umbf-10q_20200630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number001-38481

UMB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Missouri		43-0903811
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1010 Grand Boulevard, Kansas City, Missouri		64106
(Address of principal executive offices)		(Zip Code)

(Registrant's telephone number, including area code): (816) 860-7000

Securities Registered Pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 Par Value	UMBF	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non- accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 24, 2020, UMB Financial Corporation had 48,023,910 shares of common stock outstanding.

UMB FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION		3

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3
CONSOLIDATED BALANCE SHEETS		3
CONSOLIDATED STATEMENTS OF INCOME		4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME		5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY		6
CONSOLIDATED STATEMENTS OF CASH FLOWS		7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	52
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	71
ITEM 4.	CONTROLS AND PROCEDURES	77

PART II - OTHER INFORMATION		78

ITEM 1.	LEGAL PROCEEDINGS	78
ITEM 1A.	RISK FACTORS	78
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	78
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	78
ITEM 4.	MINE SAFETY DISCLOSURES	78
ITEM 5.	OTHER INFORMATION	79
ITEM 6.	EXHIBITS	80
SIGNATURES		81

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UMB FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share data)

	June 30,			December 31,
	2020			2019
	(unaudited)			(audited)
ASSETS
Loans	$	15,305,097		$	13,431,722
Allowance for credit losses on loans⁽¹⁾		(200,300	)		(101,788	)
Net loans		15,104,797			13,329,934
Loans held for sale		8,213			7,803
Securities:
Available for sale (amortized cost of $8,116,473 and $7,323,980, respectively)		8,483,624			7,447,362
Held to maturity, net of allowance for credit losses of $3,305 and $0, respectively (fair value of $1,153,833 and $1,082,345, respectively)		1,111,625			1,116,102
Trading securities		51,383			45,618
Other securities		154,206			108,420
Total securities		9,800,838			8,717,502
Federal funds sold and securities purchased under agreements to resell		1,347,643			1,578,345
Interest-bearing due from banks		1,714,478			1,225,491
Cash and due from banks		462,849			472,958
Premises and equipment, net		300,174			300,334
Accrued income		126,962			124,508
Goodwill		180,867			180,867
Other intangibles, net		24,181			27,597
Other assets		682,606			596,016
Total assets	$	29,753,608		$	26,561,355

LIABILITIES
Deposits:
Noninterest-bearing demand	$	8,633,603		$	6,944,465
Interest-bearing demand and savings		15,033,643			13,432,415
Time deposits under $250,000		546,089			611,587
Time deposits of $250,000 or more		246,069			614,777
Total deposits		24,459,404			21,603,244
Federal funds purchased and repurchase agreements		1,963,694			1,896,508
Short-term debt		15,000			—
Long-term debt		70,996			70,372
Accrued expenses and taxes		239,254			232,200
Other liabilities		227,865			152,591
Total liabilities		26,976,213			23,954,915

SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 80,000,000 shares authorized; 55,056,730 shares issued, 48,021,707 and 49,097,606 shares outstanding, respectively		55,057			55,057
Capital surplus		1,081,713			1,073,764
Retained earnings		1,692,289			1,672,438
Accumulated other comprehensive income, net		284,262			83,180
Treasury stock, 7,035,023 and 5,959,124 shares, at cost, respectively		(335,926	)		(277,999	)
Total shareholders' equity		2,777,395			2,606,440
Total liabilities and shareholders' equity	$	29,753,608		$	26,561,355

(1)	As of December 31, 2019, this line represents the Allowance for loan losses. See further discussion of this change in Note 3, “New Accounting Pronouncements.”

See Notes to Consolidated Financial Statements.

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands, except share and per share data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2020		2019			2020		2019
INTEREST INCOME
Loans	$	140,004	$	161,838		$	291,030	$	319,099
Securities:
Taxable interest		25,870		26,700			53,082		52,091
Tax-exempt interest		24,612		21,988			49,016		42,685
Total securities income		50,482		48,688			102,098		94,776
Federal funds and resell agreements		1,573		2,526			7,025		6,151
Interest-bearing due from banks		398		2,768			3,061		6,667
Trading securities		312		842			966		1,276
Total interest income		192,769		216,662			404,180		427,969
INTEREST EXPENSE
Deposits		11,243		39,516			40,975		77,350
Federal funds and repurchase agreements		1,950		9,347			8,331		17,611
Other		1,347		1,385			2,704		2,726
Total interest expense		14,540		50,248			52,010		97,687
Net interest income		178,229		166,414			352,170		330,282
Provision for credit losses⁽¹⁾		21,500		11,000			109,500		23,350
Net interest income after provision for credit losses		156,729		155,414			242,670		306,932
NONINTEREST INCOME
Trust and securities processing		46,321		42,903			93,321		84,860
Trading and investment banking		12,851		5,453			14,574		11,034
Service charges on deposit accounts		19,074		20,747			44,155		42,028
Insurance fees and commissions		533		465			792		803
Brokerage fees		5,753		7,077			15,613		14,320
Bankcard fees		12,916		16,439			29,461		33,506
Gains (losses) on sales of securities available for sale, net		4,006		(1,403	)		5,233		(594	)
Other		19,002		13,717			15,731		26,823
Total noninterest income		120,456		105,398			218,880		212,780
NONINTEREST EXPENSE
Salaries and employee benefits		130,938		114,454			241,998		230,486
Occupancy, net		11,411		11,539			23,591		23,282
Equipment		21,502		18,824			42,743		38,508
Supplies and services		3,785		4,285			7,970		8,158
Marketing and business development		3,284		7,304			7,924		12,217
Processing fees		13,603		13,096			26,993		25,228
Legal and consulting		6,220		7,496			12,330		13,129
Bankcard		4,549		4,701			9,409		9,046
Amortization of other intangible assets		1,658		1,251			3,392		2,578
Regulatory fees		3,211		2,910			5,577		5,800
Other		8,372		7,527			15,225		15,581
Total noninterest expense		208,533		193,387			397,152		384,013
Income before income taxes		68,652		67,425			64,398		135,699
Income tax expense		8,123		10,466			7,308		20,996
NET INCOME	$	60,529	$	56,959		$	57,090	$	114,703

PER SHARE DATA
Net income – basic	$	1.26	$	1.17			1.18	$	2.35
Net income – diluted		1.26		1.16			1.18		2.34
Dividends		0.31		0.30			0.62		0.60
Weighted average shares outstanding – basic		47,991,283		48,777,732			48,340,579		48,745,124
Weighted average shares outstanding – diluted		48,077,810		49,039,692			48,491,526		49,018,787

(1)	For the three and six months ended June 30, 2019, this line represents the Provision for loan losses. See further discussion of this change in Note 3, “New Accounting Pronouncements.”

See Notes to Consolidated Financial Statements.

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Net income	$	60,529		$	56,959		$	57,090		$	114,703
Other comprehensive income, before tax:
Unrealized gains and losses on debt securities:
Change in unrealized holding gains and losses, net		84,885			107,484			249,001			213,918
Less: Reclassification adjustment for (gains) losses included in net income		(4,006	)		1,403			(5,233	)		594
Change in unrealized gains and losses on debt securities during the period		80,879			108,887			243,768			214,512
Unrealized gains and losses on derivative hedges:
Change in unrealized gains and losses on derivative hedges		4,612			(3,061	)		19,137			(5,149	)
Less: Reclassification adjustment for (gains) losses included in net income		(514	)		20			254			15
Change in unrealized gains and losses on derivative hedges		4,098			(3,041	)		19,391			(5,134	)
Other comprehensive income, before tax		84,977			105,846			263,159			209,378
Income tax expense		(20,105	)		(25,590	)		(62,077	)		(50,979	)
Other comprehensive income		64,872			80,256			201,082			158,399
Comprehensive income	$	125,401		$	137,215		$	258,172		$	273,102

See Notes to Consolidated Financial Statements.

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited, dollars in thousands, except per share data)

	Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total
Balance – April 1, 2019	$	55,057	$	1,060,630	$	1,531,396		$	(17,639	)	$	(278,601	)	$	2,350,843
Total comprehensive income		—		—		56,959			80,256			—			137,215
Dividends ($0.30 per share)		—		—		(14,769	)		—			—			(14,769	)
Purchase of treasury stock		—		—		—			—			(28	)		(28	)
Forfeitures of equity awards, net of issuances		—		724		—			—			(724	)		—
Recognition of equity-based compensation		—		3,717		—			—			—			3,717
Sale of treasury stock		—		85		—			—			113			198
Exercise of stock options		—		145		—			—			469			614
Balance – June 30, 2019	$	55,057	$	1,065,301	$	1,573,586		$	62,617		$	(278,771	)	$	2,477,790

Balance – April 1, 2020	$	55,057	$	1,073,089	$	1,646,751		$	219,390		$	(330,846	)	$	2,663,441
Total comprehensive income		—		—		60,529			64,872			—			125,401
Dividends ($0.31 per share)		—		—		(14,991	)		—			—			(14,991	)
Purchase of treasury stock		—		5,115		—			—			(5,188	)		(73	)
Forfeitures of equity awards, net of issuances		—		155		—			—			(155	)		—
Recognition of equity-based compensation		—		3,292		—			—			—			3,292
Sale of treasury stock		—		25		—			—			112			137
Exercise of stock options		—		37		—			—			151			188
Balance – June 30, 2020	$	55,057	$	1,081,713	$	1,692,289		$	284,262		$	(335,926	)	$	2,777,395

	Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total
Balance – January 1, 2019	$	55,057	$	1,054,601	$	1,488,421		$	(95,782	)	$	(273,827	)	$	2,228,470
Total comprehensive income		—		—		114,703			158,399			—			273,102
Dividends ($0.60 per share)		—		—		(29,538	)		—			—			(29,538	)
Purchase of treasury stock		—		—		—			—			(4,114	)		(4,114	)
Forfeitures of equity awards, net of issuances		—		3,107		—			—			(2,503	)		604
Recognition of equity-based compensation		—		7,006		—			—			—			7,006
Sale of treasury stock		—		185		—			—			274			459
Exercise of stock options		—		402		—			—			1,399			1,801
Balance – June 30, 2019	$	55,057	$	1,065,301	$	1,573,586		$	62,617		$	(278,771	)	$	2,477,790

Balance – January 1, 2020	$	55,057	$	1,073,764	$	1,672,438		$	83,180		$	(277,999	)	$	2,606,440
Total comprehensive income		—		—		57,090			201,082			—			258,172
Dividends ($0.62 per share)		—		—		(30,200	)		—			—			(30,200	)
Purchase of treasury stock		—		615		—			—			(60,074	)		(59,459	)
Forfeitures of equity awards, net of issuances		—		676		—			—			(83	)		593
Recognition of equity-based compensation		—		6,109		—			—			—			6,109
Sale of treasury stock		—		120		—			—			201			321
Exercise of stock options		—		429		—			—			2,029			2,458
Cumulative effect adjustment⁽¹⁾		—		—		(7,039	)		—			—			(7,039	)
Balance – June 30, 2020	$	55,057	$	1,081,713	$	1,692,289		$	284,262		$	(335,926	)	$	2,777,395

(1)	Related to the adoption of ASU No. 2016-13. See Note 3, “New Accounting Pronouncements,” for further detail.

See Notes to Consolidated Financial Statements.

UMB FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

	For the Six Months Ended
	June 30,
	2020			2019
OPERATING ACTIVITIES
Net income	$	57,090		$	114,703
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses⁽¹⁾		109,500			23,350
Net (accretion) amortization of premiums and discounts from acquisition		(176	)		273
Depreciation and amortization		31,054			27,316
Deferred income tax benefit		(16,990	)		(564	)
Net increase in trading securities and other earning assets		(8,593	)		(22,779	)
(Gains) losses on sales of securities available for sale, net		(5,233	)		594
Gains on sales of assets		(1,767	)		(612	)
Amortization of securities premiums, net of discount accretion		19,990			17,321
Originations of loans held for sale		(298,732	)		(54,857	)
Gains on sales of loans held for sale, net		(810	)		(436	)
Proceeds from sales of loans held for sale		299,132			55,714
Equity-based compensation		6,702			7,610
Net tax benefit related to equity compensation plans		279			563
Changes in:
Accrued income		(2,454	)		(14,228	)
Accrued expenses and taxes		22,535			43,198
Other assets and liabilities, net		(109,842	)		(63,201	)
Net cash provided by operating activities		101,685			133,965
INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity		59,020			58,137
Proceeds from sales of securities available for sale		250,609			144,735
Proceeds from maturities of securities available for sale		1,263,352			535,514
Purchases of securities held to maturity		(60,856	)		(8,141	)
Purchases of securities available for sale		(2,297,717	)		(1,111,831	)
Payment on low-income housing tax credit investment commitments		(5,482	)		(1,363	)
Net increase in loans		(1,888,618	)		(746,789	)
Net decrease in fed funds sold and resell agreements		230,702			343,398
Net cash activity from acquisitions and divestitures		24			—
Net decrease (increase) in interest bearing balances due from other financial institutions		550			(4,747	)
Purchases of premises and equipment		(35,361	)		(22,827	)
Proceeds from sales of premises and equipment		8,420			3,865
Proceeds from bank-owned and company-owned life insurance death benefit		1,474			—
Net cash used in investing activities		(2,473,883	)		(810,049	)
FINANCING ACTIVITIES
Net increase in demand and savings deposits		3,290,366			260,698
Net decrease in time deposits		(434,206	)		(141,728	)
Net increase in fed funds purchased and repurchase agreements		67,186			189,964
Proceeds from short-term debt		15,000			—
Cash dividends paid		(30,040	)		(29,497	)
Proceeds from exercise of stock options and sales of treasury shares		2,779			2,260
Purchases of treasury stock		(59,459	)		(4,114	)
Net cash provided by financing activities		2,851,626			277,583
Increase (decrease) in cash and cash equivalents		479,428			(398,501	)
Cash and cash equivalents at beginning of period		1,669,170			1,674,121
Cash and cash equivalents at end of period	$	2,148,598		$	1,275,620

Supplemental disclosures:
Income tax payments	$	17,399	$	606
Total interest payments		59,584		95,511
Noncash disclosures:
Acquisition of low-income housing tax credit investments	$	47,172	$	6,765
Commitment to fund low-income housing tax credit investments		47,172		6,765

(1)	For the six months ended June 30, 2019, this line represents the Provision for loan losses. See further discussion of this change in Note 3, “New Accounting Pronouncements.”

See Notes to Consolidated Financial Statements.

UMB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2020 (UNAUDITED)

1. Financial Statement Presentation

The Consolidated Financial Statements include the accounts of UMB Financial Corporation and its subsidiaries (collectively, the Company) after the elimination of all intercompany transactions. In the opinion of management of the Company, all adjustments relating to items that are of a normal recurring nature and necessary for a fair presentation of the financial position and results of operations have been made. The results of operations and cash flows for the interim periods presented may not be indicative of the results of the full year ending December 31, 2020. The financial statements should be read in conjunction with “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” within this Quarterly Report on Form 10-Q (the Form 10-Q) and in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on February 27, 2020 (the Form 10-K).

The Company is a financial holding company, which offers a wide range of banking and other financial services to its customers through its branches and offices. The Company’s national bank, UMB Bank, National Association (the Bank), has its principal office in Missouri and also has branches in Arizona, Colorado, Illinois, Kansas, Nebraska, Oklahoma, and Texas. The Company also has offices in Pennsylvania, South Dakota, Indiana, Utah, Minnesota, California, and Wisconsin.

2. Summary of Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also impact reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies to assist the reader in understanding the financial presentation is provided in the Notes to Consolidated Financial Statements in the Form 10-K.

Cash and cash equivalents

Cash and cash equivalents includes Cash and due from banks and amounts due from the Federal Reserve Bank (FRB). Cash on hand, cash items in the process of collection, and amounts due from correspondent banks are included in Cash and due from banks. Amounts due from the FRB are interest-bearing for all periods presented and are included in the Interest-bearing due from banks line on the Company’s Consolidated Balance Sheets.

This table provides a summary of cash and cash equivalents as presented on the Consolidated Statements of Cash Flows as of June 30, 2020 and June 30, 2019 (in thousands):

	June 30,
	2020		2019
Due from the FRB	$	1,685,749	$	852,972
Cash and due from banks		462,849		422,648
Cash and cash equivalents at end of period	$	2,148,598	$	1,275,620

Also included in the Interest-bearing due from banks, but not considered cash and cash equivalents, are interest-bearing accounts held at other financial institutions, which totaled $28.7 million and $23.6 million at June 30, 2020 and June 30, 2019, respectively.

Per Share Data

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted quarter-to-date net income per share includes the dilutive effect of 86,528 and 261,960 shares issuable upon the exercise of stock options, nonvested restricted shares, and nonvested restricted stock units granted by the Company and outstanding at June 30, 2020 and 2019, respectively. Diluted year-to-date net income per share includes the dilutive effect of 150,946 and 273,663 shares issuable upon the exercise of stock options, nonvested restricted shares, and nonvested restricted stock units granted by the Company and outstanding at June 30, 2020 and 2019, respectively.

Certain options, restricted stock and restricted stock units issued under employee benefits plans were excluded from the computation of diluted earnings per share because they were anti-dilutive. Outstanding stock options, restricted stock and restricted stock units of 540,525 and 118,029 for the three months ended June 30, 2020 and 2019, respectively, and 371,885 and 118,029 for the six months ended June 30, 2020 and 2019, respectively, were excluded from the computation of diluted income per share because their inclusion would have been anti-dilutive.

Derivatives

The Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, four of the Company’s derivatives are designated in qualifying hedging relationships. However, the remainder of the Company’s derivatives are not designated in qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities. All changes in fair value of the Company’s non-designated derivatives and fair value hedges are recognized directly in earnings. Changes in fair value of the Company’s cash flow hedges are recognized in accumulated other comprehensive income (AOCI) and are reclassified to earnings when the hedged transaction affects earnings.

3. New Accounting Pronouncements

Leases In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases – Accounting Standards Codification (ASC) Topic 842. In January, July, and December 2018 and March 2019, the FASB issued implementation amendments to the February 2016 ASU (collectively, the amended guidance). The amended guidance changed the accounting treatment of leases, in that lessees recognize most leases on-balance sheet. This increased reported assets and liabilities, as lessees are required to recognize a right-of-use asset along with a lease liability, measured on a discounted basis. The amended guidance allows an entity to choose either the effective date, or the beginning of the earliest comparative period presented in the financial statements, as its date of initial application. The Company adopted the amended guidance on January 1, 2019, using the effective date as the date of initial application. Adoption of the amended guidance resulted in the recording of a right-of-use asset of $58.2 million and a lease liability of $63.0 million to its Consolidated Balance Sheets as of January 1, 2019.

Credit Losses In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” In April and November 2019, the FASB issued implementation amendments to the June 2016 ASU (collectively, the amended guidance). The amended guidance replaced the current incurred loss methodology for recognizing credit losses with a current expected credit loss (CECL) model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amended guidance broadened the information that an entity must consider in developing its expected credit loss estimates. Additionally, the updates amended the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The amended guidance required enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. The Company adopted the amended guidance on January 1, 2020 using a modified retrospective approach for adoption.

Results for reporting periods beginning after January 1, 2020 are presented under ASC Topic 326, Financial Instruments – Credit Losses, while prior period amounts continue to be reported in accordance with previously applicable Generally Accepted Accounting Principles (GAAP). Upon adoption, the Company recorded a cumulative effect adjustment to the Company’s Consolidated Balance Sheets of $9.0 million as increase to the allowance for credit losses and $7.0 million as a reduction to retained earnings, net of deferred tax balances. See Note 4, “Loans and Allowance for Credit Losses” for related disclosures.

4. Loans and Allowance for Credit Losses

The Company adopted the CECL methodology for measuring credit losses as of January 1, 2020. All disclosures as of and for the six months ended June 30, 2020 are presented in accordance with ASC 326, Financial Instruments – Credit Losses (ASC 326). The Company did not recast comparative financial periods and has presented those disclosures under previously applicable GAAP.

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. Authority levels are established for the extension of credit to ensure consistency throughout the Company. It is necessary that policies, processes and practices implemented to control the risks of individual credit transactions and portfolio segments are sound and adhered to. The Company maintains an independent loan review department that reviews and validates the risk assessment on a continual basis. Management regularly evaluates the results of the loan reviews. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers.

Specialty lending loans include Asset-based and Factoring loans. Asset-based loans are offered primarily in the form of revolving lines of credit to commercial borrowers that do not generally qualify for traditional bank financing. Asset-based loans are underwritten based primarily upon the value of the collateral pledged to secure the loan, rather than on the borrower’s general financial condition. The Company utilizes pre-loan due diligence techniques, monitoring disciplines, and loan management practices common within the asset-based lending industry to underwrite loans to these borrowers. Factoring loans provide working capital through the purchase and/or financing of accounts receivable to borrowers in the transportation industry and to commercial borrowers that do not generally qualify for traditional bank financing.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires that an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner occupied real estate. Also included in Commercial real estate are Construction loans that are underwritten using feasibility studies, independent appraisal reviews, sensitivity analysis or absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is

obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions, and the availability of long-term financing.

Consumer real estate loans, including residential real estate and home equity loans, are underwritten based on the borrower’s loan-to-value percentage, collection remedies, and overall credit history.

Consumer loans are underwritten based on the borrower’s repayment ability. The Company monitors delinquencies on all of its consumer loans and leases. The underwriting and review practices combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Consumer loans and leases that are 90 days past due or more are considered non-performing.

Credit cards include both commercial and consumer credit cards. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans, including an analysis of the borrower’s cash flow, available business capital, and overall creditworthiness of the borrower. Consumer credit cards are underwritten based on the borrower’s repayment ability. The Company monitors delinquencies on all of its consumer credit cards and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its consumer credit card loans.

Credit risk is a potential loss resulting from nonpayment of either the primary or secondary exposure. Credit risk is mitigated with formal risk management practices and a thorough initial credit-granting process including consistent underwriting standards and approval process. Control factors or techniques to minimize credit risk include knowing the client, understanding total exposure, analyzing the client and debtor’s financial capacity, and monitoring the client’s activities. Credit risk and portions of the portfolio risk are managed through concentration considerations, average risk ratings, and other aggregate characteristics.

Loan Aging Analysis

This table provides a summary of loan classes and an aging of past due loans at June 30, 2020 and December 31, 2019 (in thousands):

	June 30, 2020
	30-89 Days Past Due and Accruing		Greater than 90 Days Past Due and Accruing		Non- Accrual Loans		Total Past Due		Current		Total Loans
Loans
Commercial and industrial	$	12,505	$	680	$	39,982	$	53,167	$	6,947,002	$	7,000,169
Specialty lending		—		—		538		538		413,168		413,706
Commercial real estate		5,490		2,360		35,531		43,381		5,525,306		5,568,687
Consumer real estate		1,316		—		5,148		6,464		1,624,096		1,630,560
Consumer		870		78		208		1,156		154,625		155,781
Credit cards		1,266		1,470		815		3,551		336,936		340,487
Leases and other		—		—		23		23		195,684		195,707
Total loans	$	21,447	$	4,588	$	82,245	$	108,280	$	15,196,817	$	15,305,097

	December 31, 2019
	30-89 Days Past Due and Accruing		Greater than 90 Days Past Due and Accruing		Non- Accrual Loans		Total Past Due		Current		Total Loans
Loans
Commercial:
Commercial	$	10,491	$	250	$	25,592	$	36,333	$	5,805,669	$	5,842,002
Asset-based		—		—		—		—		292,231		292,231
Factoring		—		—		—		—		170,560		170,560
Commercial – credit card		760		52		24		836		181,402		182,238
Real estate:
Real estate – construction		3,933		—		95		4,028		838,318		842,346
Real estate – commercial		3,365		36		24,030		27,431		4,301,293		4,328,724
Real estate – residential		485		—		2,748		3,233		930,043		933,276
Real estate – HELOC		544		—		2,798		3,342		474,809		478,151
Consumer:
Consumer – credit card		1,835		1,681		803		4,319		222,423		226,742
Consumer – other		81		50		257		388		133,086		133,474
Leases		—		—		—		—		1,978		1,978
Total loans	$	21,494	$	2,069	$	56,347	$	79,910	$	13,351,812	$	13,431,722

The Company sold consumer real estate loans with proceeds of $299.1 million and $55.7 million in the secondary market without recourse during the six months ended June 30, 2020 and 2019, respectively.

The Company has ceased the recognition of interest on loans with a carrying value of $82.2 million and $56.3 million at June 30, 2020 and December 31, 2019, respectively. Restructured loans totaled $11.8 million and $19.8 million at June 30, 2020 and December 31, 2019, respectively. Loans 90 days past due and still accruing interest amounted to $4.6 million and $2.1 million at June 30, 2020 and December 31, 2019, respectively. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. There was an insignificant amount of interest reversed related to loans on nonaccrual during 2020. Nonaccrual loans with no related allowance for credit losses totaled $56.2 million at June 30, 2020.

The following table provides the amortized cost of nonaccrual loans with no related allowance for credit losses by loan class at June 30, 2020 (in thousands):

	June 30, 2020
	Non- Accrual Loans		Amortized Cost of Non-Accrual Loans with no related Allowance
Loans
Commercial and industrial	$	39,982	$	19,683
Specialty lending		538		538
Commercial real estate		35,531		29,812
Consumer real estate		5,148		5,148
Consumer		208		208
Credit cards		815		815
Leases and other		23		23
Total loans	$	82,245	$	56,227

Amortized Cost

The following disclosure is presented in accordance with ASC 326.

The following table provides a summary of the amortized cost balance of each of the Company’s loan classes disaggregated by collateral type and origination year as of June 30, 2020 (in thousands):

	June 30, 2020
													Amortized Cost - Revolving Loans		Amortized Cost - Revolving Loans Converted to Term Loans




Loan Segment and Type	Amortized Cost Basis by Origination Year - Term Loans
Loan Segment and Type	2020		2019		2018		2017		2016		Prior						Total
Commercial and industrial:
Equipment/Accounts Receivable/Inventory	$	2,747,391	$	888,198	$	604,472	$	239,238	$	209,719	$	133,629	$	1,958,136	$	5,668	$	6,786,451
Agriculture		4,139		10,436		2,675		6,078		3,076		1,021		141,231		—		168,656
Overdrafts		—		—		—		—		—		—		45,062		—		45,062
Total Commercial and industrial		2,751,530		898,634		607,147		245,316		212,795		134,650		2,144,429		5,668		7,000,169
Specialty lending:
Asset-based lending		10,549		58,741		—		—		—		—		227,790		—		297,080
Factoring		—		—		—		—		—		—		116,626		—		116,626
Total Specialty lending		10,549		58,741		—		—		—		—		344,416		—		413,706
Commercial real estate:
Owner-occupied		316,187		371,127		272,386		209,485		147,403		244,285		21,619		26,545		1,609,037
Non-owner-occupied		348,982		509,523		274,344		239,342		271,723		198,205		37,887		204,242		2,084,248
Farmland		197,996		58,802		44,180		46,725		58,669		56,551		44,248		—		507,171
5+ Multi-family		108,935		61,089		47,415		42,479		110,554		11,162		1,582		—		383,216
1-4 Family construction		—		—		—		—		—		—		39,126		—		39,126
General construction		11,539		3,805		5,824		520		527		2,885		918,393		2,396		945,889
Total Commercial real estate		983,639		1,004,346		644,149		538,551		588,876		513,088		1,062,855		233,183		5,568,687
Consumer real estate:
HELOC		38,600		16,301		9,158		446		84		2,791		362,728		—		430,108
First lien: 1-4 family		418,194		342,737		101,371		115,564		96,794		102,244		353		1,037		1,178,294
Junior lien: 1-4 family		5,259		8,291		3,183		2,034		1,150		1,950		291		—		22,158
Total Consumer real estate		462,053		367,329		113,712		118,044		98,028		106,985		363,372		1,037		1,630,560
Consumer:
Revolving line		—		—		—		—		—		—		94,333		—		94,333
Auto		7,377		12,530		4,308		2,456		1,212		729		—		—		28,612
Other		2,556		4,107		2,860		549		1,173		306		21,285		—		32,836
Total Consumer		9,933		16,637		7,168		3,005		2,385		1,035		115,618		—		155,781
Credit cards:
Consumer		—		—		—		—		—		—		194,434		—		194,434
Commercial		—		—		—		—		—		—		146,053		—		146,053
Total Credit cards		—		—		—		—		—		—		340,487		—		340,487
Leases and other:
Leases		—		557		—		833		—		752		—		—		2,142
Other		9,854		11,964		8,572		3,092		1,530		5,791		152,762		—		193,565
Total Leases and other		9,854		12,521		8,572		3,925		1,530		6,543		152,762		—		195,707
Total loans	$	4,227,558	$	2,358,208	$	1,380,748	$	908,841	$	903,614	$	762,301	$	4,523,939	$	239,888	$	15,305,097

Accrued interest on loans totaled $52.2 million as of June 30, 2020 and is included in the Accrued income line on the Company’s Consolidated Balance Sheets. The total amount of accrued interest is excluded from the

amortized cost basis of loans presented above. Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivables.

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 the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.

The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. The loan ratings are summarized into the following categories: Non-watch list, Watch, Special Mention, Substandard, and Doubtful. Any loan not classified in one of the categories described below is considered to be a Non-watch list loan. A description of the general characteristics of the loan rating categories is as follows:

•

Watch – This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the borrower’s industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk. These loans are considered pass-rated credits.

•

Special Mention – This rating reflects a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the borrower’s credit position at some future date. The rating is not adversely classified and does not expose an institution to sufficient risk to warrant adverse classification.

•

Substandard – This rating represents an asset inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

•

Doubtful – This rating represents an asset that has all the weaknesses inherent in an asset classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage of strengthening the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, or perfecting liens.

Commercial and industrial

A discussion of the credit quality indicators that impact each type of collateral securing Commercial and industrial loans is included below:

Equipment, accounts receivable, and inventory General commercial and industrial loans are secured by working capital assets and non-real estate assets. The general purpose of these loans is for financing capital expenditures and current operations for commercial and industrial entities. These assets are short-term in nature. In the case of accounts receivable and inventories, the repayment of debt is reliant upon converting assets into cash or through goods and services being sold and collected. Collateral based-risk is due to aged short-term assets, which can be indicative of underlying issues with the borrower and lead to the value of the collateral being overstated.

Agriculture Agricultural loans are secured by non-real estate agricultural assets. These include shorter-term assets such as equipment, crops, and livestock. The risks associated with loans to finance crops or livestock include the borrower’s ability to successfully raise and market the commodity. Adverse weather conditions and other

natural perils can dramatically affect farmers’ or ranchers’ production and ability to service debt. Volatile commodity prices present another significant risk for agriculture borrowers. Market price volatility and production cost volatility can affect both revenues and expenses.

Overdrafts Commercial overdrafts are typically short-term and unsecured. Some commercial borrowers tie their overdraft obligation to their line of credit, so any draw on the line of credit will satisfy the overdraft.

Based on the factors noted above for each type of collateral, the Company assigns risk ratings to borrowers based on their most recently assessed financial position. The following table provides a summary of the amortized cost balance by collateral type and risk rating as of June 30, 2020 (in thousands):

	June 30, 2020
													Amortized Cost - Revolving Loans		Amortized Cost - Revolving Loans Converted to Term Loans




Risk by Collateral	Amortized Cost Basis by Origination Year - Term Loans
Risk by Collateral	2020		2019		2018		2017		2016		Prior						Total
Equipment/Accounts Receivable/Inventory
Non-watch list – Pass	$	2,620,382	$	869,081	$	584,919	$	220,917	$	183,502	$	129,250	$	1,758,732	$	5,668	$	6,372,451
Watch – Pass		41,238		6,332		6,268		5,700		23,522		2,412		62,846		—		148,318
Special Mention		21,713		8,949		3,434		4,179		758		780		43,558		—		83,371
Substandard		64,058		3,747		9,851		2,796		1,937		1,149		92,722		—		176,260
Doubtful		—		89		—		5,646		—		38		278		—		6,051
Total Equipment/Accounts Receivable/Inventory	$	2,747,391	$	888,198	$	604,472	$	239,238	$	209,719	$	133,629	$	1,958,136	$	5,668	$	6,786,451
Agriculture
Non-watch list – Pass	$	3,948	$	8,102	$	2,258	$	2,783	$	2,255	$	979	$	89,194	$	—	$	109,519
Watch – Pass		170		580		399		113		751		17		24,319		—		26,349
Special Mention		21		435		—		190		—		—		2,855		—		3,501
Substandard		—		1,319		18		2,992		70		25		24,863		—		29,287
Doubtful		—		—		—		—		—		—		—		—		—
Total Agriculture	$	4,139	$	10,436	$	2,675	$	6,078	$	3,076	$	1,021	$	141,231	$	—	$	168,656

Specialty lending

A discussion of the credit quality indicators that impact each type of collateral securing Specialty loans is included below:

Asset-based lending General asset-based loans are secured by accounts receivable, inventory, equipment, and real estate. The purpose of these loans is for financing current operations for commercial customers. The repayment of debt is reliant upon collection of the accounts receivable within 30 to 90 days or converting assets into cash or through goods and services being sold and collected. The Company tracks each individual borrower credit risk based on their loan to collateral position. Any borrower position where the underlying value of collateral is below the fair value of the loan is considered out-of-margin and inherently higher risk.

Factoring General factoring loans are secured by accounts receivable. The purpose of these loans is for financing current operations for trucking or other commercial customers. The repayment of debt is reliant upon collection of the accounts receivable within 30 to 90 days. The Company tracks each individual borrower’s credit risk based on their loan to collateral position. To assess credit risk, the portfolio is separated into two tiers and a specifically impaired category. Tier 1 are loans that have not experienced collateral coverage rates falling below an internally tracked threshold at any time during their relationship history. The internal threshold is lower than each customers’ actual contractual collateral coverage ratio. Tier 2 are loans that have experienced collateral coverage rates falling below the same internally tracked threshold during their relationship history. Loans evaluated for impairment are loans that have either experienced collateral coverage rates falling below an internally tracked

threshold during their relationship history, have balances that are greater than an internally tracked threshold, or are on non-accrual. The combination of these categories has created an associated allowance to this portfolio of $0.3 million as of June 30, 2020.

The following table provides a summary of the amortized cost balance by risk rating for asset-based loans as of June 30, 2020 (in thousands):

	June 30, 2020
Risk	Asset-based lending
In-margin	$	284,115
Out-of-margin		12,965
Total	$	297,080

The following table provides a summary of the amortized cost balance by risk rating for factoring loans as of June 30, 2020 (in thousands):

	June 30, 2020
Risk	Factoring
Tier 1	$	2,851
Tier 2		68,157
Evaluated for impairment		45,618
Total	$	116,626

Commercial real estate

A discussion of the credit quality indicators that impact each type of collateral securing Commercial real estate loans is included below:

Owner-occupied Owner-occupied loans are secured by commercial real estate. These loans are often longer tenured and susceptible to multiple economic cycles. The loans rely on the owner-occupied operations to service debt which cover a broad spectrum of industries. Real estate debt can carry a significant amount of leverage for a borrower to maintain.

Non-owner-occupied Non-owner-occupied loans are secured by commercial real estate. These loans are often longer tenured and susceptible to multiple economic cycles. The key element of risk in this type of lending is the cyclical nature of real estate markets. Although national conditions affect the overall real estate industry, the effect of national conditions on local markets is equally important. Factors such as unemployment rates, consumer demand, household formation, and the level of economic activity can vary widely from state to state and among metropolitan areas. In addition to geographic considerations, markets can be defined by property type. While all sectors are influenced by economic conditions, some sectors are more sensitive to certain economic factors than others.

Farmland Farmland loans are secured by real estate used for agricultural purposes such as crop and livestock production. Assets used as collateral are long-term assets that carry the ability to have longer amortizations and maturities. Longer terms carry the risk of added susceptibility to market conditions. The limited purpose of some Agriculture-related collateral affects credit risk because such collateral may have limited or no other uses to support values when loan repayment problems emerge.

5+ Multi-family 5+ multi-family loans are secured by a multi-family residential property. The primary risks associated with this type of collateral are largely driven by economic conditions. The national and local market conditions can change with unemployment rates or competing supply of multi-family housing. Tenants may not be able to afford their housing or have better options and this can result in increased vacancy. Rents may need to be lowered to fill apartment units. Increased vacancy and lower rental rates not only drive the borrower’s ability to repay debt but also contribute to how the collateral is valued.

1-4 Family construction 1-4 family construction loans are secured by 1-4 family residential real estate and are in the process of construction or improvements being made. The predominant risk inherent to this portfolio is the

risk associated with a borrower’s ability to successfully complete a project on time and within budget. Market conditions also play an important role in understanding the risk profile. Risk from adverse changes in market conditions from the start of development to completion can result in deflated collateral values

General construction General construction loans are secured by commercial real estate in process of construction or improvements being made and their repayment is dependent on the collateral’s completion. Construction lending presents unique risks not encountered in term financing of existing real estate. The predominant risk inherent to this portfolio is the risk associated with a borrower’s ability to successfully complete a project on time and within budget. Commercial properties under construction are susceptible to market and economic conditions. Demand from prospective customers may erode after construction begins because of a general economic slowdown or an increase in the supply of competing properties.

	June 30, 2020
													Amortized Cost - Revolving Loans		Amortized Cost - Revolving Loans Converted to Term Loans




Risk by Collateral	Amortized Cost Basis by Origination Year - Term Loans
Risk by Collateral	2020		2019		2018		2017		2016		Prior						Total
Owner-occupied
Non-watch list – Pass	$	303,899	$	364,413	$	258,991	$	177,588	$	143,569	$	228,164	$	13,424	$	26,545	$	1,516,593
Watch – Pass		107		6,324		4,922		—		—		8,723		—		—		20,076
Special Mention		2,519		—		4,870		—		1,650		1,917		43		—		10,999
Substandard		9,662		390		3,603		31,897		1,560		5,481		8,152		—		60,745
Doubtful		—		—		—		—		624		—		—		—		624
Total Owner-occupied	$	316,187	$	371,127	$	272,386	$	209,485	$	147,403	$	244,285	$	21,619	$	26,545	$	1,609,037
Non-owner-occupied
Non-watch list – Pass	$	347,954	$	509,222	$	274,344	$	231,879	$	269,758	$	186,626	$	37,887	$	204,242	$	2,061,912
Watch – Pass		—		301		—		7,463		1,965		10,193		—		—		19,922
Special Mention		850		—		—		—		—		1,330		—		—		2,180
Substandard		178		—		—		—		—		56		—		—		234
Doubtful		—		—		—		—		—		—		—		—		—
Total Non-owner-occupied	$	348,982	$	509,523	$	274,344	$	239,342	$	271,723	$	198,205	$	37,887	$	204,242	$	2,084,248
Farmland
Non-watch list – Pass	$	164,615	$	37,579	$	22,949	$	32,439	$	42,892	$	22,318	$	22,223	$	—	$	345,015
Watch – Pass		19,455		9,325		15,251		6,018		9,160		18,282		18,028		—		95,519
Special Mention		—		—		—		1,257		1,149		508		695		—		3,609
Substandard		13,926		11,898		5,980		7,011		5,468		15,443		3,302		—		63,028
Doubtful		—		—		—		—		—		—		—		—		—
Total Farmland	$	197,996	$	58,802	$	44,180	$	46,725	$	58,669	$	56,551	$	44,248	$	—	$	507,171
5+ Multi-family
Non-watch list – Pass	$	102,688	$	58,634	$	47,415	$	41,137	$	110,554	$	11,162	$	1,582	$	—	$	373,172
Watch – Pass		—		—		—		1,342		—		—		—		—		1,342
Special Mention		—		2,455		—		—		—		—		—		—		2,455
Substandard		6,247		—		—		—		—		—		—		—		6,247
Doubtful		—		—		—		—		—		—		—		—		—
Total 5+ Multi-family	$	108,935	$	61,089	$	47,415	$	42,479	$	110,554	$	11,162	$	1,582	$	—	$	383,216
1-4 Family construction
Non-watch list – Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	39,126	$	—	$	39,126
Watch – Pass		—		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total 1-4 Family construction	$	—	$	—	$	—	$	—	$	—	$	—	$	39,126	$	—	$	39,126
General construction
Non-watch list – Pass	$	11,236	$	3,713	$	5,664	$	520	$	527	$	2,885	$	915,011	$	2,396	$	941,952
Watch – Pass		—		—		—		—		—		—		—		—		—
Special Mention		303		—		—		—		—		—		—		—		303
Substandard		—		—		160		—		—		—		3,382		—		3,542
Doubtful		—		92		—		—		—		—		—		—		92
Total General construction	$	11,539	$	3,805	$	5,824	$	520	$	527	$	2,885	$	918,393	$	2,396	$	945,889

Consumer real estate

A discussion of the credit quality indicators that impact each type of collateral securing Consumer real estate loans is included below:

HELOC HELOC loans are revolving lines of credit secured by 1-4 family residential property. The primary risk is the borrower’s inability to repay debt. Revolving notes are often associated with HELOCs that can be secured by real estate without a 1st lien priority. Collateral is susceptible to market volatility impacting home values or economic downturns.

First lien: 1-4 family First lien 1-4 family loans are secured by a first lien on 1-4 family residential property. These term loans carry longer maturities and amortizations. The longer tenure exposes the borrower to multiple economic cycles, coupled with longer amortizations that result in smaller principal reduction early in the life of the loan. Collateral is susceptible to market volatility impacting home values.

Junior lien: 1-4 family Junior lien 1-4 family loans are secured by a junior lien on 1-4 family residential property. The Company’s primary risk is the borrower’s inability to repay debt and not being in a first lien position. Collateral is susceptible to market volatility impacting home values or economic downturns.

A borrower is considered non-performing if the Company has ceased the recognition of interest and the loan is placed on non-accrual. Charge-offs and borrower performance are tracked on a loan origination vintage basis. Certain vintages, based on their maturation cycle, could be at higher risk due to collateral-based risk factors. The following table provides a summary of the amortized cost balance by collateral type and risk rating as of June 30, 2020 (in thousands):

	June 30, 2020
													Amortized Cost - Revolving Loans		Amortized Cost - Revolving Loans Converted to Term Loans




Risk by Collateral	Amortized Cost Basis by Origination Year - Term Loans
Risk by Collateral	2020		2019		2018		2017		2016		Prior						Total
HELOC
Performing	$	38,600	$	16,282	$	9,131	$	446	$	84	$	2,742	$	359,396	$	—	$	426,681
Non-performing		—		19		27		—		—		49		3,332		—		3,427
Total HELOC	$	38,600	$	16,301	$	9,158	$	446	$	84	$	2,791	$	362,728	$	—	$	430,108
First lien: 1-4 family
Performing	$	418,194	$	342,605	$	101,371	$	115,267	$	96,208	$	101,665	$	353	$	1,037	$	1,176,700
Non-performing		—		132		—		297		586		579		—		—		1,594
Total First lien: 1-4 family	$	418,194	$	342,737	$	101,371	$	115,564	$	96,794	$	102,244	$	353	$	1,037	$	1,178,294
Junior lien: 1-4 family
Performing	$	5,259	$	8,291	$	3,135	$	2,011	$	1,108	$	1,935	$	291	$	—	$	22,030
Non-performing		—		—		48		23		42		15		—		—		128
Total Junior lien: 1-4 family	$	5,259	$	8,291	$	3,183	$	2,034	$	1,150	$	1,950	$	291	$	—	$	22,158

Consumer

A discussion of the credit quality indicators that impact each type of collateral securing Consumer loans is included below:

Revolving line Consumer Revolving lines of credit are secured by consumer assets other than real estate. The primary risk associated with this collateral is related to market volatility and the value of the underlying financial assets.

Auto Direct consumer auto loans are secured by new and used consumer vehicles. The primary risk with this collateral class is the rate at which the collateral depreciates.

Other This category includes Other consumer loans made to an individual. The primary risk for this category is for those loans where the loan is unsecured. This collateral type also includes other unsecured lending such as consumer overdrafts.

	June 30, 2020
													Amortized Cost - Revolving Loans		Amortized Cost - Revolving Loans Converted to Term Loans




Risk by Collateral	Amortized Cost Basis by Origination Year - Term Loans
Risk by Collateral	2020		2019		2018		2017		2016		Prior						Total
Revolving line
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	94,210	$	—	$	94,210
Non-performing		—		—		—		—		—		—		123		—		123
Total Revolving line	$	—	$	—	$	—	$	—	$	—	$	—	$	94,333	$	—	$	94,333
Auto
Performing	$	7,377	$	12,470	$	4,304	$	2,456	$	1,212	$	729	$	—	$	—	$	28,548
Non-performing		—		60		4		—		—		—		—		—		64
Total Auto	$	7,377	$	12,530	$	4,308	$	2,456	$	1,212	$	729	$	—	$	—	$	28,612
Other
Performing	$	2,539	$	4,107	$	2,860	$	545	$	1,173	$	306	$	21,285	$	—	$	32,815
Non-performing		17		—		—		4		—		—		—		—		21
Total Other	$	2,556	$	4,107	$	2,860	$	549	$	1,173	$	306	$	21,285	$	—	$	32,836

Credit cards

A discussion of the credit quality indicators that impact Credit card loans is included below:

Consumer Consumer credit card loans are revolving loans made to individuals. The primary risk associated with this collateral class is credit card debt is generally unsecured; therefore, repayment depends primarily on a borrower’s willingness and capacity to repay. The highly competitive environment for credit card lending provides consumers with ample opportunity to hold several credit cards from different issuers and to pay only minimum monthly payments on outstanding balances. In such an environment, borrowers may become over-extended and unable to repay, particularly in times of an economic downturn or a personal catastrophic event.

The consumer credit card portfolio is segmented by borrower payment activity. Transactors are defined as accounts that pay off their balance by the end of each statement cycle. Revolvers are defined as an account that carries a balance from statement cycle to the next. These accounts incur monthly finance charges, and, sometimes, late fees. Revolvers are inherently higher risk and are tracked by FICO score.

Commercial Commercial credit card loans are revolving loans made to small and commercial businesses. The primary risk associated with this collateral class is credit card debt is generally unsecured; therefore, repayment depends primarily on a borrower’s willingness and capacity to repay. Borrowers may become over-extended and unable to repay, particularly in times of an economic downturn or a catastrophic event.

The commercial credit card portfolio is segmented by current and past due payment status. A borrower is past due after 30 days. In general, commercial credit card customers do not have incentive to hold a balance resulting in

paying interest on credit card debt as commercial customers will typically have other debt obligations with lower interest rates in which they can utilize for capital.

The following table provides a summary of the amortized cost balance of consumer credit cards by risk rating as of June 30, 2020 (in thousands):

	June 30, 2020
Risk	Consumer
Transactor accounts	$	51,350
Revolver accounts (by FICO score):
Less than 600		8,673
600-619		3,359
620-639		5,628
640-659		9,868
660-679		17,452
680-699		19,268
700-719		18,669
720-739		17,759
740-759		14,248
760-779		9,732
780-799		6,742
800-819		5,299
820-839		3,933
840+		2,454
Total	$	194,434

The following table provides a summary of the amortized cost balance of commercial credit cards by risk rating as of June 30, 2020 (in thousands):

	June 30, 2020
Risk	Commercial
Current	$	140,108
Past Due		5,945
Total	$	146,053

Leases and other

A discussion of the credit quality indicators that impact each type of collateral securing Leases and other loans is included below:

Leases Leases are either loans to individuals for household, family and other personal expenditures or are loans related to all other direct financing and leveraged leases on property for leasing to lessees other than for household, family and other personal expenditure purposes. All leases are secured by the lease between the lessor and the lessee. These assignments grant the creditor a security interest in the rent stream from any lease, an important source of cash to pay the note in case of the borrower’s default.

Other Other loans are loans that are obligations of states and political subdivisions in the U.S., loans to non-depository financial institutions, loans for purchasing or carrying securities, or all other non-consumer loans. Risk associated with other loans is tied to the underlying collateral by each type of loan. Collateral is generally equipment, accounts receivable, inventory, 1-4 family residential construction and susceptible to the same risks mentioned with those collateral types previously. Other risks consist of collateral that is secured by the stock of a non-depository financial institution, which can be unlisted stock with a limited market for the stock, or volatility of asset values driven by market performance.

	June 30, 2020
Risk	Leases		Other
Non-watch list – Pass	$	2,142	$	192,719
Watch – Pass		—		600
Special Mention		—		—
Substandard		—		246
Doubtful		—		—
Total	$	2,142	$	193,565

The following disclosures are presented under previously applicable GAAP.

The description of the general characteristics of the loan rating categories is as described above, however, in the prior period disclosures the Substandard loan rating category may also include loans where the collection of full principal is doubtful or remote.

All other classes of loans are generally evaluated and monitored based on payment activity. Non-performing loans include restructured loans on non-accrual and all other non-accrual loans.

This table provides an analysis of the credit risk profile of each loan class at December 31, 2019 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating

	December 31, 2019
	Commercial		Asset-based		Factoring		Real estate – construction		Real estate – commercial
Non-watch list – Pass	$	5,380,205	$	230,526	$	127,310	$	837,836	$	4,078,673
Watch – Pass		257,040		—		—		175		110,530
Special Mention		91,020		34,640		1,376		307		28,020
Substandard		113,737		27,065		41,874		4,028		111,501
Total	$	5,842,002	$	292,231	$	170,560	$	842,346	$	4,328,724

Credit Exposure

Credit Risk Profile Based on Payment Activity

	December 31, 2019
	Commercial – credit card		Real estate – residential		Real estate – HELOC		Consumer – credit card		Consumer – other		Leases
Performing	$	182,214	$	926,312	$	468,228	$	225,939	$	132,414	$	1,978
Non-performing		24		6,964		9,923		803		1,060		—
Total	$	182,238	$	933,276	$	478,151	$	226,742	$	133,474	$	1,978

Allowance for Credit Losses

The allowance for credit losses (ACL) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance

when management believes the loan balance becomes uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in portfolio industry-based segmentation, risk rating and FICO score changes, prepayment assumptions, changes in environmental conditions, or other relevant factors. For economic forecasts, the Company uses the Moody’s baseline scenario. The Company has developed a dynamic reasonable and supportable forecast period that ranges from one to three years and changes based on economic conditions. Due to current economic conditions, the Company’s reasonable and supportable forecast period is one year. After the reasonable and supportable forecast period, the Company reverts to historical losses. The reversion method applied to each portfolio can either be cliff or straight-line over four periods. The method is determined by loss specific data at the end of the reasonable and supportable forecast period.

The ACL is measured on a collective (pool) basis when similar risk characteristics exists. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods. The Company’s portfolio segmentation consists of Commercial and industrial, Specialty lending, Commercial real estate, Consumer real estate, Consumer, Credit cards, Leases and other, and Held-to-maturity securities. Multiple modeling techniques are used to measure credit losses based on the portfolio.

The Commercial & industrial and Leases and other segments are measured using a probability of default and loss given default method. Primary risk drivers within the segment are risk ratings of the individual loans along with changes of macro-economic variables such as interest rates and farm income.

Collateral positions for Specialty lending loans are continuously monitored by the Company and the borrower is required to continually adjust the amount of collateral securing the loan. Credit losses are measured for any position where the amortized cost basis is greater than the fair value of the collateral.

The Commercial real estate segment is measured using a probability of default and loss given default method. Primary risk drivers within the segment are risk ratings of the individual loans, along with changes of macro-economic variables, such as interest rates, CRE price index, median household income, construction activity, farm income, and vacancy rates.

The Consumer real estate and Consumer segments are measured using an origination vintage loss rate method. The primary risk driver within the segments is year of origination along with changes of macro-economic variables such as unemployment and the home price index.

The Credit card segment contains both consumer and commercial credit cards. Consumer credit cards are measured using a probability of default and loss given default method. Primary risk drivers within the segment are FICO ratings of the individual card holders along with changes of macro-economic variables such as unemployment and retail sales. Commercial credit cards are measured using roll-rate loss rate method based on days past due.

The Held-to-maturity (HTM) securities segment is measured using a loss rate method based on historical bond rating transitions. Primary risk drivers within the segment are bond ratings in the portfolio along with changes of macro-economic conditions. For further discussion on these securities, including the aging and amortized cost balance of HTM securities, see Note 5, “Securities.”

See the credit quality indicators presented previously for a summary of current risk in the Company’s portfolio. Changes in economic forecasts will affect all portfolio segments, updated financial records from borrowers will affect portfolio segments by risk rating, updated FICO scores will affect consumer credit cards, payment performance will affect consumer and commercial credit card portfolio segments, and updated bond credit ratings will affect held-to-maturity securities. The Company actively monitors all credit quality indicators for risk changes that will influence the current estimate.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (TDR) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by the Company.

Credit card receivables do not have stated maturities. In determining the estimated life of a credit card receivable, management first estimates the future cash flows expected to be received and then applies those expected future cash flows to the credit card balance. Expected credit losses for credit cards are determined by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting period until the expected payments have been fully allocated. The ACL is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are excluded from the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for undiscounted selling costs as appropriate. All loans are considered collateral dependent if placed on non-accrual or are considered to be a TDR.

A loan modification is considered a TDR when a concession has been granted to a debtor experiencing financial difficulties. The allowance for credit loss on a TDR is measured using the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original effective interest rate of the loan.

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides a rollforward of the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2020 (in thousands):

	Three Months Ended June 30, 2020
	Commercial and industrial			Specialty lending			Commercial real estate			Consumer real estate			Consumer			Credit cards			Leases and other			Total - Loans			HTM			Total
Allowance for credit losses:
Beginning balance	$	122,532		$	3,549		$	35,395		$	4,177		$	1,127		$	18,823		$	2,308		$	187,911		$	3,235		$	191,146
Charge-offs		(1,121	)		—			(2,858	)		(206	)		(158	)		(2,004	)		(11	)		(6,358	)		—			(6,358	)
Recoveries		241			—			55			34			118			369			—			817			—			817
Provision		(7,042	)		(2,620	)		23,242			1,947			519			2,397			(513	)		17,930			70			18,000
Ending balance - ACL	$	114,610		$	929		$	55,834		$	5,952		$	1,606		$	19,585		$	1,784		$	200,300		$	3,305		$	203,605
Allowance for credit losses on off-balance sheet credit exposures:
Beginning balance	$	2,263		$	53		$	257		$	102		$	22		$	—		$	211		$	2,908		$	70		$	2,978
Provision		3,154			28			146			212			11			—			(38	)		3,513			(13	)		3,500
Ending balance - ACL on off-balance sheet	$	5,417		$	81		$	403		$	314		$	33		$	—		$	173		$	6,421		$	57		$	6,478

	Six Months Ended June 30, 2020
	Commercial and industrial			Specialty lending			Commercial real estate			Consumer real estate			Consumer			Credit cards			Leases and other			Total - Loans			HTM			Total
Allowance for credit losses:
Beginning balance	$	63,313		$	2,545		$	15,951		$	2,623		$	543		$	15,739		$	1,074		$	101,788		$	—		$	101,788
ASU 2016-13 adjustment		3,677			148			926			152			31			914			62			5,910			3,120			9,030
Charge-offs		(2,436	)		—			(8,920	)		(219	)		(406	)		(4,130	)		(11	)		(16,122	)		—			(16,122	)
Recoveries		1,717			—			76			48			215			853			—			2,909			—			2,909
Provision		48,339			(1,764	)		47,801			3,348			1,223			6,209			659			105,815			185			106,000
Ending balance - ACL	$	114,610		$	929		$	55,834		$	5,952		$	1,606		$	19,585		$	1,784		$	200,300		$	3,305		$	203,605
Allowance for credit losses on off-balance sheet credit exposures:
Beginning balance	$	2,263		$	53		$	257		$	102		$	22		$	—		$	211		$	2,908		$	70		$	2,978
Provision		3,154			28			146			212			11			—			(38	)		3,513			(13	)		3,500
Ending balance - ACL on off-balance sheet	$	5,417		$	81		$	403		$	314		$	33		$	—		$	173		$	6,421		$	57		$	6,478

The allowance for credit losses on off-balance sheet credit exposures is recorded in the Accrued expenses and taxes line of the Company’s Consolidated Balance Sheets, see Note 10 “Commitments, Contingencies and Guarantees.”

This table provides a rollforward of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2019 (in thousands):

	Three Months Ended June 30, 2019
	Commercial			Real estate			Consumer			Leases			Total
Allowance for loan losses:
Beginning balance	$	80,332		$	14,390		$	8,928		$	11		$	103,661
Charge-offs		(12,170	)		(151	)		(2,122	)		—			(14,443	)
Recoveries		380			865			629			—			1,874
Provision		7,466			2,153			1,382			(1	)		11,000
Ending balance	$	76,008		$	17,257		$	8,817		$	10		$	102,092

	Six Months Ended June 30, 2019
	Commercial			Real estate			Consumer			Leases			Total
Allowance for loan losses:
Beginning balance	$	80,888		$	13,664		$	9,071		$	12		$	103,635
Charge-offs		(23,333	)		(265	)		(4,589	)		—			(28,187	)
Recoveries		1,006			938			1,350			—			3,294
Provision		17,447			2,920			2,985			(2	)		23,350
Ending balance	$	76,008		$	17,257		$	8,817		$	10		$	102,092
Ending balance: individually evaluated for impairment	$	2,672		$	79		$	—		$	—		$	2,751
Ending balance: collectively evaluated for impairment		73,336			17,178			8,817			10			99,341
Loans:
Ending balance: loans	$	6,356,633		$	6,183,167		$	355,736		$	4,733		$	12,900,269
Ending balance: individually evaluated for impairment		28,143			20,675			—			—			48,818
Ending balance: collectively evaluated for impairment		6,328,490			6,162,492			355,736			4,733			12,851,451

Collateral Dependent Financial Assets

The following disclosure is presented in accordance with ASC 326.

This table provides the amortized cost balance of financial assets considered collateral dependent as of June 30, 2020 (in thousands):

	June 30, 2020
Loan Segment and Type	Amortized Cost of Collateral Dependent Assets		Related Allowance for Credit Losses		Amortized Cost of Collateral Dependent Assets with no related Allowance
Commercial and industrial:
Equipment/Accounts Receivable/Inventory	$	33,471	$	6,971	$	13,172
Agriculture		6,511		—		6,511
Total Commercial and industrial		39,982		6,971		19,683
Specialty lending:
Asset-based lending		466		—		466
Factoring		72		—		72
Total Specialty lending		538		—		538
Commercial real estate:
Owner-occupied		23,059		11		20,722
Non-owner-occupied		—		—		—
Farmland		9,203		—		9,203
5+ Multi-family		—		—		—
1-4 Family construction		—		—		—
General construction		3,474		582		92
Total Commercial real estate		35,736		593		30,017
Consumer real estate:
HELOC		3,426		—		3,426
First lien: 1-4 family		2,015		—		2,015
Junior lien: 1-4 family		214		—		214
Total Consumer real estate		5,655		—		5,655
Consumer:
Revolving line		123		—		123
Auto		64		—		64
Other		21		—		21
Total Consumer		208		—		208
Leases and other:
Leases		—		—		—
Other		23		—		23
Total Leases and other		23		—		23
Total loans	$	82,142	$	7,564	$	56,124

Impaired Loans

The following disclosure is presented under previously applicable GAAP.

This table provides an analysis of impaired loans by class at December 31, 2019 (in thousands):

	December 31, 2019
	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial:
Commercial	$	32,301	$	20,986	$	856	$	21,842	$	271	$	31,271
Asset-based		948		948		—		948		—		190
Factoring		2,979		2,979		—		2,979		—		3,917
Commercial – credit card		—		—		—		—		—		—
Real estate:
Real estate – construction		97		95		—		95		—		19
Real estate – commercial		28,258		19,314		4,928		24,242		387		19,826
Real estate – residential		1,751		1,617		93		1,710		80		846
Real estate – HELOC		—		—		—		—		—		—
Consumer:
Consumer – credit card		—		—		—		—		—		—
Consumer – other		—		—		—		—		—		70
Leases		—		—		—		—		—		—
Total	$	66,334	$	45,939	$	5,877	$	51,816	$	738	$	56,139

Troubled Debt Restructurings

A loan modification is considered a TDR when a concession has been granted to a debtor experiencing financial difficulties. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the debtor short-term cash relief to allow them to improve their financial condition. The Company’s TDRs are considered collateral dependent and evaluated as part of the allowance for credit loss as described above in the Allowance for Credit Losses section of this note.

The Company had no outstanding commitments to lend to borrowers with loan modifications classified as TDRs as of June 30, 2020 and June 30, 2019. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term.

For the three and six-month periods ended June 30, 2020, the Company had one new residential real estate TDR with a pre- and post-modification loan balance of $441 thousand. For the three and six-month periods ended June 30, 2019, the Company had no new TDRs. For the three and six-month periods ended June 30, 2020 and June 30, 2019, the Company had no TDRs for which there was a payment default within the 12 months following the restructure date.

5. Securities

Securities Available for Sale

This table provides detailed information about securities available for sale at June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury	$	29,904	$	1,016	$	—		$	30,920
U.S. Agencies		413,537		7,065		(50	)		420,552
Mortgage-backed		4,549,567		200,261		(371	)		4,749,457
State and political subdivisions		3,066,713		156,257		(336	)		3,222,634
Corporates		56,752		3,309		—			60,061
Total	$	8,116,473	$	367,908	$	(757	)	$	8,483,624

December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury	$	63,835	$	408	$	(165	)	$	64,078
U.S. Agencies		89,867		3,154		—			93,021
Mortgage-backed		4,030,688		58,184		(17,078	)		4,071,794
State and political subdivisions		2,954,276		78,867		(3,226	)		3,029,917
Corporates		185,314		3,259		(21	)		188,552
Total	$	7,323,980	$	143,872	$	(20,490	)	$	7,447,362

The following table presents contractual maturity information for securities available for sale at June 30, 2020 (in thousands):

	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	210,489	$	211,619
Due after 1 year through 5 years		1,009,733		1,030,371
Due after 5 years through 10 years		578,083		604,505
Due after 10 years		1,768,601		1,887,672
Total		3,566,906		3,734,167
Mortgage-backed securities		4,549,567		4,749,457
Total securities available for sale	$	8,116,473	$	8,483,624

Securities may be disposed of before contractual maturities due to sales by the Company or because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the six months ended June 30, 2020, proceeds from the sales of securities available for sale were $250.6 million compared to $144.7 million for the same period in 2019. Securities transactions resulted in gross realized gains of $5.4 million and $824 thousand for the six months ended June 30, 2020 and 2019, respectively. There were $171 thousand of gross realized losses for the six months ended June 30, 2020, and $1.4 million of gross realized losses for the six months ended June 30, 2019.

Securities available for sale with a fair value of $6.2 billion at June 30, 2020 and $5.8 billion at December 31, 2019 were pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements. Of these amounts, securities with a market value of $823.7 million and $481.2 million at June 30, 2020 and December 31, 2019, respectively, were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

Accrued interest on securities available for sale totaled $40.9 million as of June 30, 2020 and is included in the Accrued income line on the Company’s Consolidated Balance Sheets. The total amount of accrued interest is excluded from the amortized cost of available for sale securities presented above. Further, the Company has elected not to measure an ACL for accrued interest receivable.

The following table shows the Company’s available for sale investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2020 and December 31, 2019 (in thousands):

	Less than 12 months							12 months or more							Total
June 30, 2020	Count		Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses
Description of Securities
U.S. Treasury		—	$	—	$	—			—	$	—	$	—			—	$	—	$	—
U.S. Agencies		12		314,609		(50	)		—		—		—			12		314,609		(50	)
Mortgage-backed		14		80,375		(371	)		—		—		—			14		80,375		(371	)
State and political subdivisions		43		43,573		(331	)		3		1,060		(5	)		46		44,633		(336	)
Corporates		—		—		—			—		—		—			—		—		—
Total		69	$	438,557	$	(752	)		3	$	1,060	$	(5	)		72	$	439,617	$	(757	)

	Less than 12 months					12 months or more					Total
December 31, 2019	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Description of Securities
U.S. Treasury	$	—	$	—		$	19,863	$	(165	)	$	19,863	$	(165	)
U.S. Agencies		—		—			—		—			—		—
Mortgage-backed		947,415		(5,236	)		517,824		(11,842	)		1,465,239		(17,078	)
State and political subdivisions		361,440		(3,084	)		27,501		(142	)		388,941		(3,226	)
Corporates		13,685		(21	)		—		—			13,685		(21	)
Total	$	1,322,540	$	(8,341	)	$	565,188	$	(12,149	)	$	1,887,728	$	(20,490	)

The unrealized losses in the Company’s investments in U.S. Agency securities, Government Sponsored Entity (GSE) mortgage-backed securities, and State and political subdivisions were caused by changes in interest rates, and not from a decline in credit of the underlying issuers. The U.S. Treasury, U.S. Agency, and GSE mortgage-backed securities are all considered to be agency-backed securities with no risk of loss as they are either explicitly or implicitly guaranteed by the U.S. government. The changes in fair value in the agency-backed portfolios are solely driven by change in interest rates caused by changing economic conditions. The Company has no knowledge of any underlying credit issues and the cash flows underlying the debt securities have not changed and are not expected to be impacted by changes in interest rates. For the State and political subdivision portfolio, the majority of the Company’s holdings are in general obligation bonds, which have a very low historical default rate due to issuers generally having unlimited taxing authority to service the debt. For both the State and political subdivision and Corporate portfolios, the Company has a robust process for monitoring credit risk, including both pre-purchase and ongoing post-purchase credit reviews and analysis. The Company monitors credit ratings of all bond issuers in these segments and reviews available financial data, including market and sector trends. As of June 30, 2020, the Company does not believe the decline in value in these portfolios is related to credit impairments and instead is due to declining interest rates. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. As of June 30, 2020, there is no ACL related to the Company’s available for sale securities as the decline in fair value did not result from credit issues.

Securities Held to Maturity

The following table shows the Company’s held to maturity investments’ amortized cost, fair value, and gross unrealized gains and losses at June 30, 2020 and December 31, 2019, respectively (in thousands):

				Gross		Gross
	Amortized			Unrealized		Unrealized			Fair
June 30, 2020	Cost			Gains		Losses			Value
State and political subdivisions:
Due in 1 year or less	$	670		$	11	$	—		$	681
Due after 1 year through 5 years		125,326			4,251		(127	)		129,450
Due after 5 years through 10 years		437,943			17,035		(457	)		454,521
Due after 10 years		550,991			27,405		(9,215	)		569,181
Total state and political subdivisions	$	1,114,930		$	48,702	$	(9,799	)	$	1,153,833
Allowance for credit losses		(3,305	)
Total state and political subdivisions, net of allowance for credit losses	$	1,111,625

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2019	Cost		Gains		Losses			Value
State and political subdivisions:
Due in 1 year or less	$	15,323	$	5	$	(60	)	$	15,268
Due after 1 year through 5 years		100,623		374		(699	)		100,298
Due after 5 years through 10 years		394,591		389		(8,400	)		386,580
Due after 10 years		605,565		494		(25,860	)		580,199
Total state and political subdivisions	$	1,116,102	$	1,262	$	(35,019	)	$	1,082,345

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There were no sales of securities held to maturity during the six months ended June 30, 2020 or 2019.

The following table shows the Company’s held to maturity investments’ gross unrealized losses and fair value, aggregated by length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2020 and December 31, 2019, respectively (in thousands):

	Less than 12 months					12 months or more					Total
June 30, 2020	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and political subdivisions	$	75,383	$	(1,974	)	$	106,510	$	(7,825	)	$	181,893	$	(9,799	)
Total	$	75,383	$	(1,974	)	$	106,510	$	(7,825	)	$	181,893	$	(9,799	)

	Less than 12 months					12 months or more					Total
December 31, 2019	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and political subdivisions	$	471,544	$	(12,424	)	$	546,572	$	(22,595	)	$	1,018,116	$	(35,019	)
Total	$	471,544	$	(12,424	)	$	546,572	$	(22,595	)	$	1,018,116	$	(35,019	)

The unrealized losses in the Company’s held to maturity portfolio were caused by changes in the interest rate environment. The underlying bonds are evaluated for credit losses in conjunction with management’s estimate of the ACL based on credit rating.

The following table shows the amortized cost basis by credit rating of the Company’s held to maturity investments at June 30, 2020 (in thousands):

	Amortized Cost Basis by Credit Rating - HTM Debt Securities
June 30, 2020	AA		A		BBB		BB		B		CCC-C		Total
State and political subdivisions:
Competitive	$	8,998	$	362,821	$	614,675	$	23,364	$	—	$	12,561	$	1,022,419
Utilities		—		57,345		35,166		—		—		—		92,511
Total state and political subdivisions	$	8,998	$	420,166	$	649,841	$	23,364	$	—	$	12,561	$	1,114,930

Competitive held-to-maturity securities include not-for-profit enterprises that provide public functions such as housing, higher education or healthcare, but do so in a competitive environment. It also includes project financings that can have relatively high enterprise risk, such as deals backed by revenues from sports or convention facilities or start-up transportation ventures.

Utilities are public enterprises providing essential services with a monopoly or near-monopoly over the service area. This includes environmental utilities (water, sewer, solid waste), power utilities (electric distribution and generation, gas), and transportation utilities (airports, parking, toll roads, mass transit, ports).

All held to maturity securities were current and not past due at June 30, 2020.

Accrued interest on securities held to maturity totaled $5.0 million as of June 30, 2020 and is included in the Accrued income line on the Company’s Consolidated Balance Sheets. The total amount of accrued interest is excluded from the amortized cost of available for sale securities presented above. Further, the Company has elected not to measure an ACL for accrued interest receivable.

Trading Securities

There were net unrealized losses on trading securities of $1 thousand and net unrealized gains of $185 thousand at June 30, 2020 and 2019, respectively. Net unrealized gains/losses are included in trading and investment banking income on the Company’s Consolidated Statements of Income. Securities sold not yet purchased totaled $4.0 million and $14.6 million at June 30, 2020 and December 31, 2019, respectively, and are classified within the Other liabilities line of the Company’s Consolidated Balance Sheets.

Other Securities

The table below provides detailed information for FRB stock and Federal Home Loan Bank (FHLB) stock and other securities at June 30, 2020 and December 31, 2019 (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2020	Cost		Gains		Losses			Value
FRB and FHLB stock	$	33,252	$	—	$	—		$	33,252
Other securities – non-marketable		117,894		3,270		(210	)		120,954
Total Other securities	$	151,146	$	3,270	$	(210	)	$	154,206

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2019	Cost		Gains		Losses			Value
FRB and FHLB stock	$	33,262	$	—	$	—		$	33,262
Other securities – non-marketable		69,868		5,295		(5	)		75,158
Total Other securities	$	103,130	$	5,295	$	(5	)	$	108,420

Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Other non-marketable securities include Prairie Capital Management (PCM) alternative investments in hedge funds and private equity funds, which are accounted for as equity-method investments. Also included in other non-marketable securities are equity investments which are held by a subsidiary qualified as a Small Business Investment Company, as well as investments in low-income housing partnerships within the areas the Company serves. The fair value of other non-marketable securities includes alternative investment securities of $4.3 million at June 30, 2020 and $7.0 million at December 31, 2019. Unrealized gains or losses on alternative investments are recognized in the Other noninterest income line on the Company’s Consolidated Statements of Income.

6. Goodwill and Other Intangibles

Changes in the carrying amount of goodwill for the periods ended June 30, 2020 and December 31, 2019 by reportable segment are as follows (in thousands):

	Commercial Banking		Institutional Banking		Personal Banking		Total
Balances as of January 1, 2020	$	59,419	$	51,332	$	70,116	$	180,867
Balances as of June 30, 2020	$	59,419	$	51,332	$	70,116	$	180,867


Balances as of January 1, 2019	$	59,419	$	51,332	$	70,116	$	180,867
Balances as of December 31, 2019	$	59,419	$	51,332	$	70,116	$	180,867

The following table lists the finite-lived intangible assets that continue to be subject to amortization as of June 30, 2020 and December 31, 2019 (in thousands):

	As of June 30, 2020
	Core Deposit Intangible Assets		Customer Relationships		Total
Gross carrying amount	$	50,059	$	89,928	$	139,987
Accumulated amortization		48,031		67,775		115,806
Net carrying amount	$	2,028	$	22,153	$	24,181

	As of December 31, 2019
	Core Deposit Intangible Assets		Customer Relationships		Total
Gross carrying amount	$	50,059	$	89,952	$	140,011
Accumulated amortization		47,140		65,274		112,414
Net carrying amount	$	2,919	$	24,678	$	27,597

During the year ended December 31, 2019, the Company acquired two corporate trust business with aggregate customer relationship intangibles of $18.1 million. During the six months ended June 30, 2020, the Company recorded a $24 thousand post-closing purchase adjustment related to one of these acquisitions.

The following table has the aggregate amortization expense recognized in each period (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Aggregate amortization expense	$	1,658	$	1,251	$	3,392	$	2,578

The following table lists estimated amortization expense of intangible assets in future periods (in thousands):

For the six months ending December 31, 2020	$	3,020
For the year ending December 31, 2021		5,408
For the year ending December 31, 2022		4,468
For the year ending December 31, 2023		3,750
For the year ending December 31, 2024		2,965

7. Securities Sold Under Agreements to Repurchase

The Company utilizes repurchase agreements to facilitate the needs of customers and to facilitate secured short-term funding needs. Repurchase agreements are stated at the amount of cash received in connection with the transaction. The Company monitors collateral levels on a continuous basis and 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 table below presents the remaining contractual maturities of repurchase agreements outstanding at June 30, 2020 and December 31, 2019, in addition to the various types of marketable securities that have been pledged as collateral for these borrowings (in thousands):

	As of June 30, 2020
	Remaining Contractual Maturities of the Agreements
	Overnight		2-29 Days		30-90 Days		Over 90 Days		Total
Repurchase agreements, secured by:
U.S. Agencies	$	1,563,679	$	147,842	$	217,086	$	500	$	1,929,107
Total repurchase agreements	$	1,563,679	$	147,842	$	217,086	$	500	$	1,929,107

	As of December 31, 2019
	Remaining Contractual Maturities of the Agreements
	2-29 Days		30-90 Days		Total
Repurchase agreements, secured by:
U.S. Agencies	$	1,753,870	$	110,765	$	1,864,635
Total repurchase agreements	$	1,753,870	$	110,765	$	1,864,635

8. Business Segment Reporting

The Company has strategically aligned its operations into the following three reportable segments: Commercial Banking, Institutional Banking, and Personal Banking (collectively, the Business Segments, and each, a Business Segment). The Company’s senior executive officers regularly evaluate the Business Segment financial results produced by the Company’s internal reporting system in deciding how to allocate resources and assess performance for individual Business Segments. Prior to 2020, the Company had the following four Business Segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services. In the first quarter of 2020, the Company merged the Healthcare Services segment into the Institutional Banking segment to better reflect how the core businesses, products and services are currently being evaluated by management. The Company’s Healthcare Services leadership structure and financial performance assessments are now included in the Institutional Banking segment, and accordingly, the reportable segments were realigned to reflect these changes. For comparability purposes, amounts in all periods are based on methodologies in effect at June 30, 2020. Previously reported results have been reclassified in this Form 10-Q to conform to the Company’s current organizational structure.

The following summaries provide information about the activities of each Business Segment:

Commercial Banking serves the commercial banking and treasury management needs of the small to middle-market businesses through a variety of products and services. Such services include commercial loans, commercial real estate financing, commercial credit cards, letters of credit, loan syndication services, and consultative services. In addition, our specialty lending group offers a variety of business solutions including asset-based lending, accounts receivable financing, mezzanine debt and minority equity investments. Treasury management services include depository services, account reconciliation and cash management tools such as, accounts payable and receivable solutions, electronic funds transfer and automated payments, controlled disbursements, lockbox services and remote deposit capture services.

Institutional Banking is a combination of banking services, fund services, asset management services and healthcare services provided to institutional clients. This segment also provides fixed income sales, trading and underwriting, corporate trust and escrow services, as well as institutional custody. Institutional Banking includes UMB Fund Services, which provides fund administration and accounting, investor services and transfer agency, marketing and distribution, custody, and alternative investment services. Healthcare services provides healthcare payment solutions including custodial services for health savings accounts (HSAs) and private label, multipurpose debit cards to insurance carriers, third-party administrators, software companies, employers, and financial institutions.

Personal Banking combines consumer banking and wealth management services offered to clients and delivered through personal relationships and the Company’s bank branches, ATM network and internet banking. Products offered include deposit accounts, retail credit cards, installment loans, home equity lines of credit, residential mortgages and small business loans. The range of client services extends from a basic checking account to estate planning and trust services and includes private banking, brokerage services, and insurance services in addition to a full spectrum of investment advisory, trust, and custody services.

Business Segment Information

Business Segment financial results for the three and six months ended June 30, 2020 and June 30, 2019 were as follows (in thousands):

	Three Months Ended June 30, 2020
	Commercial Banking		Institutional Banking		Personal Banking			Total
Net interest income	$	113,085	$	28,129	$	37,015		$	178,229
Provision for credit losses		19,281		298		1,921			21,500
Noninterest income		24,078		66,488		29,890			120,456
Noninterest expense		62,123		76,953		69,457			208,533
Income (loss) before taxes		55,759		17,366		(4,473	)		68,652
Income tax expense (benefit)		6,597		2,055		(529	)		8,123
Net income (loss)	$	49,162	$	15,311	$	(3,944	)	$	60,529
Average assets	$	12,390,000	$	9,671,000	$	6,075,000		$	28,136,000

	Three Months Ended June 30, 2019
	Commercial Banking		Institutional Banking		Personal Banking		Total
Net interest income	$	102,579	$	30,501	$	33,334	$	166,414
Provision for credit losses		9,306		181		1,513		11,000
Noninterest income		20,387		55,626		29,385		105,398
Noninterest expense		68,511		64,852		60,024		193,387
Income before taxes		45,149		21,094		1,182		67,425
Income tax expense		7,008		3,274		184		10,466
Net income	$	38,141	$	17,820	$	998	$	56,959
Average assets	$	10,668,000	$	7,249,000	$	5,353,000	$	23,270,000

	Six Months Ended June 30, 2020
	Commercial Banking		Institutional Banking		Personal Banking			Total
Net interest income	$	220,034	$	61,164	$	70,972		$	352,170
Provision for credit losses		101,501		573		7,426			109,500
Noninterest income		35,318		128,440		55,122			218,880
Noninterest expense		121,166		145,406		130,580			397,152
Income (loss) before taxes		32,685		43,625		(11,912	)		64,398
Income tax expense (benefit)		3,709		4,951		(1,352	)		7,308
Net income (loss)	$	28,976	$	38,674	$	(10,560	)	$	57,090
Average assets	$	12,000,000	$	9,340,000	$	5,748,000		$	27,088,000

	Six Months Ended June 30, 2019
	Commercial Banking		Institutional Banking		Personal Banking		Total
Net interest income	$	202,393	$	62,252	$	65,637	$	330,282
Provision for credit losses		19,635		467		3,248		23,350
Noninterest income		43,568		111,476		57,736		212,780
Noninterest expense		135,331		130,249		118,433		384,013
Income before taxes		90,995		43,012		1,692		135,699
Income tax expense		14,079		6,655		262		20,996
Net income	$	76,916	$	36,357	$	1,430	$	114,703
Average assets	$	10,558,000	$	7,132,000	$	5,373,000	$	23,063,000

9. Revenue Recognition

The following is a description of the principal activities from which the Company generates revenue that are within the scope of ASC Topic 606, Revenue from Contracts with Customers:

Trust and securities processing – Trust and securities processing income consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and wealth management services, and mutual fund and alternative asset servicing. The performance obligations related to this revenue include items such as performing full bond trustee service administration, investment advisory services, custody and record-keeping services, and fund administrative and accounting services. These fees are part of long-term contractual agreements and the performance obligations are satisfied upon completion of service and fees are generally a fixed flat monthly rate or based on a percentage of the account’s market value per the contract with the customer. These fees are primarily recorded within the Company’s Institutional and Personal Banking segments.

Trading and investment banking – Trading and investment banking income consists of income earned related to the Company’s trading securities portfolio, including futures hedging, dividends, bond underwriting, and other securities incomes. The vast majority of this revenue is recognized in accordance with ASC 320, Debt and Equity Securities, and is out of the scope of ASC 606. A portion of trading and investment banking represents fees earned for management fees, commissions, and underwriting of corporate bond issuances. The performance obligations related to these fees include reviewing the credit worthiness of the customer, ensuring appropriate regulatory approval and participating in due diligence. The fees are fixed per the bond prospectus and the performance obligations are satisfied upon registration approval of the bonds by the applicable regulatory agencies. Revenue is recognized at the point in time upon completion of service and when approval is granted by the regulators.

Service charges on deposits – Service charges on deposit accounts represent monthly analysis fees recognized for the services related to customer deposit accounts, including account maintenance and depository transactions processing fees. Commercial Banking and Institutional Banking depository accounts charge fees in accordance with the customer’s pricing schedule while Personal Banking account holders are generally charged a flat service fee per month. Deposit service charges for the healthcare accounts included in the Institutional Banking segment are priced according to either standard pricing schedules with individual account holders or according to service agreements between the Company and employer groups or third party administrators. The Company satisfies the performance obligation related to providing depository accounts monthly as transactions are processed and deposit service charge revenue is recorded monthly. These fees are recognized within all Business Segments.

Insurance fees and commissions – Insurance fees and commissions includes all insurance-related fees earned, including commissions for individual life, variable life, group life, health, group health, fixed annuity, and variable annuity insurance contracts. The performance obligations related to these revenues primarily represent the placement of insurance policies with the insurance company partners. The fees are based on the contracts with insurance company partners and the performance obligations are satisfied when the terms of the policy have been agreed to and the insurance policy becomes effective.

Brokerage fees – Brokerage fees represent income earned related to providing brokerage transaction services, including commissions on equity and commodity trades, and fees for investment management, advisory and administration. The performance obligations related to transaction services are executing the specified trade and are priced according to the customer’s fee schedule. Such income is recognized at a point in time as the trade occurs and the performance obligation is fulfilled. The performance obligations related to investment management, advisory and administration include allocating customer assets across a wide range of mutual funds and other investments, on-going account monitoring and re-balancing of the portfolio. These performance obligations are satisfied over time and the related revenue is calculated monthly based on the assets under management of each customer. All material performance obligations are satisfied as of the end of each accounting period.

Bankcard fees – Bankcard fees primarily represent income earned from interchange revenue from MasterCard and Visa for the Company’s processing of debit, credit, HSA, and flexible spending account transactions. Additionally, the Company earns income and incentives related to various referrals of customers to card programs.

The performance obligation for interchange revenue is the processing of each transaction through the Company’s access to the banking system. This performance obligation is completed for each individual transaction and income is recognized per transaction in accordance with interchange rates established by MasterCard and Visa. The performance obligations for various referral and incentive programs include either referring customers to certain card products or issuing exclusively branded cards for certain customer segments. The pricing of these incentive and referral programs are in accordance with the agreement with the individual card partner. These performance obligations are completed as the referrals are made or over a period of time when the Company is exclusively issuing branded cards. For the three months ended June 30, 2020 and June 30, 2019, the Company had $6.5 million and $9.9 million of expense, respectively, recorded within the Bankcard fees line on the Company’s Consolidated Income Statements related to rebates and rewards programs that are outside of the scope of ASC 606. For the six months ended June 30, 2020 and June 30, 2019, the Company had $14.9 million and $18.3 million of expenses, respectively, related to these rebates and rewards programs. All material performance obligations are satisfied as of the end of each accounting period.

Gains on sales of securities available for sale, net – In the regular course of business, the Company recognizes gains on the sale of available for sale securities. These gains are recognized in accordance with ASC 320, Debt and Equity Securities, and are outside of the scope of ASC 606.

Other income – The Company recognizes other miscellaneous income through a variety of other revenue streams, the most material of which include letter of credit fees, certain loan origination fees, gains on the sale of assets, gains and losses on equity-method investments, derivative income, and bank-owned and company-owned life insurance income. These revenue streams are outside of the scope of ASC 606 and are recognized in accordance with the applicable U.S. GAAP. The remainder of Other income is primarily earned through transactions with personal banking customers, including wire transfer service charges, stop payment charges, and fees for items like money orders and cashier’s checks. The performance obligations of these types of fees are satisfied as transactions are completed and revenue is recognized upon transaction execution according to established fee schedules with the customers.

The Company had no material contract assets, contract liabilities, or remaining performance obligations as of June 30, 2020. Total receivables from revenue recognized under the scope of ASC 606 were $53.8 million and $58.0 million as of June 30, 2020 and December 31, 2019, respectively. These receivables are included as part of the Other assets line on the Company’s Consolidated Balance Sheets.

The following table depicts the disaggregation of noninterest income according to revenue stream and Business Segment for the three and six months ended June 30, 2020 and June 30, 2019. As stated in Note 8, “Business Segment Reporting,” for comparability purposes, amounts in all periods are based on methodologies in effect at June 30, 2020 and previously reported results have been reclassified in this Form 10-Q to conform to the Company’s current organizational structure. Disaggregated revenue is as follows (in thousands):

	Three Months Ended June 30, 2020
NONINTEREST INCOME	Commercial Banking		Institutional Banking		Personal Banking		Revenue (Expense) out of Scope of ASC 606			Total
Trust and securities processing	$	—	$	31,355	$	14,966	$	—		$	46,321
Trading and investment banking		—		23		—		12,828			12,851
Service charges on deposit accounts		6,891		10,462		1,672		49			19,074
Insurance fees and commissions		—		—		533		—			533
Brokerage fees		58		3,822		1,873		—			5,753
Bankcard fees		10,913		3,535		4,677		(6,209	)		12,916
Gains on sales of securities available for sale, net		—		—		—		4,006			4,006
Other		161		370		615		17,856			19,002
Total Noninterest income	$	18,023	$	49,567	$	24,336	$	28,530		$	120,456

	Three Months Ended June 30, 2019
NONINTEREST INCOME	Commercial Banking		Institutional Banking		Personal Banking		Revenue (Expense) out of Scope of ASC 606			Total
Trust and securities processing	$	—	$	27,251	$	15,652	$	—		$	42,903
Trading and investment banking		—		134		—		5,319			5,453
Service charges on deposit accounts		7,392		10,632		2,689		34			20,747
Insurance fees and commissions		—		—		465		—			465
Brokerage fees		55		5,026		1,996		—			7,077
Bankcard fees		15,213		5,274		5,646		(9,694	)		16,439
Losses on sales of securities available for sale, net		—		—		—		(1,403	)		(1,403	)
Other		292		381		844		12,200			13,717
Total Noninterest income	$	22,952	$	48,698	$	27,292	$	6,456		$	105,398

	Six Months Ended June 30, 2020
NONINTEREST INCOME	Commercial Banking		Institutional Banking		Personal Banking		Revenue (Expense) out of Scope of ASC 606			Total
Trust and securities processing	$	—	$	62,617	$	30,704	$	—		$	93,321
Trading and investment banking		—		679		—		13,895			14,574
Service charges on deposit accounts		13,783		26,069		4,211		92			44,155
Insurance fees and commissions		—		—		792		—			792
Brokerage fees		117		11,412		4,084		—			15,613
Bankcard fees		25,901		8,259		9,667		(14,366	)		29,461
Gains on sales of securities available for sale, net		—		—		—		5,233			5,233
Other		561		808		1,328		13,034			15,731
Total Noninterest income	$	40,362	$	109,844	$	50,786	$	17,888		$	218,880

	Six Months Ended June 30, 2019
NONINTEREST INCOME	Commercial Banking		Institutional Banking		Personal Banking		Revenue (Expense) out of Scope of ASC 606			Total
Trust and securities processing	$	—	$	53,940	$	30,920	$	—		$	84,860
Trading and investment banking		—		262		—		10,772			11,034
Service charges on deposit accounts		14,853		21,709		5,397		69			42,028
Insurance fees and commissions		—		—		803		—			803
Brokerage fees		103		10,448		3,769		—			14,320
Bankcard fees		29,701		10,799		10,761		(17,755	)		33,506
Losses on sales of securities available for sale, net		—		—		—		(594	)		(594	)
Other		631		720		1,715		23,757			26,823
Total Noninterest income	$	45,288	$	97,878	$	53,365	$	16,249		$	212,780

10. Commitments, Contingencies and Guarantees

In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit, forward foreign exchange contracts and spot foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contractual or notional amount of those instruments reflects the extent of involvement the Company has in particular classes of financial instruments. Many of the commitments expire without being drawn upon; therefore, the total amount of these commitments does not necessarily represent the future cash requirements of the Company.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit, commercial letters of credit, and standby letters of credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The following table summarizes the Company’s off-balance sheet financial instruments (in thousands):

	Contract or Notional Amount
	June 30,		December 31,
	2020		2019
Commitments to extend credit for loans (excluding credit card loans)	$	8,426,630	$	7,409,338
Commitments to extend credit under credit card loans		3,378,292		3,188,905
Commercial letters of credit		3,301		4,460
Standby letters of credit		339,065		299,933
Forward contracts		230,441		58,287
Spot foreign exchange contracts		2,384		1,980

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate is based on expected utilization rates by portfolio segment. Utilization rates are influenced by historical trends and current conditions. The expected utilization rates are applied to the total commitment to determine the expected amount to be funded. The allowance for off-balance sheet credit exposure is calculated by applying portfolio segment expected credit loss rates to the expected amount to be funded.

The following categories of off-balance sheet credit exposures have been identified:

Revolving Lines of Credit: includes commercial, construction, agriculture, personal, and home-equity. Risks inherent to revolving lines of credit often are related to the susceptibility of an individual or business experiencing unpredictable cash flow or financial troubles, thus leading to payment default. During these financial troubles, the borrower could have less than desirable assets collateralizing the revolving line of credit. The financial strain the borrower is experiencing could lead to drawing against the line without the ability to pay the line down.

Non-Revolving Lines of Credit: includes commercial and personal. Lines that do not carry a revolving feature are generally associated with a specific expenditure or project, such as to purchase equipment or the construction of real estate. The predominate risk associated with non-revolving lines is the diversion of funds for other expenditures. If funds get diverted, the contributory value to collateral suffers.

Letters of Credit: includes standby letters of credit. Generally, a standby letter of credit is established to provide assurance to the beneficiary that the applicant will perform certain obligations arising out of a separate

transaction between the beneficiary and applicant. These obligations might be the performance of a service or delivery of a product. If the obligations are not met, it gives the beneficiary, the right to draw on the letter of credit.

As of June 30, 2020, the ACL for off-balance sheet credit exposures was $6.5 million and was recorded in the Accrued expenses and taxes line of the Company’s Consolidated Balance Sheets. Provision for off-balance sheet credits exposures of $3.5 million was recorded for the three and six months ended June 30, 2020 and was recorded in the Provision for credit losses line of the Company’s Consolidated Statements of Income.

11. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk of the Company’s assets or liabilities. The Company has entered into an offsetting position for each of these derivative instruments with a matching instrument from another financial institution in order to minimize its net risk exposure resulting from such transactions.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets

The table below presents the fair value of the Company’s derivative financial instruments as of June 30, 2020 and December 31, 2019. The Company’s derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets.

Derivative fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of June 30, 2020 and December 31, 2019 (in thousands):

	Derivative Assets				Derivative Liabilities
	June 30,		December 31,		June 30,		December 31,
Fair Value	2020		2019		2020		2019
Interest Rate Products:
Derivatives not designated as hedging instruments	$	119,209	$	47,458	$	10,704	$	5,997
Derivatives designated as hedging instruments		36,090		7,818		—		—
Total	$	155,299	$	55,276	$	10,704	$	5,997

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate assets and liabilities due to changes in the benchmark interest rate, London Interbank Offered Rate (LIBOR). Interest rate swaps designated as fair value hedges involve making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2020 and December 31, 2019, the Company had one interest rate swap that was designated as a fair value hedge of interest rate risk associated with the Company’s fixed rate loan assets. This swap had a notional amount of $5.2 million and $5.3 million as of June 30, 2020 and December 31, 2019, respectively.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of June 30, 2020 and December 31, 2019, the Company had two interest rate swaps that were designated as cash flow hedges of interest rate risk associated with the Company’s variable-rate subordinated debentures issued by Marquette Capital Trusts III and IV. These swaps had an aggregate notional amount of $51.5 million at both June 30, 2020 and December 31, 2019. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an upfront premium. As of June 30, 2020 and December 31, 2019, the Company had one interest rate floor with a notional amount of $750.0 million that was designated as a cash flow hedge of interest rate risk.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and is subsequently reclassified into interest expense and interest income in the period during which the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to interest rate swap derivatives will be reclassified to Interest expense as interest payments are received or paid on the Company’s derivatives. Amounts reported in AOCI related to interest rate floor derivatives will be reclassified to Interest income as interest payments are received or paid on the Company’s derivatives. The Company expects to reclassify $1.3 million from AOCI to Interest expense and $5.1 million from AOCI to Interest income during the next 12 months. As of June 30, 2020, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 16.22 years.

Non-designated Hedges

The remainder of the Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2020, the Company had 156 interest rate swaps with an aggregate notional amount of $2.1 billion related to this program. As of December 31, 2019, the Company had 142 interest rate swaps with an aggregate notional amount of $1.9 billion.

Effect of Derivative Instruments on the Consolidated Statements of Income and Accumulated Other Comprehensive Income

This table provides a summary of the amount of gain or loss recognized in Other noninterest expense in the Consolidated Statements of Income related to the Company’s derivative assets and liabilities for the three and six months ended June 30, 2020 and June 30, 2019 (in thousands):

	Amount of Gain (Loss) Recognized
	For the Three Months Ended						For the Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2020			2019			2020			2019
Interest Rate Products
Derivatives not designated as hedging instruments	$	16		$	(1,476	)	$	(243	)	$	(2,349	)
Total	$	16		$	(1,476	)	$	(243	)	$	(2,349	)
Interest Rate Products
Derivatives designated as hedging instruments:
Fair value adjustments on derivatives	$	(3	)	$	(105	)	$	(206	)	$	(163	)
Fair value adjustments on hedged items		3			104			205			163
Total	$	—		$	(1	)	$	(1	)	$	—

These tables provide a summary of the effect of hedges on AOCI in the Consolidated Statements of Comprehensive Income related to the Company’s derivative assets and liabilities for the three and six months ended June 30, 2020 and June 30, 2019 (in thousands):

	For the Three Months Ended June 30, 2020
Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI on Derivative			Gain (Loss) Recognized in OCI Included Component			Loss Recognized in OCI Excluded Component			Gain (Loss) Reclassified from AOCI into Earnings			Gain (Loss) Reclassified from AOCI into Earnings Included Component			Loss Reclassified from AOCI into Earnings Excluded Component
Interest rate floor	$	4,687		$	6,197		$	(1,510	)	$	771		$	1,407		$	(636	)
Interest rate swaps		(75	)		(75	)		—			(257	)		(257	)		—
Total	$	4,612		$	6,122		$	(1,510	)	$	514		$	1,150		$	(636	)

	For the Three Months Ended June 30, 2019
Derivatives in Cash Flow Hedging Relationships	Loss Recognized in OCI on Derivative			Loss Recognized in OCI Included Component			Loss Recognized in OCI Excluded Component		Loss Reclassified from AOCI into Earnings			Loss Reclassified from AOCI into Earnings Included Component			Loss Reclassified from AOCI into Earnings Excluded Component
Interest rate swaps	$	(3,061	)	$	(3,061	)	$	—	$	(20	)	$	(20	)	$	—
Total	$	(3,061	)	$	(3,061	)	$	—	$	(20	)	$	(20	)	$	—

	For the Six Months Ended June 30, 2020
Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI on Derivative			Gain (Loss) Recognized in OCI Included Component			Loss Recognized in OCI Excluded Component			Gain (Loss) Reclassified from AOCI into Earnings			Gain (Loss) Reclassified from AOCI into Earnings Included Component			Loss Reclassified from AOCI into Earnings Excluded Component
Interest rate floor	$	29,621		$	35,493		$	(5,872	)	$	135		$	1,407		$	(1,272	)
Interest rate swaps		(10,484	)		(10,484	)		—			(389	)		(389	)		—
Total	$	19,137		$	25,009		$	(5,872	)	$	(254	)	$	1,018		$	(1,272	)

	For the Six Months Ended June 30, 2019
Derivatives in Cash Flow Hedging Relationships	Loss Recognized in OCI on Derivative			Loss Recognized in OCI Included Component			Loss Recognized in OCI Excluded Component		Loss Reclassified from AOCI into Earnings			Loss Reclassified from AOCI into Earnings Included Component			Loss Reclassified from AOCI into Earnings Excluded Component
Interest rate swaps	$	(5,149	)	$	(5,149	)	$	—	$	(15	)	$	(15	)	$	—
Total	$	(5,149	)	$	(5,149	)	$	—	$	(15	)	$	(15	)	$	—

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

As of June 30, 2020, the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $430 thousand. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. At June 30, 2020, the Company had posted $345 thousand of collateral. If the Company had breached any of these provisions at June 30, 2020, it could have been required to settle its obligations under the agreements at the termination value.

12. Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2020, and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets and liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):

	Fair Value Measurement at June 30, 2020
Description	June 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
U.S. Treasury	$	654	$	654	$	—	$	—
Mortgage-backed		2,109		—		2,109		—
State and political subdivisions		32,654		—		32,654		—
Corporates		1,402		1,402		—		—
Trading – other		14,564		14,564		—		—
Trading securities		51,383		16,620		34,763		—
U.S. Treasury		30,920		30,920		—		—
U.S. Agencies		420,552		—		420,552		—
Mortgage-backed		4,749,457		—		4,749,457		—
State and political subdivisions		3,222,634		—		3,222,634		—
Corporates		60,061		60,061		—		—
Available for sale securities		8,483,624		90,981		8,392,643		—
Company-owned life insurance		53,525		—		53,525		—
Bank-owned life insurance		283,291		—		283,291		—
Derivatives		155,299		—		155,299		—
Total	$	9,027,122	$	107,601	$	8,919,521	$	—
Liabilities
Derivatives	$	10,704	$	—	$	10,704	$	—
Securities sold not yet purchased		4,019		—		4,019		—
Total	$	14,723	$	—	$	14,723	$	—

	Fair Value Measurement at December 31, 2019
Description	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
U.S. Agencies	$	1,246	$	—	$	1,246	$	—
Mortgage-backed		392		—		392		—
State and political subdivisions		21,764		—		21,764		—
Corporates		5,649		5,649		—		—
Trading – other		16,567		16,567		—		—
Trading securities		45,618		22,216		23,402		—
U.S. Treasury		64,078		64,078		—		—
U.S. Agencies		93,021		—		93,021		—
Mortgage-backed		4,071,794		—		4,071,794		—
State and political subdivisions		3,029,917		—		3,029,917		—
Corporates		188,552		188,552		—		—
Available for sale securities		7,447,362		252,630		7,194,732		—
Company-owned life insurance		63,900		—		63,900		—
Bank-owned life insurance		280,709		—		280,709		—
Derivatives		55,276		—		55,276		—
Total	$	7,892,865	$	274,846	$	7,618,019	$	—
Liabilities
Derivatives	$	5,997	$	—	$	5,997	$	—
Securities sold not yet purchased		14,599		—		14,599		—
Total	$	20,596	$	—	$	20,596	$	—

Valuation methods for instruments measured at fair value on a recurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a recurring basis:

Trading Securities Fair values for trading securities (including financial futures), are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

Available for Sale Securities Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Prices are provided by third-party pricing services and are based on observable market inputs. On an annual basis, the Company compares a sample of these prices to other independent sources for the same securities. Additionally, throughout the year, if securities are sold, comparisons are made between the pricing services prices and the market prices at which the securities were sold. Variances are analyzed, and, if appropriate, additional research is conducted with the third-party pricing services. Based on this research, the pricing services may affirm or revise their quoted price. No significant adjustments have been made to the prices provided by the pricing services. The pricing services also provide documentation on an ongoing basis that includes reference data, inputs and methodology by asset class, which is reviewed to ensure that security placement within the fair value hierarchy is appropriate.

Company-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

Bank-owned Life Insurance Fair value is equal to the cash surrender value of the life insurance policies.

Derivatives Fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Securities sold not yet purchased Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Prices are provided by third-party pricing services and are based on observable market inputs.

Assets measured at fair value on a non-recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):

	Fair Value Measurement at June 30, 2020 Using
Description	June 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses Recognized During the Six Months Ended June 30
Collateral dependent assets	$	18,454	$	—	$	—	$	18,454	$	(6,826	)
Other real estate owned		2,830		—		—		2,830		—
Total	$	21,284	$	—	$	—	$	21,284	$	(6,826	)

	Fair Value Measurement at December 31, 2019 Using
Description	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains Recognized During the Twelve Months Ended December 31
Impaired loans	$	5,139	$	—	$	—	$	5,139	$	3,973
Other real estate owned		55		—		—		55		7
Total	$	5,194	$	—	$	—	$	5,194	$	3,980

Valuation methods for instruments measured at fair value on a non-recurring basis

The following methods and assumptions were used to estimate the fair value of each class of financial instruments measured on a non-recurring basis:

Collateral Dependent Assets/Impaired loans With the adoption of CECL, collateral dependent assets are assets evaluated as part of the ACL on an individual basis. Those assets for which there is an associated allowance are considered financial assets measured at fair value on a non-recurring basis. Prior to the adoption of CECL, loans identified as impaired were considered financial assets measured at fair value on a non-recurring basis. The valuation method for collateral dependent assets and impaired loans is the same. Adjustments are recorded on certain assets to reflect write-downs that are based on the external appraised value of the underlying collateral. The external appraisals are generally based on recent sales of comparable properties which are then adjusted for the unique characteristics of the property being valued. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists within the Company’s property management group and the Company’s credit department. The

valuation of the collateral dependent assets and impaired loans are reviewed on a quarterly basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

Other real estate owned Other real estate owned consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including auto, recreational and marine vehicles. Other real estate owned is recorded as held for sale initially at the fair value of the collateral less estimated selling costs. The initial valuation of the foreclosed property is obtained through an appraisal process similar to the process described in the impaired loans paragraph above. Subsequent to foreclosure, valuations are reviewed quarterly and updated periodically, and the assets may be marked down further, reflecting a new cost basis. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods and those measurements are classified as Level 3.

Fair value disclosures require disclosure 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 non-recurring basis. The estimated fair value of the Company’s financial instruments at June 30, 2020 and December 31, 2019 are as follows (in thousands):

	Fair Value Measurement at June 30, 2020 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
FINANCIAL ASSETS
Cash and short-term investments	$	3,524,970	$	2,177,327	$	1,347,643	$	—	$	3,524,970
Securities available for sale		8,483,624		90,981		8,392,643		—		8,483,624
Securities held to maturity (exclusive of allowance for credit losses)		1,111,625		—		1,153,833		—		1,153,833
Trading securities		51,383		16,620		34,763		—		51,383
Other securities		154,206		—		154,206		—		154,206
Loans (exclusive of allowance for credit losses)		15,313,310		—		15,644,241		—		15,644,241
Derivatives		155,299		—		155,299		—		155,299
FINANCIAL LIABILITIES
Demand and savings deposits		23,667,246		23,667,246		—		—		23,667,246
Time deposits		792,158		—		801,048		—		801,048
Other borrowings		1,978,694		34,587		1,944,107		—		1,978,694
Long-term debt		70,996		—		71,316		—		71,316
Derivatives		10,704		—		10,704		—		10,704
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans										2,847
Commercial letters of credit										31
Standby letters of credit										1,585

	Fair Value Measurement at December 31, 2019 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Estimated Fair Value
FINANCIAL ASSETS
Cash and short-term investments	$	3,276,794	$	1,701,449	$	1,575,345	$	—	$	3,276,794
Securities available for sale		7,447,362		252,630		7,194,732		—		7,447,362
Securities held to maturity		1,116,102		—		1,082,345		—		1,082,345
Trading securities		45,618		22,216		23,402		—		45,618
Other securities		108,420		—		108,420		—		108,420
Loans (exclusive of allowance for loan loss)		13,439,525		—		13,601,595		—		13,601,595
Derivatives		55,276		—		55,276		—		55,276
FINANCIAL LIABILITIES
Demand and savings deposits		20,376,880		20,376,880		—		—		20,376,880
Time deposits		1,226,364		—		1,226,646		—		1,226,646
Other borrowings		1,896,508		31,873		1,864,635		—		1,896,508
Long-term debt		70,372		—		70,713		—		70,713
Derivatives		5,997		—		5,997		—		5,997
OFF-BALANCE SHEET ARRANGEMENTS
Commitments to extend credit for loans										5,908
Commercial letters of credit										113
Standby letters of credit										2,966

Cash and short-term investments The carrying amounts of cash and due from banks, federal funds sold and resell agreements are reasonable estimates of their fair values.

Securities held to maturity Fair value of held-to-maturity securities are estimated by discounting the future cash flows using current market rates.

Other securities Amount consists of FRB and FHLB stock held by the Company, PCM equity-method investments, and other miscellaneous investments. The carrying amount of the FRB and FHLB stock equals its fair value because the shares can only be redeemed by the FRB and FHLB at their carrying amount. For PCM non-marketable equity-method investments, the Company’s proportionate share of the income or loss is recognized on a one-quarter lag based on the valuation of the underlying investment(s). Other non-marketable securities are carried at cost, which approximates fair value.

Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, consumer, and credit card. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans are estimated by discounting the future cash flows. The discount rates used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

Demand and savings deposits The fair value of demand deposits and savings accounts was the amount payable on demand at June 30, 2020 and December 31, 2019.

Time deposits The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates that are currently offered for deposits of similar remaining maturities.

Other borrowings The carrying amounts of federal funds purchased, repurchase agreements and other short-term debt are reasonable estimates of their fair value because of the short-term nature of their maturities.

Long-term debt Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Other off-balance sheet instruments The fair value of loan commitments and letters of credit are determined based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties. Neither the fees earned during the year on these instruments nor their fair value at period-end are significant to the Company’s consolidated financial position.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations highlights the material changes in the results of operations and changes in financial condition of the Company for the three and six-month periods ended June 30, 2020. It should be read in conjunction with the accompanying Consolidated Financial Statements, Notes to Consolidated Financial Statements and other financial information appearing elsewhere in this Form 10-Q and the Form 10-K. Results of operations for the periods included in this review are not necessarily indicative of results to be attained during any future period.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

From time to time the Company has made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “outlook,” “forecast,” “target,” “trend,” “plan,” “goal,” or other words of comparable meaning or future-tense or conditional verbs such as “may,” “will,” “should,” “would,” or “could.” Forward-looking statements convey the Company’s expectations, intentions, or forecasts about future events, circumstances, results, or aspirations, in each case as of the date such forward-looking statements are made.

This Form 10-Q, including any information incorporated by reference in this Form 10-Q, contains forward-looking statements. The Company also may make forward-looking statements in other documents that are filed or furnished with the Securities and Exchange Commission. In addition, the Company may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others.

All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond the Company’s control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events, circumstances, or aspirations to differ from those in forward-looking statements include:

•

local, regional, national, or international business, economic, or political conditions or events;

•

changes in laws or the regulatory environment, including as a result of financial-services legislation or regulation;

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changes in monetary, fiscal, or trade laws or policies, including as a result of actions by central banks or supranational authorities;

•

changes in accounting standards or policies;

•

shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including changes in market liquidity or volatility or changes in interest or currency rates;

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changes in spending, borrowing, or saving by businesses or households;

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the Company’s ability to effectively manage capital or liquidity or to effectively attract or deploy deposits;

•

changes in any credit rating assigned to the Company or its affiliates;

•

adverse publicity or other reputational harm to the Company;

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changes in the Company’s corporate strategies, the composition of its assets, or the way in which it funds those assets;

•

the Company’s ability to develop, maintain, or market products or services or to absorb unanticipated costs or liabilities associated with those products or services;

•

the Company’s ability to innovate to anticipate the needs of current or future customers, to successfully compete in its chosen business lines, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;

•

changes in the credit, liquidity, or other condition of the Company’s customers, counterparties, or competitors;

•

the Company’s ability to effectively deal with economic, business, or market slowdowns or disruptions;

•

judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for, or are adverse to, the Company or the financial-services industry;

•

the Company’s ability to address changing or stricter regulatory or other governmental supervision or requirements;

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the Company’s ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or facilities, including its capacity to withstand cyber-attacks;

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the adequacy of the Company’s corporate governance, risk-management framework, compliance programs, or internal controls, including its ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;

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the efficacy of the Company’s methods or models in assessing business strategies or opportunities or in valuing, measuring, monitoring, or managing positions or risk;

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the Company’s ability to keep pace with changes in technology that affect the Company or its customers, counterparties, or competitors;

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mergers, acquisitions, or dispositions, including the Company’s ability to integrate acquisitions and divest assets;

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the adequacy of the Company’s succession planning for key executives or other personnel;

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the Company’s ability to grow revenue, control expenses, or attract and retain qualified employees;

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natural disasters, war, terrorist activities, pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which the Company operates;

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adverse effects due to COVID-19 on the Company and its customers, counterparties, employees, and third-party service providers, and the adverse impacts to our business, financial position, results of operations, and prospects; or

•

other assumptions, risks, or uncertainties described in the Notes to Consolidated Financial Statements (Item 1) and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2) in this Form 10-Q, in the Risk Factors (Item 1A) in the Form 10-K, or in any of the Company’s quarterly or current reports.

Any forward-looking statement made by the Company or on its behalf speaks only as of the date that it was made. The Company does not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except as required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that the Company may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.

Overview

During the first quarter of 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic (the COVID-19 pandemic, or the pandemic). Such impacts have included significant volatility in the global stock and fixed income markets, a 150-basis-point reduction in the target federal funds rate, the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the

Paycheck Protection Program (PPP) administered by the Small Business Administration, and a variety of rulings from the Company’s banking regulators.

The Company continues to actively monitor developments related to COVID-19 and its impact to its business, customers, employees, counterparties, vendors, and service providers. During the second quarter of 2020, the Company’s results of operations included continued building of the allowance for credit losses and monitoring key macroeconomic variables utilized in the econometric models under the CECL accounting standard adopted on January 1, 2020 and $4.0 million of nonrecurring COVID-19 specific expenses. Additionally, the Company continued to see impacts of the volatile equity and debt markets and low interest rate environment in its fee-based businesses.

In response to the COVID-19 pandemic, the Company formed a Pandemic Taskforce and a steering group comprised of associates across the multiple lines of business and support functions and has taken several actions to offer various forms of support to our customers, employees, and communities that have experienced impacts resulting from the COVID-19 pandemic. Approximately 80% of the Company’s associates are working remotely. Those associates who continue to be required to work in branch or office locations were being paid supplemental bonus pay. The Company has also increased purchases of computer hardware to support a remote workforce, as well as incurred additional cleaning and janitorial expense to disinfect branch and office locations. The Company is also actively working with customers impacted by the economic downturn by offering payment deferrals and other loan modifications. See further details under “Credit Risk Management” within “Item 3. Quantitative and Qualitative Disclosures about Market Risk.” Additionally, the Company has recorded over 5,000 loans totaling $1.5 billion under the PPP.

In light of volatility in the capital markets and economic disruptions, the Company continues to carefully monitor its capital and liquidity position. In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The Company elected this alternative in the first quarter of 2020. The Company continues to anticipate that it will have sufficient capital levels to meet all applicable regulatory capital requirements.

The COVID-19 pandemic and stay-at-home and similar mandates have also necessitated certain actions related to the way the Company operates its business. As noted above, the Company transitioned most of its workforce off-site or to work-from-home to help mitigate health risks. The Company is also carefully monitoring the activities of its vendors and other third-party service providers to mitigate the risks associated with any potential service disruptions. The length of time it may be required to operate under such circumstances and future degrees of disruption remain uncertain. While the Company has not experienced material adverse disruptions to its internal operations due to the pandemic, it continues to review evolving risks and developments.

The Company has detailed the impact of the COVID-19 pandemic in each applicable section of “Management's Discussion and Analysis of Financial Condition and Results of Operations” included below.

The Company focuses on the following strategic objectives to guide its efforts to achieve its vision, to deliver the unparalleled customer experience, all while seeking to improve net income and strengthen the balance sheet while undertaking prudent risk management.

The first strategic objective is to continuously improve operating efficiencies. The Company has focused on identifying efficiencies that simplify our organizational and reporting structures, streamline back office functions and take advantage of synergies and newer technologies among various platforms and distribution networks. The Company has identified and expects to continue identifying ongoing efficiencies through the normal course of business that, when combined with increased revenue, will contribute to improved operating leverage. During the second quarter of 2020, total revenue increased $26.9 million, or 9.9%, as compared to the second quarter of 2019, while noninterest expense increased $15.1 million, or 7.8%, for the same period. Included in the noninterest expense increase is $4.0 million of nonrecurring COVID-19 related expenses. The remaining increase in noninterest expense is primarily driven by an increase in deferred compensation expense, partially offset by a decrease in marketing and business development expense. As part of the initiative to improve operating efficiencies, the Company continues to invest in technological advances that it believes will help management drive operating

leverage in the future through improved data analysis and automation. The Company also continues to evaluate core systems and will invest in enhancements that it believes will yield operating efficiencies.

The second strategic objective is to increase net interest income through profitable loan and deposit growth and the optimization of the balance sheet. During the second quarter of 2020, the Company had an increase in net interest income of $11.8 million, or 7.1%, from the same period in 2019. The Company has shown increased net interest income through the effects of increased volume and mix of average earning assets. Loans recorded under the PPP increased loan interest income by $6.9 million in the second quarter of 2020. These increases were offset by the recent interest rate reductions. Average loan balances increased $2.5 billion, or 19.6%, compared to the same period in 2019. Average PPP loans account for $1.2 billion of this variance. The funding for these assets was driven primarily by a 19.5% increase in average interest-bearing liabilities. Net interest margin, on a tax-equivalent basis, decreased 40 basis points compared to the same period in 2019, in large part due to a 209-basis point decrease in one-month LIBOR rates, excess liquidity buildup, and repricing of earning assets in the low interest rate environment, offset by a 95-basis point decrease in cost of interest-bearing deposits. However, net interest spread contracted by only five basis points during the same period. The Company expects to see continued volatility in the economic markets and government responses to the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company for the remainder of the year.

The third strategic objective is to grow the Company’s revenue from noninterest sources. The Company seeks to grow noninterest revenues throughout all economic and interest rate cycles, while positioning itself to benefit in periods of economic growth. Noninterest income increased $15.1 million, or 14.3%, to $120.5 million for the three months ended June 30, 2020, compared to the same period in 2019. This change is primarily due to an increase in the market value of company-owned life insurance and trading and investment banking income. See greater detail below under Noninterest Income. The Company continues to emphasize its asset management, brokerage, bankcard services, healthcare services, and treasury management businesses. At June 30, 2020, noninterest income represented 40.3% of total revenues, compared to 38.8% at June 30, 2019. The recent economic changes have impacted fee income, especially those with assets tied to market values and interest rates.

The fourth strategic objective is effective capital management. The Company places a significant emphasis on maintaining a strong capital position, which management believes promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. The Company continues to maximize shareholder value through a mix of reinvesting in organic growth, evaluating acquisition opportunities that complement the Company’s strategies, increasing dividends over time, and appropriately utilizing a share repurchase program. At June 30, 2020, the Company had $2.8 billion in total shareholders’ equity. This is an increase of $299.6 million, or 12.1%, compared to total shareholders’ equity at June 30, 2019. At June 30, 2020, the Company had a total risk-based capital ratio of 13.17%. The Company repurchased 117,772 shares of common stock at an average price of $44.05 per share during the second quarter of 2020.

Earnings Summary

The following is a summary regarding the Company’s earnings for the second quarter of 2020. The changes identified in the summary are explained in greater detail below. The Company recorded net income of $60.5 million for the three-month period ended June 30, 2020, compared to net income of $57.0 million for the same period a year earlier. This represents a 6.3% increase over the three-month period ended June 30, 2019. Basic earnings per share for the second quarter of 2020 was $1.26 per share ($1.26 per share fully-diluted) compared to $1.17 per share ($1.16 per share fully-diluted) for the second quarter of 2019. Return on average assets and return on average common shareholders’ equity for the three-month period ended June 30, 2020 were 0.87% and 8.95%, respectively, compared to 0.98% and 9.46%, respectively, for the three-month period ended June 30, 2019.

Net interest income for the three and six-month periods ended June 30, 2020 increased $11.8 million, or 7.1%, and $21.9 million, or 6.6%, respectively, compared to the same periods in 2019. For the three-month period ended June 30, 2020, average earning assets increased by $4.9 billion, or 22.7%, and for the six-month period ended June 30, 2020, they increased by $4.0 billion, or 18.4%, compared to the same periods in 2019. Net interest margin, on a

tax-equivalent basis, decreased to 2.79% and 2.88% for the three and six-month periods ended June 30, 2020, respectively, compared to 3.19% for the same periods in 2019.

The provision for credit losses increased by $10.5 million to $21.5 million for the three-month period ended June 30, 2020 and increased by $86.2 million to $109.5 million for the six-month period ended June 30, 2020, as compared to the same period in 2019. This increase is the result of the adoption of the CECL standard in the first quarter of 2020 and applying this methodology for computing the allowance for credit losses, coupled with the impacts of the current and forecasted economic downturn related to the COVID-19 pandemic. The Company’s nonperforming loans increased $28.9 million to $82.2 million at June 30, 2020, compared to June 30, 2019. The allowance for credit losses on loans as a percentage of total loans increased to 1.31% as of June 30, 2020, compared to 0.79% at June 30, 2019. For a description of the Company’s methodology for computing the allowance for credit losses, please see the summary discussion in the “Provision and Allowance for Credit Losses” section included below.

Noninterest income increased by $15.1 million, or 14.3%, for the three-month period ended June 30, 2020, and increased by $6.1 million, or 2.9%, for the six-month period ended June 30, 2020, compared to the same periods in 2019. These changes are discussed in greater detail below under Noninterest Income.

Noninterest expense increased by $15.1 million, or 7.8%, for the three-month period ended June 30, 2020, and increased by $13.1 million, or 3.4%, for the six-month period ended June 30, 2020, compared to the same periods in 2019. These changes are discussed in greater detail below under Noninterest Expense.

Net Interest Income

Net interest income is a significant source of the Company’s earnings and represents the amount by which interest income on earning assets exceeds the interest expense paid on liabilities. The volume of interest-earning assets and the related funding sources, the overall mix of these assets and liabilities, and the rates paid on each affect net interest income. Net interest income for the three and six-month periods ended June 30, 2020 increased $11.8 million, or 7.1%, and $21.9 million, or 6.6%, respectively, compared to the same periods in 2019.

Table 1 shows the impact of earning asset rate changes compared to changes in the cost of interest-bearing liabilities. As illustrated in this table, net interest spread for the three months ended June 30, 2020 decreased five basis points as compared to the same period in 2019. Net interest margin for the three months ended June 30, 2020 decreased by 40 basis points compared to the same period in 2019. Net interest spread for the six-month period ended June 30, 2020 decreased by nine basis points as compared to the same period in 2019. Net interest margin for the six-month period ended June 30, 2020 decreased by 31 basis points compared to the same period in 2019. The changes are primarily due to favorable volume variance on loans and securities and favorable rate variances on interest-bearing deposits, offset by unfavorable rate variances on earning assets. PPP loans account for $1.2 billion and $600.9 million for the three and six-month periods ended June 30, 2020, respectively. These variances have led to an increase in the Company’s net interest income during 2020 as compared to results for the same period in 2019. The changes compared to last year have been impacted by the recent short-term interest rate cuts and increased liquidity on the balance sheet. The Company expects to see continued volatility in the economic markets and government responses to these changes as a result of the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company the remainder of the year. For the impact of the contribution from free funds, see the Analysis of Net Interest Margin within Table 2 below. Table 2 also illustrates how the changes in volume and interest rates have resulted in an increase in net interest income.

Table 1

AVERAGE BALANCE SHEETS/YIELDS AND RATES (tax-equivalent basis) (unaudited, dollars in thousands)

The following table presents, for the periods indicated, the average earning assets and resulting yields, as well as the average interest-bearing liabilities and resulting yields, expressed in both dollars and rates. All average balances are daily average balances. The average yield on earning assets without the tax-equivalent basis adjustment would have been 2.91% for the three-month period ended June 30, 2020, and 4.01% for the same period

in 2019. The average yield on earning assets without the tax-equivalent basis adjustment would have been 3.18% for the six-month period ended June 30, 2020 and 4.00% for the same period in 2019.

	Three Months Ended June 30,
	2020						2019
	Average			Average			Average			Average
	Balance			Yield/Rate			Balance			Yield/Rate
ASSETS
Loans, net of unearned interest	$	15,098,366			3.73	%	$	12,620,981			5.14	%
Securities:
Taxable		5,069,290			2.05			4,502,680			2.38
Tax-exempt		4,108,075			3.05			3,725,185			2.99
Total securities		9,177,365			2.50			8,227,865			2.65
Federal funds and resell agreements		807,245			0.78			329,064			3.08
Interest-bearing due from banks		1,492,798			0.11			450,032			2.47
Other earning assets		37,816			3.79			61,565			6.07
Total earning assets		26,613,590			3.01			21,689,507			4.11
Allowance for credit losses		(195,373	)					(109,463	)
Other assets		1,717,808						1,690,423
Total assets	$	28,136,025					$	23,270,467
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits	$	15,117,729			0.30	%	$	12,707,353			1.25	%
Federal funds and repurchase agreements		2,138,156			0.37			1,728,748			2.17
Borrowed funds		85,681			6.32			69,662			7.97
Total interest-bearing liabilities		17,341,566			0.34			14,505,763			1.39
Noninterest-bearing demand deposits		7,662,836						6,078,520
Other liabilities		411,964						271,890
Shareholders' equity		2,719,659						2,414,294
Total liabilities and shareholders' equity	$	28,136,025					$	23,270,467
Net interest spread					2.67	%					2.72	%
Net interest margin					2.79						3.19

	Six Months Ended June 30,
	2020						2019
	Average			Average			Average			Average
	Balance			Yield/Rate			Balance			Yield/Rate
ASSETS
Loans, net of unearned interest	$	14,357,466			4.08	%	$	12,462,946			5.16	%
Securities:
Taxable		4,881,854			2.19			4,402,458			2.39
Tax-exempt		4,085,558			3.05			3,674,456			2.96
Total securities		8,967,412			2.58			8,076,914			2.65
Federal funds and resell agreements		1,015,720			1.39			424,712			2.92
Interest-bearing due from banks		1,164,405			0.53			554,551			2.42
Other earning assets		42,959			4.93			54,029			5.36
Total earning assets		25,547,962			3.28			21,573,152			4.11
Allowance for credit losses		(154,062	)					(107,465	)
Other assets		1,693,684						1,597,444
Total assets	$	27,087,584					$	23,063,131
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits	$	14,723,895			0.56	%	$	12,729,813			1.23	%
Federal funds and repurchase agreements		2,084,271			0.80			1,642,140			2.16
Borrowed funds		78,164			6.96			69,539			7.91
Total interest-bearing liabilities		16,886,330			0.62			14,441,492			1.36
Noninterest-bearing demand deposits		7,079,224						6,028,259
Other liabilities		401,724						267,943
Shareholders' equity		2,720,306						2,325,437
Total liabilities and shareholders' equity	$	27,087,584					$	23,063,131
Net interest spread					2.66	%					2.75	%
Net interest margin					2.88						3.19

Table 2 presents the dollar amount of change in net interest income and margin due to volume and rate. Table 2 also reflects the effect that interest-free funds have on net interest margin. The average balance of interest-free funds (total earning assets less interest-bearing liabilities) increased $2.1 billion for the three-month period ended June 30, 2020, and increased $1.5 billion for the six-month period ended June 30, 2020, compared to the same periods in 2019. The benefit from interest-free funds decreased by 35 and 22 basis points in the three and six-month periods, respectively, due to decreased yields on earning assets, offset by a decrease in interest rates of interest-bearing liabilities.

Table 2

ANALYSIS OF CHANGES IN NET INTEREST INCOME AND MARGIN (unaudited, dollars in thousands)

ANALYSIS OF CHANGES IN NET INTEREST INCOME

	Three Months Ended									Six Months Ended
	June 30, 2020 and 2019									June 30, 2020 and 2019
	Volume			Rate			Total			Volume			Rate			Total
Change in interest earned on:
Loans	$	27,869		$	(49,703	)	$	(21,834	)	$	44,720		$	(72,789	)	$	(28,069	)
Securities:
Taxable		3,096			(3,926	)		(830	)		5,501			(4,510	)		991
Tax-exempt		2,173			451			2,624			4,922			1,409			6,331
Federal funds sold and resell agreements		1,853			(2,806	)		(953	)		5,330			(4,456	)		874
Interest-bearing due from banks		2,060			(4,430	)		(2,370	)		4,003			(7,609	)		(3,606	)
Trading		(268	)		(262	)		(530	)		(224	)		(86	)		(310	)
Interest income		36,783			(60,676	)		(23,893	)		64,252			(88,041	)		(23,789	)
Change in interest incurred on:
Interest-bearing deposits		6,319			(34,592	)		(28,273	)		10,721			(47,096	)		(36,375	)
Federal funds purchased and repurchase agreements		1,795			(9,192	)		(7,397	)		3,873			(13,153	)		(9,280	)
Other borrowed funds		281			(319	)		(38	)		322			(344	)		(22	)
Interest expense		8,395			(44,103	)		(35,708	)		14,916			(60,593	)		(45,677	)
Net interest income	$	28,388		$	(16,573	)	$	11,815		$	49,336		$	(27,448	)	$	21,888

ANALYSIS OF NET INTEREST MARGIN

	Three Months Ended June 30,									Six Months Ended June 30,
	2020			2019			Change			2020			2019			Change
Average earning assets	$	26,613,590		$	21,689,507		$	4,924,083		$	25,547,962		$	21,573,152		$	3,974,810
Interest-bearing liabilities		17,341,566			14,505,763			2,835,803			16,886,330			14,441,492			2,444,838
Interest-free funds	$	9,272,024		$	7,183,744		$	2,088,280		$	8,661,632		$	7,131,660		$	1,529,972
Free funds ratio (interest free funds to average earning assets)		34.84	%		33.12	%		1.72	%		33.90	%		33.06	%		0.84	%
Tax-equivalent yield on earning assets		3.01			4.11			(1.10	)		3.28			4.11			(0.83	)
Cost of interest-bearing liabilities		0.34			1.39			(1.05	)		0.62			1.36			(0.74	)
Net interest spread		2.67			2.72			(0.05	)		2.66			2.75			(0.09	)
Benefit of interest-free funds		0.12			0.47			(0.35	)		0.22			0.44			(0.22	)
Net interest margin		2.79	%		3.19	%		(0.40	)%		2.88	%		3.19	%		(0.31	)%

Provision and Allowance for Credit Losses

The allowance for credit losses (ACL) represents management’s judgment of the total expected losses included in the Company’s loan portfolio as of the balance sheet date. The Company’s process for recording the ACL is based on the evaluation of the Company’s lifetime historical loss experience, management’s understanding of the credit quality inherent in the loan portfolio, and the impact of the current economic environment, coupled with reasonable and supportable economic forecasts.

A mathematical calculation of an estimate is made to assist in determining the adequacy and reasonableness of management’s recorded ACL. To develop the estimate, the Company follows the guidelines in ASC Topic 326, Financial Instruments – Credit Losses. The estimate reserves for assets held at amortized cost and any related credit deterioration in the Company’s available-for-sale debt security portfolio. Assets held at amortized cost include the Company’s loan book and held-to-maturity security portfolio.

The process involves the consideration of quantitative and qualitative factors relevant to the specific segmentation of loans. These factors have been established over decades of financial institution experience and include economic observation and loan loss characteristics. This process is designed to produce a lifetime estimate of the losses, at a reporting date, that includes evaluation of historical loss experience, current economic conditions, reasonable and supportable forecasts, and the qualitative framework outlined by the Office of the Comptroller of the Currency in the published 2020 Interagency Policy Statement. This process allows management to take a holistic view of the recorded ACL reserve and ensure that all significant and pertinent information is considered.

The Company considers a variety of factors to ensure the safety and soundness of its estimate including a strong internal control framework, extensive methodology documentation, credit underwriting standards which encompass the Company’s desired risk profile, model validation, and ratio analysis. If the Company’s total ACL estimate, as determined in accordance with the approved ACL methodology, is either outside a reasonable range based on review of economic indicators or by comparison of historical ratio analysis, the ACL estimate is an outlier and management will investigate the underlying reason(s). Based on that investigation, issues or factors that previously had not been considered may be identified in the estimation process, which may warrant adjustments to estimated credit losses.

The ending result of this process is a recorded consolidated ACL that represents management’s best estimate of the total expected losses included in the loan portfolio, held-to-maturity securities, and credit deterioration in available-for-sale securities.

Based on the factors above, management of the Company recorded $21.5 million and $109.5 million as provision for credit losses for the three and six-month periods ended June 30, 2020, respectively, compared to $11.0 million and $23.4 million for the same periods in 2019, respectively. As illustrated in Table 3 below, the ACL on loans increased to 1.31% of total loans as of June 30, 2020, compared to 0.79% of total loans as of June 30, 2019.

Table 3 presents a summary of the Company’s ACL for the six-month periods ended June 30, 2020 and 2019, and for the year ended December 31, 2019. Net charge-offs were $13.2 million for the six-month period ended June 30, 2020, compared to $24.9 million for the same period in 2019. See “Credit Risk Management” under “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report for information relating to nonaccrual loans, past due loans, restructured loans and other credit risk matters.

Table 3

ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES (unaudited, dollars in thousands)

	Six Months Ended						Year Ended
	June 30,						December 31,
	2020			2019			2019
Allowance - January 1	$	101,788		$	103,635		$	103,635
Cumulative effect adjustment⁽¹⁾		9,030			—			—
Provision for credit losses		106,000			23,350			32,850
Charge-offs:
Commercial and industrial		(2,436	)		(7,076	)		(19,267	)
Specialty lending		—			(15,919	)		(16,813	)
Commercial real estate		(8,920	)		(217	)		(392	)
Consumer real estate		(219	)		(48	)		(52	)
Consumer		(406	)		(490	)		(909	)
Credit cards		(4,130	)		(4,437	)		(8,647	)
Leases and other		(11	)		—			—
Total charge-offs		(16,122	)		(28,187	)		(46,080	)
Recoveries:
Commercial and industrial		1,717			872			3,579
Specialty lending		—			12			3,992
Commercial real estate		76			704			738
Consumer real estate		48			234			384
Consumer		215			263			509
Credit cards		853			1,209			2,181
Leases and other		—			—			—
Total recoveries		2,909			3,294			11,383
Net charge-offs		(13,213	)		(24,893	)		(34,697	)
Allowance for credit losses - end of period	$	203,605		$	102,092		$	101,788
Allowance for credit losses on loans	$	200,300		$	102,092		$	101,788
Allowance for credit losses on held to maturity securities		3,305		N/A⁽¹⁾			N/A⁽¹⁾
Loans at end of period, net of unearned interest		15,305,097			12,900,269			13,431,722
Held to maturity securities at end of period		1,114,930			1,112,773			1,116,102
Total assets at amortized cost		16,420,027			14,013,042			14,547,824
Average loans, net of unearned interest		14,346,891			12,460,343			12,759,387
Allowance for credit losses on loans to loans at end of period		1.31	%		0.79	%		0.76	%
Allowance for credit losses - end of period to total assets at amortized cost		1.24	%	N/A⁽¹⁾			N/A⁽¹⁾
Allowance as a multiple of net charge-offs	7.66x			2.03x			2.93x
Net charge-offs to average loans		0.19	%		0.40	%		0.27	%

(1)	Related to the adoption of ASU No. 2016-13. See Note 3, “New Accounting Pronouncements,” for further detail.

Noninterest Income

A key objective of the Company is the growth of noninterest income to provide a diverse source of revenue not directly tied to interest rates. Fee-based services are typically non-credit related and are not generally affected by fluctuations in interest rates.

The Company offers multiple fee-based products and services, which management believes will more closely align with customer demands. The Company is currently emphasizing fee-based products and services including trust and securities processing, bankcard, securities trading and brokerage, and cash and treasury management.

Management believes that it can offer these products and services both efficiently and profitably, as most have common platforms and support structures.

Table 4

SUMMARY OF NONINTEREST INCOME (unaudited, dollars in thousands)

	Three Months Ended					Dollar			Percent
	June 30,					Change			Change
	2020		2019			20-19			20-19
Trust and securities processing	$	46,321	$	42,903		$	3,418			8.0	%
Trading and investment banking		12,851		5,453			7,398		>100.0
Service charges on deposits		19,074		20,747			(1,673	)		(8.1	)
Insurance fees and commissions		533		465			68			14.6
Brokerage fees		5,753		7,077			(1,324	)		(18.7	)
Bankcard fees		12,916		16,439			(3,523	)		(21.4	)
Gains (losses) on sales of securities available for sale, net		4,006		(1,403	)		5,409		>100.0
Other		19,002		13,717			5,285			38.5
Total noninterest income	$	120,456	$	105,398		$	15,058			14.3	%

	Six Months Ended					Dollar			Percent
	June 30,					Change			Change
	2020		2019			20-19			20-19
Trust and securities processing	$	93,321	$	84,860		$	8,461			10.0	%
Trading and investment banking		14,574		11,034			3,540			32.1
Service charges on deposits		44,155		42,028			2,127			5.1
Insurance fees and commissions		792		803			(11	)		(1.4	)
Brokerage fees		15,613		14,320			1,293			9.0
Bankcard fees		29,461		33,506			(4,045	)		(12.1	)
Gains (losses) on sales of securities available for sale, net		5,233		(594	)		5,827		>100.0
Other		15,731		26,823			(11,092	)		(41.4	)
Total noninterest income	$	218,880	$	212,780		$	6,100			2.9	%

Noninterest income increased by $15.1 million, or 14.3%, during the three-month period ended June 30, 2020, and increased $6.1 million, or 2.9%, during the six-month period ended June 30, 2020, compared to the same periods in 2019. Table 4 above summarizes the components of noninterest income and the respective year-over-year comparison for each category.

Trust and securities processing income consists of fees earned on personal and corporate trust accounts, custody of securities services, trust investments and wealth management services, mutual fund assets, and alternative asset servicing. The increase in these fees for the three and six-month periods ended June 30, 2020, compared to the same periods last year, was primarily due to an increase in corporate trust and fund services revenues. For the three-month period ended June 30, 2020, fund services revenue increased $2.6 million, or 13.3% and corporate trust revenue increased $1.5 million, or 21.4%, offset by a decrease of wealth management revenue of $0.7 million, or 4.3%, compared to the same period in 2019. For the six-month period ended June 30, 2020, fund services revenue increased $4.5 million, or 11.2%, and corporate trust revenue increased $4.2 million, or 32.3%. The recent volatile markets have impacted the income in this category. Since trust and securities processing fees are primarily asset-based, which are highly correlated to the change in market value of the assets, the related income for the remainder of the year will be affected by changes in the securities markets. Management continues to emphasize sales of services to both new and existing clients as well as increasing and improving the distribution channels.

Trading and investment banking fees for the three and six-month periods ended June 30, 2020 increased $7.4 million, or 135.7%, and $3.5 million, or 32.1%, respectively, compared to the same periods in 2019. These increases were primarily driven by increased trading volume and increased market valuations of investments in the

Company’s trading portfolio. The income in this category is market driven and impacted by general increases or decreases in trading volume.

Service charges on deposit accounts for the three-month period ended June 30, 2020 decreased by $1.7 million, or 8.1%, compared to the same period last year, driven by lower corporate service charges and return item fees. For the six-month period, service charges on deposit accounts increased $2.1 million, or 5.1%, compared to the same period last year, primarily driven by income related to healthcare customer transfer and conversion fees recorded in the first quarter of 2020, offset by lower corporate service charges.

Brokerage fees for the three-period ended June 30, 2020, decreased $1.3 million, or 18.7%, driven by lower 12b-1 fees. For the six-month period, brokerage fees increased $1.3 million, or 9.0%, compared to the same period in 2019, driven by higher money market balances. The recent reduction in short-term interest rates will impact the income in this category the remainder of the year.

During the three and six-month periods ended June 30, 2020, $4.0 million and $5.2 million in gains, respectively, were recognized on the sales of securities available for sale, compared to losses on the sales of securities available for sale of $1.4 million and $0.6 million for the same periods in 2019. The investment portfolio is continually evaluated for opportunities to improve its performance and risk profile relative to market conditions and the Company’s interest rate expectations. This can result in differences from quarter to quarter in the amount of realized gains or losses.

Other noninterest income for the three-month period ended June 30, 2020, increased $5.3 million, or 38.5%, driven by increased company-owned life insurance, and partially offset by a decrease in equity earnings on alternative investments. For the six-month period, other noninterest income decreased $11.1 million, or 41.4%, compared to the same period in 2019. This decrease was primarily driven by decreases in company-owned life insurance and derivative income, and partially offset by an increase in equity earnings on alternative investments.

Table 5

SUMMARY OF NONINTEREST EXPENSE (unaudited, dollars in thousands)

	Three Months Ended				Dollar			Percent
	June 30,				Change			Change
	2020		2019		20-19			20-19
Salaries and employee benefits	$	130,938	$	114,454	$	16,484			14.4	%
Occupancy, net		11,411		11,539		(128	)		(1.1	)
Equipment		21,502		18,824		2,678			14.2
Supplies and services		3,785		4,285		(500	)		(11.7	)
Marketing and business development		3,284		7,304		(4,020	)		(55.0	)
Processing fees		13,603		13,096		507			3.9
Legal and consulting		6,220		7,496		(1,276	)		(17.0	)
Bankcard		4,549		4,701		(152	)		(3.2	)
Amortization of other intangible assets		1,658		1,251		407			32.5
Regulatory fees		3,211		2,910		301			10.3
Other		8,372		7,527		845			11.2
Total noninterest expense	$	208,533	$	193,387	$	15,146			7.8	%

	Six Months Ended				Dollar			Percent
	June 30,				Change			Change
	2020		2019		20-19			20-19
Salaries and employee benefits	$	241,998	$	230,486	$	11,512			5.0	%
Occupancy, net		23,591		23,282		309			1.3
Equipment		42,743		38,508		4,235			11.0
Supplies and services		7,970		8,158		(188	)		(2.3	)
Marketing and business development		7,924		12,217		(4,293	)		(35.1	)
Processing fees		26,993		25,228		1,765			7.0
Legal and consulting		12,330		13,129		(799	)		(6.1	)
Bankcard		9,409		9,046		363			4.0
Amortization of other intangible assets		3,392		2,578		814			31.6
Regulatory fees		5,577		5,800		(223	)		(3.8	)
Other		15,225		15,581		(356	)		(2.3	)
Total noninterest expense	$	397,152	$	384,013	$	13,139			3.4	%

Noninterest expense increased by $15.1 million, or 7.8%, and $13.1 million, or 3.4%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019. Included in these variances were $4.0 million and $4.2 million, respectively, of non-recurring COVID-19 expenses in 2020. Table 5 above summarizes the components of noninterest expense and the respective year-over-year comparison for each category.

Salaries and employee benefits increased by $16.5 million, or 14.4%, and $11.5 million, or 5.0%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019. Salaries and wages increased $3.2 million, or 4.6%, and increased $9.3 million, or 6.7%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019. Employee benefits expense increased $9.8 million, or 48.6%, and decreased $5.7 million, or 12.0%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019 driven by changes in deferred compensation expense. Bonus and commission expense increased $3.5 million, or 14.5%, and $7.9 million, or 17.7%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019.

Equipment expense increased $2.7 million, or 14.2%, and $4.2 million, or 11.0%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to higher software, equipment maintenance, and COVID-19 specific costs.

Marketing and business development expense decreased $4.0 million, or 55.0%, and $4.3 million, or 35.1%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to lower travel and entertainment expense.

Processing fees expense increased $0.5 million, or 3.9%, and $1.8 million, or 7.0%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to system investments to support growth across the Company’s business lines.

Legal and consulting expense decreased $1.3 million, or 17.0%, and $0.8 million, or 6.1%, for the three and six-month periods ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to the timing of multiple projects.

Income Tax Expense

The Company’s effective tax rate was 11.3% for the six months ended June 30, 2020, compared to 15.5% for the same period in 2019. The decrease in the effective rate for 2020 is primarily attributable to a larger portion of income being earned from tax-exempt municipal securities.

Strategic Lines of Business

The Company has strategically aligned its operations into the following three reportable Business Segments: Commercial Banking, Institutional Banking, and Personal Banking. The Company’s senior executive officers regularly evaluate Business Segment financial results produced by the Company’s internal reporting system in deciding how to allocate resources and assess performance for individual Business Segments. Prior to 2020, the Company had the following four Business Segments: Commercial Banking, Institutional Banking, Personal Banking, and Healthcare Services. In the first quarter of 2020, the Company merged the Healthcare Services segment into the Institutional Banking segment to better reflect how the Company’s core businesses, products and services are currently being evaluated by management. For comparability purposes, amounts in all periods are based on methodologies in effect at June 30, 2020. Previously reported results have been reclassified in this Form 10-Q to conform to the Company’s current organizational structure.

Table 6

Commercial Banking Operating Results (unaudited, dollars in thousands)

	Three Months Ended				Dollar			Percent
	June 30,				Change			Change
	2020		2019		20-19			20-19
Net interest income	$	113,085	$	102,579	$	10,506			10.2	%
Provision for credit losses		19,281		9,306		9,975		>100.0
Noninterest income		24,078		20,387		3,691			18.1
Noninterest expense		62,123		68,511		(6,388	)		(9.3	)
Income before taxes		55,759		45,149		10,610			23.5
Income tax expense		6,597		7,008		(411	)		(5.9	)
Net income	$	49,162	$	38,141	$	11,021			28.9	%

	Six Months Ended				Dollar			Percent
	June 30,				Change			Change
	2020		2019		20-19			20-19
Net interest income	$	220,034	$	202,393	$	17,641			8.7	%
Provision for credit losses		101,501		19,635		81,866		>100.0
Noninterest income		35,318		43,568		(8,250	)		(18.9	)
Noninterest expense		121,166		135,331		(14,165	)		(10.5	)
Income before taxes		32,685		90,995		(58,310	)		(64.1	)
Income tax expense		3,709		14,079		(10,370	)		(73.7	)
Net income	$	28,976	$	76,916	$	(47,940	)		(62.3	)%

For the six-month period ended June 30, 2020, Commercial Banking net income decreased by $47.9 million, or 62.3%, to $29.0 million, as compared to the same period in 2019. Net interest income increased $17.6 million, or 8.7%, for the six-month period ended June 30, 2020, compared to the same period in 2019, primarily driven by strong loan growth and earning asset mix changes. Commercial Banking added loans of $1.5 billion and loan interest income of $6.9 million related to the PPP during the second quarter of 2020. Provision for credit losses increased by $81.9 million for the period due to adoption of CECL, coupled with the current economic environment and reasonable and supportable economic forecasts. The impacts of the COVID-19 pandemic are key elements of these forecasts. Noninterest income decreased $8.3 million, or 18.9%, over the same period in 2019 primarily due to a decrease of $6.2 million in other noninterest income driven by decreased company-owned life insurance income and derivative income and a decrease of $1.5 million in bankcard fees due to decreased interchange income. Noninterest expense decreased $14.2 million, or 10.5%, to $121.2 million for the six-month period ended June 30, 2020, compared to the same period in 2019. This decrease was driven by a $10.8 million decrease in technology, service, and overhead expenses, a decrease of $1.6 million in marketing and business development expense due to

decreased travel and entertainment expense related to the COVID-19 pandemic. Additionally, there were decreases of $0.7 million in legal and professional expense and $0.7 million in processing fees.

Table 7

Institutional Banking Operating Results (unaudited, dollars in thousands)

	Three Months Ended				Dollar			Percent
	June 30,				Change			Change
	2020		2019		20-19			20-19
Net interest income	$	28,129	$	30,501	$	(2,372	)		(7.8	)%
Provision for credit losses		298		181		117			64.6
Noninterest income		66,488		55,626		10,862			19.5
Noninterest expense		76,953		64,852		12,101			18.7
Income before taxes		17,366		21,094		(3,728	)		(17.7	)
Income tax expense		2,055		3,274		(1,219	)		(37.2	)
Net income	$	15,311	$	17,820	$	(2,509	)		(14.1	)%

	Six Months Ended				Dollar			Percent
	June 30,				Change			Change
	2020		2019		20-19			20-19
Net interest income	$	61,164	$	62,252	$	(1,088	)		(1.7	)%
Provision for credit losses		573		467		106			22.7
Noninterest income		128,440		111,476		16,964			15.2
Noninterest expense		145,406		130,249		15,157			11.6
Income before taxes		43,625		43,012		613			1.4
Income tax expense		4,951		6,655		(1,704	)		(25.6	)
Net income	$	38,674	$	36,357	$	2,317			6.4	%

For the six-month period ended June 30, 2020, Institutional Banking net income increased $2.3 million, or 6.4%, compared to the same period last year. Net interest income decreased $1.1 million, or 1.7%, compared to the same period last year, driven by a decrease in funds transfer pricing due to the decline in short-term interest rates. Noninterest income increased $17.0 million, or 15.2%, primarily due to increases of $4.2 million in corporate trust income and $3.6 million in fund services income, both recorded in trust and securities processing revenue, $6.9 million in bond trading income, and $4.4 million in service charges on deposit accounts due to healthcare customer transfer and conversion fees recorded in the first quarter of 2020. These increases were partially offset by a decrease of $2.5 million in bankcard fees. Noninterest expense increased $15.2 million, or 11.6%, primarily driven by an increase of $9.5 million in salary and employee benefits expense, an increase of $3.2 million in technology, service, and overhead expenses, increased amortization expense of $1.2 million, and an increase of $0.9 million in bankcard expense.

Table 8

Personal Banking Operating Results (unaudited, dollars in thousands)

	Three Months Ended					Dollar			Percent
	June 30,					Change			Change
	2020			2019		20-19			20-19
Net interest income	$	37,015		$	33,334	$	3,681			11.0	%
Provision for credit losses		1,921			1,513		408			27.0
Noninterest income		29,890			29,385		505			1.7
Noninterest expense		69,457			60,024		9,433			15.7
(Loss) income before taxes		(4,473	)		1,182		(5,655	)	(>100.0)
Income tax (benefit) expense		(529	)		184		(713	)	(>100.0)
Net (loss) income	$	(3,944	)	$	998	$	(4,942	)	(>100.0)%

	Six Months Ended					Dollar			Percent
	June 30,					Change			Change
	2020			2019		20-19			20-19
Net interest income	$	70,972		$	65,637	$	5,335			8.1	%
Provision for credit losses		7,426			3,248		4,178		>100.0
Noninterest income		55,122			57,736		(2,614	)		(4.5	)
Noninterest expense		130,580			118,433		12,147			10.3
(Loss) income before taxes		(11,912	)		1,692		(13,604	)	(>100.0)
Income tax (benefit) expense		(1,352	)		262		(1,614	)	(>100.0)
Net (loss) income	$	(10,560	)	$	1,430	$	(11,990	)	(>100.0)%

For the six-month period ended June 30, 2020, Personal Banking recognized a net loss of $10.6 million, which represents a decrease of $12.0 million as compared to the same period last year. Net interest income increased $5.3 million, or 8.1%, compared to the same period last year due to increased loan balances. Provision for credit losses increased $4.2 million due to adoption of CECL, coupled with the current economic environment and reasonable and supportable economic forecasts. The impacts of the COVID-19 pandemic are key elements of these forecasts. Noninterest income decreased $2.6 million, or 4.5%, for the same period. This decrease is primarily driven by a decrease of $2.2 million in other noninterest income due to lower company-owned life insurance income, and a decrease of $1.2 million in deposit service charges. These decreases were partially offset by an increase of $0.8 million in equity earnings on alternative investments. Noninterest expense increased $12.1 million, or 10.3%, primarily due to an increase of $6.9 million in technology, service, and overhead expenses, $3.5 million in salary and employee benefits expense partially due to non-recurring COVID-19 related expenses, and $1.6 million in other expense due to higher operational losses recorded in 2020.

Balance Sheet Analysis

Total assets of the Company increased by $3.2 billion, or 12.0%, as of June 30, 2020, compared to December 31, 2019, primarily due to an increase of $1.9 billion, or 13.9%, in loan balances and an increase of $1.0 billion, or 13.9%, in available for sale securities.

Total assets of the Company increased $5.7 billion, or 23.9%, as of June 30, 2020, compared to June 30, 2019, primarily due to an increase in loan balances of $2.4 billion, or 18.6%, an increase in AFS securities of $1.3 billion, or 18.2%, an increase in securities purchased under agreements to resell of $1.1 billion, or 375.8%, and an increase in interest-bearing due from banks of $837.9 million, or 95.6%. Total assets, including securities purchased under agreements to resell and interest-bearing due from banks, are being impacted by excess liquidity in the market due to PPP.

Table 9

SELECTED FINANCIAL INFORMATION (unaudited, dollars in thousands)

	June 30,				December 31,
	2020		2019		2019
Total assets	$	29,753,608	$	24,016,276	$	26,561,355
Loans, net of unearned interest		15,313,310		12,903,040		13,439,525
Total securities		9,804,143		8,459,807		8,717,502
Interest-bearing due from banks		1,714,478		876,551		1,225,491
Total earning assets		27,975,969		22,420,909		24,859,075
Total deposits		24,459,404		19,400,230		21,603,244
Total borrowed funds		2,049,690		1,778,709		1,966,880

Loans represent the Company’s largest source of interest income. In addition to growing the commercial loan portfolio, management believes its middle market commercial business and its consumer business, including home equity and credit card loan products, are the market niches that represent its best opportunity to cross-sell fee-related services and generate additional noninterest income for the Company.

Actual loan balances totaled $15.3 billion as of June 30, 2020, and increased $1.9 billion, or 13.9%, compared to December 31, 2019, and increased $2.4 billion, or 18.6%, compared to June 30, 2019. Compared to December 31, 2019, commercial and industrial loans increased $1.3 billion, or 23.6%, and commercial real estate loans increased $425.3 million, or 8.3%. Compared to June 30, 2019, commercial and industrial loans increased $1.6 billion, or 30.5%, commercial real estate loans increased $691.1 million, or 14.2%, consumer real estate loans increased $369.5 million, or 29.3%, partially offset by a decrease of $271.9 million, or 39.7% in specialty lending loans. The increase in commercial and industrial loans as compared to both December 31, 2019 and June 30, 2019 is related to the Company’s participation in the PPP, with PPP loans totaling $1.5 billion as of June 30, 2020.

Nonaccrual, past due and restructured loans are discussed under “Credit Risk Management” within “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report.

Investment Securities

The Company’s investment portfolio contains trading, AFS, and HTM securities, as well as FRB stock, FHLB stock, and other miscellaneous investments. Investment securities totaled $9.8 billion as of June 30, 2020, and $8.7 billion as of December 31, 2019, and comprised 35.0% and 35.1% of the Company’s earning assets, respectively, as of those dates.

The Company’s AFS securities portfolio comprised 86.5% of the Company’s investment securities portfolio at June 30, 2020 and 85.4% at December 31, 2019. The Company’s AFS securities portfolio provides liquidity as a result of the composition and average life of the underlying securities. This liquidity can be used to fund loan growth or to offset the outflow of traditional funding sources. The average life of the AFS securities portfolio was 65.0 months at June 30, 2020, compared to 70.9 months at December 31, 2019, and 61.3 months at June 30, 2019. In addition to providing a potential source of liquidity, the AFS securities portfolio can be used as a tool to manage interest rate sensitivity. The Company’s goal in the management of its AFS securities portfolio is to maximize return within the Company’s parameters of liquidity goals, interest rate risk, and credit risk.

Management expects collateral pledging requirements for public funds, loan demand, and deposit funding to be the primary factors impacting changes in the level of AFS securities. There were $6.2 billion of AFS securities pledged to secure U.S. Government deposits, other public deposits, certain trust deposits, derivative transactions, and repurchase agreements at June 30, 2020. Of this amount, securities with a market value of $823.7 million at June 30, 2020 were pledged at the Federal Reserve Discount Window but were unencumbered as of that date.

The Company’s HTM securities portfolio consists of private placement bonds, which are issued primarily to refinance existing revenue bonds in the healthcare and education sectors. The HTM portfolio, net of the ACL totaled $1.1 billion at both June 30, 2020 and December 31, 2019. The average life of the HTM portfolio was 6.2 years at June 30, 2020, 6.3 years at December 31, 2019, and 6.7 years at June 30, 2019.

The securities portfolio generates the Company’s second largest component of interest income. The securities portfolio achieved an average yield on a tax-equivalent basis of 2.58% for the six-month period ended June 30, 2020, compared to 2.65% for the same period in 2019.

Deposits and Borrowed Funds

Deposits increased $2.9 billion, or 13.2%, from December 31, 2019 to June 30, 2020 and increased $5.1 billion, or 26.1%, from June 30, 2019 to June 30, 2020. Total interest-bearing deposits increased $1.2 billion, and noninterest-bearing deposits increased $1.7 billion from December 31, 2019 to June 30, 2020. Total interest-bearing deposits increased $2.9 billion, and noninterest-bearing deposits increased $2.1 billion from June 30, 2019 to June 30, 2020. The increase in deposits as compared to prior periods is related to the excess liquidity in the market created by the PPP and customer behavior changes related to the COVID-19 pandemic.

Deposits represent the Company’s primary funding source for its asset base. In addition to the core deposits garnered by the Company’s retail branch structure, the Company continues to focus on its cash management services, as well as its trust and mutual fund servicing businesses, in order to attract and retain additional deposits. Management believes a strong core deposit composition is one of the Company’s key strengths given its competitive product mix.

Long-term debt totaled $71.0 million at June 30, 2020, compared to $70.4 million as of December 31, 2019, and $69.8 million as of June 30, 2019. The Company’s long-term debt was assumed from the acquisition of Marquette Financial Companies (Marquette) and consists of debt obligations payable to four unconsolidated trusts (Marquette Capital Trust I, Marquette Capital Trust II, Marquette Capital Trust III, and Marquette Capital Trust IV) that previously issued trust preferred securities. These long-term debt obligations have an aggregate contractual balance of $103.1 million. Interest rates on trust preferred securities are tied to the three-month LIBOR rate with spreads ranging from 133 basis points to 160 basis points, and reset quarterly. The trust preferred securities have maturity dates ranging from January 2036 to September 2036.

The Company has a revolving line of credit with Wells Fargo Bank, N.A. which allows the Company to borrow up to $50.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company’s option either 1.00% above LIBOR or 1.75% below the prime rate on the date of an advance. The Company pays a 0.3% unused commitment fee for unused portions of the revolving line of credit. As of June 30, 2020, the Company had an outstanding balance of $15.0 million on this revolving line of credit. This borrowing is included in the Short-term debt line on the Company’s Consolidated Balance Sheets.

Federal funds purchased and securities sold under agreements to repurchase totaled $2.0 billion as of June 30, 2020, $1.9 billion as of December 31, 2019, and $1.7 billion at June 30, 2019. Repurchase agreements are transactions involving the exchange of investment funds by the customer for securities by the Company under an agreement to repurchase the same or similar issues at an agreed-upon price and date. The level of borrowings could be impacted by earning asset mix changes in the Company’s balance sheet from the impacts of the COVID-19 pandemic.

Capital and Liquidity

The Company places a significant emphasis on the maintenance of a strong capital position, which promotes investor confidence, provides access to funding sources under favorable terms, and enhances the Company’s ability to capitalize on business growth and acquisition opportunities. Higher levels of liquidity, however, bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher expenses for extended liability maturities. The Company manages capital for each subsidiary based upon the subsidiary’s respective risks and growth opportunities as well as regulatory requirements.

Total shareholders’ equity was $2.8 billion at June 30, 2020, a $171.0 million increase compared to December 31, 2019, and a $299.6 million increase compared to June 30, 2019.

The Company’s Board of Directors authorized, at its April 28, 2020, April 23, 2019, and April 24, 2018 meetings, the repurchase of up to two million shares of the Company’s common stock during the twelve months

following each meeting (each a Repurchase Authorization). During the six-month periods ended June 30, 2020 and 2019, the Company acquired 1,138,137 shares and 62,161 shares, respectively, of its common stock pursuant to the applicable Repurchase Authorization. In March 2020, the Company entered into an agreement with Bank of America (BoA) to repurchase an aggregate of $30.0 million of the Company’s common stock through an accelerated share repurchase agreement (the ASR). The Company repurchased a total of 653,498 shares under the ASR, which was completed during the second quarter. The ASR was entered into pursuant to the April 23, 2019 Repurchase Authorization and the Company has not made any repurchase of its securities other than pursuant to the Repurchase Authorizations. The Company is not currently engaging in repurchases. In the future, it may determine to resume repurchases.

At the Company’s quarterly board meeting, the Board of Directors declared a $0.31 per share quarterly cash dividend payable on October 1, 2020, to shareholders of record at the close of business on September 10, 2020.

Through the Company’s relationship with the FHLB of Des Moines, the Company owns $10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. The Company’s borrowing capacity is dependent upon the amount of collateral the Company places at the FHLB. The Company’s borrowing capacity with the FHLB was $1.4 billion as of June 30, 2020. The Company had no outstanding FHLB advances at FHLB of Des Moines as of June 30, 2020.

Risk-based capital guidelines established by regulatory agencies set minimum capital standards based on the level of risk associated with a financial institution’s assets. The Company has implemented the Basel III regulatory capital rules adopted by the FRB. Basel III capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a minimum tier 1 risk-based capital ratio of 6%. A financial institution’s total capital is also required to equal at least 8% of risk-weighted assets.

The risk-based capital guidelines indicate the specific risk weightings by type of asset. Certain off-balance sheet items (such as standby letters of credit and binding loan commitments) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings. The Company is also required to maintain a leverage ratio equal to or greater than 4%. The leverage ratio is calculated as the ratio of tier 1 core capital to total average assets, less goodwill and intangibles.

U.S. banking agencies in December 2018 approved a final rule to address the impact of CECL on regulatory capital by allowing banking organizations the option to phase in the day-one impact of CECL until the first quarter of 2023. In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The Company is electing this alternative option instead of the one described in the December 2018 rule.

The Company's capital position as of June 30, 2020 is summarized in the table below and exceeded regulatory requirements.

Table 10

	Three Months Ended						Six Months Ended
	June 30,						June 30,
RATIOS	2020			2019			2020			2019
Common equity tier 1 capital ratio		11.92	%		12.65	%		11.92	%		12.65	%
Tier 1 risk-based capital ratio		11.92			12.65			11.92			12.65
Total risk-based capital ratio		13.17			13.63			13.17			13.63
Leverage ratio		8.35			9.69			8.35			9.69
Return on average assets		0.87			0.98			0.42			1.00
Return on average equity		8.95			9.46			4.22			9.95
Average equity to assets		9.67			10.37			10.04			10.08

The Company's per share data is summarized in the table below.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
Per Share Data	2020			2019			2020			2019
Earnings - basic	$	1.26		$	1.17		$	1.18		$	2.35
Earnings - diluted		1.26			1.16			1.18			2.34
Cash dividends		0.31			0.30			0.62			0.60
Dividend payout ratio		24.60	%		25.64	%		52.54	%		25.53	%
Book value	$	57.84		$	50.50		$	57.84		$	50.50

Off-balance Sheet Arrangements

The Company’s main off-balance sheet arrangements are loan commitments, commercial and standby letters of credit, futures contracts and forward exchange contracts, which have maturity dates rather than payment due dates. See Note 10, “Commitments, Contingencies and Guarantees” in the Notes to Consolidated Financial Statements for detailed information on these arrangements. The level of the outstanding commitments will be impacted by financial impacts related to the COVID-19 pandemic.

Critical Accounting Policies and Estimates

The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to customers and suppliers, allowance for credit losses, bad debts, investments, financing operations, long-lived assets, taxes, other contingencies, and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which have formed the basis for making such judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from the recorded estimates.

A summary of critical accounting policies is listed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices, or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading.

The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The following discussion of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial.

Interest Rate Risk

In the banking industry, a major risk exposure is changing interest rates. To minimize the effect of interest rate changes to net interest income and exposure levels to economic losses, the Company manages its exposure to changes in interest rates through asset and liability management within guidelines established by its Asset Liability

Committee (ALCO) and approved by the Board. The ALCO is responsible for approving and ensuring compliance with asset/liability management policies, including interest rate exposure. The Company’s primary method for measuring and analyzing consolidated interest rate risk is the Net Interest Income Simulation Analysis. The Company also uses a Net Portfolio Value model to measure market value risk under various rate change scenarios and a gap analysis to measure maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time. On a limited basis, the Company uses hedges such as swaps, rate floors, and futures contracts to manage interest rate risk on certain loans, trading securities, and trust preferred securities. See further information in Note 11 “Derivatives and Hedging Activities” in the Notes to the Consolidated Financial Statements.

Overall, the Company manages interest rate risk by positioning the balance sheet to maximize net interest income while maintaining an acceptable level of interest rate and credit risk, remaining mindful of the relationship among profitability, liquidity, interest rate risk, and credit risk.

Net Interest Income Modeling

The Company’s primary interest rate risk tool, the Net Interest Income Simulation Analysis, measures interest rate risk and the effect of interest rate changes on net interest income and net interest margin. This analysis incorporates all of the Company’s assets and liabilities together with assumptions that reflect the current interest rate environment. Through these simulations, management estimates the impact on net interest income of a 300 basis point upward or a 200 basis point downward gradual change (e.g. ramp) and immediate change (e.g. shock) of market interest rates over a two year period. In ramp scenarios, rates change gradually for a one-year period and remain constant in year two. In shock scenarios, rates change immediately and the change is sustained for the remainder of the two-year scenario horizon. Assumptions are made to project rates for new loans and deposits based on historical analysis, management outlook and repricing strategies. Asset prepayments and other market risks are developed from industry estimates of prepayment speeds and other market changes. The results of these simulations can be significantly influenced by assumptions utilized and management evaluates the sensitivity of the simulation results on a regular basis.

Table 11 shows the net interest income increase or decrease over the next two years as of June 30, 2020 and 2019 based on hypothetical changes in interest rates and a constant sized balance sheet with runoff being replaced.

Table 11

MARKET RISK (unaudited)

	Hypothetical change in interest rate – Rate Ramp
	Year One						Year Two
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Change in basis points	Percentage change			Percentage change			Percentage change			Percentage change
300		(0.3	)%		4.3	%		10.3	%		9.5	%
200		(0.3	)		2.8			7.3			6.0
100		(0.2	)		1.3			3.4			2.5
Static		—			—			—			—
(100)		(1.3	)		(1.6	)		(3.3	)		(6.1	)
(200)	n/a				(3.6	)	n/a				(11.9	)

	Hypothetical change in interest rate – Rate Shock
	Year One						Year Two
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Change in basis points	Percentage change			Percentage change			Percentage change			Percentage change
300		2.7	%		10.3	%		12.9	%		12.3	%
200		1.6			6.8			9.0			7.8
100		0.4			3.3			4.6			3.5
Static		—			—			—			—
(100)		(1.9	)		(4.2	)		(3.7	)		(7.8	)
(200)	n/a				(8.8	)	n/a				(14.7	)

The Company is positioned slightly asset sensitive to changes in interest rates with the exception of rising rate ramps in year one. Sensitivity of the rising rate ramps is almost neutral for year one, changing to asset sensitive in year two. For decreasing rate ramps, net interest income is predicted to decrease in year one and two. For rate shocks, net interest income is predicted to increase in year one and two in rising rate scenarios and decrease in falling rate scenarios. Increases and decreases in net interest income in rising and falling rate scenarios are due to yields on earning assets increasing and decreasing more due to changes in market rates than the cost of paying liabilities is projected to increase or decrease. A key assumption underlying these projections is how the Company is projected to price deposits in a rising rate environment being consistent with our history.

Trading Account

The Company carries securities in a trading account that is maintained according to Board-approved policy and procedures. The policy limits the amount and type of securities that can be carried in the trading account, requires compliance with any limits under applicable law and regulations, and mandates the use of a value-at-risk methodology to manage price volatility risks within financial parameters. The risk associated with the carrying of trading securities is offset by utilizing financial instruments including exchange-traded financial futures as well as short sales of U.S. Treasury and Corporate securities. The trading securities and related hedging instruments are marked-to-market daily. The trading account had a balance of $51.4 million as of June 30, 2020, $45.6 million as of December 31, 2019, and $81.4 million as of June 30, 2019. Securities sold not yet purchased (i.e. short positions) totaled $4.0 million at June 30, 2020, $14.6 million as of December 31, 2019, and $32.1 million at June 30, 2019 and are classified within the Other liabilities line of the Company’s Consolidated Balance Sheets.

The Company is subject to market risk primarily through the effect of changes in interest rates of its assets held for purposes other than trading. The discussion in Table 11 above of interest rate risk, however, combines instruments held for trading and instruments held for purposes other than trading, because the instruments held for trading represent such a small portion of the Company’s portfolio that the interest rate risk associated with them is immaterial.

Other Market Risk

The Company has minimal foreign currency risk as a result of foreign exchange contracts. See Note 10 “Commitments, Contingencies and Guarantees” in the notes to the Consolidated Financial Statements.

Credit Risk Management

Credit risk represents the risk that a customer or counterparty may not perform in accordance with contractual terms. The Company utilizes a centralized credit administration function, which provides information on the Bank’s risk levels, delinquencies, an internal ranking system and overall credit exposure. Loan requests are centrally reviewed to ensure the consistent application of the loan policy and standards. In addition, the Company has an internal loan review staff that operates independently of the Bank. This review team performs periodic

examinations of the Bank’s loans for credit quality, documentation and loan administration. The respective regulatory authorities governing the Bank also review loan portfolios.

A primary indicator of credit quality and risk management is the level of nonperforming loans. Nonperforming loans include both nonaccrual loans and restructured loans on nonaccrual. The Company’s nonperforming loans increased $28.9 million to $82.2 million at June 30, 2020, compared to June 30, 2019, and increased $25.9 million, compared to December 31, 2019.

The Company had $5.7 million, $3.2 million, and $2.9 million of other real estate owned as of June 30, 2020 and 2019, and December 31, 2019, respectively. Loans past due more than 90 days and still accruing interest totaled $4.6 million as of June 30, 2020, compared to $1.8 million at June 30, 2019 and $2.1 million as of December 31, 2019.

A loan is generally placed on nonaccrual status when payments are past due 90 days or more and/or when management has considerable doubt about the borrower’s ability to repay on the terms originally contracted. The accrual of interest is discontinued and recorded thereafter only when actually received in cash.

Certain loans are restructured to provide a reduction or deferral of interest or principal due to deterioration in the financial condition of the respective borrowers. The Company had $11.8 million of restructured loans at June 30, 2020, $19.0 million at June 30, 2019, and $19.8 million at December 31, 2019. Those loans modified as part of the Company’s response to the COVID-19 pandemic are not considered to be restructured loans and are discussed further below in Table 13.

Table 12

LOAN QUALITY (unaudited, dollars in thousands)

	June 30,						December 31,
	2020			2019			2019
Nonaccrual loans	$	71,285		$	34,829		$	36,909
Restructured loans on nonaccrual		10,960			18,566			19,438
Total nonperforming loans		82,245			53,395			56,347
Other real estate owned		5,710			3,248			2,935
Total nonperforming assets	$	87,955		$	56,643		$	59,282
Loans past due 90 days or more	$	4,588		$	1,825		$	2,069
Restructured loans accruing		805			402			392
Allowance for credit losses on loans		200,300			102,092			101,788
Ratios:
Nonperforming loans as a percent of loans		0.54	%		0.41	%		0.42	%
Nonperforming assets as a percent of loans plus other real estate owned		0.57			0.44			0.44
Nonperforming assets as a percent of total assets		0.30			0.24			0.22
Loans past due 90 days or more as a percent of loans		0.03			0.01			0.02
Allowance for credit losses on loans as a percent of loans		1.31			0.79			0.76
Allowance for credit losses on loans as a multiple of nonperforming loans	2.44x			1.91x			1.81x

COVID-19 Loan Modifications

In response to the COVID-19 pandemic, the Company has taken two primary approaches in assisting our customers by modifying terms of existing loans and loans under the PPP. The Company has taken a proactive approach to assisting its borrowers through individual evaluation and broad-based programs. Modifications granted to borrowers have been payment deferrals taking the form of either full payment deferral or interest-only payments. Based on the circumstances of the borrower, payments have been deferred either 90 days, with the option to extend, or 180 days. Consistent with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, modifications granted to borrowers that are

related to COVID-19 are not required to be evaluated as TDRs under ASC 310-40. These modified loans are classified as performing and are not considered past due. Loans are to be placed on non-accrual when it becomes apparent that payment of interest or recovery of all principal is questionable, and the COVID-19 related modification is no longer considered short-term or the modification is deemed ineffective. The Company anticipates additional loans to be modified due to the effects of COVID-19 in the coming periods. Any loans modified are segmented separately with specific prepayment and maturity assumptions within the Company’s ACL. As of June 30, 2020, the Company had made 1,676 COVID-19 related modifications on loans with a total balance of $1.3 billion. See further discussion of the impacts of COVID-19 on the Company’s consolidated financial statements in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Table 13

COVID-19 LOAN MODIFICATIONS (unaudited, in thousands)

	As of June 30, 2020
			Modification Type
	Balance		Deferment		Interest Only
Commercial and industrial	$	349,858	$	312,033	$	37,825
Specialty lending		25,644		25,240		404
Commercial real estate		874,236		704,648		169,588
Consumer real estate		69,045		67,859		1,186
Consumer		2,132		2,132		—
Credit cards		2,884		2,240		644
Leases and other		37		37		—
Held to maturity securities		15,767		15,767		—
Total	$	1,339,603	$	1,129,956	$	209,647

Liquidity Risk

Liquidity represents the Company’s ability to meet financial commitments through the maturity and sale of existing assets or availability of additional funds. The Company believes that the most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, the Company believes public confidence is generated through profitable operations, sound credit quality and a strong capital position. The primary source of liquidity for the Company is regularly scheduled payments on and maturity of assets, which include $8.5 billion of high-quality securities available for sale as of June 30, 2020. The liquidity of the Company and the Bank is also enhanced by its activity in the federal funds market and by its core deposits. Additionally, management believes it can raise debt or equity capital on favorable terms in the future, should the need arise.

Another factor affecting liquidity is the amount of deposits and customer repurchase agreements that have pledging requirements. All customer repurchase agreements require collateral in the form of a security. The U.S. Government, other public entities, and certain trust depositors require the Company to pledge securities if their deposit balances are greater than the FDIC-insured deposit limitations. These pledging requirements affect liquidity risk in that the related security cannot otherwise be disposed of due to the pledging restriction. At June 30, 2020, $6.2 billion, or 73.5%, of the securities available-for-sale were pledged or used as collateral, compared to $5.8 billion, or 77.5%, at December 31, 2019. However, of these amounts, securities with a market value of $823.7 million at June 30, 2020 and $481.2 million at December 31, 2019 were pledged at the Federal Reserve Discount Window but were unencumbered as of those dates.

The Company also has other commercial commitments that may impact liquidity. These commitments include unused commitments to extend credit, standby letters of credit and financial guarantees, and commercial letters of credit. The total amount of these commercial commitments at June 30, 2020 was $12.1 billion. Since many of these commitments expire without being drawn upon, the total amount of these commercial commitments does not necessarily represent the future cash requirements of the Company.

The Company’s cash requirements consist primarily of dividends to shareholders, debt service, operating expenses, and treasury stock purchases. Management fees and dividends received from bank and non-bank subsidiaries traditionally have been sufficient to satisfy these requirements and are expected to be sufficient in the future. The Bank is subject to various rules regarding payment of dividends to the Company. For the most part, the Bank can pay dividends at least equal to its current year’s earnings without seeking prior regulatory approval. The Company also uses cash to inject capital into its bank and non-bank subsidiaries to maintain adequate capital as well as fund strategic initiatives.

To enhance general working capital needs, the Company has a revolving line of credit with Wells Fargo Bank, N.A., which allows the Company to borrow up to $50.0 million for general working capital purposes. The interest rate applied to borrowed balances will be at the Company’s option, either 1.00% above LIBOR or 1.75% below the prime rate on the date of an advance. The Company pays a 0.3% unused commitment fee for unused portions of the line of credit. As of June 30, 2020, the Company had an outstanding balance of $15.0 million on this line of credit.

The Company is a member bank of the FHLB. The Company owns $10.0 million of FHLB stock and has access to additional liquidity and funding sources through FHLB advances. Additionally, the Company has access to borrow up to $1.4 billion through advances at the FHLB of Des Moines, but had no outstanding FHLB Des Moines advances as of June 30, 2020.

Operational Risk

Operational risk generally refers to the risk of loss resulting from the Company’s operations, including those operations performed for the Company by third parties. This would include but is not limited to the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees or others, errors relating to transaction processing, breaches of the internal control system and compliance requirements, and unplanned interruptions in service. This risk of loss also includes the potential legal or regulatory actions that could arise as a result of an operational deficiency, or as a result of noncompliance with applicable regulatory standards. The Company must comply with a number of legal and regulatory requirements.

The Company operates in many markets and relies on the ability of its employees and systems to properly process a high number of transactions. In the event of a breakdown in internal control systems, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation. In order to address this risk, management maintains a system of internal controls with the objective of providing proper transaction authorization and execution, safeguarding of assets from misuse or theft, and ensuring the reliability of financial and other data.

The Company maintains systems of internal controls that provide management with timely and accurate information about the Company’s operations. These systems have been designed to manage operational risk at appropriate levels given the Company’s financial strength, the environment in which it operates, and considering factors such as competition and regulation. The Company has also established procedures that are designed to ensure that policies relating to conduct, ethics, and business practices are followed on a uniform basis. In certain cases, the Company has experienced losses from operational risk. Such losses have included the effects of operational errors that the Company has discovered and included as expense in the statement of income. While there can be no assurance that the Company will not suffer such losses in the future, management continually monitors and works to improve its internal controls, systems, and corporate-wide processes and procedures.

ITEM 4. CONTROLS AND PROCEDURES

The Sarbanes-Oxley Act of 2002, as amended, requires the Chief Executive Officer and the Chief Financial Officer to make certain certifications under this Form 10-Q with respect to the Company’s disclosure controls and procedures and internal control over financial reporting. The Company has a Code of Ethics that expresses the values that drive employee behavior and maintains the Company’s commitment to the highest standards of ethics.

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Form 10-Q. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, the Company’s disclosure controls and procedures were effective for ensuring that the Company’s SEC filings are recorded, processed, summarized, and reported within the time period required and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the six-month period ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, the Company and its subsidiaries are named defendants in various legal proceedings. In the opinion of management, after consultation with legal counsel, none of these lawsuits are expected to have a materially adverse effect on the financial position, results of operations, or cash flows of the Company.

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors as previously disclosed in response to Item 1A to Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, or in response to Item 1A to Part II of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth the information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three-month period ended June 30, 2020.

ISSUER PURCHASE OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1 - April 28, 2020		—	$	—		—		973,490
April 29 - April 30, 2020		1,329		49.56		1,329		1,998,671
May 1 - May 31, 2020		116,346		43.98		116,346		1,882,325
June 1 - June 30, 2020		97		53.67		97		1,882,228
Total		117,772	$	44.05		117,772

On April 23, 2019, the Company announced a plan to repurchase up to two million shares of common stock, which terminated on April 28, 2020. On April 28, 2020, the Company announced a plan to repurchase up to two million shares of common stock, which will terminate on April 27, 2021. The Company has not made any repurchases other than through these Repurchase Authorizations. The Company is not currently engaging in repurchase, other than in connection with the settlement of the ASR. In the future, it may determine to resume repurchases. Other than purchases pursuant to the ASR, all share purchases pursuant to the Repurchase Authorizations are intended to be within the scope of Rule 10b-18 promulgated under the Exchange Act. Rule 10b-18 provides a safe harbor for purchases in a given day if the Company satisfies the manner, timing and volume conditions of the rule when purchasing its own shares of common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS


3.1		Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and filed with the Commission on May 9, 2006).

3.2		Bylaws, amended as of October 28, 2014 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 and filed with the Commission on August 2, 2016).

31.1		CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act filed herewith.

31.2		CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act filed herewith.

32.1		CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act filed herewith.

32.2		CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act filed herewith.

101.INS		XBRL Instance Document – The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document filed herewith.

101.CAL		Inline XBRL Taxonomy Extension Calculation Document filed herewith.

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document filed herewith.

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document filed herewith.

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document filed herewith.

104		The cover page of our Form 10-Q for the quarter ended June 30, 2020, formatted in iXBRL.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

UMB FINANCIAL CORPORATION

/s/ David C. Odgers

David C. Odgers

Chief Accounting Officer

Date: July 30, 2020