuation of the underlying collateral. The valuation of the collateral is determined by either an independent third-party appraisal or other collateral analysis. Discounts can be made by the Company based upon the overall evaluation of the independent appraisal. Collateral-dependent loans are classified within Level 3 of the fair value hierarchy. Collateral values supporting the individually assessed loans are evaluated quarterly for updates to appraised values or adjustments due to non-current valuations.
Foreclosed assets and other real estate owned – Foreclosed assets and other real estate owned are reported at fair value, less estimated costs to sell. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for credit losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets and other real estate owned is estimated using Level 3 inputs based on unobservable market data.
The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent loans and foreclosed assets primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. Management’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 asset. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount.
The following table sets forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.
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Fair Value Measurements Using
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(In thousands)
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Fair Value
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Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
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Significant Other
Observable Inputs
(Level 2)
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Significant
Unobservable Inputs
(Level 3)
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September 30, 2021
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Individually assessed loans (1) (2) (collateral-dependent)
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$
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31,075
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$
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—
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$
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—
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$
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31,075
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Foreclosed assets and other real estate owned (1)
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2,661
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—
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—
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2,661
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December 31, 2020
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Individually assessed loans (1) (2) (collateral-dependent)
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$
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66,209
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$
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—
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$
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—
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$
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66,209
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Foreclosed assets and other real estate owned (1)
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17,074
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—
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—
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17,074
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________________________
(1)These amounts represent the resulting carrying amounts on the consolidated balance sheets for collateral-dependent loans and foreclosed assets and other real estate owned for which fair value re-measurements took place during the period.
(2)Identified reserves of $2,129,000 and $13,725,000 were related to collateral-dependent loans for which fair value re-measurements took place during the periods ended September 30, 2021 and December 31, 2020, respectively.
ASC Topic 825, Financial Instruments, requires disclosure in annual and interim financial statements of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The following methods and assumptions were used to estimate the fair value of each class of financial instruments not previously disclosed.
Cash and cash equivalents – The carrying amount for cash and cash equivalents approximates fair value (Level 1).
Interest bearing balances due from banks – The fair value of interest bearing balances due from banks – time is estimated using a discounted cash flow calculation that applies the rates currently offered on deposits of similar remaining maturities (Level 2).
Held-to-maturity securities – Fair values for held-to-maturity securities equal quoted market prices, if available, such as for highly liquid government bonds (Level 1). If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things (Level 2). In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Loans – The fair value of loans is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Additional factors considered include the type of loan and related collateral, variable or fixed rate, classification status, remaining term, interest rate, historical delinquencies, loan to value ratios, current market rates and remaining loan balance. The loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans were based on current market rates for new originations of similar loans. Estimated credit losses were also factored into the projected cash flows of the loans. The fair value of loans is estimated on an exit price basis incorporating the above factors (Level 3).
Deposits – The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount) (Level 2). The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities (Level 3).
Federal Funds purchased, securities sold under agreement to repurchase and short-term debt – The carrying amount for Federal funds purchased, securities sold under agreement to repurchase and short-term debt are a reasonable estimate of fair value (Level 2).
Other borrowings – For short-term instruments, the carrying amount is a reasonable estimate of fair value. For long-term debt, rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value (Level 2).
Subordinated debentures – The fair value of subordinated debentures is estimated using the rates that would be charged for subordinated debentures of similar remaining maturities (Level 2).
Accrued interest receivable/payable – The carrying amounts of accrued interest approximated fair value (Level 2).
Commitments to extend credit, letters of credit and lines of credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:
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Carrying
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Fair Value Measurements
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(In thousands)
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Amount
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Level 1
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Level 2
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Level 3
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Total
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September 30, 2021
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Financial assets:
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Cash and cash equivalents
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$
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1,781,413
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$
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1,781,413
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$
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—
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$
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—
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$
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1,781,413
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Interest bearing balances due from banks - time
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1,780
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—
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1,780
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—
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1,780
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Held-to-maturity securities
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1,516,797
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—
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1,487,916
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—
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1,487,916
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Interest receivable
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68,405
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—
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68,405
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—
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68,405
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Loans, net
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10,622,719
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—
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—
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10,705,185
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10,705,185
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Financial liabilities:
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Non-interest bearing transaction accounts
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4,918,845
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—
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4,918,845
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—
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4,918,845
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Interest bearing transaction accounts and savings deposits
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10,697,451
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—
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10,697,451
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—
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10,697,451
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Time deposits
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2,455,774
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—
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—
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2,460,441
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2,460,441
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Federal funds purchased and securities sold under agreements to repurchase
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217,276
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—
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217,276
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—
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217,276
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Other borrowings
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1,338,585
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—
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1,408,087
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—
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1,408,087
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Subordinated notes and debentures
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383,278
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—
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395,786
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—
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395,786
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Interest payable
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11,230
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—
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11,230
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—
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11,230
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December 31, 2020
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Financial assets:
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Cash and cash equivalents
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$
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3,472,152
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$
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3,472,152
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$
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—
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$
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—
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$
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3,472,152
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Interest bearing balances due from banks - time
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1,579
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—
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1,579
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—
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1,579
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Held-to-maturity securities
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333,031
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—
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341,925
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—
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341,925
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Interest receivable
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72,597
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—
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72,597
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—
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72,597
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Loans, net
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12,662,847
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—
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—
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12,736,991
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12,736,991
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Financial liabilities:
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Non-interest bearing transaction accounts
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4,482,091
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—
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4,482,091
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—
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4,482,091
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Interest bearing transaction accounts and savings deposits
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9,672,608
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—
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9,672,608
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—
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9,672,608
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Time deposits
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2,832,327
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—
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—
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2,848,621
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2,848,621
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Federal funds purchased and securities sold under agreements to repurchase
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299,111
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—
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299,111
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—
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299,111
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Other borrowings
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1,342,067
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—
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1,448,625
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—
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1,448,625
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Subordinated notes and debentures
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382,874
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—
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398,827
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—
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398,827
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Interest payable
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8,887
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—
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8,887
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—
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8,887
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The fair value of commitments to extend credit, letters of credit and lines of credit is not presented since management believes the fair value to be insignificant.
NOTE 23: DERIVATIVE INSTRUMENTS
The Company utilizes derivative instruments to manage exposure to various types of interest rate risk for itself and its customers within policy guidelines. Transactions should only be entered into with an associated underlying exposure. All derivative instruments are carried at fair value.
Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s asset/liability management committee. In arranging these products for its customers, the Company assumes additional credit risk from the customer and from the dealer counterparty with whom the transaction is undertaken. Credit risk exists due to the default credit risk created in the exchange of the payments over a period of time. Credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps with each counterparty. Access to collateral in the event of default is reasonably assured. Therefore, credit exposure may be reduced by the amount of collateral pledged by the counterparty.
Hedge Structures
The Company will seek to enter derivative structures that most effectively address the risk exposure and structural terms of the underlying position being hedged. The term and notional principal amount of a hedge transaction will not exceed the term or principal amount of the underlying exposure. In addition, the Company will use hedge indices which are the same as, or highly correlated to, the index or rate on the underlying exposure. Derivative credit exposure is monitored on an ongoing basis for each customer transaction and aggregate exposure to each counterparty is tracked. The Company has set a maximum outstanding notional contract amount at 10% of the Company’s assets.
Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. During the third quarter of 2021, the Company began utilizing interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable AFS securities. The hedging strategy converts the fixed interest rates to variable interest rates based on federal funds rates.
The following table summarizes the fair value hedges recorded in the accompanying consolidated balance sheets.
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September 30, 2021
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December 31, 2020
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(In thousands)
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Balance Sheet Location
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Weighted Average Pay Rate
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Receive Rate
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Notional
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Fair Value
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Notional
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Fair Value
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Derivative assets
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Other assets
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1.21%
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Federal Funds
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$
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1,001,715
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$
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13,948
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$
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—
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$
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—
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Customer Risk Management Interest Rate Swaps
The Company’s qualified loan customers have the opportunity to participate in its interest rate swap program for the purpose of managing interest rate risk on their variable rate loans with the Company. The Company enters into such agreements with customers, then offsetting agreements are executed between the Company and an approved dealer counterparty to minimize market risk from changes in interest rates. The counterparty contracts are identical to customer contracts in terms of notional amounts, interest rates, and maturity dates, except for a fixed pricing spread or fee paid to the Company by the dealer counterparty. These interest rate swaps carry varying degrees of credit, interest rate and market or liquidity risks. The fair value of these derivative instruments is recognized as either derivative assets or liabilities in the accompanying consolidated balance sheets. The Company has a limited number of swaps that are standalone without a similar agreement with the loan customer.
The following table summarizes the fair values of loan derivative contracts recorded in the accompanying consolidated balance sheets.
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September 30, 2021
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December 31, 2020
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(In thousands)
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Notional
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Fair Value
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Notional
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Fair Value
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Derivative assets
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$
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316,357
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$
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17,661
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$
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408,881
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$
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35,846
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Derivative liabilities
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320,001
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17,825
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417,941
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36,141
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Risk Participation Agreements
The Company has a limited number of Risk Participation Agreement swaps, that are associated with loan participations, where the Company is not the counterparty to the interest rate swaps that are associated with the risk participation sold. The interest rate swap mark to market only impacts the Company if the swap is in a liability position to the counterparty and the customer defaults on payments to the counterparty. The notional amount of these contingent agreements is $31.4 million as of September 30, 2021.
Energy Hedging
The Company provides energy derivative services to qualifying, high quality oil and gas borrowers for hedging purposes. The Company serves as an intermediary on energy derivative products between the Company’s borrowers and dealers. The Company will only enter into back-to-back trades, thus maintaining a balanced book between the dealer and the borrower.
Energy hedging risk exposure to the Company’s customer increases as energy prices for crude oil and natural gas rise. As prices decrease, exposure to the exchange increases. These risks are mitigated by customer credit underwriting policies and establishing a predetermined hedge line for each borrower and by monitoring the exchange margin.
The outstanding notional value as of September 30, 2021 for energy hedging Customer Sell to Company swaps were $18.2 million and the corresponding Company Sell to Dealer swaps were $18.2 million and the corresponding net fair value of the derivative asset and derivative liability was $265,000.