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EX-32.1 - EXHIBIT 32.1 - BBVA USA Bancshares, Inc.exhibit321x20200331.htm
EX-32.2 - EXHIBIT 32.2 - BBVA USA Bancshares, Inc.exhibit322x20200331.htm
EX-31.2 - EXHIBIT 31.2 - BBVA USA Bancshares, Inc.exhibit312x20200331.htm
EX-31.1 - EXHIBIT 31.1 - BBVA USA Bancshares, Inc.exhibit311x20200331.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2020
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to  
Commission File Number: 000-55106
BBVA USA Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Texas
 
20-8948381
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
2200 Post Oak Blvd. Houston, Texas
 
77056
(Address of principal executive offices)
 
(Zip Code)
 
(205) 297-3000
 
(Registrant’s telephone number, including area code)
 
Not Applicable
 
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
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 þ No o
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 o
 
Accelerated filer o
 
Non-accelerated filer þ (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company o
 
 
 
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of April 24, 2020
Common Stock (par value $0.01 per share)
 
222,963,891 shares

Explanatory Note
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this report with certain reduced disclosures as permitted by those instructions.
 
 
 
 
 



TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 






Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
AFS
Available For Sale
ASC
Accounting Standards Codification
ASC 326
ASU 2016-13, Financial Instruments - Credit Losses
ASU
Accounting Standards Update
Basel III
Global regulatory framework developed by the Basel Committee on Banking Supervision
Bank
BBVA USA
BBVA
Banco Bilbao Vizcaya Argentaria, S.A.
BBVA Group
BBVA and its consolidated subsidiaries
BOLI
Bank Owned Life Insurance
BSI
BBVA Securities Inc.
Cash Flow Hedge
A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability
CD    
Certificate of Deposit and/or time deposits
CET1
Common Equity Tier 1
CET1 Risk-Based Capital Ratio
Ratio of Common Equity Tier 1 capital to risk-weighted assets
CFPB    
Consumer Financial Protection Bureau
Company
BBVA USA Bancshares, Inc. and its subsidiaries
CRA
Community Reinvestment Act
ERM
Enterprise Risk Management
EVE
Economic Value of Equity
Exchange Act
Securities and Exchange Act of 1934, as amended
Fair Value Hedge
A hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment
FASB    
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
Federal Reserve Board
Board of Governors of the Federal Reserve System
FHC
Financial holding company
FHLB    
Federal Home Loan Bank
FICO
Fair Isaac Corporation
Fitch
Fitch Ratings
FNMA    
Federal National Mortgage Association
HTM
Held To Maturity
IHC
Top-tier U.S. intermediate holding company
Large FBO
Foreign Banking Organization with $100 billion or more in global total consolidated assets
LCR
Liquidity Coverage Ratio
Leverage Ratio
Ratio of Tier 1 capital to quarterly average on-balance sheet assets
Moody's
Moody's Investor Services, Inc.
MRA
Master Repurchase Agreement
MSR
Mortgage Servicing Rights
OREO
Other Real Estate Owned
OIS
Overnight Index Swap
Parent
BBVA USA Bancshares, Inc.
Potential Problem Loans
Commercial loans rated substandard or below, which do not meet the definition of nonaccrual, TDR, or 90 days past due and still accruing
SBA
Small Business Administration

3


SBIC
Small Business Investment Company
SEC
Securities and Exchange Commission
Series A Preferred Stock
Floating Non-Cumulative Perpetual Preferred Stock, Series A
SOFR
Secured Overnight Financing Rate
S&P
Standard and Poor's Rating Services
Tailoring Rules
Rules adopted by the Federal Reserve Board on October 10, 2019 that adjust the thresholds at which certain enhanced prudential standards apply to bank holding companies and rules adopted jointly by the Federal Reserve Board, OCC and FDIC that adjust the thresholds at which certain capital and liquidity requirements apply to bank holding companies.
TBA
To be announced
TDR
Troubled Debt Restructuring
Tier 1 Risk-Based Capital Ratio
Ratio of Tier 1 capital to risk-weighted assets
Total Risk-Based Capital Ratio
Ratio of Total capital (the sum of Tier 1 capital and Tier 2 capital) to risk-weighted assets
U.S.
United States of America
U.S. Treasury
United States Department of the Treasury
U.S. GAAP
Accounting principles generally accepted in the U.S.

4


Unless otherwise specified, the terms “we,” “us,” “our,” and the “Company” are used to refer to BBVA USA Bancshares, Inc. and its subsidiaries, or any one or more of them, as the context may require. The term “Parent” refers to BBVA USA Bancshares, Inc. The term “BBVA” refers to Banco Bilbao Vizcaya Argentaria, S.A., the parent company of BBVA USA Bancshares, Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements about the Company and its industry that involve substantial risks and uncertainties. Statements other than statements of current or historical fact, including statements regarding the Company's future financial condition, results of operations, business plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations applicable to the Company, are forward-looking statements. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:
national, regional and local economic conditions may be less favorable than expected, resulting in, among other things, increased charge-offs of loans, higher provisions for credit losses and/or reduced demand for the Company's services;
disruptions to the credit and financial markets, either nationally or globally;
the COVID-19 pandemic may continue to have an adverse impact on the Company's business and financial results;
decline in real estate values or overall economic weakness could also have an adverse impact upon the value of real estate or other assets which the Company owns as a result of foreclosing a loan and its ability to realize value on such assets;
legislative, regulatory or accounting changes, which may adversely affect our business and/or competitive position, impose additional costs on the Company or cause us to change our business practices;
the fiscal and monetary policies of the federal government and its agencies;
the impact of consumer protection regulations, including the CFPB's residential mortgage and other regulations, which could adversely affect the Company's business, financial condition or results of operations;
the failure to satisfy capital adequacy and liquidity guidelines applicable to the Company;
volatile or declining oil prices, which could have a negative impact on the economies and real estate markets of states such as Texas, resulting in, among other things, higher delinquencies and increased charge-offs in the energy lending portfolio as well as other commercial and consumer loan portfolios indirectly impacted by declining oil prices;
a failure by the Company to effectively manage the risks the Company faces, including credit, operational and cyber security risks;
failure to control concentration risk such as loan type, industry segment, borrower type or location of the borrower or collateral;
changes in the creditworthiness of customers;
downgrades to the Company's credit ratings;
changes in interest rates which could affect interest rate spreads and net interest income;
costs and effects of litigation, regulatory investigations, examinations or similar matters;
disruptions in the Company's ability to access capital markets, which may adversely affect its capital resources and liquidity;
increased loan losses or impairment of goodwill;
the Company's heavy reliance on communications and information systems to conduct its business and reliance on third parties and affiliates to provide key components of its business infrastructure, any disruptions of which could interrupt the Company's operations or increase the costs of doing business;
negative public opinion, which could damage the Company's reputation and adversely impact business and revenues;
the Company depends on the expertise of key personnel, and if these individuals leave or change their roles without effective replacements, operations may suffer;
the Company's financial reporting controls and procedures may not prevent or detect all errors or fraud;
the Company is subject to certain risks related to originating and selling mortgages. It may be required to repurchase mortgage loans or indemnify mortgage loan purchases as a result of breaches of representations

5


and warranties, borrower fraud or certain breaches of its servicing agreements, and this could harm the Company's liquidity, results of operations and financial condition;
increased pressures from competitors (both banks and non-banks) and/or an inability by the Company to remain competitive in the financial services industry, particularly in the markets which the Company serves, and keep pace with technological changes;
unpredictable natural or other disasters, which could impact the Company's customers or operations;
a loss of customer deposits, which could increase the Company's funding costs;
the Company's dependence on the accuracy and completeness of information about clients and counterparties;
changes in the Company's accounting policies or in accounting standards which could materially affect how the Company reports financial results and condition;
the Company has in the past and may in the future pursue acquisitions, which could affect costs and from which the Company may not be able to realize anticipated benefits; and
the Company may not be able to hire or retain additional qualified personnel and recruiting and compensation costs may increase as a result of turnover, both of which may increase costs and reduce profitability and may adversely impact the Company's ability to implement the Company's business strategies.
The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the time they are made and do not necessarily reflect the Company’s outlook at any other point in time. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or for any other reason. However, readers should carefully review the risk factors set forth in other reports or documents the Company files periodically with the SEC.

6


PART I FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Assets:
 
 
 
Cash and due from banks
$
1,033,733

 
$
1,149,734

Federal funds sold, securities purchased under agreements to resell and interest bearing deposits
4,479,535

 
5,788,964

Cash and cash equivalents
5,513,268

 
6,938,698

Trading account assets
1,009,130

 
473,976

Debt securities available for sale
6,344,816

 
7,235,305

Debt securities held to maturity, net of allowance for debt securities held to maturity losses of $1,892 at March 31, 2020 (fair value of $8,267,393 and $6,921,158 at March 31, 2020 and December 31, 2019, respectively)
7,876,266

 
6,797,046

Loans held for sale, at fair value
117,752

 
112,058

Loans
67,539,414

 
63,946,857

Allowance for loan losses
(1,351,072
)
 
(920,993
)
Net loans
66,188,342

 
63,025,864

Premises and equipment, net
1,068,741

 
1,087,698

Bank owned life insurance
754,409

 
750,224

Goodwill
2,328,296

 
4,513,296

Other assets
3,124,539

 
2,669,182

Total assets
$
94,325,559

 
$
93,603,347

Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
20,418,504

 
$
21,850,216

Interest bearing
56,816,003

 
53,135,067

Total deposits
77,234,507

 
74,985,283

FHLB and other borrowings
3,790,137

 
3,690,044

Federal funds purchased and securities sold under agreements to repurchase
409,784

 
173,028

Accrued expenses and other liabilities
1,532,777

 
1,368,403

Total liabilities
82,967,205

 
80,216,758

Shareholder’s Equity:
 
 
 
Series A Preferred stock — $0.01 par value, liquidation preference $200,000 per share
 
 
 
Authorized — 30,000,000 shares
 
 
 
Issued — 1,150 shares at both March 31, 2020 and December 31, 2019
229,475

 
229,475

Common stock — $0.01 par value:
 
 
 
Authorized — 300,000,000 shares
 
 
 
Issued — 222,963,891 shares at both March 31, 2020 and December 31, 2019
2,230

 
2,230

Surplus
14,039,572

 
14,043,727

Accumulated deficit
(3,305,226
)
 
(917,227
)
Accumulated other comprehensive income (loss)
362,339

 
(1,072
)
Total BBVA USA Bancshares, Inc. shareholder’s equity
11,328,390

 
13,357,133

Noncontrolling interests
29,964

 
29,456

Total shareholder’s equity
11,358,354

 
13,386,589

Total liabilities and shareholder’s equity
$
94,325,559

 
$
93,603,347

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

7


BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Interest income:
 
 
 
Interest and fees on loans
$
715,476

 
$
800,488

Interest on debt securities available for sale
(1,492
)
 
53,522

Interest on debt securities held to maturity
41,102

 
29,495

Interest on trading account assets
1,122

 
539

Interest and dividends on other earning assets
42,175

 
22,968

Total interest income
798,383

 
907,012

Interest expense:
 
 
 
Interest on deposits
164,742

 
182,354

Interest on FHLB and other borrowings
21,176

 
37,626

Interest on federal funds purchased and securities sold under agreements to repurchase
22,658

 
3,747

Interest on other short-term borrowings
352

 
196

Total interest expense
208,928

 
223,923

Net interest income
589,455

 
683,089

Total provision for credit losses
356,991

 
182,292

Net interest income after provision for credit losses
232,464

 
500,797

Noninterest income:
 
 
 
Service charges on deposit accounts
61,531

 
58,908

Card and merchant processing fees
50,091

 
46,002

Investment services sales fees
34,407

 
26,696

Investment banking and advisory fees
26,731

 
18,857

Money transfer income
24,548

 
21,981

Mortgage banking
17,451

 
4,937

Asset management fees
11,904

 
10,767

Corporate and correspondent investment sales
10,717

 
6,892

Bank owned life insurance
4,625

 
4,584

Investment securities gains, net
19,139

 
8,958

Other
73,098

 
49,178

Total noninterest income
334,242

 
257,760

Noninterest expense:
 
 
 
Salaries, benefits and commissions
310,136

 
292,716

Professional services
70,220

 
63,896

Equipment
64,681

 
65,394

Net occupancy
39,843

 
40,941

Money transfer expense
17,136

 
14,978

Goodwill impairment
2,185,000

 

Other
122,044

 
104,048

Total noninterest expense
2,809,060

 
581,973

Net (loss) income before income tax expense
(2,242,354
)
 
176,584

Income tax (benefit) expense
(5,069
)
 
35,603

Net (loss) income
(2,237,285
)
 
140,981

Less: net income attributable to noncontrolling interests
501

 
556

Net (loss) income attributable to BBVA USA Bancshares, Inc.
(2,237,786
)
 
140,425

Less: preferred stock dividends
4,155

 
4,485

Net (loss) income attributable to common shareholder
$
(2,241,941
)
 
$
135,940

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

8



BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Net (loss) income
$
(2,237,285
)
 
$
140,981

Other comprehensive income, net of tax:
 
 
 
Net unrealized gains arising during period from debt securities available for sale
99,699

 
51,700

Less: reclassification adjustment for net gains on sale of debt securities available for sale in net income
14,572

 
6,834

Net change in net unrealized holding gains on debt securities available for sale
85,127

 
44,866

Change in unamortized net holding gains on debt securities held to maturity
1,575

 
1,743

Change in unamortized non-credit related impairment on debt securities held to maturity
118

 
368

Net change in unamortized holding gains on debt securities held to maturity
1,693

 
2,111

Unrealized holding gains arising during period from cash flow hedge instruments
274,837

 
24,053

Change in defined benefit plans
1,754

 
3,119

Other comprehensive income, net of tax
363,411

 
74,149

Comprehensive (loss) income
(1,873,874
)
 
215,130

Less: comprehensive income attributable to noncontrolling interests
501

 
556

Comprehensive (loss) income attributable to BBVA USA Bancshares, Inc.
$
(1,874,375
)
 
$
214,574

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

9


BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(Unaudited)
 
Preferred Stock
 
Common Stock
 
Surplus
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Non-Controlling Interests
 
Total Shareholder’s Equity
 
(In Thousands)
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
229,475

 
$
2,230

 
$
14,545,849

 
$
(1,107,198
)
 
$
(186,848
)
 
$
29,021

 
$
13,512,529

Cumulative effect adjustment related to ASU adoptions (1)

 

 

 
38,896

 
(35,436
)
 

 
3,460

Balance, January 1, 2019
$
229,475

 
$
2,230

 
$
14,545,849

 
$
(1,068,302
)
 
$
(222,284
)
 
$
29,021

 
$
13,515,989

Net income

 

 

 
140,425

 

 
556

 
140,981

Other comprehensive income, net of tax

 

 

 

 
74,149

 

 
74,149

Issuance of common stock

 

 
802

 

 

 

 
802

Preferred stock dividends

 

 
(4,485
)
 

 

 

 
(4,485
)
Capital contribution

 

 

 

 

 
101

 
101

Balance, March 31, 2019
$
229,475

 
$
2,230

 
$
14,542,166

 
$
(927,877
)
 
$
(148,135
)
 
$
29,678

 
$
13,727,537

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
$
229,475

 
$
2,230

 
$
14,043,727

 
$
(917,227
)
 
$
(1,072
)
 
$
29,456

 
$
13,386,589

Cumulative effect adjustment related to ASC 326 adoption

 

 

 
(150,213
)
 

 

 
(150,213
)
Balance, January 1, 2020
$
229,475

 
$
2,230

 
$
14,043,727

 
$
(1,067,440
)
 
$
(1,072
)
 
$
29,456

 
$
13,236,376

Net (loss) income

 

 

 
(2,237,786
)
 

 
501

 
(2,237,285
)
Other comprehensive income, net of tax

 

 

 

 
363,411

 

 
363,411

Preferred stock dividends

 

 
(4,155
)
 

 

 

 
(4,155
)
Capital contribution

 

 

 

 

 
7

 
7

Balance, March 31, 2020
$
229,475

 
$
2,230

 
$
14,039,572

 
$
(3,305,226
)
 
$
362,339

 
$
29,964

 
$
11,358,354

(1)
Related to the Company's adoption of ASU 2016-02, ASU 2017-12 and ASU 2018-02 on January 1, 2019.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

10


BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Operating Activities:
 
 
 
Net (loss) income
$
(2,237,285
)
 
$
140,981

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
104,267

 
85,705

Goodwill impairment
2,185,000

 

Accretion of discount, loan fees and purchase market adjustments, net
(8,070
)
 
(13,557
)
Provision for credit losses
356,991

 
182,292

Net change in trading account assets
(535,154
)
 
(68,467
)
Net change in trading account liabilities
124,326

 
(30,075
)
Originations and purchases of mortgage loans held for sale
(209,524
)
 
(127,894
)
Sale of mortgage loans held for sale
212,605

 
124,857

Deferred tax (benefit) expense
(66,187
)
 
666

Investment securities gains, net
(19,139
)
 
(8,958
)
Net gain on sale of premises and equipment
(483
)
 
(1,297
)
Loss on sale of loans

 
78

Gain on sale of mortgage loans held for sale
(8,775
)
 
(5,135
)
Net loss on sale of other real estate and other assets
625

 
1,305

Increase in other assets
(7,625
)
 
(177,149
)
Increase in other liabilities
111,425

 
46,979

Net cash provided by operating activities
2,997

 
150,331

Investing Activities:
 
 
 
Proceeds from sales of debt securities available for sale
607,655

 
1,446,776

Proceeds from prepayments, maturities and calls of debt securities available for sale
1,137,698

 
1,065,045

Purchases of debt securities available for sale
(769,621
)
 
(772,086
)
Proceeds from prepayments, maturities and calls of debt securities held to maturity
204,481

 
88,119

Purchases of debt securities held to maturity
(1,298,774
)
 
(1,779,789
)
Proceeds from sales of equity securities
16,479

 
165,495

Purchases of equity securities
(883
)
 
(168,209
)
Net change in loan portfolio
(3,702,303
)
 
(7,043
)
Proceeds from sales of loans

 
144,596

Purchases of premises and equipment
(25,811
)
 
(31,735
)
Proceeds from sales of premises and equipment
1,377

 
1,543

Proceeds from settlement of BOLI policies
442

 

Cash payments for premiums of BOLI policies

 
(9
)
Proceeds from sales of other real estate owned
5,301

 
7,115

Net cash (used in) provided by investing activities
(3,823,959
)
 
159,818

Financing Activities:
 
 
 
Net increase in total deposits
2,251,788

 
2,215,223

Net increase in federal funds purchased and securities sold under agreements to repurchase
236,756

 
85,749

Net increase in other short-term borrowings

 
30,975

Proceeds from FHLB and other borrowings
1,000

 
3,840,000

Repayment of FHLB and other borrowings
(1,057
)
 
(3,840,055
)
Capital contribution for non-controlling interest
7

 
101

Issuance of common stock

 
802

Preferred dividends paid
(4,155
)
 
(4,485
)
Net cash provided by financing activities
2,484,339

 
2,328,310

Net (decrease) increase in cash, cash equivalents and restricted cash
(1,336,623
)
 
2,638,459

Cash, cash equivalents and restricted cash at beginning of year
7,156,689

 
3,501,380

Cash, cash equivalents and restricted cash at end of period
$
5,820,066

 
$
6,139,839

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

11

BBVA USA BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1) Basis of Presentation
General
The accounting and reporting policies of the Company and the methods of applying those policies that materially affect the consolidated financial statements conform with U.S. GAAP and with general financial services industry practices. The accompanying unaudited consolidated financial statements include the accounts of BBVA USA Bancshares, Inc. and its subsidiaries and have been prepared in conformity with U.S. GAAP for interim financial information and in accordance with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the condensed consolidated financial statements have been included. Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The Company has evaluated subsequent events for potential recognition and disclosure through the filing date of this Quarterly Report on Form 10-Q to determine if either recognition or disclosure of significant events or transactions is required.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, the most significant of which relate to the allowance for credit losses and goodwill impairment. Actual results could differ from those estimates. The extent to which the COVID-19 pandemic impacts the results of operations and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted.
Recently Adopted Accounting Standards
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which introduces new guidance for the accounting for credit losses on instruments within its scope. The new approach changes the impairment model for most financial assets, and will require the use of an “expected credit loss” model for financial instruments measured at amortized cost and certain other instruments. This model applies to receivables, loans, debt securities, and off-balance sheet credit exposures. This model requires entities to estimate the lifetime expected credit loss on such instruments and record an allowance that represents the portion of the amortized cost basis that the entity does not expect to collect. This allowance is deducted from the financial asset’s amortized cost basis to present the net amount expected to be collected. The new expected credit loss model also applies to purchased financial assets with credit deterioration, superseding current accounting guidance for such assets.
The amended guidance also amends the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on such securities is a credit loss, and also eliminating the option for management to consider the length of time a security has been in an unrealized loss position as a factor in concluding whether or not a credit loss exists. The amended model states that an entity will recognize an allowance for credit losses on available-for-sale debt securities, instead of a direct reduction of the amortized cost basis of the investment, as required under current guidance. As a result, entities recognize improvements to estimated credit losses on available-for-sale debt securities immediately in earnings as opposed to in interest income over time. There are also additional disclosure requirements included in this guidance.
In November 2018, the FASB issued ASU 2018-19 and in April, May and November 2019 and February 2020, the FASB issued ASU 2019-04, ASU 2019-05, ASU 2019-11, and ASU 2020-02 respectively, which made minor clarifications to the guidance in ASU 2016-13.

12


The Company’s implementation process included loss model development, data sourcing and validation, development of governance processes, development of a qualitative framework, documentation and governance surrounding economic forecast for credit loss purposes, evaluation of technical accounting topics, updates to allowance policies and methodology documentation, development of reporting processes and related internal controls.
The Company adopted this ASU, as amended on January 1, 2020 using a modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under this ASU, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net of tax increase to accumulated deficit of $150.2 million as of January 1, 2020 for the cumulative effect of adopting this ASU.
The Company adopted this ASU using the prospective transition approach for debt securities for which other-than -temporary impairment has been recognized prior to January 1, 2020. As a result, the amortized cost basis remained the same before and after the effective date of this ASU. The effective interest rate on these debt securities was not changed. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2020 related to improvements in cash flows expected to be collected will be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.
The amended guidance in this ASU eliminates the current accounting model for purchased-credit-impaired loans, but requires an allowance to be recognized for purchased-credit-deteriorated assets (those that have experienced more-than-insignificant deterioration in credit quality since origination). The Company had no impact from purchased-credit-deteriorated assets upon adoption.
The following table illustrates the impact of ASC 326.
 
January 1, 2020
 
As Reported Under ASC 326
 
Pre-ASC Adoption
 
Impact of ASC 326 Adoption
 
(In Thousands)
Assets:
 
 
 
 
 
Allowance for credit losses on debt securities held to maturity
$
1,847

 
$

 
$
1,847

Allowance for credit losses on loans
1,105,924

 
920,993

 
184,931

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Allowance for credit losses on letters of credit and unfunded commitments
76,946

 
66,955

 
9,991

The Company did not record a material allowance with respect to HTM and AFS securities as the portfolios consist primarily of U.S. Treasury and agency-backed securities that inherently have minimal credit risk.
See Note 2, Debt Securities Available for Sale and Debt Securities Held to Maturity, and Note 3, Loans and Allowance for Loan Losses, for the required disclosures in accordance with this ASU.
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements. The amendments in this ASU modified the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurements. The Company adopted this ASU on January 1, 2020. The adoption of this standard did not have material impact on the financial condition or results of operation of the Company. See Note 9, Fair Value Measurements, for the modified disclosure in accordance with this ASU.

13


Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The Company adopted this ASU on January 1, 2020. The adoption of this standard did not have material impact on the financial condition or results of operation of the Company.
(2) Debt Securities Available for Sale and Debt Securities Held to Maturity
The following tables present the adjusted cost and approximate fair value of debt securities available for sale and debt securities held to maturity.
 
March 31, 2020
 
 
 
Gross Unrealized
 
 
 
Amortized Cost
 
Gains
 
Losses
 
Fair Value
 
(In Thousands)
Debt securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
2,534,159

 
$
62,833

 
$
26,679

 
$
2,570,313

Agency mortgage-backed securities
1,173,282

 
24,195

 
11,801

 
1,185,676

Agency collateralized mortgage obligations
2,541,103

 
50,649

 
3,642

 
2,588,110

States and political subdivisions
686

 
31

 

 
717

Total
$
6,249,230

 
$
137,708

 
$
42,122

 
$
6,344,816

Debt securities held to maturity:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
1,288,246

 
$
127,437

 
$

 
$
1,415,683

Collateralized mortgage obligations:


 


 


 


Agency
5,959,454

 
261,403

 

 
6,220,857

Non-agency
35,930

 
4,490

 
2,182

 
38,238

Asset-backed securities and other
51,503

 
1,423

 
4,230

 
48,696

States and political subdivisions (1)
543,025

 
8,536

 
7,642

 
543,919

Total
$
7,878,158

 
$
403,289

 
$
14,054

 
$
8,267,393

(1)
The Company recorded an allowance of $2 million, at March 31, 2020, related to state and political subdivisions, which is not included in the table above.

14


 
December 31, 2019
 
 
 
Gross Unrealized
 
 
 
Amortized Cost
 
Gains
 
Losses
 
Fair Value
 
(In Thousands)
Debt securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
3,145,331

 
$
16,888

 
$
34,694

 
$
3,127,525

Agency mortgage-backed securities
1,322,432

 
12,444

 
9,019

 
1,325,857

Agency collateralized mortgage obligations
2,783,003

 
7,744

 
9,622

 
2,781,125

States and political subdivisions
757

 
41

 

 
798

Total
$
7,251,523

 
$
37,117

 
$
53,335

 
$
7,235,305

Debt securities held to maturity:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
1,287,049

 
$
53,399

 
$

 
$
1,340,448

Collateralized mortgage obligations:


 


 


 


Agency
4,846,862

 
82,105

 
16,568

 
4,912,399

Non-agency
37,705

 
5,923

 
1,154

 
42,474

Asset-backed securities and other
52,355

 
1,266

 
2,017

 
51,604

States and political subdivisions
573,075

 
8,652

 
7,494

 
574,233

Total
$
6,797,046

 
$
151,345

 
$
27,233

 
$
6,921,158

The investments held within the states and political subdivision caption of debt securities held to maturity relate to private placement transactions underwritten as loans by the Company but that meet the definition of a security within ASC Topic 320, Investments – Debt Securities.
As noted in Note 1, Basis of Presentation, the Company adopted ASC 326 on January 1, 2020, which had an immaterial impact on the Company's available for sale debt securities and held to maturity debt securities.
The Company records its HTM debt securities at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as AFS when they might be sold before they mature. The Company records its AFS debt securities at fair value with unrealized holding gains and losses reported in other comprehensive income.
The Company measures expected credit losses on held to maturity debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The majority of the Company's HTM debt securities portfolio consists of U.S. government entities and agencies which are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and inherently have minimal risk of nonpayment and therefore has applied a zero credit loss assumption for these securities.
Under the revised guidance of ASC 326, if the fair value of a security falls below the amortized cost basis, the security will be evaluated to determine if any of the decline in value is attributable to credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security, and adverse conditions specially related to the security, among other factors. If it is determined that a credit loss exists then an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. If the credit subsequently improves, the allowance is reversed. When the Company intends to sell an impaired AFS debt security or it is more likely than not that the security will be required to be sold prior to recovering the amortized cost basis, the security's amortized cost basis is written down to fair value through income.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. The Company has elected to not measure an allowance on its accrued interest receivable as a result of the timely reversal of interest receivable deemed uncollectible. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.


15


The following tables disclose the fair value and the gross unrealized losses of the Company’s available for sale debt securities that were in a loss position at March 31, 2020 and December 31, 2019, for which an allowance for credit losses has not been recorded at March 31, 2020. This information is aggregated by investment category and the length of time the individual securities have been in an unrealized loss position.
 
March 31, 2020
 
Securities in a loss position for less than 12 months
 
Securities in a loss position for 12 months or longer
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
(In Thousands)
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
257,286

 
$
57

 
$
385,446

 
$
26,622

 
$
642,732

 
$
26,679

Agency mortgage-backed securities
277,545

 
3,473

 
276,708

 
8,328

 
554,253

 
11,801

Agency collateralized mortgage obligations
94,112

 
111

 
346,121

 
3,531

 
440,233

 
3,642

Total
$
628,943

 
$
3,641

 
$
1,008,275

 
$
38,481

 
$
1,637,218

 
$
42,122

 
December 31, 2019
 
Securities in a loss position for less than 12 months
 
Securities in a loss position for 12 months or longer
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
(In Thousands)
Debt securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
59,496

 
$
208

 
$
819,360

 
$
34,486

 
$
878,856

 
$
34,694

Agency mortgage-backed securities
245,191

 
851

 
592,312

 
8,168

 
837,503

 
9,019

Agency collateralized mortgage obligations
880,485

 
4,768

 
579,679

 
4,854

 
1,460,164

 
9,622

Total
$
1,185,172

 
$
5,827

 
$
1,991,351

 
$
47,508

 
$
3,176,523

 
$
53,335

As indicated in the previous tables, at March 31, 2020, the Company held debt securities in unrealized loss positions. The Company has not recognized the unrealized losses into income for its securities because they are all backed by the U.S. government or government agencies and management does not intend to sell and it is likely that management will not be required to sell these securities before their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the securities approach maturity.

16


The following table presents the activity in the allowance for debt securities held to maturity losses as of March 31, 2020.
 
Held to Maturity Debt Securities
 
(In Thousands)
Three months ended March 31, 2020
 
Allowance for debt securities held to maturity losses:
 
Balance at beginning of period
$

Impact of adopting ASC 326
1,847

Provision for credit losses
45

Securities charged off

Recoveries

Balance at end of period
$
1,892

The Company regularly evaluates each held to maturity debt security for credit losses on a quarterly basis. The Company has not recorded a provision for credit loss related to its agency securities because they are all backed by the U.S. government or government agencies and have been deemed to have zero expected credit loss as of March 31, 2020. These securities are evaluated quarterly to determine if they still qualify as a zero credit loss security. The Company has non-agency securities that have unrealized losses at March 31, 2020. The Company considers such factors as the extent to which the fair value has been below cost and the financial condition of the issuer.
The Company monitors the credit quality of its HTM debt securities through credit ratings. The following table presents the amortized cost of HTM debt securities, as of March 31, 2020, aggregated by credit quality indicator.
 
 
March 31, 2020
 
 
 
 
Range of Ratings
 
 
 
 
AAA
 
AA+ / A -
 
BBB+ / B-
 
CCC+ / C
 
D
 
NR
 
Total
 
 
(In Thousands)
Debt securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
 
$
1,288,246

 
$

 
$

 
$

 
$

 
$

 
$
1,288,246

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
5,959,454

 

 

 

 

 

 
5,959,454

Non-agency
 
75

 
11,515

 
10,770

 
6,095

 
3,160

 
4,315

 
35,930

Asset-backed securities and other
 

 
50,288

 
330

 
803

 

 
82

 
51,503

States and political subdivisions
 

 
337,789

 
205,236

 

 

 

 
543,025

 
 
$
7,247,775

 
$
399,592

 
$
216,336

 
$
6,898

 
$
3,160

 
$
4,397

 
$
7,878,158


17


The contractual maturities of the securities portfolios are presented in the following table.
March 31, 2020
 
Amortized Cost
 
Fair Value
 
 
(In Thousands)
Debt securities available for sale:
 
 
Maturing within one year
 
$
425,274

 
$
426,343

Maturing after one but within five years
 
1,646,452

 
1,706,765

Maturing after five but within ten years
 
21,114

 
21,833

Maturing after ten years
 
442,005

 
416,089

 
 
2,534,845

 
2,571,030

Mortgage-backed securities and collateralized mortgage obligations
 
3,714,385

 
3,773,786

Total
 
$
6,249,230

 
$
6,344,816

 
 
 
 
 
Debt securities held to maturity:
 
 
 
 
Maturing within one year
 
$
49,190

 
$
50,040

Maturing after one but within five years
 
1,391,311

 
1,519,329

Maturing after five but within ten years
 
272,817

 
274,289

Maturing after ten years
 
169,456

 
164,640

 
 
1,882,774

 
2,008,298

Collateralized mortgage obligations
 
5,995,384

 
6,259,095

Total
 
$
7,878,158

 
$
8,267,393

The gross realized gains and losses recognized on sales of debt securities available for sale are shown in the table below.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Gross gains
$
19,139

 
$
8,958

Gross losses

 

Net realized gains
$
19,139

 
$
8,958

(3) Loans and Allowance for Loan Losses
Loans
Loans that management has the intent and ability to hold for the forseeable future or until maturity or pay-off are considered held-for-investment. Loans are stated at amortized cost, net of the allowance for loan losses. Amortized cost, or the recorded investment, is the principal balance outstanding, adjusted for charge-offs, deferred loan fees and direct costs on originated loans and unamortized premiums or discounts on purchased loans. Accrued interest receivable is reported in other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets. Interest income is accrued on the principal balance outstanding and is recognized on the interest method. Loan fees, net of direct costs and unamortized premiums and discounts are deferred and amortized as an adjustment to the yield of the related loan over the term of the loan and are included as a noncash adjustment in the net cash provided by operating activities in the Company’s Unaudited Condensed Consolidated Statement of Cash Flows.
The Company has elected to not measure an allowance on its accrued interest receivable as a result of the timely reversal of interest receivable deemed uncollectible. It is the general policy of the Company to stop accruing interest income and apply subsequent interest payments as principal reductions when any commercial, industrial, commercial real estate or construction loan is 90 days or more past due as to principal or interest and/or the ultimate collection of either is in doubt, unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Accrual of interest income on consumer loans, including residential real estate loans, is generally suspended when any payment of principal or interest is more than 90 days delinquent or when foreclosure proceedings

18


have been initiated or repossession of the underlying collateral has occurred. When a loan is placed on a nonaccrual status, any interest previously accrued but not collected is reversed against current interest income unless the fair value of the collateral for the loan is sufficient to cover the accrued interest.
In general, a loan is returned to accrual status when none of its principal and interest is due and unpaid and the Company expects repayments of the remaining contractual principal and interest or when it is determined to be well secured and in the process of collection. Charge-offs on commercial loans are recognized when available information confirms that some or all of the balance is uncollectible. Consumer loans are subject to mandatory charge-off at a specified delinquency date consistent with regulatory guidelines. In general, charge-offs on consumer loans are recognized at the earlier of the month of liquidation or the month the loan becomes 120 days past due; residential loan deficiencies are charged off in the month the loan becomes 180 days past due; and credit card loans are charged off before the end of the month when the loan becomes 180 days past due with the related interest accrued but not collected reversed against current income. The Company determines past due or delinquency status of a loan based on contractual payment terms.
Troubled Debt Restructurings
A loan is accounted for as a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. A TDR typically involves a modification of terms such as establishment of a below market interest rate, a reduction in the principal amount of the loan, a reduction of accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for a new loan with similar risk. The Company’s policy for measuring the allowance for credit losses on TDRs, including TDRs that have defaulted, is consistent with its policy for other loans held for investment. The Company’s policy for returning nonaccrual TDRs to accrual status is consistent with its return to accrual policy for all other loans.
Allowance for Loan Losses
The allowance for loan losses 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 uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management uses discounted cash flows, default probabilities and loss severities to calculate the allowance for loan losses.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating 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 underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, gross domestic product, or other relevant factors. The Company has internally developed a macroeconomic forecast which projects over a four-year reasonable and supportable forecast period. Management may change the horizon of the forecast in response to changes in portfolio composition or performance as well as changes in the economic environment. After the forecast period, the Company reverts to long run historical average default probabilities and loss severities using a linear model with a variable reversion speed determined on a portfolio basis, for those portfolios with sufficient history.
Economic Forecast: Management selects economic variables it believes to be most relevant based on the composition of the loan portfolio and customer base, including forecasted levels of employment, gross domestic product, real estate price indices, interest rates and corporate bond spreads. The Company uses an internally formulated and approved single baseline economic scenario for the collective estimation. However, management will assess the uncertainty associated with the baseline scenario in each period, and may make adjustments based on alternative scenarios applied through the qualitative framework.
Determining the Contractual Term: 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 management has a reasonable expectation at the reporting date that a troubled debt restructuring

19


will be executed with an individual borrower. While the Company does have contracts with extension or renewal options included, the vast majority are considered unconditionally cancellable.
The Company monitors the entire loan portfolio so that risks in the portfolio can be identified on a timely basis and an appropriate allowance maintained. Loan review procedures, including loan grading, periodic credit rescoring and trend analysis of portfolio performance, are utilized by the Company in order to ensure that potential problem loans are identified. Management’s involvement continues throughout the process and includes participation in the work-out process and recovery activity. These formalized procedures are monitored internally and by regulatory agencies. The allowance for credit losses is measured on a collective basis when similar risk characteristics exist. The Company has identified the following portfolio segments: commercial, financial and agricultural; commercial real estate; residential real estate; and consumer. Commercial loans utilize internal risk grades aligned with regulatory classifications to assess risks. Consumer loans utilize credit scoring models as the basis for assessing risk of consumer borrowers. The Company estimates the present value of cash shortfalls resulting from the sum of the marginal losses occurring in each time period, on an annual basis, over the remaining life of the loan. The marginal losses are derived from the projection of principal balance, inclusive of principal cash flow and prepayment schedules, and parameters reflecting the severity of losses (LGD) in the case of default that is given by the marginal probability of default (Marginal PD) for each period of the portfolio’s lifetime. The Company also includes the considerations of a forecasted macroeconomic scenario by adjusting the PDs and LGDs applied, with econometric models dependent on the aforementioned correlated macroeconomic variables included in the forecasted scenarios.
The allowance for credit losses on loans that do not share similar risk characteristics are estimated on an individual basis. Individual evaluations are typically performed for nonaccrual loans and certain accruing loans, based on dollar thresholds. These loans receive specific reserves allocated based on the present value of the loan's expected future cash flows, discounted at the loan's original effective rate, except where foreclosure or liquidation is probable or when the cash flows are predominately dependent on the value of the collateral. In these circumstances, impairment is measured based upon the fair value less cost to sell of the collateral.
The Company adjusts the loss estimates described above when it is determined that expected credit losses may not have been captured in the loss estimates. To adjust the loss estimates, the Company considers qualitative factors such as changes in risk profile/composition; current economic and business conditions and uncertainty of outlook, potentially including alternative economic scenarios; limitations in the data or models used in the collective estimation; credit risk management practices; and other external/environmental factors.
In order to estimate an allowance for credit losses on letters of credit and unfunded commitments, the Company uses a process consistent with that used in developing the allowance for loan losses. The Company estimates future fundings of current, noncancellable, unfunded commitments based on historical funding experience of these commitments before default and adjusted based on historical cancellations. Allowance for loan loss factors, which are based on product and loan grade, and are consistent with the factors used for portfolio loans, are applied to these funding estimates and discounted to the present value to arrive at the reserve balance. The allowance for credit losses on letters of credit and unfunded commitments is recognized in accrued expenses and other liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets with changes recognized within noninterest expense in the Company’s Unaudited Condensed Consolidated Statements of Income. See Note 8, Commitments, Contingencies and Guarantees for additional information.

20


The following table presents the composition of the loan portfolio.
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Commercial loans:
 
 
 
Commercial, financial and agricultural
$
27,832,113

 
$
24,432,238

Real estate – construction
2,171,714

 
2,028,682

Commercial real estate – mortgage
13,853,405

 
13,861,478

Total commercial loans
43,857,232

 
40,322,398

Consumer loans:
 
 
 
Residential real estate – mortgage
13,446,018

 
13,533,954

Equity lines of credit
2,611,350

 
2,592,680

Equity loans
229,369

 
244,968

Credit card
1,023,372

 
1,002,365

Consumer direct
2,276,045

 
2,338,142

Consumer indirect
4,096,028

 
3,912,350

Total consumer loans
23,682,182

 
23,624,459

Total loans
$
67,539,414

 
$
63,946,857


Accrued interest receivable totaling $206 million and $205 million at March 31, 2020 and December 31, 2019, respectively, was reported in other assets on the Company's Unaudited Condensed Balance Sheets and is excluded from the related footnote disclosures.

21


Allowance for Loan Losses and Credit Quality
The following table, which excludes loans held for sale, presents a summary of the activity in the allowance for loan losses. The portion of the allowance that has not been identified by the Company as related to specific loan categories has been allocated to the individual loan categories on a pro rata basis for purposes of the table below:
 
Commercial, Financial and Agricultural
 
Commercial Real Estate (1)
 
Residential Real Estate (2)
 
Consumer (3)
 
Total
 
(In Thousands)
Three months ended March 31, 2020
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance, prior to adoption of ASC 326
$
408,197

 
$
118,633

 
$
99,089

 
$
295,074

 
$
920,993

Impact of adopting ASC 326
18,389

 
(35,034
)
 
47,390

 
154,186

 
184,931

Beginning balance, after adoption of ASC 326
426,586

 
83,599

 
146,479

 
449,260

 
1,105,924

Provision for loan losses
140,413

 
24,548

 
7,032

 
184,953

 
356,946

Loans charged-off
(24,207
)
 
(87
)
 
(1,999
)
 
(115,866
)
 
(142,159
)
Loan recoveries
5,193

 
173

 
1,423

 
23,572

 
30,361

Net charge-offs
(19,014
)
 
86

 
(576
)
 
(92,294
)
 
(111,798
)
Ending balance
$
547,985

 
$
108,233

 
$
152,935

 
$
541,919

 
$
1,351,072

Three months ended March 31, 2019
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
Beginning balance
$
393,315

 
$
112,437

 
$
101,929

 
$
277,561

 
$
885,242

Provision for loan losses
59,180

 
4,662

 
2,183

 
116,267

 
182,292

Loans charged-off
(9,503
)
 
(25
)
 
(5,012
)
 
(112,873
)
 
(127,413
)
Loan recoveries
4,760

 
1,462

 
3,589

 
16,090

 
25,901

Net charge-offs
(4,743
)
 
1,437

 
(1,423
)
 
(96,783
)
 
(101,512
)
Ending balance
$
447,752

 
$
118,536

 
$
102,689

 
$
297,045

 
$
966,022

(1)
Includes commercial real estate – mortgage and real estate – construction loans.
(2)
Includes residential real estate – mortgage, equity lines of credit and equity loans.
(3)
Includes credit card, consumer direct and consumer indirect loans.
The increase in the allowance for loan losses from January 1, 2020 to March 31, 2020, was primarily driven by the deteriorating economic outlook resulting from the COVID-19 pandemic as well as the impact of declining oil prices.
The table below provides a summary of the allowance for loan losses and related loan balances by portfolio at December 31, 2019.
 
Commercial, Financial and Agricultural
 
Commercial Real Estate (1)
 
Residential Real Estate (2)
 
Consumer (3)
 
Total
 
(In Thousands)
December 31, 2019
 
 
 
 
 
 
 
 
 
Ending balance of allowance attributable to loans:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
88,164

 
$
13,255

 
$
22,775

 
$
2,638

 
$
126,832

Collectively evaluated for impairment
320,033

 
105,378

 
76,314

 
292,436

 
794,161

Total allowance for loan losses
$
408,197

 
$
118,633

 
$
99,089

 
$
295,074

 
$
920,993

Ending balance of loans:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
238,653

 
$
78,301

 
$
155,728

 
$
13,362

 
$
486,044

Collectively evaluated for impairment
24,193,585

 
15,811,859

 
16,215,874

 
7,239,495

 
63,460,813

Total loans
$
24,432,238

 
$
15,890,160

 
$
16,371,602

 
$
7,252,857

 
$
63,946,857

(1)
Includes commercial real estate – mortgage and real estate – construction loans.

22


(2)
Includes residential real estate – mortgage, equity lines of credit and equity loans.
(3)
Includes credit card, consumer direct and consumer indirect loans.
The following table presents information on nonaccrual loans, by loan class at March 31, 2020.
 
March 31, 2020
 
Nonaccrual
 
Nonaccrual With No Recorded Allowance
 
(In Thousands)
Commercial, financial and agricultural
$
323,881

 
$
34,522

Real estate – construction
13,676

 

Commercial real estate – mortgage
114,839

 
33,438

Residential real estate – mortgage
147,058

 

Equity lines of credit
33,354

 

Equity loans
8,027

 

Credit card

 

Consumer direct
7,160

 

Consumer indirect
28,721

 

Total loans
$
676,716

 
$
67,960

The following table presents information on individually evaluated impaired loans, by loan class at December 31, 2019.
 
December 31, 2019
 
Individually Evaluated Impaired Loans With No Recorded Allowance
 
Individually Evaluated Impaired Loans With a Recorded Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Allowance
 
(In Thousands)
Commercial, financial and agricultural
$
51,203

 
$
52,991

 
$

 
$
187,450

 
$
249,486

 
$
88,164

Real estate – construction

 

 

 
5,972

 
5,979

 
850

Commercial real estate – mortgage
46,232

 
51,286

 

 
26,097

 
27,757

 
12,405

Residential real estate – mortgage

 

 

 
111,623

 
111,623

 
8,974

Equity lines of credit

 

 

 
15,466

 
15,472

 
10,896

Equity loans

 

 

 
28,639

 
29,488

 
2,905

Credit card

 

 

 

 

 

Consumer direct

 

 

 
11,601

 
13,596

 
1,903

Consumer indirect

 

 

 
1,761

 
1,761

 
735

Total loans
$
97,435

 
$
104,277

 
$

 
$
388,609

 
$
455,162

 
$
126,832



23


The following table presents information on individually impaired loans, by loan class for the three months ended March 31, 2019.
 
Three Months Ended March 31, 2019
 
Average Recorded Investment
 
Interest Income Recognized
 
(In Thousands)
Commercial, financial and agricultural
$
413,888

 
$
963

Real estate – construction
134

 
2

Commercial real estate – mortgage
82,864

 
215

Residential real estate – mortgage
106,397

 
649

Equity lines of credit
15,257

 
174

Equity loans
31,718

 
276

Credit card

 

Consumer direct
5,559

 
68

Consumer indirect
364

 

Total loans
$
656,181

 
$
2,347

The Company monitors the credit quality of its commercial portfolio using an internal dual risk rating, which considers both the obligor and the facility. The obligor risk ratings are defined by ranges of default probabilities of the borrowers, through internally assigned letter grades (AAA through D2) and the facility risk ratings are defined by ranges of the loss given default. The combination of those two approaches results in the assessment of the likelihood of loss and it is mapped to the regulatory classifications. The Company assigns internal risk ratings at loan origination and at regular intervals subsequent to origination. Loan review intervals are dependent on the size and risk grade of the loan, and are generally conducted at least annually. Additional reviews are conducted when information affecting the loan’s risk grade becomes available. The general characteristics of the risk grades are as follows:
The Company’s internally assigned letter grades “AAA” through “B-” correspond to the regulatory classification “Pass.” These loans do not have any identified potential or well-defined weaknesses and have a high likelihood of orderly repayment. Exceptions exist when either the facility is fully secured by a CD and held at the Company or the facility is secured by properly margined and controlled marketable securities.
Internally assigned letter grades “CCC+” through “CCC” correspond to the regulatory classification “Special Mention.” Loans within this classification have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Internally assigned letter grades “CCC-” through “D1” correspond to the regulatory classification “Substandard.” A loan classified as substandard is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
The internally assigned letter grade “D2” corresponds to the regulatory classification “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable.
The Company considers payment history as the best indicator of credit quality for the consumer portfolio. Nonperforming loans in the tables below include loans classified as nonaccrual, loans 90 days or more past due and loans modified in a TDR 90 days or more past due.

24


The following tables, which exclude loans held for sale, illustrate the credit quality indicators associated with the Company’s loans, by loan class.

Commercial

March 31, 2020

Recorded Investment of Term Loans by Origination Year

 
 
 
 
 

2020
 
2019
 
2018
 
2017
 
2016

Prior

Recorded Investment of Revolving Loans
 
Recorded Investment of Revolving Loans Converted to Term Loans
 
Total

(In Thousands)
Commercial, financial and agricultural

















Pass
$
1,106,835

 
$
3,278,768

 
$
2,917,757

 
$
3,319,000

 
$
1,164,840

 
$
3,965,678

 
$
10,814,825

 
$


$
26,567,703

Special Mention
3

 
15,162

 
63,090

 
101,070

 
25,458

 
93,458

 
331,603

 


629,844

Substandard

 
18,569

 
73,723

 
17,835

 
35,367

 
91,158

 
304,282

 


540,934

Doubtful
1,328

 

 
29,107

 
4,158

 
20,687

 
18,860

 
19,492

 


93,632

Total commercial, financial and agricultural
$
1,108,166


$
3,312,499


$
3,083,677


$
3,442,063


$
1,246,352


$
4,169,154


$
11,470,202


$


$
27,832,113

Real estate - construction

















Pass
$
54,956

 
$
598,239

 
$
735,319

 
$
428,388

 
$
103,582

 
$
78,487

 
$
144,882

 
$


$
2,143,853

Special Mention

 

 

 

 
1,486

 
2,499

 

 


3,985

Substandard

 
5,637

 
7,749

 

 
5,837

 
4,653

 

 


23,876

Doubtful

 

 

 

 

 

 

 



Total real estate - construction
$
54,956


$
603,876


$
743,068


$
428,388


$
110,905


$
85,639


$
144,882


$


$
2,171,714

Commercial real estate - mortgage

















Pass
$
621,191

 
$
3,201,350

 
$
3,856,095

 
$
1,759,006

 
$
1,085,493

 
$
2,710,254

 
$
236,345

 
$


$
13,469,734

Special Mention
2,892

 

 
103,329

 
4,361

 
2,506

 
67,356

 

 


180,444

Substandard

 
1,171

 
8,901

 
59,215

 
32,879

 
85,684

 
11,897

 


199,747

Doubtful

 

 
461

 

 

 
3,019

 

 


3,480

Total commercial real estate - mortgage
$
624,083


$
3,202,521


$
3,968,786


$
1,822,582


$
1,120,878


$
2,866,313


$
248,242


$


$
13,853,405

 
December 31, 2019
 
Commercial, Financial and Agricultural
 
Real Estate - Construction
 
Commercial Real Estate - Mortgage
 
(In Thousands)
Pass
$
23,319,645

 
$
1,979,310

 
$
13,547,273

Special Mention
543,928

 
67

 
168,679

Substandard
488,813

 
49,305

 
134,420

Doubtful
79,852

 

 
11,106

 
$
24,432,238

 
$
2,028,682

 
$
13,861,478


25


 
Consumer
 
March 31, 2020
 
Recorded Investment of Term Loans by Origination Year
 
 
 
 
 
 
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Recorded Investment of Revolving Loans
 
Recorded Investment of Revolving Loans Converted to Term Loans
 
Total
 
(In Thousands)
Residential real estate - mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
$
508,538

 
$
2,609,558

 
$
1,388,842

 
$
1,398,484

 
$
1,503,951

 
$
5,883,578

 
$

 
$

 
$
13,292,951

Nonperforming

 
776

 
6,007

 
11,581

 
11,055

 
123,648

 

 

 
153,067

Total residential real estate - mortgage
$
508,538

 
$
2,610,334

 
$
1,394,849

 
$
1,410,065

 
$
1,515,006

 
$
6,007,226

 
$

 
$

 
$
13,446,018

Equity lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
$

 
$

 
$

 
$

 
$

 
$

 
$
2,571,031

 
$
3,670

 
$
2,574,701

Nonperforming

 

 

 

 

 

 
36,453

 
196

 
36,649

Total equity lines of credit
$

 
$

 
$

 
$

 
$

 
$

 
$
2,607,484

 
$
3,866

 
$
2,611,350

Equity loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Performing
$
2,004

 
$
15,471

 
$
14,046

 
$
5,886

 
$
4,680

 
$
178,892

 
$

 
$

 
$
220,979

Nonperforming

 

 
339

 
149

 

 
7,902

 

 

 
8,390

Total equity loans
$
2,004

 
$
15,471

 
$
14,385

 
$
6,035

 
$
4,680

 
$
186,794

 
$

 
$

 
$
229,369

Credit card
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
$

 
$

 
$

 
$

 
$

 
$

 
$
999,665

 
$

 
$
999,665

Nonperforming

 

 

 

 

 

 
23,707

 

 
23,707

Total credit card
$

 
$

 
$

 
$

 
$

 
$

 
$
1,023,372

 
$

 
$
1,023,372

Consumer direct
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Performing
$
239,046

 
$
704,151

 
$
591,586

 
$
168,069

 
$
79,114

 
$
33,047

 
$
438,676

 
$

 
$
2,253,689

Nonperforming

 
4,009

 
13,092

 
2,738

 
878

 
388

 
1,251

 

 
22,356

Total consumer direct
$
239,046

 
$
708,160

 
$
604,678

 
$
170,807

 
$
79,992

 
$
33,435

 
$
439,927

 
$

 
$
2,276,045

Consumer indirect
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing
$
598,254

 
$
1,548,308

 
$
1,099,575

 
$
468,646

 
$
161,401

 
$
182,083

 
$

 
$

 
$
4,058,267

Nonperforming

 
5,829

 
13,623

 
8,482

 
4,838

 
4,989

 

 

 
37,761

Total consumer indirect
$
598,254

 
$
1,554,137

 
$
1,113,198

 
$
477,128

 
$
166,239

 
$
187,072

 
$

 
$

 
$
4,096,028

 
December 31, 2019
 
Residential Real Estate -Mortgage
 
Equity Lines of Credit
 
Equity Loans
 
Credit Card
 
Consumer Direct
 
Consumer Indirect
 
(In Thousands)
Performing
$
13,381,709

 
$
2,553,000

 
$
236,122

 
$
979,569

 
$
2,313,082

 
$
3,870,839

Nonperforming
152,245

 
39,680

 
8,846

 
22,796

 
25,060

 
41,511

 
$
13,533,954

 
$
2,592,680

 
$
244,968

 
$
1,002,365

 
$
2,338,142

 
$
3,912,350



26


The following tables present an aging analysis of the Company’s past due loans, excluding loans classified as held for sale.
 
March 31, 2020
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Nonaccrual
 
Accruing TDRs
 
Total Past Due, Nonaccrual or TDR
 
Not Past Due, Nonaccrual or TDR
 
Total
 
(In Thousands)
Commercial, financial and agricultural
$
31,493

 
$
7,588

 
$
3,013

 
$
323,881

 
$
1,931

 
$
367,906

 
$
27,464,207

 
$
27,832,113

Real estate – construction
9,356

 
66

 
574

 
13,676

 
69

 
23,741

 
2,147,973

 
2,171,714

Commercial real estate – mortgage
13,439

 
5,241

 
912

 
114,839

 
3,333

 
137,764

 
13,715,641

 
13,853,405

Residential real estate – mortgage
67,938

 
25,187

 
5,744

 
147,058

 
55,116

 
301,043

 
13,144,975

 
13,446,018

Equity lines of credit
16,382

 
6,244

 
3,295

 
33,354

 

 
59,275

 
2,552,075

 
2,611,350

Equity loans
2,636

 
1,147

 
293

 
8,027

 
22,392

 
34,495

 
194,874

 
229,369

Credit card
13,230

 
8,932

 
23,707

 

 

 
45,869

 
977,503

 
1,023,372

Consumer direct
34,553

 
19,738

 
15,196

 
7,160

 
14,898

 
91,545

 
2,184,500

 
2,276,045

Consumer indirect
76,547

 
24,249

 
9,040

 
28,721

 

 
138,557

 
3,957,471

 
4,096,028

Total loans
$
265,574

 
$
98,392

 
$
61,774

 
$
676,716

 
$
97,739

 
$
1,200,195

 
$
66,339,219

 
$
67,539,414

 
December 31, 2019
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Nonaccrual
 
Accruing TDRs
 
Total Past Due and Impaired
 
Not Past Due or Impaired
 
Total
 
(In Thousands)
Commercial, financial and agricultural
$
29,273

 
$
16,462

 
$
6,692

 
$
268,288

 
$
1,456

 
$
322,171

 
$
24,110,067

 
$
24,432,238

Real estate – construction
7,603

 
2

 
571

 
8,041

 
72

 
16,289

 
2,012,393

 
2,028,682

Commercial real estate – mortgage
5,325

 
5,458

 
6,576

 
98,077

 
3,414

 
118,850

 
13,742,628

 
13,861,478

Residential real estate – mortgage
72,571

 
21,909

 
4,641

 
147,337

 
57,165

 
303,623

 
13,230,331

 
13,533,954

Equity lines of credit
15,766

 
6,581

 
1,567

 
38,113

 

 
62,027

 
2,530,653

 
2,592,680

Equity loans
2,856

 
1,028

 
195

 
8,651

 
23,770

 
36,500

 
208,468

 
244,968

Credit card
11,275

 
9,214

 
22,796

 

 

 
43,285

 
959,080

 
1,002,365

Consumer direct
33,658

 
20,703

 
18,358

 
6,555

 
12,438

 
91,712

 
2,246,430

 
2,338,142

Consumer indirect
83,966

 
28,430

 
9,730

 
31,781

 

 
153,907

 
3,758,443

 
3,912,350

Total loans
$
262,293

 
$
109,787

 
$
71,126

 
$
606,843

 
$
98,315

 
$
1,148,364

 
$
62,798,493

 
$
63,946,857

It is the Company’s policy to classify TDRs that are not accruing interest as nonaccrual loans. It is also the Company’s policy to classify TDR past due loans that are accruing interest as TDRs and not according to their past due status. The tables above reflect this policy.
Modifications to borrowers' loan agreements are considered TDRs if a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be considered. Within each of the Company’s loan classes, TDRs typically involve modification of the loan interest rate to a below market rate or an extension or deferment of the loan. Loans that have been restructured for COVID-19 related hardships and meet certain criteria under the CARES Act are not categorized as TDRs. During the three months ended March 31, 2020, $5.2 million of TDR modifications included an interest rate concession and $43.6 million of TDR modifications resulted from modifications to the loan’s structure. During the three months ended March 31, 2019, $4.7 million of TDR modifications included an interest rate concession and $15.8 million of TDR modifications resulted from modifications to the loan’s structure.

27


The following tables present an analysis of the types of loans that were restructured and classified as TDRs, excluding loans classified as held for sale.
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Number of Contracts
 
Post-Modification Outstanding Recorded Investment
 
Number of Contracts
 
Post-Modification Outstanding Recorded Investment
 
(Dollars in Thousands)
Commercial, financial and agricultural
10

 
$
41,238

 
3

 
$
11,570

Real estate – construction

 

 

 

Commercial real estate – mortgage
2

 
1,740

 

 

Residential real estate – mortgage
8

 
844

 
20

 
5,233

Equity lines of credit
1

 
36

 

 

Equity loans
1

 
192

 
4

 
176

Credit card

 

 

 

Consumer direct
89

 
4,762

 
13

 
3,519

Consumer indirect

 

 

 

The impact to the allowance for loan losses related to modifications classified as TDRs was approximately $5.3 million and $3.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
The Company considers TDRs aged 90 days or more past due, charged off or classified as nonaccrual subsequent to modification, where the loan was not classified as a nonperforming loan at the time of modification, as subsequently defaulted.
The following tables provide a summary of initial subsequent defaults that occurred within one year of the restructure date. The tables exclude loans classified as held for sale as of period-end and includes loans no longer in default as of period-end.
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Number of Contracts
 
Recorded Investment at Default
 
Number of Contracts
 
Recorded Investment at Default
 
(Dollars in Thousands)
Commercial, financial and agricultural

 
$

 

 
$

Real estate – construction

 

 

 

Commercial real estate – mortgage

 

 

 

Residential real estate – mortgage
1

 
84

 

 

Equity lines of credit

 

 

 

Equity loans

 

 
2

 
151

Credit card

 

 

 

Consumer direct
4

 
217

 
2

 
15

Consumer indirect

 

 

 

At March 31, 2020 and December 31, 2019, there were $43.1 million and $43.8 million, respectively, of commitments to lend additional funds to borrowers whose terms have been modified in a TDR.
Foreclosure Proceedings
OREO totaled $21 million and $22 million at March 31, 2020 and December 31, 2019, respectively. OREO included $13 million and $14 million of foreclosed residential real estate properties at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, there were $52 million and $57 million, respectively, of loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

28


(4) Loan Sales and Servicing
Loans held for sale were $118 million and $112 million at March 31, 2020 and December 31, 2019, respectively, and were comprised entirely of residential real estate - mortgage loans.
The following table summarizes the Company's activity in the loans held for sale portfolio and loan sales, excluding activity related to loans originated for sale in the secondary market.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Loans transferred from held for investment to held for sale
$

 
$
1,196,883

Charge-offs on loans recognized at transfer from held for investment to held for sale

 

Loans and loans held for sale sold

 
144,674

The following table summarizes the Company's sales of loans originated for sale in the secondary market.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Residential real estate loans originated for sale in the secondary market sold (1)
$
203,830

 
$
119,722

Net gains recognized on sales of residential real estate loans originated for sale in the secondary market (2)
8,775

 
5,135

Servicing fees recognized (2)
2,608

 
2,672

(1)
The Company has retained servicing responsibilities for all loans sold that were originated for sale in the secondary market.
(2)
Recorded as a component of mortgage banking income in the Company's Unaudited Condensed Consolidated Statements of Income.
The following table provides the recorded balance of loans sold with retained servicing and the related MSRs.
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Recorded balance of residential real estate mortgage loans sold with retained servicing (1)
$
4,578,812

 
$
4,534,202

MSRs (2)
31,232

 
42,022

(1)
These loans are not included in loans on the Company's Unaudited Condensed Consolidated Balance Sheets.
(2)
Recorded under the fair value method and included in other assets on the Company's Unaudited Condensed Consolidated Balance Sheets.

29


The fair value of MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining rates, the fair value of MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity. During periods of rising interest rates, the fair value of MSRs generally increases due to reduced refinance activity. The Company maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the fair value of the MSR portfolio.  This strategy includes the purchase of various trading securities.  The interest income, mark-to-market adjustments and gain or loss from sale activities associated with these securities are expected to economically hedge a portion of the change in the fair value of the MSR portfolio.
The following table is an analysis of the activity in the Company’s MSRs.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Carrying value, at beginning of period
$
42,022

 
$
51,539

Additions
1,671

 
1,059

Increase (decrease) in fair value:
 
 
 
Due to changes in valuation inputs or assumptions
(10,140
)
 
(2,343
)
Due to other changes in fair value (1)
(2,321
)
 
(2,710
)
Carrying value, at end of period
$
31,232

 
$
47,545

(1)
Represents the realization of expected net servicing cash flows, expected borrower repayments and the passage of time.
See Note 9, Fair Value Measurements, for additional disclosures related to the assumptions and estimates used in determining fair value of MSRs.
At March 31, 2020 and December 31, 2019, the sensitivity of the current fair value of the residential MSRs to immediate 10% and 20% adverse changes in key economic assumptions are included in the following table:
 
March 31, 2020
 
December 31, 2019
 
(Dollars in Thousands)
Fair value of MSRs
$
31,232

 
$
42,022

Composition of residential loans serviced for others:
 
 
 
Fixed rate mortgage loans
98.2
%
 
98.1
%
Adjustable rate mortgage loans
1.8

 
1.9

Total
100.0
%
 
100.0
%
Weighted average life (in years)
3.7

 
4.6

Prepayment speed:
16.6
%
 
16.9
%
Effect on fair value of a 10% increase
$
(1,888
)
 
$
(2,906
)
Effect on fair value of a 20% increase
(3,578
)
 
(5,043
)
Weighted average option adjusted spread:
6.2
%
 
6.4
%
Effect on fair value of a 10% increase
$
(633
)
 
$
(1,159
)
Effect on fair value of a 20% increase
(1,241
)
 
(1,812
)
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one assumption may result in changes to another, which may magnify or counteract the effect of the change.

30


(5) Goodwill
A summary of the activity related to the Company’s goodwill follows.
 
 
(In Thousands)
Balance, at December 31, 2018
 
 
Goodwill
 
$
9,835,400

Accumulated impairment losses
 
(4,852,104
)
Goodwill, net at December 31, 2018
 
4,983,296

Impairment losses
 
(470,000
)
Balance, at December 31, 2019
 
 
Goodwill
 
9,835,400

Accumulated impairment losses
 
(5,322,104
)
Goodwill, net at December 31, 2019
 
4,513,296

Impairment losses
 
(2,185,000
)
Balance, at March 31, 2020
 
 
Goodwill
 
9,835,400

Accumulated impairment losses
 
(7,507,104
)
Goodwill, net at March 31, 2020
 
$
2,328,296

Goodwill is allocated to each of the Company's segments (each a reporting unit: Commercial Banking and Wealth, Retail Banking, and Corporate and Investment Banking).
At March 31, 2020 and December 31, 2019, the goodwill, net of accumulated impairment losses, attributable to each of the Company’s three identified reporting units is as follows:
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Commercial Banking and Wealth
$
1,930,830

 
$
2,659,830

Retail Banking
135,660

 
1,427,660

Corporate and Investment Banking
261,806

 
425,806

Through March 31, 2020, the Company had recognized accumulated goodwill impairment losses of $3.2 billion, $2.7 billion, and $883 million within the Commercial Banking and Wealth, Retail Banking, and Corporate and Investment Banking reporting units, respectively. In addition, the Company has previously recognized $784 million of accumulated goodwill impairment losses from reporting units that no longer have a goodwill balance.
In accordance with the applicable accounting guidance, the Company performs annual tests to identify potential impairment of goodwill. The tests are required to be performed annually and more frequently if events or circumstances indicate a potential impairment may exist. The Company compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The estimated fair value of the reporting unit is determined using a blend of both income and market approaches.
The Company completed its annual goodwill impairment test as of October 31, 2019. Additionally, on a quarterly basis, the Company evaluates whether a triggering event has occurred. During the three months ended March 31, 2020, the Company performed an interim impairment test due to the impact of COVID-19 pandemic on the economic environment. The interim impairment test indicated a goodwill impairment of $164 million within the Corporate and Investment Banking reporting unit, $729 million within the Commercial Banking and Wealth reporting unit, and $1.3 billion within the Retail Banking reporting unit resulting in the Company recording a goodwill impairment charge of $2.2 billion for the three months ended March 31, 2020. The primary causes of the goodwill impairment were economic and industry conditions, volatility in the market capitalization of U.S. banks, and management's downward revisions

31


to financial projections that resulted in the fair value of the reporting units being less than the carrying value of the reporting units.
The fair values of the reporting units are based upon management’s estimates and assumptions. Although management has used the estimates and assumptions it believes to be most appropriate in the circumstances, it should be noted that even relatively minor changes in certain valuation assumptions used in management’s calculations could result in significant differences in the results of the impairment tests. Additionally, the impact of the COVID-19 pandemic is highly uncertain and cannot be predicted.

32


(6) Derivatives and Hedging
The Company is a party to derivative instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates and foreign currency exchange rates. The Company has made an accounting policy decision not to offset derivative fair value amounts under master netting agreements. See Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, for additional information on the Company's accounting policies related to derivative instruments and hedging activities. For derivatives cleared through central clearing houses the variation margin payments made are legally characterized as settlements of the derivatives. As a result, these variation margin payments are netted against the fair value of the respective derivative contracts in the balance sheet and related disclosures and there is no fair value presented for these contracts. The following table reflects the notional amount and fair value of derivative instruments included on the Company’s Unaudited Condensed Consolidated Balance Sheets on a gross basis.
 
March 31, 2020
 
December 31, 2019
 
 
 
Fair Value
 
 
 
Fair Value
 
Notional Amount
 
Derivative Assets (1)
 
Derivative Liabilities (2)
 
Notional Amount
 
Derivative Assets (1)
 
Derivative Liabilities (2)
 
(In Thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps related to long-term debt
$
3,623,950

 
$
12,976

 
$
807

 
$
3,623,950

 
$
10,633

 
$
354

Total fair value hedges
 
 
12,976

 
807

 
 
 
10,633

 
354

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Swaps related to commercial loans
10,000,000

 

 

 
10,000,000

 

 

Swaps related to FHLB advances
120,000

 

 
4,237

 
120,000

 

 
2,864

Foreign currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Forwards related to currency fluctuations
3,699

 

 
574

 
2,597

 
102

 

Total cash flow hedges
 
 

 
4,811

 
 
 
102

 
2,864

Total derivatives designated as hedging instruments
 
 
$
12,976

 
$
5,618

 
 
 
$
10,735

 
$
3,218

 
 
 
 
 
 
 
 
 
 
 
 
Free-standing derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Forward contracts related to held for sale mortgages
$
508,500

 
$
3,891

 
$
10,175

 
$
289,990

 
$
148

 
$
514

Option contracts related to mortgage servicing rights

 

 

 
60,000

 
38

 

Interest rate lock commitments
473,795

 
14,324

 
1,914

 
146,941

 
3,088

 

Equity contracts:
 
 
 
 
 
 
 
 
 
 
 
Purchased equity option related to equity-linked CDs
111,248

 
2,572

 

 
152,130

 
4,460

 

Written equity option related to equity-linked CDs
91,806

 

 
2,141

 
128,620

 

 
3,765

Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
Forwards and swaps related to commercial loans
572,016

 
7,574

 
2,666

 
443,493

 
167

 
3,872

Spots related to commercial loans
7,612

 
3

 
5

 
48,626

 
7

 
68

Swap associated with sale of Visa, Inc. Class B shares
138,881

 

 
5,506

 
161,904

 

 
5,904

Futures contracts (3)
2,396,000

 

 

 
2,110,000

 

 

Trading account assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts for customers
38,301,554

 
780,757

 
187,995

 
35,503,973

 
313,573

 
97,881

Foreign exchange contracts for customers
1,335,719

 
57,647

 
54,890

 
1,039,507

 
22,766

 
20,678

Total trading account assets and liabilities
 
 
838,404

 
242,885

 
 
 
336,339

 
118,559

Total free-standing derivative instruments not designated as hedging instruments
 
 
$
866,768

 
$
265,292

 
 
 
$
344,247

 
$
132,682

(1)
Derivative assets, except for trading account assets that are recorded as a component of trading account assets on the Company's Unaudited Condensed Consolidated Balance Sheets, are recorded in other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets.
(2)
Derivative liabilities are recorded in accrued expenses and other liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets.
(3)
Changes in fair value are cash settled daily; therefore, there is no ending balance at any given reporting period.

33


Hedging Derivatives
The Company uses derivative instruments to manage the risk of earnings fluctuations caused by interest rate volatility. For those financial instruments that qualify and are designated as a hedging relationship, either a fair value hedge or cash flow hedge, the effect of interest rate movements on the hedged assets or liabilities will generally be offset by change in fair value of the derivative instrument.
Fair Value Hedges
The Company enters into fair value hedging relationships using interest rate swaps to mitigate the Company’s exposure to losses in value as interest rates change. Derivative instruments that are used as part of the Company’s interest rate risk management strategy include interest rate swaps that relate to the pricing of specific balance sheet assets and liabilities.
Interest rate swaps are used to convert the Company’s fixed rate long-term debt to a variable rate. The critical terms of the interest rate swaps match the terms of the corresponding hedged items. All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness.
The Company recognized no gains or losses for the three months ended March 31, 2020 and 2019, related to hedged firm commitments no longer qualifying as a fair value hedge. At March 31, 2020, the fair value hedges had a weighted average expected remaining term of 3.1 years.
Cash Flow Hedges
The Company enters into cash flow hedging relationships using interest rate swaps and options, such as caps and floors, to mitigate exposure to the variability in future cash flows or other forecasted transactions associated with its floating rate assets and liabilities. The Company uses interest rate swaps and options to hedge the repricing characteristics of its floating rate commercial loans and FHLB advances. The Company also uses foreign currency forward contracts to hedge its exposure to fluctuations in foreign currency exchange rates due to a portion of money transfer expense being denominated in foreign currency. All components of each derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. The initial assessment of expected hedge effectiveness is based on regression analysis. The ongoing periodic measures of hedge ineffectiveness are based on the expected change in cash flows of the hedged item caused by changes in the benchmark interest rate. There were no gains or losses reclassified from other comprehensive income because of the discontinuance of cash flow hedges related to certain forecasted transactions that are probable of not occurring for the three months ended March 31, 2020 and 2019.
At March 31, 2020, cash flow hedges not terminated had a net fair value of $(5) million and a weighted average life of 2.9 years. Net gains of $110.9 million are expected to be reclassified to income over the next 12 months as net settlements occur. The maximum length of time over which the entity is hedging its exposure to the variability in future cash flows for forecasted transactions is 3.9 years.

34


The following table presents the effect of hedging derivative instruments on the Company’s Unaudited Condensed Consolidated Statements of Income.
 
 
Interest Income
 
Interest Expense
 
 
Interest and fees on loans
 
Interest on FHLB and other borrowings
 
 
(In Thousands)
Three Months Ended March 31, 2020
 
 
 
 
Total amounts presented in the unaudited condensed consolidated statements of income
 
$
715,476

 
$
21,176

 
 
 
 
 
Gains (losses) on fair value hedging relationships:
 
 
 
 
Interest rate contracts:
 
 
 
 
Amounts related to interest settlements and amortization on derivatives
 
$

 
$
3,365

Recognized on derivatives
 

 
105,944

Recognized on hedged items
 

 
(99,171
)
Net income (expense) recognized on fair value hedges
 
$

 
$
10,138

 
 
 
 
 
Gain (losses) on cash flow hedging relationships: (1)
 
 
 
 
Interest rate contracts:
 
 
 
 
Realized losses reclassified from AOCI into net income (2)
 
$
5,459

 
$
(419
)
Net income (expense) recognized on cash flow hedges
 
$
5,459

 
$
(419
)
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
Total amounts presented in the unaudited condensed consolidated statements of income
 
$
800,488

 
$
37,626

 
 
 
 
 
Gains (losses) on fair value hedging relationships:
 
 
 
 
Interest rate contracts:
 
 
 
 
Amounts related to interest settlements and amortization on derivatives
 
$

 
$
(2,348
)
Recognized on derivatives
 

 
24,034

Recognized on hedged items
 

 
(22,643
)
Net income (expense) recognized on fair value hedges
 
$

 
$
(957
)
 
 
 
 
 
Gain (losses) on cash flow hedging relationships: (1)
 
 
 
 
Interest rate contracts:
 
 
 
 
Realized losses reclassified from AOCI into net income (2)
 
$
(1,210
)
 
$
(169
)
Net income (expense) recognized on cash flow hedges
 
$
(1,210
)
 
$
(169
)
(1)
See Note 10, Comprehensive Income, for gain or loss recognized for cash flow hedges in accumulated other comprehensive income.
(2)
Pre-tax

The following tables present the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of hedged assets and liabilities on the Company's Unaudited Condensed Consolidated Balance Sheets in fair value hedging relationships.
 
 
March 31, 2020
 
 
 
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Liabilities
 
 
Carrying Amount of Hedged Liabilities
 
Hedged Items Currently Designated
 
Hedged Items No Longer Designated
 
 
(In Thousands)
FHLB and other borrowings
 
$
3,484,746

 
$
124,221

 
$
1,335


35


 
 
December 31, 2019
 
 
 
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Liabilities
 
 
Carrying Amount of Hedged Liabilities
 
Hedged Items Currently Designated
 
Hedged Items No Longer Designated
 
 
(In Thousands)
FHLB and other borrowings
 
$
3,483,177

 
$
25,092

 
$
1,883


Derivatives Not Designated As Hedges
Derivatives not designated as hedges include those that are entered into as either economic hedges to facilitate client needs or as part of the Company’s overall risk management strategy. Economic hedges are those that do not qualify to be treated as a fair value hedge, cash flow hedge or foreign currency hedge for accounting purposes, but are necessary to economically manage the risk exposure associated with the assets and liabilities of the Company. The Company holds a portfolio of futures, forwards and interest rate lock commitments as well as options related to its equity-linked CDs to mitigate its economic risk exposure. The Company also enters into a variety of interest rate contracts and foreign exchange contracts in its trading activities. See Note 13, Derivatives and Hedging, in the Notes to the December 31, 2019, Consolidated Financial Statements for a description of the Company's derivatives not designated as hedges.
The net gains and losses recorded in the Company's Unaudited Condensed Consolidated Statements of Income from free-standing derivative instruments not designated as hedging instruments are summarized in the following table.
 
 
 
Gain (Loss) for the
 
Condensed Consolidated
 
Three Months Ended March 31,
 
Statements of Income Caption
 
2020
 
2019
 
 
 
(In Thousands)
Futures contracts
Mortgage banking income
 and corporate and correspondent investment sales
 
$
(793
)
 
$
(579
)
Interest rate contracts:
 
 
 
 
 
Interest rate lock commitments
Mortgage banking income
 
9,322

 
1,146

Option contracts related to mortgage servicing rights
Mortgage banking income
 
1,528

 
294

Forward contracts related to residential mortgage loans held for sale
Mortgage banking income
 
(5,907
)
 
(89
)
Interest rate contracts for customers
Corporate and correspondent investment sales
 
4,137

 
3,428

Equity contracts:
 
 
 
 
 
Purchased equity option related to equity-linked CDs
Other expense
 
(1,888
)
 
(1,017
)
Written equity option related to equity-linked CDs
Other expense
 
1,624

 
996

Foreign currency contracts:
 
 
 
 
 
Forward and swap contracts related to commercial loans
Other income
 
25,981

 
2,696

Spot contracts related to commercial loans
Other income
 
771

 
(502
)
Foreign currency exchange contracts for customers
Corporate and correspondent investment sales
 
4,701

 
3,851

Derivatives Credit and Market Risks
By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the Company’s fair value gain in a derivative. When the fair value of a derivative instrument contract is positive, this generally indicates that the counterparty owes the Company and, therefore, creates a credit risk for the Company. When the fair value of a derivative instrument contract is negative, the Company owes the counterparty and, therefore, it has no credit risk. The Company minimizes the credit risk in derivative

36


instruments by entering into transactions with high-quality counterparties that are reviewed periodically. Credit losses are also mitigated through collateral agreements and other contract provisions with derivative counterparties.
Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken.
The Company’s derivatives activities are monitored by its Asset/Liability Committee as part of its risk-management oversight. The Company’s Asset/Liability Committee is responsible for mandating various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Company’s overall interest rate risk management and trading strategies.
Entering into interest rate swap agreements and options involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also interest rate risk associated with unmatched positions. At March 31, 2020, interest rate swap agreements and options classified as trading were substantially matched. The Company had credit risk of $838 million related to derivative instruments in the trading account portfolio, which does not take into consideration master netting arrangements or the value of the collateral. There were no credit losses associated with derivative instruments classified as trading for the three months ended March 31, 2020 and 2019. At March 31, 2020 and December 31, 2019, there were no material nonperforming derivative positions classified as trading.
The Company’s derivative positions designated as hedging instruments are primarily executed in the over-the-counter market. These positions at March 31, 2020, have credit risk of $13 million, which does not take into consideration master netting arrangements or the value of the collateral.
There were no credit losses associated with derivative instruments classified as nontrading for the three months ended March 31, 2020 and 2019. At March 31, 2020 and December 31, 2019, there were no nonperforming derivative positions classified as nontrading.
As of March 31, 2020 and December 31, 2019, the Company had recorded the right to reclaim cash collateral of $231 million and $150 million, respectively, within other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets and had recorded the obligation to return cash collateral of $23 million and $12 million, respectively, within deposits on the Company’s Unaudited Condensed Consolidated Balance Sheets.
Contingent Features
Certain of the Company’s derivative instruments contain provisions that require the Company’s debt maintain a certain credit rating from each of the major credit rating agencies. If the Company’s debt were to fall below this rating, it would be in violation of these provisions, and the counterparties to the derivative instruments could demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on March 31, 2020, was $86 million for which the Company has collateral requirements of $84 million in the normal course of business. If the credit risk-related contingent features underlying these agreements had been triggered on March 31, 2020, the Company’s collateral requirements to its counterparties would increase by $2 million. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position on December 31, 2019, was $47 million for which the Company had collateral requirements of $45 million in the normal course of business. If the credit risk-related contingent features underlying these agreements had been triggered on December 31, 2019, the Company’s collateral requirements to its counterparties would have increased by $2 million.
Netting of Derivative Instruments
The Company is party to master netting arrangements with its financial institution counterparties for some of its derivative and hedging activities. The Company does not offset assets and liabilities under these master netting arrangements for financial statement presentation purposes. The master netting arrangements provide for single net settlement of all derivative instrument arrangements, as well as collateral, in the event of default with respect to, or termination of, any one contract with the respective counterparties. Cash collateral is usually posted by the counterparty with a net liability position in accordance with contract thresholds.

37


The following table represents the Company’s total gross derivative instrument assets and liabilities subject to an enforceable master netting arrangement. The derivative instruments the Company has with its customers are not subject to an enforceable master netting arrangement.
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amount Presented in the Condensed Consolidated Balance Sheets
 
Financial Instruments Collateral Received/Pledged (1)
 
Cash Collateral Received/ Pledged (1)
 
Net Amount
 
(In Thousands)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Derivative financial assets:
 
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
77,191

 
$

 
$
77,191

 
$

 
$
5,160

 
$
72,031

Not subject to a master netting arrangement
802,553

 

 
802,553

 

 

 
802,553

Total derivative financial assets
$
879,744

 
$

 
$
879,744

 
$

 
$
5,160

 
$
874,584

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
230,610

 
$

 
$
230,610

 
$

 
$
230,610

 
$

Not subject to a master netting arrangement
40,300

 

 
40,300

 

 

 
40,300

Total derivative financial liabilities
$
270,910

 
$

 
$
270,910

 
$

 
$
230,610

 
$
40,300

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Derivative financial assets:
 
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
41,390

 
$

 
$
41,390

 
$

 
$
5,860

 
$
35,530

Not subject to a master netting arrangement
313,592

 

 
313,592

 

 

 
313,592

Total derivative financial assets
$
354,982

 
$

 
$
354,982

 
$

 
$
5,860

 
$
349,122

 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
94,979

 
$

 
$
94,979

 
$

 
$
94,979

 
$

Not subject to a master netting arrangement
40,921

 

 
40,921

 

 

 
40,921

Total derivative financial liabilities
$
135,900

 
$

 
$
135,900

 
$

 
$
94,979

 
$
40,921

(1)
The actual amount of collateral received/pledged is limited to the asset/liability balance and does not include excess collateral received/pledged. When excess collateral exists, the collateral shown in the table above has been allocated based on the percentage of the actual amount of collateral posted.
(7) Securities Financing Activities
Netting of Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
The Company has various financial assets and liabilities that are subject to enforceable master netting agreements or similar agreements. The Company's derivatives that are subject to enforceable master netting agreements or similar transactions are discussed in Note 6, Derivatives and Hedging. The Company enters into agreements under which it purchases or sells securities subject to an obligation to resell or repurchase the same or similar securities. Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and recorded at the amounts at which the securities were purchased or sold plus accrued interest. The securities pledged as collateral are generally U.S. Treasury securities and other U.S. government agency securities and mortgage-backed securities.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are governed by a MRA. Under the terms of the MRA, all transactions between the Company and the counterparty constitute a single business relationship such that in the event of default, the nondefaulting party is entitled to set off claims and apply property held by that party in respect of any transaction against obligations owed. Any payments, deliveries, or other transfers may be applied against each other and netted. These amounts are limited to the contract asset/liability balance,

38


and accordingly, do not include excess collateral received or pledged. The Company offsets the assets and liabilities under netting arrangements for the balance sheet presentation of securities purchased under agreements to resell and securities sold under agreements to repurchase provided certain criteria are met that permit balance sheet netting.
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amount Presented in the Condensed Consolidated Balance Sheets
 
Financial Instruments Collateral Received/Pledged (1)
 
Cash Collateral Received/ Pledged (1)
 
Net Amount
 
(In Thousands)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Securities purchased under agreements to resell:
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
9,227,506

 
$
8,982,090

 
$
245,416

 
$
245,416

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
9,391,874

 
$
8,982,090

 
$
409,784

 
$
409,784

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Securities purchased under agreements to resell:
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
656,504

 
$
477,590

 
$
178,914

 
$
178,914

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
 
 
 
Subject to a master netting arrangement
$
650,618

 
$
477,590

 
$
173,028

 
$
173,028

 
$

 
$

(1)
The actual amount of collateral received/pledged is limited to the asset/liability balance and does not include excess collateral received/pledged. When excess collateral exists, the collateral shown in the table above has been allocated based on the percentage of the actual amount of collateral posted.
Collateral Associated with Securities Financing Activities
Securities sold under agreements to repurchase are accounted for as secured borrowings. The following table presents the Company's related activity, by collateral type and remaining contractual maturity.
 
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight and Continuous
 
Up to 30 days
 
30 - 90 days
 
Greater Than 90 days
 
Total
 
 
(In Thousands)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
 
$
3,734,955

 
$
1,838,089

 
$
1,476,830

 
$
2,342,000

 
$
9,391,874

Mortgage-backed securities
 

 

 

 

 

Total
 
$
3,734,955

 
$
1,838,089

 
$
1,476,830

 
$
2,342,000

 
$
9,391,874

 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
 
$
321,310

 
$

 
$

 
$
305,750

 
$
627,060

Mortgage-backed securities
 

 

 
23,558

 

 
23,558

Total
 
$
321,310

 
$

 
$
23,558

 
$
305,750

 
$
650,618

In the event of a significant decline in fair value of the collateral pledged for the securities sold under agreements to repurchase, the Company would be required to provide additional collateral. The Company minimizes the risk by monitoring the liquidity and credit quality of the collateral, as well as the maturity profile of the transactions.
At March 31, 2020, the fair value of collateral received related to securities purchased under agreements to resell was $9.4 billion and the fair value of collateral pledged for securities sold under agreements to repurchase was $10.2

39


billion. At December 31, 2019, the fair value of collateral received related to securities purchased under agreements to resell was $648 million and the fair value of collateral pledged for securities sold under agreements to repurchase was $644 million.
(8) Commitments, Contingencies and Guarantees
Commitments to Extend Credit & Standby and Commercial Letters of Credit
The following represents the Company’s commitments to extend credit, standby letters of credit and commercial letters of credit:
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Commitments to extend credit
$
25,333,070

 
$
27,725,965

Standby and commercial letters of credit
1,033,885

 
996,830

Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby and commercial letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions, and expire in decreasing amounts with terms ranging from one to four years.
The credit risk involved in issuing letters of credit and commitments is essentially the same as that involved in extending loan facilities to customers. The fair value of the letters of credit and commitments typically approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. At March 31, 2020 and December 31, 2019, the recorded amount of these deferred fees was $8 million and $7 million, respectively. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary. At March 31, 2020, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit was $1.0 billion. At March 31, 2020 and December 31, 2019, the Company had allowance for credit losses related to letters of credit and unfunded commitments recorded in accrued expenses and other liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheet of $101 million and $67 million, respectively. See Note 1, Basis of Presentation, for discussion of the impact of the adoption of ASC 326 on the allowance for credit losses related to letters of credit and unfunded commitments.
Loan Sale Recourse
The Company has potential recourse related to specific FNMA securitizations. At March 31, 2020 and December 31, 2019, the amount of potential recourse was $19 million and $18 million, respectively, of which the Company had reserved $690 thousand and $693 thousand which is recorded in accrued expenses and other liabilities on the Company's Unaudited Condensed Consolidated Balance Sheets for the respective periods.
The Company also issues standard representations and warranties related to mortgage loan sales to government-sponsored agencies. Although these agreements often do not specify limitations, the Company does not believe that any payments related to these representations and warranties would materially change the financial condition or results of operations of the Company. At March 31, 2020 and December 31, 2019, the Company had $1.7 million and $1.2 million, respectively, of reserves in accrued expenses and other liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets related to potential losses from loans sold.
Legal and Regulatory Proceedings
In the ordinary course of business, the Company is subject to legal proceedings, including claims, litigation, investigations and administrative proceedings, all of which are considered incidental to the normal conduct of business.

40


The Company believes it has substantial defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to defend itself vigorously. Set forth below are descriptions of certain of the Company’s legal proceedings.


In January 2014, the Bank was named as a defendant in a lawsuit filed in the District Court of Dallas County, Texas, David Bagwell, individually and as Trustee of the David S. Bagwell Trust, et al. v. BBVA USA, et al., wherein the plaintiffs (who are the borrowers and guarantors of the underlying loans) allege that BBVA USA wrongfully sold their loans to a third party after representing that it would not do so. The plaintiffs seek unspecified monetary relief. Following trial in December 2017, the jury rendered a verdict in favor of the plaintiffs totaling $98 million. On June 27, 2018, the court entered a judgment in favor of the plaintiffs in the amount of $96 million, which includes prejudgment interest. The Bank has appealed and will vigorously contest the judgment on appeal. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.

In October 2016, BSI was named as a defendant in a putative class action lawsuit filed in the District Court of Harris County, Texas, St. Lucie County Fire District Firefighters' Pension Trust, individually and on behalf of all others similarly situated v. Southwestern Energy Company, et al., wherein the plaintiffs allege that Southwestern Energy Company, its officers and directors, and the underwriting defendants (including BSI) made inaccurate and misleading statements in the registration statement and prospectus related to a securities offering. The plaintiffs seek unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.

The Company and the Bank have been named in two proceedings involving David L. Powell: one that was filed in January 2017 with the Federal Conciliation and Arbitration Labor Board of Mexico City, Mexico, David Lannon Powell Finneran v. BBVA USA Bancshares, Inc., et al., and one that was filed in April 2018 in the United States District Court for the Northern District of Texas, David L. Powell, et al. v. BBVA USA. Powell alleges discrimination and wrongful termination in both proceedings, and seeks unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.

In March 2019, the Company and its subsidiary, Simple Finance Technology Corp., were named as defendants in a putative class action lawsuit filed in the United States District Court for the Northern District of California, Amitahbo Chattopadhyay v. BBVA USA Bancshares, Inc., et al. Plaintiff claims that Simple and the Company only permit United States citizens to open Simple accounts (which are exclusively originated through online channels). Plaintiff alleges that this constitutes alienage discrimination and violations of California's Unruh Act. The Company believes that there are substantial defenses to these claims and intends to defend them vigorously.

In July 2019, the Company was named as a defendant in a putative class action lawsuit filed in the United States District Court for the Northern District of Alabama, Ferguson v. BBVA USA Bancshares, Inc., wherein the plaintiffs allege certain investment options within the Company’s employee retirement plan violate provisions of ERISA. The plaintiffs seek unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.
In April 2020, the Bank was named in a putative class action lawsuit filed in the District Court of Bexar County, Texas styled Zamora-Orduna Realty Group LLC v. BBVA USA, wherein plaintiffs allege the Bank tortiously failed to process certain loan requests submitted in connection with the federal Paycheck Protection Program.  The plaintiffs seek an amount not less than $10 million along with other demands for unspecified monetary relief. The Company believes there are substantial defenses to these claims and intends to defend them vigorously.


The Company is or may become involved from time to time in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding the Company’s business. Such matters may result in material adverse consequences, including without limitation adverse judgments, settlements, fines, penalties, orders, injunctions,

41


alterations in the Company’s business practices or other actions, and could result in additional expenses and collateral costs, including reputational damage, which could have a material adverse impact on the Company’s business, consolidated financial position, results of operations or cash flows.
The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments. Where a loss is not probable or the amount of a probable loss is not reasonably estimable, the Company does not accrue legal reserves. At March 31, 2020, the Company had accrued legal reserves in the amount of $24 million. Additionally, for those matters where a loss is reasonably possible and the amount of loss is reasonably estimable, the Company estimates the amount of losses that it could incur beyond the accrued legal reserves. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote" if “the chance of the future event or events occurring is slight.” For a limited number of legal matters in which the Company is involved, the Company is able to estimate a range of reasonably possible losses in excess of related reserves, if any. Management currently estimates these losses to range from $0 to approximately $76 million. This estimated range of reasonably possible losses is based on information available at March 31, 2020. The matters underlying the estimated range will change from time to time, and the actual results may vary significantly from this estimate. Those matters for which an estimate is not possible are not included within this estimated range; therefore, this estimated range does not represent the Company’s maximum loss exposure.
While the outcome of legal proceedings and the timing of the ultimate resolution are inherently difficult to predict, based on information currently available, advice of counsel and available insurance coverage, the Company believes that it has established adequate legal reserves. Further, based upon available information, the Company is of the opinion that these legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s financial condition or results of operations. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to the Company’s results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.
Income Tax Review
The Company is subject to review and examination from various tax authorities. The Company is currently under examination by a number of states, and has received notices of proposed adjustments related to state income taxes due for prior years. Management believes that adequate provisions for income taxes have been recorded.

42


(9) Fair Value Measurements
See Note 19, Fair Value Measurements, in the Notes to the December 31, 2019, Consolidated Financial Statements for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis.
The following tables summarize the financial assets and liabilities measured at fair value on a recurring basis.
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
March 31, 2020
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Recurring fair value measurements
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Trading account assets:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
170,378

 
$
170,378

 
$

 
$

State and political subdivisions
348

 

 
348

 

Interest rate contracts
780,757

 

 
780,757

 

Foreign exchange contracts
57,647

 

 
57,647

 

Total trading account assets
1,009,130

 
170,378

 
838,752

 

Debt securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
2,570,313

 
2,091,237

 
479,076

 

Mortgage-backed securities
1,185,676

 

 
1,185,676

 

Collateralized mortgage obligations
2,588,110

 

 
2,588,110

 

States and political subdivisions
717

 

 
717

 

Total debt securities available for sale
6,344,816

 
2,091,237

 
4,253,579

 

Loans held for sale
117,752

 

 
117,752

 

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts
31,191

 

 
16,867

 
14,324

Equity contracts
2,572

 

 
2,572

 

Foreign exchange contracts
7,577

 

 
7,577

 

Total derivative assets
41,340

 

 
27,016

 
14,324

Other assets:
 
 
 
 
 
 
 
Equity securities
19,990

 
19,990

 

 

MSR
31,232

 

 

 
31,232

SBIC
156,400

 

 

 
156,400

Liabilities:
 
 
 
 
 
 
 
Trading account liabilities:
 
 
 
 
 
 
 
Interest rate contracts
$
187,995

 
$

 
$
187,995

 
$

Foreign exchange contracts
54,890

 

 
54,890

 

Total trading account liabilities
242,885

 

 
242,885

 

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts
17,133

 

 
15,219

 
1,914

Equity contracts
2,141

 

 
2,141

 

Foreign exchange contracts
3,245

 

 
3,245

 

Total derivative liabilities
22,519

 

 
20,605

 
1,914



43


 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
December 31, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
(In Thousands)
Recurring fair value measurements
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Trading account assets:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
$
137,637

 
$
137,637

 
$

 
$

Interest rate contracts
313,573

 

 
313,573

 

Foreign exchange contracts
22,766

 

 
22,766

 

Total trading account assets
473,976

 
137,637

 
336,339

 

Debt securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury and other U.S. government agencies
3,127,525

 
2,598,471

 
529,054

 

Mortgage-backed securities
1,325,857

 

 
1,325,857

 

Collateralized mortgage obligations
2,781,125

 

 
2,781,125

 

States and political subdivisions
798

 

 
798

 

Total debt securities available for sale
7,235,305

 
2,598,471

 
4,636,834

 

Loans held for sale
112,058

 

 
112,058

 

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts
13,907

 
38

 
10,781

 
3,088

Equity contracts
4,460

 

 
4,460

 

Foreign exchange contracts
276

 

 
276

 

Total derivative assets
18,643

 
38

 
15,517

 
3,088

Other assets:
 
 
 
 
 
 
 
Equity securities
19,038

 
19,038

 

 

MSR
42,022

 

 

 
42,022

SBIC
119,475

 

 

 
119,475

Liabilities:
 
 
 
 
 
 
 
Trading account liabilities:
 
 
 
 
 
 
 
Interest rate contracts
$
97,881

 
$

 
$
97,881

 
$

Foreign exchange contracts
20,678

 

 
20,678

 

Total trading account liabilities
118,559

 

 
118,559

 

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts
3,732

 

 
3,732

 

Equity contracts
3,765

 

 
3,765

 

Foreign exchange contracts
3,940

 

 
3,940

 

Total derivative liabilities
11,437

 

 
11,437

 


44


The following tables reconcile the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Three Months Ended March 31,
Interest Rate Contracts, net
 
Other Assets - MSR
 
Other Assets - SBIC
 
(In Thousands)
Balance, December 31, 2018
$
2,012

 
$
51,539

 
$
80,074

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains or losses (realized/unrealized):
 
 
 
 
 
Included in earnings (1)
1,146

 
(5,053
)
 
7,557

Included in other comprehensive income

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 
Purchases

 

 
5,712

Issuances

 
1,059

 

Sales

 

 

Settlements

 

 

Balance, March 31, 2019
$
3,158

 
$
47,545

 
$
93,343

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at March 31, 2019
$
1,146

 
$
(5,053
)
 
$
7,557

 
 
 
 
 
 
Balance, December 31, 2019
$
3,088

 
$
42,022

 
$
119,475

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains or losses (realized/unrealized):
 
 
 
 
 
Included in earnings (1)
9,322

 
(12,461
)
 
27,658

Included in other comprehensive income

 

 

Purchases, issuances, sales and settlements:
 
 
 
 
 
Purchases

 

 
9,267

Issuances

 
1,671

 

Sales

 

 

Settlements

 

 

Balance, March 31, 2020
$
12,410

 
$
31,232

 
$
156,400

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at March 31, 2020
$
9,322

 
$
(12,461
)
 
$
27,658

(1)
Included in noninterest income in the Unaudited Condensed Consolidated Statements of Income.


45


Assets Measured at Fair Value on a Nonrecurring Basis
Periodically, certain assets may be recorded at fair value on a non-recurring basis. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following tables represent those assets that were subject to fair value adjustments during the three months ended March 31, 2020 and 2019, and still held as of the end of the period, and the related gains and losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total Gains (Losses)
 
March 31, 2020
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Three Months Ended March 31, 2020
 
(In Thousands)
Nonrecurring fair value measurements
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
OREO
$
21,392

 
$

 
$

 
$
21,392

 
$
(707
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
Total Gains (Losses)
 
March 31, 2019
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Three Months Ended March 31, 2019
 
(In Thousands)
Nonrecurring fair value measurements
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
OREO
$
14,983

 
$

 
$

 
$
14,983

 
$
(1,973
)
(1)
Total gains (losses) represent charge-offs on impaired loans for which adjustments are based on the appraised value of the collateral.
The following is a description of the methodologies applied for valuing these assets:
OREO – OREO is recorded at the lower of recorded balance or fair value, which is based on appraisals and third-party price opinions, less estimated costs to sell. The fair value is classified as Level 3.

46


The tables below present information about the significant unobservable inputs for material assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring and nonrecurring basis.
 
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value at
 
 
 
 
 
Range of Unobservable Inputs
 
March 31, 2020
 
Valuation Technique
 
Unobservable Input(s)
 
(Weighted Average)
 
(In Thousands)
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
Interest rate contracts, net
$
12,410

 
Discounted cash flow
 
Closing ratios (pull-through)
 
7.8% - 99.8% (61.6%)
 
 
 
 
 
Cap grids
 
-0.2% - 2.6% (0.9%)
Other assets - MSRs
31,232

 
Discounted cash flow
 
Option adjusted spread
 
6.0% - 8.3% (6.2%)
 
 
 
 
 
Constant prepayment rate or life speed
 
0.4% - 79.2% (19.4%)
 
 
 
 
 
Cost to service
 
$65 - $4,000 ($92)
Other assets - SBIC investments
156,400

 
Transaction price
 
Transaction price
 
N/A
Nonrecurring fair value measurements:
 
 
 
 
 
 
OREO
21,392

 
Appraised value
 
Appraised value
 
8.0% (1)
(1)
Represents discount to appraised value for estimated costs to sell.

 
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value at
 
 
 
 
 
Range of Unobservable Inputs
 
December 31, 2019
 
Valuation Technique
 
Unobservable Input(s)
 
(Weighted Average)
 
(In Thousands)
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
Interest rate contracts, net
$
3,088

 
Discounted cash flow
 
Closing ratios (pull-through)
 
16.8% - 100.0% (60.1%)
 
 
 
 
 
Cap grids
 
0.5% - 2.5% (0.9%)
Other assets - MSRs
42,022

 
Discounted cash flow
 
Option adjusted spread
 
6.0% - 9.0% (6.4%)
 
 
 
 
 
Constant prepayment rate or life speed
 
0.0% - 80.0% (14.6%)
 
 
 
 
 
Cost to service
 
$65 - $4,000 ($90)
Other assets - SBIC investments
119,475

 
Transaction price
 
Transaction price
 
N/A
Nonrecurring fair value measurements:
 
 
 
 
 
 
Debt securities held to maturity
$
2,177

 
Discounted cash flow
 
Prepayment rate
 
13.7% - 14.7% (14.2%)
 
 
 
 
 
Default rate
 
3.1% - 4.9% (4.0%)
 
 
 
 
 
Loss severity
 
50.3% - 61.9% (56.1%)
Impaired loans
484

 
Appraised value
 
Appraised value
 
0.0% - 70.0% (9.7%)
OREO
21,583

 
Appraised value
 
Appraised value
 
8.0% (1)
(1)
Represents discount to appraised value for estimated costs to sell.
The following provides a description of the sensitivity of the valuation technique to changes in unobservable inputs for recurring fair value measurements.

47


Recurring Fair Value Measurements Using Significant Unobservable Inputs
Interest Rate Contracts - Interest Rate Lock Commitments
Significant unobservable inputs used in the valuation of interest rate contracts are pull-through and cap grids. Increases or decreases in the pull-through or cap grids will have a corresponding impact in the value of interest rate contracts.
Other Assets - MSRs
The significant unobservable inputs used in the fair value measurement of MSRs are option-adjusted spreads, constant prepayment rate or life speed, and cost to service assumptions. The impact of prepayments and changes in the option-adjusted spread are based on a variety of underlying inputs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. The impact of the costs to service assumption will have a directionally opposite change in the fair value of the MSR asset.
Other Assets - SBIC Investments
The significant unobservable inputs used in the fair value measurement of SBIC Investments are initially based upon transaction price. Increases or decreases in valuation factors such as recent or proposed purchase or sale of debt or equity of the issuer, pricing by other dealers in similar securities, size of position held, liquidity of the market will have a corresponding impact in the value of SBIC investments.
Fair Value of Financial Instruments
The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments, excluding financial instruments measured at fair value on a recurring basis, are as follows:
 
March 31, 2020
 
Carrying Amount
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In Thousands)
Financial Instruments:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,513,268

 
$
5,513,268

 
$
5,513,268

 
$

 
$

Debt securities held to maturity
7,878,158

 
8,267,393

 
1,415,683

 
6,220,857

 
630,853

Loans
67,539,414

 
67,372,923

 

 

 
67,372,923

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
77,234,507

 
$
77,257,753

 
$

 
$
77,257,753

 
$

FHLB and other borrowings
3,790,137

 
3,580,396

 

 
3,580,396

 

Federal funds purchased and securities sold under agreements to repurchase
409,784

 
409,784

 

 
409,784

 


48


 
December 31, 2019
 
Carrying Amount
 
Estimated Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In Thousands)
Financial Instruments:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
6,938,698

 
$
6,938,698

 
$
6,938,698

 
$

 
$

Debt securities held to maturity
6,797,046

 
6,921,158

 
1,340,448

 
4,912,399

 
668,311

Loans
63,946,857

 
60,869,662

 

 

 
60,869,662

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
74,985,283

 
$
75,024,350

 
$

 
$
75,024,350

 
$

FHLB and other borrowings
3,690,044

 
3,721,949

 

 
3,721,949

 

Federal funds purchased and securities sold under agreements to repurchase
173,028

 
173,028

 

 
173,028

 

Fair Value Option
The Company has elected to apply the fair value option for single family real estate mortgage loans originated for resale in the secondary market. The election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. The Company has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments.
At both March 31, 2020 and December 31, 2019, no loans held for sale for which the fair value option was elected were 90 days or more past due or were in nonaccrual. Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest and fees on loans in the Company's Unaudited Condensed Consolidated Statements of Income. Net gains (losses) of $2.6 million and $245 thousand resulting from changes in fair value of these loans were recorded in noninterest income during the three months ended March 31, 2020 and 2019, respectively.
The Company also had fair value changes on forward contracts related to residential mortgage loans held for sale of approximately $(5.9) million and $(89) thousand for the three months ended March 31, 2020 and 2019, respectively. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential mortgage loans measured at fair value.
 
Aggregate Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
 
(In Thousands)
March 31, 2020
 
 
 
 
 
Residential mortgage loans held for sale
$
117,752

 
$
111,440

 
$
6,312

December 31, 2019
 
 
 
 
 
Residential mortgage loans held for sale
$
112,058

 
$
108,345

 
$
3,713


49


(10) Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances arising from nonowner sources. The following summarizes the change in the components of other comprehensive income.
 
Three Months Ended March 31,
 
2020
 
2019
 
Pretax
 
Tax Expense/ (Benefit)
 
After-tax
 
Pretax
 
Tax Expense/ (Benefit)
 
After-tax
 
(In Thousands)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains arising during period from debt securities available for sale
$
130,943

 
$
31,244

 
$
99,699

 
$
67,768

 
$
16,068

 
$
51,700

Less: reclassification adjustment for net gains on sale of debt securities in net income
19,139

 
4,567

 
14,572

 
8,958

 
2,124

 
6,834

Net change in unrealized gains on debt securities available for sale
111,804

 
26,677

 
85,127

 
58,810

 
13,944

 
44,866

Change in unamortized net holding gains on debt securities held to maturity
2,069

 
494

 
1,575

 
2,284

 
541

 
1,743

Change in unamortized non-credit related impairment on debt securities held to maturity
155

 
37

 
118

 
482

 
114

 
368

Net change in unamortized holding gains on debt securities held to maturity
2,224

 
531

 
1,693

 
2,766

 
655

 
2,111

Unrealized holding gains arising during period from cash flow hedge instruments
360,963

 
86,126

 
274,837

 
31,518

 
7,465

 
24,053

Change in defined benefit plans
2,301

 
547

 
1,754

 
4,089

 
970

 
3,119

Other comprehensive income
$
477,292

 
$
113,881

 
$
363,411

 
$
97,183

 
$
23,034

 
$
74,149

Activity in accumulated other comprehensive income (loss), net of tax was as follows:
 
Unrealized Gains (Losses) on Debt Securities Available for Sale and Transferred to Held to Maturity
 
Accumulated Gains (Losses) on Cash Flow Hedging Instruments
 
Defined Benefit Plan Adjustment
 
Unamortized Impairment Losses on Debt Securities Held to Maturity
 
Total
 
(In Thousands)
Balance, December 31, 2018
$
(158,433
)
 
$
6,175

 
$
(29,495
)
 
$
(5,095
)
 
$
(186,848
)
Cumulative effect of adoption of ASUs (1)
(25,844
)
 
(1,040
)
 
(7,351
)
 
(1,201
)
 
(35,436
)
 
$
(184,277
)
 
$
5,135

 
$
(36,846
)
 
$
(6,296
)
 
$
(222,284
)
Other comprehensive income before reclassifications
51,700

 
23,001

 

 

 
74,701

Amounts reclassified from accumulated other comprehensive income (loss)
(5,091
)
 
1,052

 
3,119

 
368

 
(552
)
Net current period other comprehensive income
46,609

 
24,053

 
3,119

 
368

 
74,149

Balance, March 31, 2019
$
(137,668
)
 
$
29,188

 
$
(33,727
)
 
$
(5,928
)
 
$
(148,135
)
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
$
(40,080
)
 
$
91,445

 
$
(46,666
)
 
$
(5,771
)
 
$
(1,072
)
Other comprehensive income before reclassifications
99,699

 
278,675

 

 

 
378,374

Amounts reclassified from accumulated other comprehensive income (loss)
(12,997
)
 
(3,838
)
 
1,754

 
118

 
(14,963
)
Net current period other comprehensive income
86,702

 
274,837

 
1,754

 
118

 
363,411

Balance, March 31, 2020
$
46,622

 
$
366,282

 
$
(44,912
)
 
$
(5,653
)
 
$
362,339

(1)
Related to the Company's adoption of ASU 2017-12 and ASU 2018-02 on January 1, 2019.

50


The following table presents information on reclassifications out of accumulated other comprehensive income (loss).
Details About Accumulated Other Comprehensive Income (Loss) Components
 
Amounts Reclassified From Accumulated Other Comprehensive Income (Loss) (1)
 
Condensed Consolidated Statements of Income Caption
 
 
Three Months Ended March 31,
 
 
 
 
2020
 
2019
 
 
 
 
(In Thousands)
 
 
Unrealized Gains (Losses) on Debt Securities Available for Sale and Transferred to Held to Maturity
 
$
19,139

 
$
8,958

 
Investment securities gains, net
 
 
(2,069
)
 
(2,284
)
 
Interest on debt securities held to maturity
 
 
17,070

 
6,674

 
 
 
 
(4,073
)
 
(1,583
)
 
Income tax expense
 
 
$
12,997

 
$
5,091

 
Net of tax
 
 
 
 
 
 
 
Accumulated Gains (Losses) on Cash Flow Hedging Instruments
 
$
5,459

 
$
(1,210
)
 
Interest and fees on loans
 
 
(419
)
 
(169
)
 
Interest on FHLB and other borrowings
 
 
5,040

 
(1,379
)
 
 
 
 
(1,202
)
 
327

 
Income tax (expense) benefit
 
 
$
3,838

 
$
(1,052
)
 
Net of tax
 
 
 
 
 
 
 
Defined Benefit Plan Adjustment
 
$
(2,301
)
 
$
(4,089
)
 
(2)
 
 
547

 
970

 
Income tax benefit
 
 
$
(1,754
)
 
$
(3,119
)
 
Net of tax
 
 
 
 
 
 
 
Unamortized Impairment Losses on Debt Securities Held to Maturity
 
$
(155
)
 
$
(482
)
 
Interest on debt securities held to maturity
 
 
37

 
114

 
Income tax benefit
 
 
$
(118
)
 
$
(368
)
 
Net of tax
(1)
Amounts in parentheses indicate debits to the Unaudited Condensed Consolidated Statements of Income.
(2)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 17, Benefit Plans, in the Notes to the December 31, 2019, Consolidated Financial Statements for additional details).
(11) Supplemental Disclosure for Statement of Cash Flows
The following table presents the Company’s supplemental disclosures for statement of cash flows.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
207,334

 
$
194,297

Net income taxes paid
7,208

 
320

Operating cash flows from operating leases
12,499

 
13,417

Operating cash flows from finance leases
140

 
159

Financing cash flows from finance leases
414

 
386

 
 
 
 
Supplemental schedule of noncash activities:
 
 
 
Transfer of loans and loans held for sale to OREO
$
5,735

 
$
6,534

Transfer of loans to loans held for sale

 
1,196,883

Right-of-use assets obtained in exchange for lease obligations- operating leases
17,568

 
22,108


51


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s Unaudited Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Company's Unaudited Condensed Consolidated Statements of Cash Flows.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Cash and cash equivalents
$
5,513,268

 
$
6,008,461

Restricted cash in other assets
306,798

 
131,378

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
5,820,066

 
$
6,139,839

Restricted cash primarily represents cash collateral related to the Company's derivatives as well as amounts restricted for regulatory purposes related to BSI and BBVA Transfer Holdings, Inc. Restricted cash is included in other assets on the Company’s Unaudited Condensed Consolidated Balance Sheets.
(12) Segment Information
The Company’s operating segments are based on the Company’s organizational structure. Each segment reflects the manner in which financial information is evaluated by management. The operating segment results include certain overhead allocations and intercompany transactions. All intercompany transactions have been eliminated to determine the consolidated balances. The Company operates primarily in the United States, and, accordingly, revenue and assets outside the United States are not material. There are no individual customers whose attributable revenues exceed 10% of consolidated revenue.
The following tables present the segment information for the Company’s existing segments.
 
Three Months Ended March 31, 2020
 
Commercial Banking and Wealth
 
Retail Banking
 
Corporate and Investment Banking
 
Treasury
 
Corporate Support and Other
 
Consolidated
 
(In Thousands)
Net interest income (expense)
$
266,837

 
$
295,009

 
$
30,779

 
$
(36,427
)
 
$
33,257

 
$
589,455

Allocated provision for credit losses
42,184

 
66,729

 
92,970

 
(237
)
 
155,345

 
356,991

Noninterest income
68,535

 
130,704

 
40,135

 
26,202

 
68,666

 
334,242

Noninterest expense
174,583

 
305,258

 
61,395

 
4,046

 
2,263,778

 
2,809,060

Net income (loss) before income tax expense (benefit)
118,605

 
53,726

 
(83,451
)
 
(14,034
)
 
(2,317,200
)
 
(2,242,354
)
Income tax expense (benefit)
24,685

 
11,494

 
(17,525
)
 
(2,947
)
 
(20,776
)
 
(5,069
)
Net income (loss)
93,920

 
42,232

 
(65,926
)
 
(11,087
)
 
(2,296,424
)
 
(2,237,285
)
Less: net income (loss) attributable to noncontrolling interests
116

 

 

 
396

 
(11
)
 
501

Net income (loss) attributable to BBVA USA Bancshares, Inc.
$
93,804

 
$
42,232

 
$
(65,926
)
 
$
(11,483
)
 
$
(2,296,413
)
 
$
(2,237,786
)
Average assets
$
41,177,867

 
$
18,697,233

 
$
8,282,036

 
$
20,254,208

 
$
7,944,769

 
$
96,356,113


52


 
Three Months Ended March 31, 2019
 
Commercial Banking and Wealth
 
Retail Banking
 
Corporate and Investment Banking
 
Treasury
 
Corporate Support and Other
 
Consolidated
 
(In Thousands)
Net interest income (expense)
$
315,332

 
$
349,377

 
$
33,818

 
$
(20,024
)
 
$
4,586

 
$
683,089

Allocated provision (credit) for loan losses
57,440

 
103,405

 
25,930

 
373

 
(4,856
)
 
182,292

Noninterest income
57,375

 
111,919

 
36,517

 
12,486

 
39,463

 
257,760

Noninterest expense
167,968

 
297,923

 
39,879

 
5,589

 
70,614

 
581,973

Net income (loss) before income tax expense (benefit)
147,299

 
59,968

 
4,526

 
(13,500
)
 
(21,709
)
 
176,584

Income tax expense (benefit)
30,933

 
12,593

 
950

 
(2,835
)
 
(6,038
)
 
35,603

Net income (loss)
116,366

 
47,375

 
3,576

 
(10,665
)
 
(15,671
)
 
140,981

Less: net income attributable to noncontrolling interests
96

 

 

 
405

 
55

 
556

Net income (loss) attributable to BBVA USA Bancshares, Inc.
$
116,270

 
$
47,375

 
$
3,576

 
$
(11,070
)
 
$
(15,726
)
 
$
140,425

Average assets
$
40,393,329

 
$
18,932,712

 
$
8,214,217

 
$
17,214,202

 
$
8,231,416

 
$
92,985,876

The financial information presented was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. This information is based on internal management accounting policies that have been developed to reflect the underlying economics of the businesses. These policies address the methodologies applied and include policies related to funds transfer pricing, cost allocations and capital allocations.
Funds transfer pricing was used in the determination of net interest income earned primarily on loans and deposits. The method employed for funds transfer pricing is a matched funding concept whereby lines of business which are fund providers are credited and those that are fund users are charged based on maturity, prepayment and/or repricing characteristics applied on an instrument level. Provision for loan losses is allocated to each segment based on internal management accounting policies for the allowance for loan losses and the related provision which differs from the policies for consolidated purposes. The difference between the consolidated provision for credit losses and the segments' provision for credit losses is reflected in Corporate Support and Other and reflects a current year revision in policy. Costs for centrally managed operations are generally allocated to the lines of business based on the utilization of services provided or other appropriate indicators. Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing services to, customers. Results of operations for the business segments reflect these fee sharing allocations. Capital is allocated to the lines of business based upon the underlying risks in each business considering economic and regulatory capital standards.
The development and application of these methodologies is a dynamic process. Accordingly, prior period financial results have been revised to reflect management accounting enhancements and changes in the Company's organizational structure. The 2019 segment information has been revised to conform to the 2020 presentation. In addition, unlike financial accounting, there is no authoritative literature for management accounting similar to U.S. GAAP. Consequently, reported results are not necessarily comparable with those presented by other financial institutions.
(13) Related Party Transactions
The Company enters into various transactions with BBVA that affect the Company’s business and operations. The following discloses the significant transactions between the Company and BBVA during 2020 and 2019.
The Company believes all of the transactions entered into between the Company and BBVA were transacted on terms that were no more or less beneficial to the Company than similar transactions entered into with unrelated market participants, including interest rates and transaction costs. The Company foresees executing similar transactions with BBVA in the future.

53


Derivatives
The Company has entered into various derivative contracts as noted below with BBVA as the upstream counterparty. The total notional amount of outstanding derivative contracts between the Company and BBVA are $3.5 billion and $3.4 billion as of March 31, 2020 and December 31, 2019, respectively. The net fair value of outstanding derivative contracts between the Company and BBVA are detailed below.
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Derivative contracts:
 
Fair value hedges
$
(799
)
 
$
(354
)
Cash flow hedges
(574
)
 
102

Free-standing derivatives not designated as hedging instruments
(60,621
)
 
(9,688
)
Securities Purchased Under Agreements to Resell/ Securities Sold Under Agreements to Repurchase
The Company enters into agreements with BBVA as the counterparty under which it purchases/sells securities subject to an obligation to resell/repurchase the same or similar securities. The following represents the amount of securities purchased under agreement to resell and securities sold under agreement to repurchase where BBVA is the counterparty.
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Securities purchased under agreements to resell
$
138,265

 
$
178,914

Securities sold under agreements to repurchase
53,574

 
16,596

Borrowings
BSI, a wholly owned subsidiary of the Company, had a $420 million revolving note and cash subordination agreement with BBVA that was executed on March 16, 2012, with an original maturity date of March 16, 2018. On March 16, 2017, the agreement was amended to increase the available amount to $450 million and the maturity date was extended to March 16, 2023. On March 16, 2017, BSI entered into an uncommitted demand facility agreement with BBVA for a revolving loan facility up to $1 billion to be used for trade settlement purposes. BSI has not drawn against this facility in 2019. At both March 31, 2020 and December 31, 2019 there was no amount outstanding under the revolving note and cash subordination agreement. There was $55 thousand in interest expense related to these agreements for the three months ended March 31, 2020 and $25 thousand interest expense for the three months ended March 31, 2019 and are included in interest on other short-term borrowings within the Company's Unaudited Condensed Consolidated Statements of Income.
Service and Referral Agreements
The Company and its affiliates entered into or were subject to various service and referral agreements with BBVA and its affiliates. Each of the agreements was done in the ordinary course of business and on market terms. Income associated with these agreements was $4.1 million for both the three months ended March 31, 2020 and 2019, and is recorded as a component of noninterest income within the Company's Unaudited Condensed Consolidated Statements of Income. Expenses associated with these agreements was $9.9 million and $8.5 million for the three months ended March 31, 2020 and 2019, respectively, and is recorded as a component of noninterest expense within the Company's Unaudited Condensed Consolidated Statements of Income.
Series A Preferred Stock
BBVA is the sole holder of the Series A Preferred Stock that the Company issued in December 2015. At both March 31, 2020 and December 31, 2019, the carrying amount of the Series A Preferred Stock was approximately $229 million. During the three months ended March 31, 2020 and 2019, the Company paid $4.2 million and $4.5 million, respectively, of preferred stock dividends to BBVA.

54


Loan Sales to Related Parties
During the three months ended March 31, 2019, the Company transferred to loans held for sale and subsequently sold $1.2 billion of commercial loans to BBVA, S.A. New York Branch. The Company recognized a gain on the sale of these loans of $778 thousand.


55


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. The Company’s critical accounting policies relate to the allowance for loan losses and goodwill impairment. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. The Company’s significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in detail in Note 1 in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1, Basis of Presentation, in the Notes to the Unaudited Condensed Consolidated Financial Statements, included herein.
Executive Overview
Financial Performance
Consolidated net (loss) income attributable to the Company for the three months ended March 31, 2020 was $(2.2) billion compared to $140.4 million earned during the three months ended March 31, 2019. The Company’s results of operations for the three months ended March 31, 2020, reflected lower net interest income, higher provision for credit losses, higher noninterest expense, which includes $2.2 billion of goodwill impairment, offset by higher noninterest income.
Net interest income totaled $589.5 million for the three months ended March 31, 2020 compared to $683.1 million for the three months ended March 31, 2019. Net interest income for the three months ended March 31, 2020 was impacted by the decrease in the Federal Reserve Board benchmark interest rates during the second half of 2019 and in March of 2020. The net interest margin for the three months ended March 31, 2020 was 2.80%, compared to 3.41% for the three months ended March 31, 2019.
For the three months ended March 31, 2020, the Company recorded $357.0 million of provision for credit losses compared to $182.3 million for the three months ended March 31, 2019. For the three months ended March 31, 2020, provision for credit losses was comprised of $356.9 million of provision for loan losses and $45 thousand of provision for HTM security losses.
For the three months ended March 31, 2020, the Company recorded $356.9 million of provision for loan losses compared to $182.3 million for the three months ended March 31, 2019. The Company adopted ASC 326 effective January 1, 2020 recorded a net of tax increase to accumulated deficit of $150.2 million as of January 1, 2020 for the cumulative effect of adopting ASC 326. The increase in provision for loan losses for the three months ended March 31, 2020 reflected an increase in expected losses over the life of the portfolio. The primary drivers of this increase was the impact of the COVID-19 pandemic on economic conditions which impacted the Company's economic forecast as well as the impact of higher reserves in the energy portfolio due to the decrease in oil prices for three months ended March 31, 2020.
Net charge-offs for the three months ended March 31, 2020 totaled $111.8 million compared to $101.5 million for the three months ended March 31, 2019. The increase in net charge-offs for the three months ended March 31, 2020 as compared to the corresponding period in 2019 was primarily driven by a $14.3 million increase in commercial, financial and agricultural net charge-offs and a $4.3 million increase in credit card net charge-offs, offset by a $2.1 million decrease in consumer direct net charge-offs and a $6.6 million decrease in consumer indirect net charge-offs.
Noninterest income increased to $334.2 million for the three months ended March 31, 2020 compared to $257.8 million for the three months ended March 31, 2019. The primary drivers of the increase in noninterest income were a $7.7 million increase in investment services sales fees, a $7.9 million increase in investment banking and advisory fees, a $3.8 million increase in corporate and correspondent investment sales, a $12.5 million increase in mortgage banking

56


income, a $10.2 million increase in investment securities gains, and a $23.9 million increase in other noninterest income due to a $20.3 million increase in the value of the SBIC investments.
Noninterest expense increased $2.2 billion to $2.8 billion for the three months ended March 31, 2020 compared to $582.0 million for the three months ended March 31, 2019. The increase was driven by a $17.4 million increase in salaries, benefits and commissions, a $2.2 billion goodwill impairment and an $18.0 million increase in other noninterest expense primarily attributable to an increase in provision for unfunded commitments.
Income tax (benefit) expense was $(5.1) million for the three months ended March 31, 2020 compared to $35.6 million for the three months ended March 31, 2019. This resulted in an effective tax rate of 0.2% for the three months ended March 31, 2020 and 20.2% for three months ended March 31, 2019. The decrease in the tax rate was primarily due to an unfavorable permanent difference related to goodwill impairment for the three months ended March 31, 2020.
The Company's total assets at March 31, 2020 were $94.3 billion, an increase of $722 million from December 31, 2019 levels. Total loans, excluding loans held for sale, were $67.5 billion at March 31, 2020, an increase of $3.6 billion or 5.6% from year-end December 31, 2019 levels. The increase was primarily driven by a $3.4 billion increase in commercial, financial and agricultural loans reflecting an increase in line of credit draws late in the quarter as companies responded to the COVID-19 pandemic. Deposits increased $2.2 billion or 3.0% compared to December 31, 2019.
Total shareholder's equity at March 31, 2020 was $11.4 billion, a decrease of $2.0 billion compared to December 31, 2019.
COVID-19 Pandemic Government Responses and Regulatory Developments
Government Response to COVID-19
Congress, the Federal Reserve Board and the other U.S. state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from COVID-19. The descriptions below summarize certain significant government actions taken in response to the COVID-19 pandemic. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions or government programs summarized.
The CARES Act
The CARES Act was signed into law on March 27, 2020. Among other provisions, the CARES Act includes funding for the Small Business Administration to expand lending, relief from certain U.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as troubled debt restructurings and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts. One of the key CARES Act programs is the Paycheck Protection Program, which temporarily expands the Small Business Administration’s business loan guarantee program through June 30, 2020. Paycheck Protection Program loans are available to a broader range of entities than ordinary Small Business Administration loans, require six-month deferral of principal and interest repayment, and the loan may be forgiven in an amount equal to payroll costs and certain other expenses during an eight-week covered period.
The CARES Act contains additional protections for homeowners and renters of properties with federally backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings beginning on March 18, 2020 and a 120-day moratorium on initiating eviction proceedings effective March 27, 2020. Borrowers of federally backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the coronavirus-related public health emergency.
Also pursuant to the CARES Act, the U.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19 pandemic. Some of these funds have been used to support the several Federal Reserve Board programs and facilities described below or additional programs or facilities that are established by the Federal Reserve Board under its Section 13(3) authority and meeting certain criteria.

57


Federal Reserve Board Actions
The Federal Reserve Board has taken a range of actions to support the flow of credit to households and businesses. For example, on March 15, 2020, the Federal Reserve Board reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The Federal Reserve Board has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as of March 26, 2020.
In addition, the Federal Reserve Board has established, or has taken steps to establish, a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19 pandemic. Through these facilities and programs, the Federal Reserve Board, relying on its authority under Section 13(3) of the Federal Reserve Act, has taken steps to directly or indirectly purchase assets from, or make loans to, U.S. companies, financial institutions, municipalities and other market participants.
Federal Reserve Board facilities and programs established, or in the process of being established, include:
a Paycheck Protection Program Liquidity Facility to provide financing to related to Paycheck Protection Program loans made by banks;
a Main Street New Loan Facility and a Main Street Expanded Loan Facility to purchase loan participations, under specified conditions, from banks lending to small and medium U.S. businesses;
a Primary Dealer Credit Facility to provide liquidity to primary dealers through a secured lending facility;
a Commercial Paper Funding Facility to purchase the commercial paper of certain U.S. issuers;
a Primary Market Corporate Credit Facility to purchase corporate bonds directly from, or make loans directly, to eligible participants;
a Secondary Market Corporate Credit Facility to purchase corporate bonds trading in secondary markets, including from exchange-traded funds, that were issued by eligible participants;
a Term Asset-Backed Securities Loan Facility to make loans secured by asset-backed securities;
a Municipal Liquidity Facility to purchased bonds directly from U.S. state, city and county issuers; and
a Money Market Mutual Fund Liquidity Facility to purchase certain assets from, or make loans to, financial institutions providing financing to eligible money market mutual funds.
These facilities and programs are in various stages of development, and the Company and the Bank may participate in some or all of them, including as an agent or intermediary on behalf of clients or customers or in an advisory capacity.
Regulatory Considerations
Revisions to Definition of Eligible Retained Income
The U.S. banking agencies have adopted an interim final rule altering the definition of eligible retained income in their respective capital rules. Under the new rule, eligible retained income is the greater of a firm’s (i) net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) average net income over the preceding four quarters. This definition applies with respect to all of the Company’s capital requirements. The interim final rule became effective March 20, 2020.
Regulatory Effects of the CARES Act
In addition to authorizing several programs to provide loans, guarantees and other investments in support of eligible organizations, states and municipalities affected by the economic effects of the COVID-19 pandemic, the CARES Act also includes several measures that temporarily adjust existing laws or regulations. These include providing the FDIC with additional authority to guarantee the deposits of solvent insured depository institutions held in noninterest-bearing

58


business transaction accounts to a maximum amount specified by the FDIC, reinstating the FDIC’s Temporary Liquidity Guarantee Authority to guarantee debt obligations of solvent insured depository institutions or depository institution holding companies and temporarily allowing the Treasury to fully guarantee money market mutual funds. The CARES Act also provides financial institutions with the option to suspend GAAP requirements for coronavirus-related loan modifications that would otherwise constitute troubled debt restructurings and further requires the federal banking agencies to defer to financial institutions’ determinations in making such suspensions.
Capital
Under the Basel III final rule, the Company's Tier1 and CET1 ratios were 12.29% and 11.97%, respectively, at March 31, 2020 compared to 12.83% and 12.49%, respectively, at December 31, 2019.
The Company has elected the ‘five-year transition’ for the ASC 326 accounting standard from the banking agencies’ interim final rule announced on March 27, 2020. This five-year transition election allows banking organizations to defer certain effects of the ASC 326 accounting standard on their regulatory capital. Specifically, this interim final rule allows for 25% of the cumulative increase in the allowance for credit losses since the adoption of ASC 326 and 100% of the day-one impact of ASC 326 adoption to be deferred for a two-year period. This two-year period will be followed by a three-year transition period to phase-in the impact of the deferred amounts on regulatory capital.
Liquidity
The Company’s sources of liquidity include customers’ interest-bearing and noninterest-bearing deposit accounts, loan principal and interest payments, investment securities, short-term investments and borrowings. As a holding company, the Parent’s primary source of liquidity is dividends from the Bank. Due to the net earnings restrictions on dividend distributions under Alabama law, the Bank must obtain regulatory approval prior to paying any dividends.
Any dividends paid by the Parent must be set forth as capital actions in the Company's capital plan and must be made in accordance with the relevant banking law and Federal Reserve Board regulations and policy.
At March 31, 2020, the Company's LCR was 144%, which would have been fully compliant with the LCR requirements if the LCR requirements applied to the Company.
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth.
Recently Issued Accounting Standards Not Yet Adopted
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes. This ASU is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

59


This ASU is effective as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of applying the elections in this ASU on the financial condition and results of operations of the Company.
Analysis of Results of Operations
Consolidated net (loss) income attributable to the Company totaled $(2.2) billion and $140.4 million for the three months ended March 31, 2020 and 2019, respectively. The Company’s results of operations for the three months ended March 31, 2020, reflected lower net interest income, higher provision for credit losses, higher noninterest expense, which includes $2.2 billion of goodwill impairment, offset by higher noninterest income.
Net Interest Income and Net Interest Margin
Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest bearing liabilities can impact net interest income. The following discussion of net interest income is presented on a fully taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among various taxable and tax-exempt assets.
Three Months Ended March 31, 2020 and 2019
Net interest income totaled $589.5 million for the three months ended March 31, 2020 compared to $683.1 million for the three months ended March 31, 2019.
Net interest income on a fully taxable equivalent basis totaled $601.5 million for the three months ended March 31, 2020, a decrease of $94.8 million compared with $696.3 million for the three months ended March 31, 2019. The decrease in net interest income was primarily the result of a decrease in interest income on loans and AFS debt securities offset by decreases in interest expense on interest bearing deposits and FHLB and other borrowings.
Net interest margin was 2.80% for the three months ended March 31, 2020 compared to 3.41% for the three months ended March 31, 2019. The 61 basis point decrease in net interest margin was primarily driven by the impact of the decrease in the Federal Reserve Board benchmark interest rates during the second half of 2019 and in March of 2020.
The fully taxable equivalent yield for the three months ended March 31, 2020, on the loan portfolio was 4.50% compared to 5.03% for the same period in 2019. The 53 basis point decrease was primarily driven by the timing of the Federal Reserve Board's decrease of benchmark rates during the second half of 2019 and in March of 2020.
The fully taxable equivalent yield on the investment securities portfolio was 1.18% for the three months ended March 31, 2020 compared to 2.45% for the three months ended March 31, 2019. The decrease was a result of lower interest rates during the three months ended March 31, 2020 as compared to rates during the three months ended March 31, 2019 as well as higher levels of premium amortization as actual and expected prepayments increased.
The average rate paid on interest bearing deposits was 1.21% for the three months ended March 31, 2020 compared to 1.42% for the three months ended March 31, 2019 and reflects the impact of lower funding costs on interest bearing deposit offerings including savings, money market and CD products.
The average rate paid on FHLB and other borrowings for the three months ended March 31, 2020 was 2.28% compared to 3.56% for the corresponding period in 2019.

60


The following table sets forth the major components of net interest income and the related annualized yields and rates.
Table 1
Consolidated Average Balance and Yield/ Rate Analysis
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Average Balance
 
Income/Expense
 
Yield/ Rate
 
Average Balance
 
Income/ Expense
 
Yield/Rate
 
(Dollars in Thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans (1) (2) (3)
$
64,875,095

 
$
726,532

 
4.50
 %
 
$
65,482,395

 
$
812,415

 
5.03
%
Debt securities – AFS
6,669,560

 
(1,492
)
 
(0.09
)
 
9,922,400

 
53,522

 
2.19

Debt securities – HTM (tax exempt) (3)
541,954

 
4,690

 
3.48

 
658,910

 
6,091

 
3.75

Debt securities – HTM (taxable)
6,650,211

 
37,390

 
2.26

 
3,375,382

 
24,674

 
2.96

Total debt securities - HTM
7,192,165

 
42,080

 
2.35

 
4,034,292

 
30,765

 
3.09

Trading account securities (3)
167,070

 
1,122

 
2.70

 
81,552

 
539

 
2.68

Other (4) (5)
7,568,988

 
42,175

 
2.24

 
3,170,307

 
22,968

 
2.94

Total earning assets
86,472,878

 
810,417

 
3.77

 
82,690,946

 
920,209

 
4.51

Noninterest earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
537,961

 
 
 
 
 
1,293,095

 
 
 
 
Allowance for credit losses
(1,064,750
)
 
 
 
 
 
(909,663
)
 
 
 
 
Net unrealized gain (loss) on investment securities available for sale
31,630

 
 
 
 
 
(187,905
)
 
 
 
 
Other noninterest earning assets
10,378,394

 
 
 
 
 
10,099,403

 
 
 
 
Total assets
$
96,356,113

 
 
 
 
 
$
92,985,876

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
11,698,488

 
24,551

 
0.84

 
$
8,685,693

 
20,346

 
0.95

Savings and money market accounts
31,978,293

 
84,792

 
1.07

 
27,218,571

 
76,909

 
1.15

Certificates and other time deposits
10,911,541

 
55,399

 
2.04

 
16,116,509

 
85,099

 
2.14

Total interest bearing deposits
54,588,322

 
164,742

 
1.21

 
52,020,773

 
182,354

 
1.42

FHLB and other borrowings
3,736,201

 
21,176

 
2.28

 
4,290,724

 
37,626

 
3.56

Federal funds purchased and securities sold under agreements to repurchase (5)
1,451,501

 
22,658

 
6.28

 
411,925

 
3,747

 
3.69

Other short-term borrowings
20,037

 
352

 
7.07

 
28,117

 
196

 
2.83

Total interest bearing liabilities
59,796,061

 
208,928

 
1.41

 
56,751,539

 
223,923

 
1.60

Noninterest bearing deposits
20,293,503

 
 
 
 
 
20,183,069

 
 
 
 
Other noninterest bearing liabilities
2,765,934

 
 
 
 
 
2,410,613

 
 
 
 
Total liabilities
82,855,498

 
 
 
 
 
79,345,221

 
 
 
 
Shareholder’s equity
13,500,615

 
 
 
 
 
13,640,655

 
 
 
 
Total liabilities and shareholder’s equity
$
96,356,113

 
 
 
 
 
$
92,985,876

 
 
 
 
Net interest income/net interest spread
 
 
$
601,489

 
2.36
 %
 
 
 
$
696,286

 
2.91
%
Net interest margin
 
 
 
 
2.80
 %
 
 
 
 
 
3.41
%
Taxable equivalent adjustment
 
 
12,034

 
 
 
 
 
13,197

 
 
Net interest income
 
 
$
589,455

 
 
 
 
 
$
683,089

 
 
(1)
Loans include loans held for sale and nonaccrual loans.
(2)
Interest income includes loan fees for rate calculation purposes.
(3)
Yields are stated on a fully taxable equivalent basis assuming the tax rate in effect for each period presented.
(4)
Includes federal funds sold, securities purchased under agreements to resell, interest bearing deposits, and other earning assets.
(5)
Yield/rate reflects impact of balance sheet offsetting. See Note 7, Securities Financing Activities, in the notes to the financial statements.


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Provision for Credit Losses
The provision for credit losses is the charge to earnings that management determines to be necessary to maintain the allowance for credit losses at a sufficient level reflecting management's estimate of expected losses over the life of the portfolio. The Company adopted ASC 326 effective January 1, 2020 recorded a net of tax increase to accumulated deficit of $150.2 million as of January 1, 2020 for the cumulative effect of adopting ASC 326.
Three Months Ended March 31, 2020 and 2019
For the three months ended March 31, 2020, the Company recorded $357.0 million of provision for credit losses compared to $182.3 million for the three months ended March 31, 2019. For the three months ended March 31, 2020, provision for credit losses was comprised of $356.9 million of provision for loan losses and $45 thousand of provision for HTM security losses.
For the three months ended March 31, 2020, the Company recorded $356.9 million of provision for loan losses compared to $182.3 million for the three months ended March 31, 2019. The increase in provision for loan losses for the three months ended March 31, 2020 reflected an increase in expected losses over the life of the portfolio. The primary drivers of this increase was the impact of the COVID-19 pandemic on economic conditions which impacted the Company's economic forecast as well as the impact of higher reserves in the energy portfolio due to the decrease in oil prices for three months ended March 31, 2020.
The Company recorded net charge-offs of $111.8 million during the three months ended March 31, 2020 compared to $101.5 million during the corresponding period in 2019. The increase in net charge-offs for the three months ended March 31, 2020, as compared to the corresponding period in 2019, was primarily driven by a $14.3 million increase in commercial, financial and agricultural net charge-offs and a $4.3 million increase in credit card net charge-offs, offset by a $2.1 million decrease in consumer direct net charge-offs and a $6.6 million decrease in consumer indirect net charge-offs.
Net charge-offs were 0.69% of average loans for the three months ended March 31, 2020 compared to 0.63% of average loans for the three months ended March 31, 2019.
For further discussion and analysis of the allowance for loan losses, refer to the discussion of lending activities found later in this section. Also, refer to Note 3, Loans and Allowance for Loan Losses, in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional disclosures.
Noninterest Income
The following table presents the components of noninterest income.
Table 2
Noninterest Income
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Service charges on deposit accounts
$
61,531

 
$
58,908

Card and merchant processing fees
50,091

 
46,002

Investment services sales fees
34,407

 
26,696

Investment banking and advisory fees
26,731

 
18,857

Money transfer income
24,548

 
21,981

Mortgage banking
17,451

 
4,937

Asset management fees
11,904

 
10,767

Corporate and correspondent investment sales
10,717

 
6,892

Bank owned life insurance
4,625

 
4,584

Investment securities gains, net
19,139

 
8,958

Other
73,098

 
49,178

Total noninterest income
$
334,242

 
$
257,760


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Three Months Ended March 31, 2020 and 2019
Noninterest income was $334.2 million for the three months ended March 31, 2020, compared to $257.8 million for the three months ended March 31, 2019. The increase in noninterest income was primarily driven by increases in investment services sales fees, investment banking and advisory fees, corporate and correspondent investment sales, mortgage banking income, investment securities gains and other noninterest income.
Investment services sales fees is comprised of mutual fund and annuity sales income and insurance sales fees. Income from investment services sales fees increased to $34.4 million for the three months ended March 31, 2020, compared to $26.7 million for the three months ended March 31, 2019. The primary contributors to this increase were a $4.3 million increase in securities transaction fees, a $2.4 million increase in annuity sales fees, and a $1.3 million increase in mutual fund fees.
Investment banking and advisory fees primarily represent income from BSI. Income from investment banking and advisory fees increased to $26.7 million for the three months ended March 31, 2020, compared to $18.9 million for the three months ended March 31, 2019. The primary driver of this increase was an increase in debt capital markets activity during the three months ended March 31, 2020 compared to the same period in 2019.
Mortgage banking is comprised of servicing income, guarantee fees and gains on sales of mortgage loans as well as fair value adjustments on mortgage loans held for sale, mortgage related derivatives and MSRs. Mortgage banking income increased $12.5 million for three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in mortgage banking income was primarily due to an increase of $9.9 million in fair value adjustments on mortgage loans held for sale, mortgage related derivatives and MSRs as well as $3.1 million increase in gains on sale of mortgage loans driven by increased production and sales income as lower market interest rates drove increased applications.
Corporate and correspondent investment sales represents income generated through the sales of interest rate protection contracts to corporate customers and the sale of bonds and other services to the Company's correspondent banking clients. Income from corporate and correspondent investment sales increased to $10.7 million for the three months ended March 31, 2020 from $6.9 million for the three months ended March 31, 2019. The primary driver of the increase was an increase in bond trading as well as increases in sales of interest rate and foreign currency contracts.
Investment securities gains, net were $19.1 million for the three months ended March 31, 2020 compared to $9.0 million for the three months ended March 31, 2019. See, “—Debt Securities” for more information related to the debt securities sales.
Other income is comprised of income recognized that does not typically fit into one of the other noninterest income categories and includes various fees associated with letters of credit, syndications, ATMS and foreign exchange. Other noninterest income increased to $73.1 million for the three months ended March 31, 2020, compared to $49.2 million for the three months ended March 31, 2019, was primarily due to a $20.3 million increase in the value of the SBIC investments.

63


Noninterest Expense
The following table presents the components of noninterest expense.
Table 3
Noninterest Expense
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Salaries, benefits and commissions
$
310,136

 
$
292,716

Professional services
70,220

 
63,896

Equipment
64,681

 
65,394

Net occupancy
39,843

 
40,941

Money transfer expense
17,136

 
14,978

Goodwill impairment
2,185,000

 

Other
122,044

 
104,048

Total noninterest expense
$
2,809,060

 
$
581,973

Three Months Ended March 31, 2020 and 2019
Noninterest expense was $2.8 billion for the three months ended March 31, 2020, an increase of $2.2 billion compared to $582.0 million for the three months ended March 31, 2019. The increase in noninterest expense was primarily driven by increases in salaries, benefits and commissions, goodwill impairment and other noninterest expense.
Salaries, benefits and commissions expense increased to $310.1 million during the three months ended March 31, 2020, compared to $292.7 million for the three months ended March 31, 2019, related to increases in full time salaries due to annual merit increases and higher production-based incentives.
Goodwill impairment was $2.2 billion for the three months ended March 31, 2020, compared to no goodwill impairment during the three months ended March 31, 2019. Refer to "—Goodwill" and Note 5, Goodwill, in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Other noninterest expense includes FDIC insurance, marketing, communications, postage, supplies, subscriptions, provision for unfunded commitments and gains and losses on the sales and write-downs of OREO. Other noninterest expense increased $18.0 million during the three months ended March 31, 2020, to $122.0 million compared to $104.0 million for the three months ended March 31, 2019 primarily attributable to a $22.5 million increase in provision for unfunded commitments.
Income Tax Expense
Three Months Ended March 31, 2020 and 2019
The Company’s income tax (benefit) expense totaled $(5.1) million and $35.6 million for the three months ended March 31, 2020 and 2019, respectively. The effective tax rate was 0.2% for the three months ended March 31, 2020 and 20.2% for the three months ended March 31, 2019. The tax rate was primarily due to an unfavorable permanent difference related to goodwill impairment for the three months ended March 31, 2020.
Analysis of Financial Condition
A review of the Company’s major balance sheet categories is presented below.
Federal Funds Sold, Securities Purchased Under Agreements to Resell and Interest Bearing Deposits
Federal funds sold, securities purchased under agreements to resell and interest bearing deposits totaled $4.5 billion at March 31, 2020, compared to $5.8 billion December 31, 2019. The decrease was primarily driven by a $1.3 billion decrease in interest bearing deposits with the Federal Reserve.

64


Trading Account Assets
Trading account assets totaled $1.0 billion at March 31, 2020, compared to $474 million December 31, 2019. The increase in trading account assets primarily related to increases in the fair value of interest rate derivative contracts for customers.
Debt Securities
At March 31, 2020, the securities portfolio included $6.3 billion in available for sale debt securities and $7.9 billion in held to maturity debt securities for a total debt securities portfolio of $14.2 billion, an increase of $191 million compared with December 31, 2019.
During the three months ended March 31, 2020, the Company received proceeds of $607.7 million related to the sale of U.S. Treasury securities and agency collateralized mortgage obligations securities classified as available for sale which resulted in a net gain of $19.1 million. The Company also purchased approximately $1.3 billion of agency collateralized mortgage obligations that were classified as held to maturity.
Lending Activities
The Company groups its loans into portfolio segments based on internal classifications reflecting the manner in which the allowance for loan losses is established and how credit risk is measured, monitored and reported. Commercial loans are comprised of commercial, financial and agricultural, real estate — construction, and commercial real estate–mortgage loans. Consumer loans are comprised of residential real estate — mortgage, equity lines of credit, equity loans, credit cards, consumer direct and consumer indirect loans.
The following table presents the composition of the loan portfolio.
Table 4
Loan Portfolio
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Commercial loans:
 
 
 
Commercial, financial and agricultural
$
27,832,113

 
$
24,432,238

Real estate – construction
2,171,714

 
2,028,682

Commercial real estate – mortgage
13,853,405

 
13,861,478

Total commercial loans
$
43,857,232

 
$
40,322,398

Consumer loans:
 
 
 
Residential real estate – mortgage
$
13,446,018

 
$
13,533,954

Equity lines of credit
2,611,350

 
2,592,680

Equity loans
229,369

 
244,968

Credit card
1,023,372

 
1,002,365

Consumer direct
2,276,045

 
2,338,142

Consumer indirect
4,096,028

 
3,912,350

Total consumer loans
$
23,682,182

 
$
23,624,459

Total loans
$
67,539,414

 
$
63,946,857

Loans held for sale
117,752

 
112,058

Total loans and loans held for sale
$
67,657,166

 
$
64,058,915

Loans and loans held for sale, net of unearned income, totaled $67.7 billion at March 31, 2020, an increase of $3.6 billion from December 31, 2019. The increase was primarily driven by a $3.4 billion increase in commercial, financial and agricultural loans primarily reflecting an increase in line of credit draws late in the quarter as companies responded to the COVID-19 pandemic.
See Note 3, Loans and Allowance for Loan Losses, and Note 4, Loan Sales and Servicing, in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional discussion.

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Asset Quality
Nonperforming assets, which includes nonaccrual loans, nonaccrual loans held for sale, accruing loans 90 days past due, accruing TDRs 90 days past due, foreclosed real estate and other repossessed assets, totaled $773 million at March 31, 2020, an increase of $63 million, compared to $710 million at December 31, 2019. As a percentage of total loans and loans held for sale, foreclosed real estate and other repossessed assets, nonperforming assets were 1.14% at March 31, 2020 compared with 1.11% at December 31, 2019.
The Company defines potential problem loans as commercial loans rated substandard or doubtful that do not meet the definition of nonaccrual, TDR or 90 days past due and still accruing. See Note 3, Loans and Allowance for Loan Losses, in the Notes to the Unaudited Condensed Consolidated Financial Statements for further information on the Company’s credit grade categories, which are derived from standard regulatory rating definitions. The following table provides a summary of potential problem loans.
Table 5
Potential Problem Loans
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Commercial, financial and agricultural
$
313,119

 
$
312,125

Real estate – construction
9,664

 
13,099

Commercial real estate – mortgage
86,926

 
78,428

 
$
409,709

 
$
403,652


66


The following table summarizes asset quality information and includes loans held for sale.
Table 6
Asset Quality
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Nonaccrual loans:
 
 
 
Commercial, financial and agricultural
$
323,881

 
$
268,288

Real estate – construction
13,676

 
8,041

Commercial real estate – mortgage
114,839

 
98,077

Residential real estate – mortgage
147,058

 
147,337

Equity lines of credit
33,354

 
38,113

Equity loans
8,027

 
8,651

Credit card

 

Consumer direct
7,160

 
6,555

Consumer indirect
28,721

 
31,781

Total nonaccrual loans
676,716

 
606,843

Nonaccrual loans held for sale

 

Total nonaccrual loans and loans held for sale
$
676,716

 
$
606,843

Accruing TDRs: (1)
 
 
 
Commercial, financial and agricultural
$
1,931

 
$
1,456

Real estate – construction
69

 
72

Commercial real estate – mortgage
3,333

 
3,414

Residential real estate – mortgage
55,116

 
57,165

Equity lines of credit

 

Equity loans
22,392

 
23,770

Credit card

 

Consumer direct
14,898

 
12,438

Consumer indirect

 

 Total Accruing TDRs
97,739

 
98,315

Accruing TDRs classified as loans held for sale

 

 Total Accruing TDRs (loans and loans held for sale)
$
97,739

 
$
98,315

Loans 90 days past due and accruing:
 
 
 
Commercial, financial and agricultural
$
3,013

 
$
6,692

Real estate – construction
574

 
571

Commercial real estate – mortgage
912

 
6,576

Residential real estate – mortgage
5,744

 
4,641

Equity lines of credit
3,295

 
1,567

Equity loans
293

 
195

Credit card
23,707

 
22,796

Consumer direct
15,196

 
18,358

Consumer indirect
9,040

 
9,730

Total loans 90 days past due and accruing
61,774

 
71,126

Loans held for sale 90 days past due and accruing

 

Total loans and loans held for sale 90 days past due and accruing
$
61,774

 
$
71,126

Foreclosed real estate
$
20,642

 
$
20,833

Other repossessed assets
$
13,338

 
$
10,930

(1)
TDR totals include accruing loans 90 days past due classified as TDR.

67


Nonperforming assets, which include loans held for sale, are detailed in the following tables.
Table 7
Nonperforming Assets
 
March 31, 2020
 
December 31, 2019
 
(In Thousands)
Nonaccrual loans
$
676,716

 
$
606,843

Loans 90 days or more past due and accruing (1)
61,774

 
71,126

TDRs 90 days or more past due and accruing
335

 
414

Nonperforming loans
738,825

 
678,383

Foreclosed real estate
20,642

 
20,833

Other repossessed assets
13,338

 
10,930

Total nonperforming assets
$
772,805

 
$
710,146

(1)
Excludes loans classified as TDR.
Table 8
Asset Quality Ratios
 
March 31, 2020
 
December 31, 2019
Asset Quality Ratios:
 
 
 
Nonperforming loans and loans held for sale as a percentage of loans and loans held for sale (1)
1.09
%
 
1.06
%
Nonperforming assets as a percentage of total loans and loans held for sale, foreclosed real estate, and other repossessed assets (2)
1.14

 
1.11

Allowance for loan losses as a percentage of loans
2.00

 
1.44

Allowance for loan losses as a percentage of nonperforming loans (3)
182.87

 
135.76

(1)
Nonperforming loans include nonaccrual loans and loans held for sale (including nonaccrual loans classified as TDR), accruing loans 90 days past due and accruing TDRs 90 days past due.
(2)
Nonperforming assets include nonperforming loans, foreclosed real estate and other repossessed assets.
(3)
Nonperforming loans include nonaccrual loans (including nonaccrual loans classified as TDR), accruing loans 90 days past due and accruing TDRs 90 days past due.
The following table provides a rollforward of nonaccrual loans and loans held for sale.
Table 9
Rollforward of Nonaccrual Loans
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Balance at beginning of period,
$
606,843

 
$
751,486

Additions
200,156

 
227,190

Returns to accrual
(18,779
)
 
(37,819
)
Loan sales

 

Payments and paydowns
(68,185
)
 
(17,758
)
Transfers to foreclosed real estate
(5,825
)
 
(5,984
)
Charge-offs
(37,494
)
 
(110,471
)
Balance at end of period
$
676,716

 
$
806,644

When borrowers are experiencing financial difficulties, the Company, in order to assist the borrowers in repaying the principal and interest owed to the Company, may make certain modifications to the loan agreement. To facilitate this process, a concessionary modification that would not otherwise be considered may be granted resulting in a classification of the loan as a TDR. Within each of the Company’s loan classes, TDRs typically involve modification of the loan interest rate to a below market rate or an extension or deferment of the loan term. The financial effects of TDRs are reflected in the components that comprise the allowance for loan losses in either the amount of charge-offs or loan loss provision and period-end allowance levels. All TDRs are considered to be impaired loans. Refer to Note

68


3, Loans and Allowance for Loan Losses, in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information.
The following table provides a rollforward of TDR activity, excluding loans held for sale.
Table 10
Rollforward of TDR Activity
 
Three Months Ended March 31,
 
2020
 
2019
 
(In Thousands)
Balance at beginning period
$
215,481

 
$
311,442

New TDRs
48,812

 
20,498

Payments/Payoffs
(13,259
)
 
(15,719
)
Charge-offs
(743
)
 
(460
)
Transfers to foreclosed real estate

 

Balance at end of period
$
250,291

 
$
315,761

The Company’s aggregate recorded investment in loans modified through TDRs was $250 million at March 31, 2020 compared to $215 million at December 31, 2019. Included in these amounts are $98 million at March 31, 2020 and $98 million at December 31, 2019 of accruing TDRs. Accruing TDRs are not considered nonperforming because they are performing in accordance with the restructured terms.
In response to the COVID-19 pandemic, beginning in March 2020 the Company began providing financial hardship relief in the form of payment deferrals and forbearances to consumer and commercial customers across a wide array of lending products, as well as the suspension of vehicle repossessions and home foreclosures. The payment deferrals and forbearances are currently expected to cover periods of three to six months. In most cases, if the loans have been restructured for COVID-19 related hardships and meet certain criteria under the CARES Act they are not classified as TDRs and do not result in loans being placed on nonaccrual status. 
Allowance for Loan Losses
Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb expected losses over the life of the loan portfolio. The Company adopted ASC 326 effective January 1, 2020. See Note 3, Loans and Allowance for Loan Losses, in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional disclosures regarding the allowance for loan losses.
The total allowance for loan losses increased to $1.4 billion at March 31, 2020, from $921 million at December 31, 2019. The Company adopted ASC 326 effective January 1, 2020, and recorded a $184.9 million increase to its allowance for loan losses that was reflected as an adjustment to shareholder's equity, net of taxes. The increase was largely attributable to the residential real estate and consumer loan portfolios, given the longer asset duration associated with these portfolios.
The increase in the allowance for loan losses during the three months ended March 31, 2020, reflected an increase in expected losses over the life of the loan portfolio. The most significant driver of this increase is attributable to the recognition of the COVID-19 pandemic through an update to the reasonable and supportable macroeconomic forecast included in the baseline calculation, which most significantly impacted the commercial loan portfolios, but also drove increases in the consumer loan portfolio. The macroeconomic forecast utilized as of March 31, 2020, represented the best information available at the end of the reporting period, and included the following considerations:
Steep economic contraction in the second quarter of 2020, with a recovery starting in the third quarter of 2020.
Substantial increase in unemployment with a peak during the third quarter of 2020 and subsequent hiring rebound.
Significant and lingering negative impact on commercial real estate prices.

69


Further, due to the level of uncertainty related to the economic outlook, a more conservative downside economic scenario was included as part of the qualitative framework adjustments. An additional driver of the increase in the allowance for loan losses is the recognition of the decline in oil prices on the energy portfolio. Management recognized a qualitative factor adjustment separately from the baseline scenario considerations as oil prices are not a significant driver of the econometric models used in the baseline allowance calculation.
The ratio of the allowance for loan losses to total loans was 2.00% at March 31, 2020 compared to 1.44% at December 31, 2019. Nonperforming loans were $739 million at March 31, 2020 compared to $678 million at December 31, 2019.
Net charge-offs were 0.69% of average loans for the three months ended March 31, 2020 compared to 0.63% of average loans for the three months ended March 31, 2019. The increase in net charge-offs for the three months ended March 31, 2020, as compared to the corresponding period in 2019, was primarily driven by a $14.3 million increase in commercial, financial and agricultural net charge-offs and a $4.3 million increase in credit card net charge-offs, offset by a $2.1 million decrease in consumer direct net charge-offs and a $6.6 million decrease in consumer indirect net charge-offs.

70


The following table sets forth information with respect to the Company’s loans, excluding loans held for sale, and the allowance for loan losses.
Table 11
Summary of Loan Loss Experience
 
Three Months Ended March 31,
 
2020
 
2019
 
(Dollars in Thousands)
Average loans outstanding during the period
$
64,792,123

 
$
65,386,558

Allowance for loan losses, beginning of period, prior to adoption of ASC 326
920,993

 
885,242

Impact of adopting ASC 326
184,931

 

Allowance for loan losses, beginning of period, after adoption of ASC 326
1,105,924

 
885,242

Charge-offs:
 
 
 
Commercial, financial and agricultural
24,207

 
9,503

Real estate – construction
27

 
19

Commercial real estate – mortgage
60

 
6

Residential real estate – mortgage
464

 
1,446

Equity lines of credit
1,155

 
3,238

Equity loans
380

 
328

Credit card
21,430

 
16,942

Consumer direct
58,931

 
59,131

Consumer indirect
35,505

 
36,800

Total charge-offs
142,159

 
127,413

Recoveries:
 
 
 
Commercial, financial and agricultural
5,193

 
4,760

Real estate – construction
40

 
1,429

Commercial real estate – mortgage
133

 
33

Residential real estate – mortgage
636

 
517

Equity lines of credit
619

 
2,663

Equity loans
168

 
409

Credit card
1,913

 
1,699

Consumer direct
7,205

 
5,257

Consumer indirect
14,454

 
9,134

Total recoveries
30,361

 
25,901

Net charge-offs
111,798

 
101,512

Total provision for loan losses
356,946

 
182,292

Allowance for loan losses, end of period
$
1,351,072

 
$
966,022

Net charge-offs to average loans
0.69
%
 
0.63
%
Concentrations
The following tables provide further details regarding the Company’s commercial, financial and agricultural, commercial real estate, residential real estate and consumer portfolio segments as of March 31, 2020 and December 31, 2019.
Commercial, Financial and Agricultural
In accordance with the Company's lending policy, each commercial loan undergoes a detailed underwriting process, which incorporates the Company's risk tolerance, credit policy and procedures. In addition, the Company has a graduated approval process which accounts for the quality, loan type and total exposure of the borrower. The Company has also

71


adopted an internal exposure-based limit which is based on a variety of risk factors, including but not limited to the borrower industry.
The commercial, financial and agricultural portfolio segment totaled $27.8 billion at March 31, 2020 compared to $24.4 billion at December 31, 2019. This segment consists primarily of large national and international companies and small to mid-sized companies. This portfolio segment also contains owner occupied commercial real estate loans. Loans in this portfolio are generally underwritten individually and are secured with the assets of the company, and/or the personal guarantees of the business owners. The Company minimizes the risk associated with this portfolio segment by various means, including maintaining prudent advance rates, financial covenants, and obtaining personal guarantees from the principals of the borrower.
The following table provides details related to the commercial, financial, and agricultural portfolio segment.
Table 12
Commercial, Financial and Agricultural
 
 
March 31, 2020
 
December 31, 2019
Industry
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Autos, Components and Durable Goods
 
$
2,264,955

 
$
55,221

 
$

 
$
8

 
$
2,139,178

 
$
47,261

 
$

 
$
8

Basic Materials
 
573,995

 
962

 

 
6

 
526,485

 
1,342

 

 

Capital Goods & Industrial Services
 
2,396,739

 
49,729

 
637

 

 
1,987,046

 
23,736

 
96

 
4

Construction & Construction Materials
 
718,256

 
41,849

 

 

 
653,157

 
45,243

 

 

Consumer
 
704,670

 
2,328

 

 

 
641,289

 
1,540

 

 

Healthcare
 
2,986,057

 
24,128

 
306

 

 
2,747,248

 
24,989

 
314

 

Energy
 
3,447,553

 
88,364

 

 

 
2,905,791

 
69,042

 

 

Financial Services
 
1,227,127

 
24,551

 

 

 
1,009,533

 
23,427

 

 
1,615

General Corporates
 
1,802,658

 
16,366

 
436

 
2,999

 
1,726,318

 
16,883

 
475

 
5,065

Institutions
 
3,263,791

 
374

 

 

 
3,166,048

 
400

 

 

Leisure and Consumer Services
 
3,149,193

 
12,086

 
325

 

 
2,777,440

 
6,957

 
335

 

Real Estate
 
2,082,298

 

 

 

 
1,490,985

 

 

 

Retail
 
619,744

 
3,968

 
227

 

 
483,988

 
1,869

 
236

 

Telecoms, Technology & Media
 
1,142,538

 
2,361

 

 

 
909,476

 
2,558

 

 

Transportation
 
1,058,391

 
1,594

 

 

 
903,034

 
3,041

 

 

Utilities
 
394,148

 

 

 

 
365,222

 

 

 

Total Commercial, Financial and Agricultural
 
$
27,832,113

 
$
323,881

 
$
1,931

 
$
3,013

 
$
24,432,238

 
$
268,288

 
$
1,456

 
$
6,692

Commercial Real Estate
The commercial real estate portfolio segment includes the commercial real estate and real estate - construction loan portfolios. Commercial real estate loans totaled $13.9 billion at both March 31, 2020 and December 31, 2019, and real estate — construction loans totaled $2.2 billion and $2.0 billion at March 31, 2020 and December 31, 2019, respectively.
This portfolio segment consists primarily of extensions of credits to real estate developers and investors for the financing of land and buildings, whereby the repayment is generated from the sale of the real estate or the income generated by the real estate property. The Company attempts to minimize risk on commercial real estate properties by various means, including requiring collateral with values that exceed the loan amount, adequate cash flow to service the debt, and the personal guarantees of principals of the borrowers. In order to minimize risk on the construction

72


portfolio, the Company has established an operations group outside of the lending staff which is responsible for loan disbursements during the construction process.
The following tables present the geographic distribution for the commercial real estate and real estate — construction portfolios.
Table 13
Commercial Real Estate
 
 
March 31, 2020
 
December 31, 2019
State
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Alabama
 
$
419,329

 
$
3,867

 
$
2,003

 
$

 
$
419,063

 
$
4,377

 
$
2,048

 
$

Arizona
 
1,048,927

 
4,890

 

 

 
1,074,395

 
22,549

 

 

California
 
1,977,913

 

 

 
28

 
1,992,085

 

 

 
28

Colorado
 
745,762

 
6,388

 

 

 
694,691

 
6,463

 

 

Florida
 
1,201,965

 
10,758

 
17

 

 
1,299,336

 
11,047

 
27

 

New Mexico
 
99,228

 
3,789

 

 

 
100,845

 
3,952

 

 

Texas
 
3,882,538

 
52,140

 
485

 
884

 
3,802,306

 
36,278

 
495

 
4,168

Other
 
4,477,743

 
33,007

 
828

 

 
4,478,757

 
13,411

 
844

 
2,380

 
 
$
13,853,405

 
$
114,839

 
$
3,333

 
$
912

 
$
13,861,478

 
$
98,077

 
$
3,414

 
$
6,576


Table 14
Real Estate – Construction
 
 
March 31, 2020
 
December 31, 2019
State
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Alabama
 
$
78,113

 
$
90

 
$

 
$
115

 
$
70,800

 
$
90

 
$

 
$
115

Arizona
 
183,216

 
5,836

 

 

 
158,027

 

 

 

California
 
303,943

 

 

 

 
281,690

 

 

 

Colorado
 
93,531

 

 

 

 
94,260

 
473

 

 

Florida
 
177,993

 
6

 

 

 
167,346

 
905

 

 

New Mexico
 
19,120

 
210

 
14

 

 
18,000

 
242

 
15

 

Texas
 
788,323

 
7,128

 
55

 
459

 
747,651

 
5,926

 
57

 
456

Other
 
527,475

 
406

 

 

 
490,908

 
405

 

 

 
 
$
2,171,714

 
$
13,676

 
$
69

 
$
574

 
$
2,028,682

 
$
8,041

 
$
72

 
$
571

Residential Real Estate
The residential real estate portfolio includes residential real estate — mortgage loans, equity lines of credit and equity loans. The residential real estate portfolio primarily contains loans to individuals, which are secured by single-family residences. Loans of this type are generally smaller in size than commercial real estate loans and are geographically dispersed throughout the Company's market areas, with some guaranteed by government agencies or private mortgage insurers. Losses on residential real estate loans depend, to a large degree, on the level of interest rates, the unemployment rate, economic conditions and collateral values.

73


Residential real estate — mortgage loans totaled $13.4 billion at March 31, 2020 and $13.5 billion at December 31, 2019. Risks associated with residential real estate — mortgage loans are mitigated through rigorous underwriting procedures, collateral values established by independent appraisers and mortgage insurance. In addition, the collateral for this portfolio segment is concentrated in the Company's footprint as indicated in the table below.
Table 15
Residential Real Estate — Mortgage
 
 
March 31, 2020
 
December 31, 2019
State
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Alabama
 
$
902,611

 
$
20,917

 
$
10,585

 
$
1,768

 
$
913,683

 
$
21,891

 
$
11,208

 
$
1,557

Arizona
 
1,378,639

 
11,229

 
7,401

 
344

 
1,380,589

 
12,111

 
7,645

 
609

California
 
3,408,479

 
17,384

 
3,318

 

 
3,441,689

 
17,941

 
3,383

 

Colorado
 
1,121,418

 
3,847

 
2,188

 
145

 
1,144,260

 
4,141

 
2,327

 
144

Florida
 
1,507,954

 
34,651

 
9,292

 
586

 
1,511,146

 
32,740

 
10,051

 
247

New Mexico
 
213,009

 
3,468

 
1,235

 
150

 
215,835

 
3,802

 
1,249

 
424

Texas
 
4,532,020

 
44,296

 
19,229

 
2,618

 
4,534,481

 
43,048

 
19,394

 
1,660

Other
 
381,888

 
11,266

 
1,868

 
133

 
392,271

 
11,663

 
1,908

 

 
 
$
13,446,018

 
$
147,058

 
$
55,116

 
$
5,744

 
$
13,533,954

 
$
147,337

 
$
57,165

 
$
4,641

The following table provides information related to refreshed FICO scores for the Company's residential real estate portfolio.
Table 16
Residential Real Estate - Mortgage
 
 
March 31, 2020
 
December 31, 2019
FICO Score
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Below 621
 
$
731,053

 
$
102,027

 
$
21,232

 
$
4,020

 
$
707,778

 
$
96,107

 
$
22,804

 
$
3,736

621 – 680
 
1,103,201

 
21,615

 
10,321

 
553

 
1,074,497

 
23,950

 
10,570

 
114

681 – 720
 
1,644,769

 
7,968

 
5,985

 

 
1,704,801

 
9,197

 
7,305

 
144

Above 720
 
9,419,712

 
8,967

 
17,067

 
81

 
9,490,067

 
11,000

 
15,922

 
290

Unknown
 
547,283

 
6,481

 
511

 
1,090

 
556,811

 
7,083

 
564

 
357

 
 
$
13,446,018

 
$
147,058

 
$
55,116

 
$
5,744

 
$
13,533,954

 
$
147,337

 
$
57,165

 
$
4,641


74


Equity lines of credit and equity loans totaled $2.8 billion at both March 31, 2020 and December 31, 2019. Losses in these portfolios generally track overall economic conditions. These loans are underwritten in accordance with the underwriting standards set forth in the Company's policy and procedures. The collateral for this portfolio segment is concentrated within the Company's footprint as indicated in the table below.
Table 17
Equity Loans and Lines
 
 
March 31, 2020
 
December 31, 2019
State
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Alabama
 
$
447,818

 
$
9,512

 
$
6,659

 
$
1,050

 
$
452,102

 
$
10,096

 
$
7,437

 
$
341

Arizona
 
308,646

 
5,758

 
3,626

 
547

 
311,875

 
5,475

 
3,674

 
22

California
 
407,498

 
1,401

 
183

 
254

 
399,494

 
2,528

 
187

 
165

Colorado
 
167,068

 
2,383

 
649

 
53

 
167,594

 
2,729

 
738

 
176

Florida
 
292,554

 
6,942

 
4,509

 
515

 
295,552

 
7,298

 
4,827

 
121

New Mexico
 
45,192

 
1,442

 
501

 

 
45,440

 
1,704

 
505

 
11

Texas
 
1,147,702

 
12,749

 
5,917

 
944

 
1,138,289

 
15,104

 
6,050

 
914

Other
 
24,241

 
1,194

 
348

 
225

 
27,302

 
1,830

 
352

 
12

 
 
$
2,840,719

 
$
41,381

 
$
22,392

 
$
3,588

 
$
2,837,648

 
$
46,764

 
$
23,770

 
$
1,762


The following table provides information related to refreshed FICO scores for the Company's equity loans and lines.
Table 18
Equity Loans and Lines
 
 
March 31, 2020
 
December 31, 2019
FICO Score
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Below 621
 
$
200,488

 
$
21,371

 
$
6,531

 
$
2,716

 
$
200,509

 
$
27,098

 
$
6,262

 
$
1,232

621 – 680
 
359,000

 
10,394

 
6,185

 
403

 
355,324

 
9,207

 
7,314

 
290

681 – 720
 
486,714

 
5,988

 
3,421

 
293

 
484,077

 
6,324

 
3,683

 
139

Above 720
 
1,787,963

 
3,588

 
6,255

 
176

 
1,790,879

 
4,095

 
6,511

 
101

Unknown
 
6,554

 
40

 

 

 
6,859

 
40

 

 

 
 
$
2,840,719

 
$
41,381

 
$
22,392

 
$
3,588

 
$
2,837,648

 
$
46,764

 
$
23,770

 
$
1,762

Other Consumer
The Company centrally underwrites and sources from the Company's branches or online, credit card loans and other consumer direct loans. Total consumer direct loans were $2.3 billion at both March 31, 2020 and December 31, 2019. Total credit cards were $1.0 billion at both March 31, 2020 and December 31, 2019.
The Company also operates a consumer finance unit which purchases loan contracts for indirect automobile and other consumer financing. These loans are centrally underwritten using underwriting guidelines and industry accepted tools. Total consumer indirect loans were $4.1 billion and $3.9 billion at March 31, 2020 and December 31, 2019, respectively.

75


The following tables provide information related to refreshed FICO scores for the Company's consumer direct and consumer indirect loans.
Table 19
Consumer Direct
 
 
March 31, 2020
 
December 31, 2019
FICO Score
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Below 621
 
$
221,617

 
$
4,391

 
$
992

 
$
13,775

 
$
225,736

 
$
4,258

 
$
1,433

 
$
17,228

621 – 680
 
445,951

 
1,714

 
3,628

 
240

 
450,532

 
1,259

 
2,858

 
359

681 – 720
 
494,890

 
769

 
6,547

 
161

 
516,706

 
693

 
5,150

 
123

Above 720
 
1,048,524

 
286

 
3,731

 
103

 
1,076,436

 
345

 
2,997

 
84

Unknown
 
65,063

 

 

 
917

 
68,732

 

 

 
564

 
 
$
2,276,045

 
$
7,160

 
$
14,898

 
$
15,196

 
$
2,338,142

 
$
6,555

 
$
12,438

 
$
18,358

Table 20
Consumer Indirect
 
 
March 31, 2020
 
December 31, 2019
FICO Score
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
Recorded Investment
 
Nonaccrual
 
Accruing TDRs
 
Accruing Greater Than 90 Days Past Due
 
 
(In Thousands)
Below 621
 
$
798,621

 
$
25,035

 
$

 
$
8,617

 
$
817,071

 
$
27,600

 
$

 
$
9,100

621 – 680
 
1,002,907

 
2,615

 

 
341

 
1,006,409

 
2,969

 

 
408

681 – 720
 
765,491

 
520

 

 
77

 
728,580

 
621

 

 
157

Above 720
 
1,526,878

 
551

 

 
5

 
1,358,098

 
591

 

 
65

Unknown
 
2,131

 

 

 

 
2,192

 

 

 

 
 
$
4,096,028

 
$
28,721

 
$

 
$
9,040

 
$
3,912,350

 
$
31,781

 
$

 
$
9,730

Foreign Exposure
As of March 31, 2020, foreign exposure risk did not represent a significant concentration of the Company's total portfolio of loans and was substantially represented by borrowers domiciled in Mexico and foreign borrowers currently residing in the United States. 
Goodwill
Goodwill totaled $2.3 billion and $4.5 billion at March 31, 2020 and December 31, 2019, respectively, and is allocated to each of the Company’s reporting units, the level at which goodwill is tested for impairment on an annual basis or more often if events and circumstances indicate impairment may exist. At March 31, 2020 the goodwill, net of accumulated impairment losses, attributable to each of the Company’s three identified reporting units is as follows: Commercial Banking and Wealth - $1.9 billion, Retail Banking - $136 million, and Corporate and Investment Banking - $262 million.
A test of goodwill for impairment consists of comparing the fair value of each reporting unit with its carrying amount, including goodwill. The carrying value of equity for each reporting unit is determined from an allocation based upon risk weighted assets. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

76


The estimated fair value of the reporting unit is determined using a blend of both income and market approaches. For the income approach, estimated future cash flows and terminal values are discounted. The Company utilizes a CAPM in order to derive the base discount rate. The inputs to the CAPM include the 20-year risk free rate, 5-year beta for a select peer set, and a market risk premium based on published data. Once the output of the CAPM is determined, a size premium is added (also based on a published source) for each reporting unit.
In estimating future cash flows, a balance sheet as of the test date and a statement of income for the last 12 months of activity for each reporting unit is compiled. From that point, future balance sheets and statements of income are projected based on the inputs. Due to the economic uncertainty due to the COVID-19 pandemic, at March 31, 2020, the Company projected multiple scenarios and then probability weighted those scenarios. Cash flows are based on future capitalization requirements due to balance sheet growth and anticipated changes in regulatory capital requirements.
The Company uses the guideline public company method and the guideline transaction method as the market approaches. The public company method applies valuation multiples derived from each reporting unit's peer group to tangible book value or earnings and an implied control premium to the respective reporting unit. The control premium is evaluated and compared to similar financial services transactions considering the absolute and relative potential revenue synergies and cost savings. The guideline transaction method applies valuation multiples to a financial metric of the reporting unit based on comparable observed purchase transactions in the financial services industry for the reporting unit, where available.
The Company evaluates each reporting unit's goodwill for impairment on an annual basis as of October 31, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. At March 31, 2020, the Company assessed the indicators of goodwill impairment as it related to the impact of COVID-19 on the Company including: recent operating performance, market conditions, regulatory actions and assessment, change in the business climate, company-specific factors, and trends in the banking industry. Based on the assessment of these indicators, interim quantitative testing of goodwill was required for all of the Company's reporting units as of March 31, 2020.
The results of this test indicated $2.2 billion of goodwill impairment related to the following reporting units: Corporate and Investment Banking - $164 million, Commercial Banking and Wealth - $729 million, and Retail Banking - $1.3 billion. The primary causes of the goodwill impairment were the volatility in the market capitalization of U.S. banks along with revised management projections based on the current economic and industry conditions.  These factors resulted in the fair value of the reporting units being less than the reporting unit's carrying value.   
The goodwill impairment charge is a non-cash item which does not have an adverse impact on regulatory capital or liquidity.
The following table includes the carrying value and fair value of each reporting unit as of March 31, 2020, the date of the most recent interim goodwill impairment test.
Table 21
Fair Value of Reporting Units
 
Fair Value
 
Carrying Value
 
(In Thousands)
Reporting Unit:
 
 
 
Commercial Banking and Wealth
$
6,830,000

 
$
7,559,000

Corporate and Investment Banking
910,000

 
1,074,000

Retail Banking
3,610,000

 
4,902,000

The fair values of the reporting units are based upon management’s estimates and assumptions. Although management has used the estimates and assumptions it believes to be most appropriate in the circumstances, it should be noted that even relatively minor changes in certain valuation assumptions used in management’s calculations would result in significant differences in the results of the impairment tests.

77


Specific factors as of the date of filing of the financial statements that could negatively impact the assumptions used in assessing goodwill for impairment include: disparities in the level of fair value changes in net assets; increases in book values of equity of a reporting unit in excess of the increase in fair value of equity; adverse business trends resulting from litigation and/or regulatory actions; higher loan losses; future increased minimum regulatory capital requirements above current thresholds; and future federal rules and actions of regulators.
Funding Activities
Deposits are the primary source of funds for lending and investing activities and their cost is the largest category of interest expense. The Company also utilizes brokered deposits as a funding source in addition to customer deposits. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, federal funds purchased, securities sold under agreements to repurchase and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process.
The Company's and the Bank's credit ratings at March 31, 2020 were as follows:
Table 22
Credit Ratings
 
As of March 31, 2020
 
Standard & Poor’s
 
Moody’s
 
Fitch
BBVA USA Bancshares, Inc.
 
 
 
 
 
Long-term debt rating
BBB+
 
Baa2
 
BBB+
Short-term debt rating
A-2
 
 
F2
BBVA USA
 
 
 
 
 
Long-term debt rating
BBB+
 
Baa2
 
BBB+
Long-term bank deposits (1)
N/A
 
A2
 
A-
Subordinated debt
BBB
 
Baa2
 
BBB
Short-term debt rating
A-2
 
P-2
 
F2
Short-term deposit rating (1)
N/A
 
P-1
 
F2
Outlook
Stable
 
Stable
 
Negative
(1) S&P does not provide a rating; therefore, the rating is N/A.
The cost and availability of financing to the Company and the Bank are impacted by its credit ratings. A downgrade to the Company’s or Bank’s credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Company’s financial condition and liquidity. Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures. See the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, for additional information.
A credit rating is not a recommendation to buy, sell or hold securities, and the ratings are subject to revision or withdrawal by the assigning rating agency. Each rating should be evaluated independently of any other rating.

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Deposits
Total deposits increased by $2.2 billion from December 31, 2019 to March 31, 2020. At March 31, 2020 and December 31, 2019, total deposits included $5.3 billion and $4.7 billion, respectively, of brokered deposits. The following table presents the Company’s deposits segregated by major category:
Table 23
Composition of Deposits
 
March 31, 2020
 
December 31, 2019
 
Balance
 
% of Total
 
Balance
 
% of Total
 
(Dollars in Thousands)
Noninterest-bearing demand deposits
$
20,418,504

 
26.4
%
 
$
21,850,216

 
29.1
%
Interest-bearing demand deposits
13,121,732

 
17.0

 
10,031,622

 
13.4

Savings and money market
33,196,397

 
43.0

 
31,050,016

 
41.4

Time deposits
10,497,874

 
13.6

 
12,053,429

 
16.1

Total deposits
$
77,234,507

 
100.0
%
 
$
74,985,283

 
100.0
%
Borrowed Funds
In addition to internal deposit generation, the Company also relies on borrowed funds as a supplemental source of funding. Borrowed funds consist of short-term borrowings, FHLB advances, subordinated debentures and other long-term borrowings.
Short-term borrowings are primarily in the form of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings.
The short-term borrowings table presents the distribution of the Company’s short-term borrowed funds and the corresponding weighted average interest rates. Also provided are the maximum outstanding amounts of borrowings, the average amounts of borrowings and the average interest rates at period-end.
Table 24
Short-Term Borrowings
 
Maximum Outstanding at Any Month End
 
Average Balance
 
Average Interest Rate
 
Ending Balance
 
Average Interest Rate at Period End
 
(Dollars in Thousands)
Balance at March 31, 2020
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase (1)
$
1,050,182

 
$
1,451,501

 
0.45
%
 
$
409,784

 
0.85
%
Other short-term borrowings
14,951

 
20,037

 
7.07

 

 

 
$
1,065,133

 
$
1,471,538

 
 
 
$
409,784

 
 
Balance at December 31, 2019
 
 
 
 
 
 
 
 
 
Federal funds purchased
$
5,060

 
$
746

 
1.50
%
 
$

 
%
Securities sold under agreements to repurchase (1)
1,198,822

 
857,176

 
0.22

 
173,028

 
1.70

Other short-term borrowings
69,446

 
14,963

 
3.79

 

 

 
$
1,273,328

 
$
872,885

 
 
 
$
173,028

 
 
(1)
Average interest rate does not reflect impact of balance sheet offsetting. See Note 7, Securities Financing Activities, in the Notes to the Unaudited Condensed Consolidated Financial Statements.
At March 31, 2020 and December 31, 2019, FHLB and other borrowings were $3.8 billion and $3.7 billion, respectively. In August 2019, the Bank issued under its Global Bank Note Program $600 million aggregate principal amount of its 2.5% unsecured senior notes due 2024.
For the three months ended March 31, 2020, the Company had $1.0 million of proceeds received from FHLB and other borrowings and repayments were approximately $1.1 million.

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Shareholder’s Equity
Total shareholder's equity was $11.4 billion at March 31, 2020, compared to $13.4 billion at December 31, 2019, a decrease of $2.0 billion. Shareholder's equity decreased $2.2 billion due to losses attributable to the Company during the period offset, in part, by increases of $363 million in accumulated other comprehensive income largely attributable to a decrease in unrealized losses on available for sale securities and cash flow hedging instruments. Additionally, the impact of the adoption of ASC 326 decreased shareholder's equity by $150 million.
Risk Management
In the normal course of business, the Company encounters inherent risk in its business activities. The Company’s risk management approach includes processes for identifying, assessing, managing, monitoring and reporting risks. Management has grouped the risks facing its operations into the following categories: credit risk, interest rate risk, liquidity risk, operational risk, market risk, model risk, reputational risk, fiduciary risk, suitability risk, compliance risk, legal risk, and strategic and business risk. Each of these risks is managed through the Company’s ERM program. The ERM program provides the structure and framework necessary to identify, measure, control and manage risk across the organization. ERM is the cornerstone for defining risk tolerance, identifying and monitoring key risk indicators, managing capital and integrating the Company’s capital planning process with on-going risk assessments and related stress testing for major risks.
Market Risk Management
The effective management of market risk is essential to achieving the Company’s strategic financial objectives. As a financial institution, the Company’s most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in the Company’s lines of business. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income, and to offset the risk of price changes for certain assets recorded at fair value.
Interest Rate Market Risk
The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in interest rates through policies established by its Asset/Liability Committee. The Asset/Liability Committee meets regularly and has responsibility for approving asset/liability management policies, formulating strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company.
Management utilizes an interest rate simulation model to estimate the sensitivity of the Company’s net interest income to changes in interest rates. Such estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments.
The estimated impact on the Company’s net interest income sensitivity over a one-year time horizon at March 31, 2020, is shown in the table below. Such analysis assumes a gradual and sustained parallel shift in interest rates, expectations of balance sheet growth and composition and the Company’s estimate of how interest-bearing transaction accounts would reprice in each scenario using current yield curves at March 31, 2020.
Table 25
Net Interest Income Sensitivity
 
Estimated % Change in Net Interest Income
 
March 31, 2020
Rate Change
 
+ 200 basis points
3.98
 %
+ 100 basis points
2.33

 - 25 basis points
(0.81
)
Management modeled only a 25 basis point decline because larger declines would have resulted in a federal funds rate of less than zero.

80


The following table shows the effect that the indicated changes in interest rates would have on EVE. Inherent in this calculation are many assumptions used to project lifetime cash flows for every item on the balance sheet that may or may not be realized, such as deposit decay rates, prepayment speeds and spread assumptions. This measurement only values existing business without consideration of new business or potential management actions.
Table 26
Economic Value of Equity
 
Estimated % Change in Economic Value of Equity
 
March 31, 2020
Rate Change
 
+ 300 basis points
(9.48)
 %
+ 200 basis points
(4.66
)
+ 100 basis points
(0.85
)
 - 25 basis points
(0.10
)
The Company is also subject to trading risk. The Company utilizes various tools to measure and manage price risk in its trading portfolios. In addition, the Board of Directors of the Company has established certain limits relative to positions and activities. The level of price risk exposure at any given point in time depends on the market environment and expectation of future price and market movements, and will vary from period to period.
Derivatives
The Company uses derivatives primarily to manage economic risks related to commercial loans, mortgage banking operations, long-term debt and other funding sources. The Company also uses derivatives to facilitate transactions on behalf of its clients. As of March 31, 2020, the Company had derivative financial instruments outstanding with notional amounts of $57.7 billion. The estimated net fair value of open contracts was in an asset position of $609 million at March 31, 2020. For additional information about derivatives, refer to Note 6, Derivatives and Hedging, in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Liquidity Management
Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves.
The Company regularly assesses liquidity needs under various scenarios of market conditions, asset growth and changes in credit ratings. The assessment includes liquidity stress testing which measures various sources and uses of funds under the different scenarios. The assessment provides regular monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity.
The asset portion of the balance sheet provides liquidity primarily through unencumbered securities available for sale, loan principal and interest payments, maturities and prepayments of investment securities held to maturity and, to a lesser extent, sales of investment securities available for sale and trading account assets. Other short-term investments such as federal funds sold, and securities purchased under agreements to resell, are additional sources of liquidity.
The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and noninterest-bearing deposit accounts and through FHLB and other borrowings. Brokered deposits, federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings as well as excess borrowing capacity with the FHLB and access to the debt capital markets are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity. These sources of liquidity are used as necessary to fund asset growth and meet short-term liquidity needs.

81


The Company's financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. At March 31, 2020, the Company had unused FHLB borrowing capacity of $6.7 billion. Additionally, the Company had Federal Reserve discount window availability of $13.4 billion at March 31, 2020.
In addition to the Company’s financial performance and condition, liquidity may be impacted by the Parent’s structure as a holding company that is a separate legal entity from the Bank. The Parent requires cash for various operating needs including payment of dividends to its shareholder, the servicing of debt, and the payment of general corporate expenses. The primary source of liquidity for the Parent is dividends paid by the Bank. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits and other such items. Due to the net earnings restrictions on dividend distributions under Alabama law, the Bank was not permitted to pay dividends at March 31, 2020 or December 31, 2019 without regulatory approval. Appropriate limits and guidelines are in place to ensure the Parent has sufficient cash to meet operating expenses and other commitments without relying on subsidiaries or capital markets for funding. Any future dividends paid from the Parent must be set forth as capital actions in the Company's capital plans and not objected to by the Federal Reserve Board.
The Company’s ability to raise funding at competitive prices is affected by the rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings. Management meets with the rating agencies on a routine basis to discuss the current outlook for the Company.
At March 31, 2020, the Company's LCR was 144% and was fully compliant with the LCR requirements. However, the Company is no longer subject to the LCR going forward as a result of the Tailoring Rules. It may become subject to the LCR again in the future if the Company becomes a Category IV U.S. IHC under the Tailoring Rules.
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth.
Capital
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking regulators. Failure to meet minimum risk-based and leverage capital requirements can subject the Company and the Bank to a series of increasingly restrictive regulatory actions.
The following table sets forth the Company's U.S. Basel III regulatory capital ratios at March 31, 2020 and December 31, 2019.
Table 27
Capital Ratios
 
March 31, 2020
 
December 31, 2019
 
(Dollars in Thousands)
Capital:
 
 
 
CET1 Capital
$
8,623,779

 
$
8,615,357

Tier 1 Capital
8,853,779

 
8,849,557

Total Capital
10,528,826

 
10,332,023

Ratios:
 
 
 
CET1 Risk-based Capital Ratio
11.97
%
 
12.49
%
Tier 1 Risk-based Capital Ratio
12.29

 
12.83

Total Risk-based Capital Ratio
14.62

 
14.98

Leverage Ratio
9.40

 
9.70

At March 31, 2020, the regulatory capital ratios of the Bank exceeded the “well-capitalized” standard for banks based on applicable U.S. regulatory capital requirements. The Company continually monitors these ratios to ensure that the Bank exceeds this standard.

82


The Company has elected the ‘five-year transition’ for the ASC 326 accounting standard from the banking agencies’ interim final rule announced on March 27, 2020. This five-year transition election allows banking organizations to defer certain effects of the ASC 326 accounting standard on their regulatory capital. Specifically, this interim final rule allows for 25% of the cumulative increase in the allowance for credit losses since the adoption of ASC 326 and 100% of the day-one impact of ASC 326 adoption to be deferred for a two-year period. This two-year period will be followed by a three-year transition period to phase-in the impact of the deferred amounts on regulatory capital
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Refer to “Market Risk Management” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, herein.
Item 4.    Controls and Procedures
Disclosure Controls and Procedures.
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
Changes In Internal Control Over Financial Reporting.
There have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION
Item 1.
Legal Proceedings
See under “Legal and Regulatory Proceedings” in Note 8, Commitments, Contingencies and Guarantees, of the Notes to the Unaudited Condensed Consolidated Financial Statements.
Item 1A.
Risk Factors
Various risk and uncertainties could affect the Company's business. These risks are described elsewhere in this report and the Company's other filings with the SEC, including the Company's Annual Report on Form 10-K for the year-ended December 31, 2019.
The following discussion updates the risk factors disclosed in the Company's Annual Report on Form 10-K for the year-ended December 31, 2019.
The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. 
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services has been and may continue to be significantly impacted, which impact has adversely affected, and may continue to adversely affect, our revenue. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we have recognized and may be required to recognize additional impairments of our goodwill. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and we have already temporarily closed certain of our branches and offices. In response to the pandemic, we have also suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions, and are offering fee waivers, payment deferrals, and other expanded assistance for credit card, automobile, mortgage, and other consumer and commercial customers, and future governmental actions may require the continuance or the expansion of these and other types of customer-related responses. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
To the extent the COVID-19 pandemic continues to adversely affect the global economy, and/or adversely affects our business, results of operations or financial condition, it may also have the effect of increasing the likelihood and/or magnitude of other risks described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, including those risks related to market, credit, geopolitical and business operations.

Volatile or declining oil prices could adversely affect the Company's performance.
As of March 31, 2020, energy-related loan balances represented approximately 5.1 percent of the Bank’s total loan portfolio. This amount is comprised of loans directly related to energy, such as exploration and production, pipeline transportation of natural gas, crude oil and other refined petroleum products, oil field services, and refining and support. In late 2014, oil prices began to decline and continued to decline through the first half of 2016, which at the time had and continues to have an adverse effect on some of the Bank’s borrowers in this portfolio and on the value of the collateral securing some of these loans. The recent steep decline in oil prices, including, at times, dropping below zero dollars per barrel, in March and April 2020 has again adversely impacted and may continue to adversely impact some of the Bank’s customers in this industry, including with respect to the cash flows of such customers which could impair their ability to service any loans outstanding to them and/or reduce demand for loans. These factors could result in higher delinquencies and greater charge-offs in future periods, which could adversely affect the Company's business,

84


financial condition or results of operations. Furthermore, energy production and related industries represent a significant part of the economies in some of the Bank’s primary markets. A prolonged period of low or volatile oil prices could have a negative impact on the economies and real estate markets of states such as Texas, which could adversely affect the Company's business, financial condition or results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Omitted pursuant to General Instruction H of Form 10-Q.
Item 3.
Defaults Upon Senior Securities
Omitted pursuant to General Instruction H of Form 10-Q.
Item 4.
Mine Safety Disclosures
Not Applicable.
Item 5.
Other Information
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
The Company discloses the following information pursuant to Section 13(r) of the Exchange Act, which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified executive orders, including activities not prohibited by U.S. law and conducted outside the United States by non-U.S. affiliates in compliance with local law. In order to comply with this requirement, the Company has requested relevant information from its affiliates globally.
The Company has not knowingly engaged in activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under the specified executive orders.
Because the Company is controlled by BBVA, a Spanish corporation, the Company's disclosure includes activities, transactions or dealings conducted outside the United States by non-U.S. affiliates of BBVA and its consolidated subsidiaries that are not controlled by the Company. The BBVA Group has the following activities, transactions and dealings with Iran requiring disclosure.
Iranian embassy-related activity. The BBVA Group maintains bank accounts in Spain for one employee of the Iranian embassy in Spain. This employee is a Spanish citizen. Estimated gross revenues for the three months ended March 31, 2020, from embassy-related activity, which include fees and/or commissions, did not exceed $4. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure.

85


Item 6.
Exhibits

Exhibit Number
Description of Documents
 
 
Second Amended and Restated Certificate of Formation of the Company, reflecting name change to BBVA USA Bancshares, Inc., (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K (file no. 000-55106), filed on June 10, 2019).
Bylaws of BBVA USA Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 of the Company’s Registration Statement on Form 10 filed with the Commission on November 22, 2013, File No. 0-55106).
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1
Interactive Data File.

Certain instruments defining rights of holders of long-term debt of the Company and its subsidiaries constituting less than 10% of the Company’s total assets are not filed herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. At the SEC’s request, the Company agrees to furnish the SEC a copy of any such agreement.


86


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, thereunto duly authorized.
Date: May 7, 2020
BBVA USA Bancshares, Inc.
 
By:
/s/ Kirk P. Pressley
 
 
Name:
Kirk P. Pressley
 
 
Title:
Senior Executive Vice President, Chief Financial Officer and Duly Authorized Officer



87